The Kentucky and Great Eastern Railway Construction Company,
which had a contract with the Kentucky and Great Eastern Railway
Company made May 22, 1873, to construct for it a railway in
Kentucky from Newport to Catlettsburg, and did work between
Maysville and Catlettsburg, completing about seven miles of road
and purchasing and putting down the iron rails and other materials,
acquired no lien on the road or on any part of its line, completed
or not completed.
The Kentucky and Great Eastern Railway Company having
previously, under a contract made by it January 15, 1873, with the
owners of the Maysville and Big Sandy Railroad for a conditional
sale of that railroad, taken possession of it, and the Construction
Company having notice of that contract when the construction
contract was made, and the vendors having declared that contract to
be void according to its terms and resumed possession of the
railroad with the consent of the vendee; the Construction Company
acquired no rights in regard to so much of the line, completed or
not completed, between Maysville and Catlettsburg as was part of
the line of the Maysville and Big Sandy Railroad, which were not
subject to the rights of the vendors of that road. A mortgage
having been made by the Kentucky and Great Eastern Railway Company
on February 15, 1872, to a trustee, to secure bonds, on the line
from Newport to Catlettsburg, the trustee acquired under it no
greater rights at any time than the Railway Company had, and, no
bonds having been issued before the conditional sale of the
Maysville and Big Sandy Railroad was made, on January 15, 1873, the
trustee had, as against the vendors of that road, only such rights
as the mortgagor had.
The facts which make the case are stated in the opinion of the
Court.
Page 117 U. S. 73
MR. JUSTICE BLATCHFORD delivered the opinion of the Court.
On the 18th of December, 1850, the Legislature of Kentucky, by
special act, Laws of 1850, vol. ii, c. 96, p. 73, created a
corporation known as the "Maysville and Big Sandy Railroad Company"
(hereinafter called the "Big Sandy Company,") with power to
construct and maintain a railroad commencing at or near the City of
Maysville, Kentucky, and running thence to the Big Sandy River by
such route as might be found practicable. The act gave authority to
the Counties of Mason Lewis, and Greenup, and to any town in any of
those counties, to subscribe to the stock of the company, when
authorized by a majority of the voters of the county or town, the
proposition to be submitted to them by the directors of the
company, and the issue of bonds by the counties and towns in aid of
the railroad was provided for. This indicated that the route of the
road was expected to run through the counties above named.
Maysville is in Mason County, on the south bank of the Ohio River.
Lewis County adjoins Mason on the east, and Greenup adjoins Lewis
on the east. All three of them lie along the south bank of the Ohio
River. The next county in Kentucky east of Greenup is Boyd, and the
Big Sandy River, after being for some distance the boundary between
Kentucky and West Virginia, empties into the Ohio River in Boyd
County, only a short distance eastward of the line between Greenup
and Boyd Counties. For the railroad to reach the Big Sandy River,
it was necessary it should pass for a short distance through Boyd
County. The company was organized and began the construction of the
road in 1853, and after expending a considerable sum of money,
claimed to have been $300,000, it became financially embarrassed,
and suspended the work permanently in 1854. To secure certain of
its creditors, it executed one or more mortgages to them on its
road and all its franchises and chartered privileges.
By an Act of the Legislature of Kentucky approved February 17,
1866, Laws of 1866, c. 755, p. 664, those mortgages
Page 117 U. S. 74
were declared to be legal, and authority was given to foreclose
them by proceedings in the Mason Circuit Court, with power to that
court to sell the road, with all its property, rights of property,
franchises, and chartered privileges at public sale, and the act
provided that the purchasers at the sale, after it had been
approved by the court, should be invested with the title to the
road and all its franchises and chartered privileges, and should
have power to reorganize the company under its charter, and, for
the purposes of its charter, to "make contracts with individuals,
corporations, and other railroad companies for the building,
completion, and operation of said road, or any part thereof." The
foreclosure proceedings were had in 1869, resulting in a decree,
and a sale thereunder at which M. Ryan, H. Taylor, Elizabeth Gray
W. H. Wadsworth, John B. Poyntz, and John G. Hickman, trustee of
Charles B. Coons, deceased, became the purchasers of what the act
of 1866 authorized to be sold, and a deed of it was made to them,
but was not recorded until 1875.
On the 21st of March, 1870, the Legislature of Kentucky, by a
special act, Laws of 1870, vol. 2, c. 867, p. 545, created a
corporation known as the "Kentucky and Great Eastern Railway
Company" (hereinafter called the "Great Eastern Company"). The
tenth section of that act gave power to the company to construct a
railway from such point or points in the Cities of Covington and
Newport as it might select, thence through the Counties of
Campbell, Kenton, Pendleton, Bracken, Harrison, Fleming, Nicholas,
Robertson, Bourbon, Clark, Montgomery, Menifee, Bath, Rowan,
Powell, Wolfe, Morgan, Carter, Lawrence, Johnson, Magoffin,
Breathitt, Floyd, Pike, and Letcher, or such of them as it might
choose, to any point or points on the boundary line between the
States of Kentucky and Virginia that it might select. The route
thus indicated for the road, by naming those counties, carried it
far to the southward of the south line of Boyd County and of any
road running from Maysville through Mason, Lewis, Greenup, and Boyd
Counties to the Big Sandy River. The 10th section of the act also
authorized the company "to construct such branch railroads to their
main trunk road in or through such counties"
Page 117 U. S. 75
as it might deem proper. Provision was made, in section 16 and
following sections for subscriptions by counties, precincts,
cities, and towns to the stock of the company and for the issuing
of bonds to pay therefor. Section 41 provided as follows:
"That the president and directors of said company may, with the
assent of the holders of a majority in value of the stock in said
company, purchase and hold any other railroad in this or any other
state, and may subscribe stock in or aid in the building of any
other road in or out of this state whenever in their judgment it
may be to the interest of the said railway company to do so. They
may sell the said railway or lease the same, and may build branches
from said road and branches from said branches. That said company
may connect its said road, or any of its branches, with the
railroad of any other company in or out of this state, and may
lease and operate any railroad connecting with the road or branches
of said railway, and it may consolidate with, and make running and
operating arrangements with, any other railroad company, upon such
terms as may be agreed on by the contracting parties."
By sections 44 and 45 it was provided that the company might
issue its bonds for $1,000 each, to an amount not exceeding
$15,000,000, to be secured by "a mortgage or deed of trust
conveying said railroad and its property franchises to a trustee or
trustees."
The Great Eastern Company was organized in June, 1871. On the
15th of July, 1871, the owners of the Big Sandy road made the
following written proposition, signed by all of them, to the Great
Eastern Company:
"To the Kentucky and Great Eastern Railroad Co.: The owners of
the Maysville and Big Sandy Railroad propose to accept fifty-seven
thousand and seven dollars for the road, and all its rights and
franchises held by them under their purchase, payable in cash or
bonds of the County of Mason or other good security. Should the
payments be made in the bonds of the County of Mason, they will
take the payments in such proportion as their debt bears to the sum
voted by the County of Mason and the issuance of those bonds by the
county to the Kentucky and Great Eastern Company; but it is hereby
stipulated that, upon the acceptance
Page 117 U. S. 76
of this proposition by the Kentucky and Great Eastern, road, no
unnecessary delay shall occur in taking the vote of the County of
Mason upon their subscription to the railroad company. This
proposition to remain open for acceptance for thirty days from 15th
day of July, 1871; the work on the road to commence in good faith
in six months from the 15th July, or this article to be void."
It is manifest that in this proposition the owners of the Big
Sandy property were providing for the completion of the Big Sandy
road, under the charter of the Big Sandy Company and the act of
1866, for the only authority for the issuing of bonds of the County
of Mason was that given by the charter of the Big Sandy Company,
and, by the proposition, the bonds of that county to be taken in
payment were bonds to be issued for a subscription to stock by that
county, and the work which was to commence in six months was work
on the Big Sandy road.
The executive committee of the Great Eastern Company accepted
this proposition, and reported it to the board of directors of that
company at a meeting held by them, and it was on the 23d of August,
1871, approved by that board. On the 24th of August, 1871, the
board adopted a resolution
"That the question of submitting the proposition to the various
counties between Newport and Catlettsburg for subscriptions to the
stock of the company be referred to the executive committee, with
full powers vested in them to proceed and carry such propositions
into effect."
Newport is on the Ohio River, in Campbell County, and
Catlettsburg is on the Big Sandy River, in Boyd County, and the
counties between Newport and Catlettsburg are Campbell, Pendleton,
Bracken Mason Lewis, Greenup, and Boyd, all lying on the south bank
of the Ohio River. Maysville is in Mason County, about half way
between the east and west lines of that county.
In the fall of 1871, Mason County voted to subscribe $400,000,
and Lewis county voted to subscribe $100,000, to the stock of the
Great Eastern Company, the subscriptions to be paid in the bonds of
those counties. There is no satisfactory evidence that any work on
the road
Page 117 U. S. 77
between Maysville and Catlettsburg, or on the old line of the
Big Sandy Company, was commenced within six months from the 15th of
July, 1871, or that even surveying on that line was done within
that time.
On the 15th of February, 1872, the Great Eastern Company
executed a mortgage to the Farmers' Loan and Trust Company
(hereinafter called the "Trust Company"), a corporation of New
York, as trustee. That mortgage recites as follows:
"Whereas, the said Kentucky and Great Eastern Railway Company,
the party of the first part, has been duly chartered and organized
under and by virtue of the laws of the Commonwealth of Kentucky
with power to locate, construct, equip, and operate a line of
railway within the said Commonwealth of Kentucky from the City of
Newport, in Campbell County, State of Kentucky, upon, along, and
near the southern bank of the Ohio River in said State of Kentucky
to a point on the state line between the State of Kentucky and West
Virginia at or near Catlettsburg, Boyd County, State of Kentucky, a
distance of one hundred and forty-six miles, be the same more or
less."
It then states that the company, "for the purpose of
constructing, equipping, and completing its aforesaid line of
railway," has determined to issue its bonds for an amount "not
exceeding $15,000 per mile for the whole length of said railway in
the State of Kentucky," being in all $2,190,000, and to secure the
payment of said bonds "by a first mortgage upon the aforesaid
railroad, franchises, and all the property, real and personal,
rights and interests, now owned and possessed" by it in the State
of Kentucky, or which it "may hereafter acquire therein." It then
mortgages to the trust company
"all and singular the entire line of the Kentucky and Great
Eastern Railway Company's railroad, extending from the said City of
Newport, in the State of Kentucky, to said point in said state, on
the state line between the States of Kentucky and West Virginia, as
hereinbefore described, as the same is now or may hereafter be
located and constructed by the said party of the first part, with
the right of way, and all the real and personal property, rights
and interests, of the said party of the first part to the said line
of
Page 117 U. S. 78
railway in the State of Kentucky, whether the same is now owned
or possessed or may hereafter be acquired by the said party of the
first part, and all the privileges and franchises of the said party
of the first part for the holding, operating, and maintaining its
said line of railway."
The mortgage trust was accepted by the trustee in writing March
5, 1872, and the mortgage was recorded in October, 1872, in
Campbell, Pendleton, and Bracken Counties; in November, 1872, in
Lewis and Greenup Counties, and in January, 1873, in Boyd
County.
By an Act of the Legislature of Kentucky passed March 27, 1872,
it was provided, sec. 1, that section 10 of the Act of March 21,
1870, be amended so as to authorize the Great Eastern Company
"to construct said road through the Counties of Mason Lewis,
Greenup, and Boyd, and the said Kentucky and Great Eastern Railway
Company are hereby invested with all the rights, privileges, and
franchises necessary, as contained in their said charter, to
construct their main stem line of railway through said counties,
except as hereinafter provided."
Section 2 provided that whenever the company should desire to
submit any vote to the qualified voters of either of the four
counties above named, "for any subscriptions to the capital stock
of said railway, or any branch thereof," it should be submitted
under the provisions of section 16 of the Act of March 21, 1870,
and not otherwise. Section 2 concluded with this proviso:
"
Provided further that said Kentucky and Great Eastern
Railroad Company shall, previous to constructing their said road
east of Maysville, through Mason County, and on through the
Counties of Lewis, Greenup, and Boyd, purchase and pay for the
Maysville and Big Sandy Railroad, or make such arrangements with
the owners of said Maysville and Big Sandy Railroad as shall be
satisfactory to each of said owners."
Sections 5 and 6 were as follows:
"§ 5. The President and directors of said railroad company shall
have no authority, either under this charter or the charter of the
Maysville and Big Sandy Railroad Company, to submit to voters of
any county the question of a subscription by a county to the
capital stock of said company, but said subscription may alone be
submitted by the county court."
"§ 6. Nothing in this act shall
Page 117 U. S. 79
be construed as making valid the votes in the counties of Lewis
and Mason upon the propositions voted on in said counties to
subscribe to the capital stock in said counties."
Undoubtedly because of the concluding proviso of section 2 of
the Act of March 27, 1872, and of the fact that any agreement
growing out of the proposition of July 15, 1871, was considered to
be at an end, a resolution was adopted at a meeting of the board of
directors of the Great Eastern Company on the 19th of February,
1873, authorizing the president of the company, then Nathaniel
Sands,
"to contract with the officers and owners of the Maysville and
Big Sandy Railroad Company for the purchase and transfer of said
road to the Kentucky and Great Eastern Railway Company."
Prior to this, and on the 15th of January, 1873, all of the six
owners of the Big Sandy property except Poyntz (the Bank of
Kentucky having succeeded to the interest of Ryan) had executed the
following instrument:
"Whereas the General Assembly of the Commonwealth of Kentucky
passed an act entitled 'An act to authorize the sale of the
Maysville and Big Sandy Railroad, and providing for the
organization of a new company under its charter to construct said
road,' approved February 17, 1866, and whereas said road was duly
sold by a decree of the Mason Circuit Court in pursuance to the
provisions of said act, and was purchased by M. Ryan, H. Taylor,
Elizabeth Gray, W. H. Wadsworth, John B. Poyntz, and John G.
Hickman, trustee of Charles B. Coons, deceased, and the sale and
purchase was duly confirmed by said court, and whereas, the said
parties, as sole owners and corporators, having reorganized the
said railroad company under their purchase and said act of the
legislature, did, on the 15th day of July, 1871, propose to sell
and transfer to the Kentucky and Great Eastern Railway Company all
the property, rights, and franchises of the said Maysville and Big
Sandy Railroad Company held by them as the sole owners,
stockholders, corporators, and officers of same, for the sum of
($57,007) fifty-seven thousand and seven dollars, payable in cash
or bonds of the County of Mason or other good security, in the way
pointed out by the written proposition of that date, which was
Page 117 U. S. 80
duly accepted by said Kentucky and Great Eastern Railway
Company, and whereas, the said M. Ryan (and his assignee, the Bank
of Kentucky), H. Taylor, Elizabeth Gray, W. H. Wadsworth, John G.
Hickman, trustee of Charles B. Coons, deceased, are desirous to
faithfully carry out said contract and recognize its binding force,
and for the purpose of securing the construction of the Maysville
and Big Sandy road under its charter, and that of the Kentucky and
Great Eastern Railway Company, and with such modifications and
explanations as may the better secure the interests of said
proposers, and of said Maysville and Big Sandy Railroad Company,
the Kentucky and Great Eastern Railway Company thereto consenting,
now it is agreed by M. Ryan and the Bank of Kentucky, his assignee,
H. Taylor, Elizabeth Gray, W. H. Wadsworth, and John G. Hickman,
trustee of Charles B. Coons, deceased, being all the owners,
stockholders, and corporators of said Maysville and Big Sandy
Railroad Company, except John B. Poyntz (who does not unite in or
subscribe to this instrument), they being, however, all the
officers of said railroad company and the owners of nearly all of
its stock, property, rights, and franchises, that they will sell,
and do hereby offer to sell, on the terms and conditions
hereinafter named, all their rights, title, and interests in and to
the stock held by them in the said Maysville and Big Sandy Railroad
Company, and in and to its roadbed, bridges, material, rights of
way, and property of all kinds whatsoever, and in and to the
franchises and charter of said company, so far as they have any
power or authority, in law or equity, so to do, as owners,
stockholders, corporators, and officers of said company, owning the
large majority of the stock, for the sum of fifty-seven thousand
and sixty-five dollars, with interest at the rate of six percent
per annum, until paid, from this date, and that they will, on full
payment, transfer and convey the property, stock, rights and
franchises aforesaid, so far as they lawfully can, by any and all
instruments necessary or proper in the premises, the stock,
ownership, and rights of the said John B. Poyntz in said company
not being included herein, but left to stand upon the original
proposition signed by him as aforesaid. And the said Kentucky and
Great
Page 117 U. S. 81
Eastern Railway Company, wishing to assert and maintain the said
contract of July 15, 1871, but willing to furnish any additional
guarantee in its power to the aforesaid parties for compliance
therewith, now hereby binds and obliges itself to accept the
foregoing offer, and to pay to said parties making the same the sum
of fifty-seven thousand and sixty-five dollars aforesaid, with
interest from the 15th day of January, 1873, until paid, in
installments of the bonds of Mason County subscribed, or which may
be subscribed, to its capital stock, to be delivered to said
parties as received by said railway company, in amounts bearing the
same ratio to the sum herein agreed to be paid as the installments
of bonds from time to time delivered by said county to said railway
company bear to the whole number of bonds subscribed by said county
as aforesaid, until the whole of said sum of fifty-seven thousand
and sixty-five dollars and interest shall be fully paid. And it is
agreed by said Kentucky and Great Eastern Railway Company that if,
from any cause, said bonds, or any installments thereof, shall not
be delivered to said railway company by said county, and by reason
thereof said bonds, or any installment thereof, cannot be paid to
said parties as herein agreed, then in that case and to the extent
of such failure, said railway company shall make payment to said
parties in cash within one hundred and twenty days from the time
such bonds should have been delivered by said county to the railway
company, and upon failure to deliver either bonds or cash as
aforesaid to said parties, then this contract to be null and void.
And it is further agreed, as this contracts is made to secure the
construction of the line of said Big Sandy road to Portsmouth by
the Kentucky and Great Eastern Railway Company, that said company
shall, within one hundred and twenty days from this date, commence
the construction of said road in good faith, and shall continue to
prosecute said construction in a reasonably diligent and effectual
manner, and the failure to commence the construction as aforesaid,
or, after commencing, the failure to prosecute the same as
aforesaid, for the space of two hundred and forty days shall in
either event render this contract void, and whenever this contract,
by its terms, shall become void, then,
Page 117 U. S. 82
upon the happening of such event, said parties representing the
Maysville and Big Sandy Railroad Company and their own interests
may enter and take possession of the road, property, rights, and
franchises herein described and conditionally sold. It is finally
expressly agreed that this offer to sell and transfer on full
payment shall not admit under any circumstances of the intervention
of any prior lien on the rights, franchises, and property aforesaid
in favor of other parties, a lien being now and always retained
thereon in favor of the parties aforesaid until payment in full
shall be made. In testimony whereof, all of the parties have
hereunto signed this 15th day of January, 1873."
On the 11th of June, 1873, the proposition so made was accepted
by the Great Eastern Company by the signature of Sands, as its
president, to this memorandum at its foot:
"The foregoing proposition is accepted by the Kentucky and Great
Eastern Railway Company, which hereby agrees to purchase said
property on the terms and conditions expressed above."
On the 22d of May, 1873, at a meeting of the board of directors
of the Great Eastern Company, a contract which had before been made
by it for the construction of the road was cancelled with the
consent of the contractors, and a resolution was adopted
authorizing the president to execute a new contract, similar in
terms with the prior one, "with Frank Byrne, doing business under
the name of
Kentucky and Great Eastern Railroad Construction
Company.'"
On the same day, the contract was executed by the Great Eastern
Company and Byrne, as follows:
"This agreement, made and entered into by and between the
Kentucky and Great Eastern Railway Company, by its president, under
the authority of the board of directors, party of the first part,
and Frank P. Byrne, of Ohio, doing business as railroad builder,
under the name and style of the 'Kentucky and Great Eastern
Railroad Construction Company,' or their assigns, parties of the
second part, witnesseth:"
"That the said parties of the second part, for and in
consideration of the payment in hand of one dollar, received and
hereby
Page 117 U. S. 83
acknowledged, and for the further stipulations, covenants, and
agreements of the said party of the first part hereinafter
mentioned, hereby agree and bind themselves to construct, finish,
and equip, or cause to be constructed, finished, and equipped, the
line of railway designated by the charter of said party of the
first part, to be known as the 'Kentucky and Great Eastern
Railway,' located along the banks of the Ohio River in the State of
Kentucky, commencing at the City of Newport and extending to
Catlettsburg, on the Big Sandy River, being about one hundred and
forty-six (146) miles, by such route as may be necessary to fulfill
the conditions of any donations to said party of the first part, or
any subscriptions to the capital stock of said party of the first
party, by municipal, county, or other corporations, or by
individuals, as authorized by law, the construction of said road to
commence as soon as the right of way therefor shall be procured by
the said party of the first part, and the necessary subscriptions
voted by the counties along the line, and the work shall be
prosecuted so as to have the same completed, ready for the running
of trains, by the 15th day of February, 1878, or as much sooner as
can be done by said parties of the second part. Said construction
shall be carried on and made in good and workmanlike manner, with
timber structures for crossings or trestling, and the track laid
with iron rails not less than fifty-six pounds to the yard, lineal,
for main track, and fifty-four pounds to the yard, lineal, for side
tracks. The equipment shall be such as may be necessary to
accommodate the business that may be offered said road on its
completion."
"In consideration of the covenants and agreements aforesaid of
said parties of the second part, the said party of the first part
hereby agrees and binds itself as follows, to-wit:"
"First. That it will procure and furnish to said parties of the
second part, free of cost and in time to complete said road by the
period hereinbefore fixed, the right of way of said road, and also
such other property as it is authorized by the laws of Kentucky to
procure by purchase or condemnation, for any purpose connected with
the construction of bridges, embankments, excavations, spoil banks
or borrow pits, turn-outs, depots,
Page 117 U. S. 84
engine houses, turntables, water stations, or other things
necessary to the completion and maintenance of said road."
"Second. That it will transfer and deliver to said parties of
the second part, or cause to be transferred and delivered to them,
all the money, bonds of municipal corporations and counties, or
other property or evidences of obligation which have been given or
issued, or which may be hereafter given or issued, in payment of
any subscription to the capital stock of said party of the first
part, or which may have been, or may hereafter be, given by way of
donation, including lands, to the said party of the first part, the
said transfer and delivery to be made when and as the conditions
upon which such subscriptions or donations may be or may have been
made are complied with."
"Third. That it will, in part payment of the work of
construction agreed to be performed as aforesaid by said parties of
the second part, issue or transfer and deliver, or cause to be
delivered and transferred, to said parties of the second part or
their assigns all of the capital stock of the said party of the
first part issued or to be issued, except so much as may be
necessary to maintain, according to the law of the State of
Kentucky, the corporate character and powers of the said party of
the first part, and such stock as shall have to be issued in
payment for the subscriptions to the capital stock of said party of
the first part by the counties and municipal corporations along the
line of said road, equaling in no case the amount held by party of
the second part without their consent, said issue or transfer of
stock to the said parties of the second part to be made in
proportionate installments as each or any mile of the track of said
road is laid with iron rails as aforesaid, the said installments,
respectively, to be in the proportion to the whole amount as one
mile is to the entire length of the road, and each issue or
transfer shall be regularly made on the books of said company, and
the certificates for said stock delivered to said parties of the
second part or their assigns."
"Fourth. That it will, for the consideration aforesaid, further
pay to said parties of the second part or their assigns the sum
Page 117 U. S. 85
of two millions one hundred and ninety thousand ($2,190,000)
dollars, in the coupon seven percent gold bonds of said party of
the first part, secured by mortgage or deed of trust, a first lien
upon its corporate property and franchises, which said bonds shall
be issued in one series, which shall be for two million one hundred
and ninety thousand (2,190,000) dollars, in the aggregate, and
shall be in such form and on such terms and conditions as may be
authorized by law and as may be approved by said parties of the
second part. The payment of said mortgage bonds shall be made as
follows, to-wit: the said parties of the second part shall be
entitled to receive, if they so desire, two hundred and fifty
thousand (250,000) dollars of the first mortgage bonds aforesaid in
advance of regular payments, as hereinafter stated, giving
accountable receipts therefor, which receipts shall be cancelled on
the completion of the road and final settlement of the bond
payments. Regular payment of said bonds shall be made absolutely to
said parties of the second part or their assigns in
pro
rata installments, respectively, to be in proportion to the
whole amount as one mile is to the whole length of the road, except
in the purchase of iron rails, when said party of the second part
will be entitled to the use of such an amount of bonds (first
mortgage) as will be necessary to make such purchase, to use either
for absolute payment or as security on time purchase."
"Fifth. That it will pay, in further consideration aforesaid, to
the parties of the second part or their assigns for construction of
said road the bonds of the counties along the line of road issued
in payment of the subscription made to the capital stock of the
party of the first part, to be not less in amount that one million
two hundred thousand (1,200,000) dollars, the deficit, if any, to
be paid in cash, or its equivalent."
"Sixth. That it will pay, in further consideration aforesaid, to
the parties of the second part, in cash, or, in lieu thereof, in an
equipment bond, secured by mortgage on the equipment of the road,
its earnings, and the road itself, if the legal consent of the
stockholders can be obtained thereto, for the sum of one million
two hundred thousand (1,200,000) dollars."
"Seventh. That it will give and use its corporate credit to
aid
Page 117 U. S. 86
said parties of the second part in purchasing material, or
supplying means to carry on the said work, and to that end will
issue its notes in the name of said party of the first part, in its
corporate capacity, from time to time, as the same may be
necessary, and will deliver the same to said parties of the second
part, to be used for the purposes aforesaid, and such obligations,
if met by said party of the first part, shall be made good by said
parties of the second part, and all such notes so issued and
delivered to said party of the second part shall be regularly and
satisfactorily accounted for."
"Eighth. That it further agrees that such parties of the second
part have all the earnings of said road during construction until
accepted by said party of the first part."
"Ninth. That it will maintain its corporate organization, and,
through its proper officers and agents, do and perform every act or
thing necessary or proper to be performed by it, or in its name, in
order to protect the rights and interests of said parties of the
second part, their heirs and assigns, as stockholders in said
railway company, to the extent as hereinbefore provided, and as may
be necessary to conform to the requirements of the laws of the
State of Kentucky."
The construction company, represented by Byrne, proceeded to do
work in constructing the road, and continued till December, 1873,
when it ceased work, through pecuniary embarrassment, and never
resumed it, being a creditor of the Great Eastern Company to a
large amount for work done and materials furnished under the
contract of May 22, 1873.
On the 19th of April, 1878, Frank P. Byrne and John Byrne were,
on their own petition, adjudged bankrupts by the District Court of
the United States for the Southern District of Ohio, Frank P. Byrne
being described in the petition as "doing business as the Kentucky
and Great Eastern Railway Construction Company," and John Byrne as
"interested in profits." A. J. Hodder was appointed assignee of the
bankrupts, and the proper assignment was executed to him by the
register in bankruptcy on the 22d of May, 1878.
On the 17th of April, 1880, Hodder, as such assignee, filed a
petition in equity in the Circuit Court of Mason County,
Page 117 U. S. 87
Kentucky, against the Great Eastern Company, the trust company,
the Big Sandy Company, sundry former stockholders of that company,
the owners of the interests purchased under the foreclosure of
1869, and sundry judgment creditors of the Great Eastern Company.
The gravamen of the petition is that the construction company had,
under its contract, expended large sums of money and incurred much
debt in work on part of the line from Maysville to Catlettsburg,
completing about seven miles of it and purchasing and putting down
the iron rails and other materials; that the road and improvements,
as far as completed, and all the improvements put upon it by the
construction company, are the exclusive property of the plaintiff,
and no part of the line and improvements, finished or unfinished,
was surrendered or delivered by the construction company to the
railway company; that the value of the improvements so put into the
roadbed and road is $350,000, and they are of a permanent and fixed
nature; that the plaintiff has a first and prior lien on the entire
line of railway and said improvements for the $350,000; that the
labor performed and materials furnished and improvements made in
the construction of the line of railway by the construction company
under its contract were on the part of the line which the Great
Eastern Company acquired from the Big Sandy Company; that at the
time the contract of the construction company was made, the Great
Eastern Company had possession and exclusive control of the line of
railway purchased from the Big Sandy Company, with the consent of
that company, and of the defendants who were former stockholders in
it, and they knew of the construction contract, and of the
improvements which were being made under it, and made no objection,
but gave express consent, and are estopped from claiming ownership
of the line formerly owned by them, and especially as to the
improvements made by the construction company; that the mortgage to
the trust company was made after the Great Eastern Company had
purchased and taken possession of the Big Sandy road, and, as
between the trust company and the former stockholders of the Big
Sandy road, the trust company has priority, but its mortgage lien,
if any,
Page 117 U. S. 88
is inferior to that of the plaintiff, and that the Great Eastern
Company has abandoned work on the road, and it is being destroyed.
The petition asserts that the plaintiff has a first and prior lien
on the entire property of the Great Eastern Company, including
road, franchises, rights, privileges, improvements, and everything
appertaining to the defendants' property, for the $350,000 and
interest, and especially a first and prior lien on that part of the
line on which the labor was performed and the materials were
furnished and the improvements were made by the construction
company under its contract to the value of the same in case of a
sale; that he has no adequate remedy at law, and that the Great
Eastern Company is insolvent. The petition prays judgment against
the Great Eastern Company for $350,000 and interest, that the
plaintiff's claim may be declared a first lien on the road,
franchises, and improvements, or a first lien on that part of the
line known as the old Maysville and Big Sandy Railroad, and on the
funds derived from its sale, that a receiver be appointed of all
the property, and that the road, franchises, and improvements, and
all property involved in the controversy be sold by the court and
the proceeds distributed as prayed.
On October 28, 1880, the trust company appeared and filed its
answer and cross-petition. It sets up that the construction
contract was void because several of the directors of the Great
Eastern Company who voted to authorize its execution, and to ratify
it after it was executed, and whose votes were requisite for the
purposes, were partners in the construction company. It avers that
under the contract, as soon as the materials and improvements were
placed on the line of the railway, they became the property of the
Great Eastern Company, and the lien of the mortgage to the trust
company attached to them and became the first lien on them. It
denies the alleged ownership and lien of the plaintiff, and avers
that the improvements made were surrendered and delivered to the
Great Eastern Company. It asserts a first lien on behalf of the
trust company, and the holders of bonds secured by the mortgage, as
against the plaintiff, and as against the former owners of the Big
Sandy franchises and property, and as against the other defendants
on
Page 117 U. S. 89
the property and franchises of the Great Eastern Company and the
Big Sandy Company, and on the improvements made by the construction
company. It sets up the agreements of July 15, 1871, and January
15, 1873, and avers that after the first one was made, the Great
Eastern Company began work in good faith on the road from Newport
to Catlettsburg, including all the line of the Big Sandy road, and
executed the mortgage to the trust company, and that under the
mortgage which authorized $2,190,000 of bonds, $443,000 were issued
to persons for materials furnished and work done in and about the
building of the railway, and for money procured and expended for
that purpose. It alleges that a default in the payment of interest
on the bonds has occurred, under the terms of the mortgage, and its
conditions have become operative, and the trust company is entitled
to have possession of the mortgaged property and to have it sold,
to pay the whole amount of the principal and interest due on the
bonds issued. It prays that the plaintiff be decreed to have no
lien, or one inferior to that of the trust company; that the
property, rights, and franchises of the Great Eastern Company,
including those of the Big Sandy Company, be sold, and the
bondholders be first paid in full, and that a receiver be appointed
of all the property.
On the same day, the trust company filed in the state court a
petition and bond for the removal of the cause into the Circuit
Court of the United States for the District of Kentucky on the
ground of diversity of citizenship, but no transcript of the record
from the state court appears to have been certified until December
4, 1880, nor filed in the federal court until two days later, and
meantime proceedings went on in the state court.
On the 19th of November, 1880, Wadsworth and others filed in the
state court an answer to the petition of Hodder. It alleges that
the construction company did not perform the construction contract;
that the road and improvements are not the property of the
plaintiff; that it is not true they were to remain the property of
the construction company till they were surrendered or delivered to
the Great Eastern Company or paid for by it; that the plaintiff
does not own and has no
Page 117 U. S. 90
lien on any part of the property or franchises or line or road
of the Big Sandy Company, or of any improvements thereon, or on any
part of the line of the Great Eastern Company; that, by the
agreement of July 15, 1871, the Great Eastern Company, then having
no right to construct a line of railway in the Counties of Mason
Lewis, Greenup, and Boyd, and having no line in those counties,
arranged with the stockholders of the Big Sandy Company to buy
their stock and property rights in that company, and to construct
the Big Sandy line from Maysville to Catlettsburg; that neither
that agreement nor the one of January 15, 1873, was performed by
the Great Eastern Company; that the construction company had
knowledge of the terms of those agreements at the date of the
construction contract; that after the construction company stopped
work, the Big Sandy Company took possession of that part of the
line on which the work had been done, and had always been in
possession of the rest of the line, and that the Great Eastern
Company, after the agreement of January 15, 1873, came to an end,
surrendered to the Big Sandy Company the property on the line of
that company. It denies that the Great Eastern Company is indebted
to the construction company. After the transcript of the record was
filed in the federal court, Wadsworth and others made a motion to
remand the cause, which was denied. The plaintiff then filed a
demurrer to the cross-bill of the trust company, and Wadsworth and
others and Poyntz filed separate demurrers to the answer and
cross-bill of the trust company. In June, 1881, the court sustained
the demurrers and gave the trust company leave to amend the
cross-bill.
In the decision on the demurrers, 7 F. 793, these points were
ruled:
(1) It was not necessary that the stockholders of the Great
Eastern Company should authorize the execution of the mortgage to
the trust company.
(2) The president could legally acknowledge in Ohio the
execution of the mortgage.
(3) The cross-bill sufficiently averred that the bonds were held
by
bona fide holders.
(4) The application to foreclose was not premature.
(5) At the date of the mortgage, the Great Eastern Company had
no right to build the mortgage
Page 117 U. S. 91
road from Newport to Catlettsburg unless as a branch of its main
stem.
(6) There is nothing in the mortgage or the cross-bill
indicating that any part of the line mortgaged is a branch of the
main road authorized to be built, but the mortgage describes the
mortgaged line as the "main line."
(7) The Great Eastern Company had no right to acquire the Big
Sandy property without the assent of the holders of a majority in
value of its stock, and the cross-bill does not allege such
assent.
(8) Under the terms of the mortgage, and the allegations of the
cross-bill, the Big Sandy property was not intended to be mortgaged
as future acquired property.
On the 12th of July, 1881, the trust company filed an amended
cross-bill, in which it alleged that the purchase made by the
agreement of July 15, 1871, was made with the consent and approval
of the several stockholders of the Great Eastern Company, or a
majority in number and interest of them, and was authorized and
accepted by them, and that the line of the Great Eastern Railway,
as it existed when the mortgage was executed, acknowledged and
delivered, was located and ran through the seven counties in which
the mortgage was recorded. The prayer of the amended cross-bill
asks that out of the proceeds of sale the unpaid purchase money of
the Big Sandy property be paid before the bondholders are paid.
On the 30th of July, 1881, the plaintiff filed an amended bill,
conforming to the equity rules of the federal court and asking for
a reformation of the contract of May 22, 1873, if necessary, so as
to make it provide that the construction company be and remain the
sole owner of the improvements put on the line of the railroad
until paid for. The amended bill also claims a substitution of the
plaintiff in the claims of the Great Eastern Company against the
Big Sandy Company and Wadsworth and his associates, to the amount
of his claim.
On the same day, the plaintiff demurred to the cross-bill and
amended cross-bill of the trust company. On the 5th of September,
1881, the Great Eastern Company demurred to the same. On the same
day, the trust company answered the amended bill. On the 29th of
September, 1881, Wadsworth and others and the Big Sandy Company
answered the amended
Page 117 U. S. 92
bill and also the amended cross-bill. There were then exceptions
by the plaintiff to the answer of the trust company to the amended
bill, and to the answer of the Big Sandy Company to that bill. All
of these exceptions and demurrers were, on hearing, overruled, in
December, 1881. On the 6th of February, 1882, the plaintiff
answered the amended cross-bill of the trust company. Issues being
joined on all the answers, proofs were taken and the plaintiff's
amended bill was taken as confessed by the defendants who had not
answered it, including the Great Eastern Company. The cause was
heard on pleadings and proofs, and a decision rendered, on which a
decree was made August 8, 1882, the material parts of which are as
follows:
"The case having been fully argued by counsel and submitted to
the court, and the court being fully advised in the premises, finds
and decrees that no just claim for relief is shown against the
Maysville and Big Sandy Railroad Company or against the Bank of
Kentucky, William H. Wadwworth, John G. Hickman, assignee of
Charles of Kentucky, William H. Wadsworth, Gray executrix of
Hamilton Gray deceased, C. B. Childs, as shareholder in said
Maysville and Big Sandy Railroad Company, H. L. Wilson,
administrator of Harrison Taylor, deceased, as shareholder or part
owners of said Maysville and Big Sandy Railroad Company, or
otherwise, or against any of the other defendants, and that said
amended bill is dismissed, with costs to be taxed; that no just
claim for relief is shown against any of the before-mentioned
defendants, or any of the defendants, under the amended cross-bill
of the Farmers' Loan and Trust Company, except or other than as the
mortgage asserted in said amended cross-bill may be shown to cover
the line of railroad of the Kentucky and Great Eastern Railway
Company lying west of the west line of Mason County, Kentucky, and
the franchises of said railroad company as organized, of said
railroad company as organized, as to which excepted property the
complainant in said amended cross-bill is allowed time until the
next term of this court to make a further showing and prepare for
the approval of the court such decrees as he may be advised, but,
as to all other claims of relief under said amended cross-bill, it
is dismissed,
Page 117 U. S. 93
with costs to be taxed, without prejudice, however, to the right
of said Farmers' Loan and Trust Company to bring such other suit,
if any, as it shall be advised to recover any rights of way which
may have been acquired or for the Kentucky and Great Eastern
Railway Company, for its line of railroad east of the west line of
Mason County, other than such rights of way as were acquired by or
for the Maysville and Big Sandy Railroad Company under its charter,
or by the exercise of its franchises, and which rights of way, if
any such there are, may be found to be covered and included in the
mortgage by said Kentucky and Great Eastern Railway Company to the
said Farmers' Loan and Trust Company."
From that decree the plaintiff and the trust company took
separate appeals to this Court. Since the cases came into this
Court, Rogers Wright has been appointed assignee in bankruptcy in
place of Hodder, and been substituted in the appeals.
The circuit court, in its opinion on final hearing, reached the
following conclusions:
Even if the construction contract is valid, the plaintiff has no
lien on the roadbed or what was put upon it, either by that
contract or by possession, or under any statute of Kentucky. The
work on the road was not commenced in good faith within six months
from July 15, 1871, under the contract of that date. Neither Poyntz
nor the other parties can take advantage of his refusal to unite in
the contract of January 15, 1873. Mr. Sands was authorized to make
that contract, and the Great Eastern Company took possession of the
Big Sandy property under it. The construction company had actual
notice of the terms and conditions of that contract when it entered
into the construction contract. The parties making the conditional
sale provided for by the contract of January 15, 1873, declared the
contract to be void, according to its terms, and reentered into
possession of their property, and their right to do so was
recognized by a resolution of the board of directors of the Great
Eastern Company, and as the construction company made its contract
with actual notice of the terms and conditions of the conditional
purchase from the Big Sandy owners, the construction contract was
subject to
Page 117 U. S. 94
those terms and conditions, and the construction company and the
Great Eastern Company are bound by them. The grading, iron, ties,
culverts, etc., and all that had become a part of the roadbed of
the Big Sandy road, went with it when it was retaken. The plaintiff
shows no reason for not enforcing this forfeiture. If the
construction company is to be regarded as a distinct company from
the Great Eastern Company, having interests adverse to it, then, in
view of the evidence and of the principles laid down in
Wardell
v. Railroad Co., 103 U. S. 651, the
construction contract should not be enforced. The plaintiff cannot
have relief in this suit, even in respect to rights of way which
the Big Sandy Company did not own or in respect to that part of the
track which was relocated. The bill must be dismissed. In respect
to the cross-bill, the agreement of July 15, 1871, is shown to have
been made with the assent of the holders of a majority of the stock
of the Great Eastern Company. If the language of the mortgage
embraces the property rights which the Great Eastern Company had at
the date of the mortgage, and those subsequently obtained under the
contract of January 15, 1873, still only such rights as the Great
Eastern Company had were conveyed, and the mortgagee took subject
to the same conditions as the Great Eastern Company. When the
mortgage was made, the contract of July 15, 1871, had become
voidable at the option of the Big Sandy owners, the contract of
January 15, 1873, was made before any of the mortgage bonds were
issued, and the mortgagee took only those rights which the
mortgagor had, as against the persons who made a conditional sale
of the Big Sandy road. The mortgagee cannot separate the contract
of July 15, 1871, from that of January 15, 1873, but must take them
as the mortgagor took them. The title was never in the mortgagor,
and when the Big Sandy Company resumed the possession of its
property, under the contracts, the mortgagee was bound thereby. If
the mortgagee had, within a reasonable time, sought to set aside
the forfeiture and to be allowed the benefit of any enhancement in
the value of the property by reason of improvements, this might
have been allowed, but as the work stopped in 1873, and the
mortgagee could have sought a remedy under the
Page 117 U. S. 95
mortgage at any time after that year, the delay has been
unreasonable. The delay would not have been so material if the
provisions in the contract of January 15, 1873, for reentry, had
been made solely to secure the purchase money, but the speedy
construction of the road was a reason, if not the chief one, why
the original owners retained the right to declare the contract void
and to reenter into possession. As to any rights of way which the
Great Eastern Company obtained along the line of the Big Sandy
road, other than those purchased from the Big Sandy Company,
although Wadsworth and his associated are not entitled to them, the
cross-bill is not so drawn, nor the evidence such, that those
rights can be subjected to the mortgage in this proceeding.
This comprehensive statement of the conclusions reached by the
circuit court, as indicating the views it took of the facts and the
law in this case, may be taken as an announcement of the results at
which this Court has arrived in affirmance of the decree of the
circuit court in all particulars. It is necessary to add only a few
observations. By the terms of the contract of January 15, 1873, the
purchase money of the Big Sandy property was to be paid in bonds of
the County of Mason or in cash, within specified times, and, on
failure to do so, the contract was to become null and void. Mason
County never delivered any bonds to the Great Eastern Company, and
no payment of bonds or cash was made to the Big Sandy owners. The
sale was conditional. No ownership or title passed, and it was
expressly provided that until full payment should be made, no prior
lien should intervene on the Big Sandy property as against the lien
of the vendors.
The terms of the construction contract are inconsistent with the
idea of any ownership of the constructed road by the construction
company, or any lien on it by that company. That company was to
have all the money, municipal bonds, and property given or issued
in payment of subscriptions to stock, and all stock not necessary
to maintain the charter or not issued to municipal corporations for
subscriptions to stock, the charter or not issued to mortgage
bonds, secured by the mortgage
Page 117 U. S. 96
as "a first lien," and $1,200,000 in an equipment bond, secured
by an equipment mortgage. In other words, it was to have everything
except the road, and the Great Eastern Company was necessarily to
have and own that, so as to be able to give a mortgage on it as a
"first lien." Nor is there anything in the construction contract
suggesting a direct lien in favor of the construction company. The
provision for giving to that company all the earnings of the road
"during construction," and "until accepted" by the Great Eastern
Company, is vague and indefinite, but it cannot be construed as
giving a lien, for that would be inconsistent with the whole tenor
of the instrument.
Many questions were discussed by counsel at the bar and in their
briefs, and we have given attention to all the views and arguments
on the part of the respective appellants, but the considerations
above stated, on which the case was disposed of by the circuit
court, seem to us to be controlling, and to make it unnecessary to
say anything further.
Decree affirmed.
MR. JUSTICE MATTHEWS did not sit in these cases or take any part
in their decision.