Farley v. Kittson,
120 U.S. 303 (1887)

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U.S. Supreme Court

Farley v. Kittson, 120 U.S. 303 (1887)

Farley v. Kittson

Argued March 29-30, 1886

Reargued December 8-9, 1886

Decided February 7, 1887

120 U.S. 303


At the hearing upon a plea in equity and a general replication, no fact is in issue but the truth of the matter pleaded.

Objections to the equity of the plaintiff's claim, as stated in his bill, cannot be taken by plea.

A plea in equity, though under oath and negativing a material averment in the bill, is no evidence in the defendant's favor.

A bill in equity to enforce a contract between the plaintiff and the defendants to purchase for their joint benefit the bonds, secured by mortgages, of two railroads, of one of which the plaintiff was receiver and of the other general manager under the trustees in the mortgage, alleged that he performed the agreement on his part; that the defendants purchased the bonds through an agent of the bondholders, and afterwards purchased the railroads under decrees of foreclosure, and entered into possession and made large profits, and refused to account to the plaintiff for his share, and that the plaintiff, pending the negotiations for the purchase of the bonds, informed the agent of the bondholders of his interest, and at all times answered to the best of his knowledge and ability all inquiries of the bondholders or their agent or of the trustees or any person interested in the property, and always acted honestly and in good faith toward all such persons. The defendants filed a plea averring that neither the agent nor the bondholders had any notice of the plaintiff's interest until after the sale of the railroads under the decrees of foreclosure,

Page 120 U. S. 304

and that the agreement sued on was a breach of his trusts as receiver and as manager, and did not entitle him to relief in equity. A general replication was filed, and at the hearing, the truth of the fact averred in the plea was disproved. Held that the plea must be overruled and the defendants ordered to answer the bill.

This was a bill in equity by Jesse P. Farley against Norman W. Kittson, James J. Hill and the St. Paul, Minneapolis and Manitoba Railway Company, which, as amended by leave of court, contained the following allegations:

That in 1876 the plaintiff and Kittson and Hill agreed together to acquire by purchase or contract, for their joint and equal benefit, all that could be obtained of the bonds of the St. Paul and Pacific Railroad Company and the First Division of the St. Paul and Pacific Railroad Company, two corporations existing under the laws of Minnesota, and owning railroads in that state, those bonds being then outstanding and for sale at a large discount, and secured by mortgages upon the railroads, then in process of foreclosure; that the object of the agreement was to buy the railroads at the foreclosure sales, using the bonds in payment, and thereby to acquire the railroads; that it was also agreed that, in order to obtain from one Donald A. Smith and other capitalists the funds required for the enterprise, Kittson and Hill might use or give them an interest therein, but that all the interest not so used or given should be retained and held for the joint and equal benefit of the plaintiff and Kittson and Hill.

That it was further agreed between the plaintiff and Kittson and Hill that the details of the negotiations for procuring the necessary funds and for the purchase of the bonds should be principally conducted and managed by Kittson and Hill and the persons so given an interest in the enterprise, and that the plaintiff "should furnish such facts, information, and advice, and render such aid and assistance therein, from time to time, as should be required of him."

That the plaintiff

"had knowledge not possessed by any of the other parties as to the whereabouts and situation of said bonds, the rated value thereof by the holders, the mode whereby, and the channel through which, the same could be

Page 120 U. S. 305

reached and procured; also in respect to the situation, amount, character, and value of the lines of railroad and property mortgaged to secure said bonds, and in respect to the pending suits for the foreclosure of said mortgages, and that the services of the plaintiff in respect to all of said matters, and his cooperation, were indispensable to the success of said enterprise."

That thereupon Kittson procured funds from Smith and one George Stevens, and agreed to give them a share in the enterprise, the amount of which was unknown to the plaintiff, but was believed by him to be one-half, and that the rest belonged to the plaintiff, Kittson, and Hill in equal shares.

That pursuant to the agreement between the plaintiff and Kittson and Hill, negotiations were opened in 1877 and carried on until 1879, resulting in the purchase of bonds, amounting in the aggregate at their face value and interest, to more than $25,000,000, and that the purchases of bonds were made by and in the name of Smith, Stevens, Kittson, and Hill but for the purpose of being used in the purchase of the railroads when offered for sale under foreclosure decrees, and under and in pursuance of the agreement between the plaintiff and Kittson and Hill.


"throughout said negotiations for the purchase of said bonds, and in the purchases thereof, the plaintiff was continuously called upon by the said Kittson and Hill for facts and information, advice and cooperation, in respect thereto, and at their request furnished and rendered the same, pursuant to the aforesaid agreements and understandings between them, and that said negotiations were only successful through and by means of the advice and cooperation of the plaintiff, and the facts and information peculiarly within his knowledge as aforesaid, and imparted by him to the said Kittson and Hill at their request, under said understandings and agreements."

That most of the purchases of bonds were made under an agreement with the holders that they should not be paid for till the railroads were sold under decrees of foreclosure, and that the sellers of the bonds should then have the option of

Page 120 U. S. 306

being paid in cash, or of taking new bonds issued by a company to be organized by the purchasers, and secured by mortgage upon the same property.

That nearly all the bonds were owned in Holland, and that one John S. Kennedy was agent of a large majority of the bondholders, with full authority to take such action in respect to them as he thought best, and was a trustee in all the mortgages, except one for $15,000,000 on the First Division of the St. Paul and Pacific Railroad, and was the agent of the holders of more than $11,000,000 of the bonds secured by that mortgage, and that all the foreclosure suits had been commenced by his order, and were prosecuted under his general control and direction.

That the plaintiff

"was appointed receiver of the property of the St. Paul and Pacific Railroad Company, and was made general manager of the lines of road of the First Division of the St. Paul and Pacific Railroad Company, under the trustees in said mortgages in possession thereof, upon the recommendation and at the instance and request of said Kennedy."

That after the agreement between the plaintiff and Kittson and Hill and before the decrees of foreclosure, and before the purchase of any of the bonds, and while negotiations were pending for the purchase of the bonds represented by Kennedy,

"the plaintiff informed the said Kennedy of his said interest and connection with the said Kittson and Hill in the project for the purchase of said bonds, and that the said Kennedy had full notice and knowledge that he was so connected therewith and interested therein, and fully approved and sanctioned the same;"

that the negotiations for the purchase of the bonds were mainly had with Kennedy, as agent of the bondholders, and the bonds purchased were placed in the hands of Kennedy and his partner, one Barnes, to be held until paid for as agreed, and were so held, and only delivered upon being so paid for, and that Kennedy strongly recommended the bondholders to sell their bonds upon the terms offered by Smith, Stevens, Kittson, and Hill as the best disposition of them that could be made.


"to all inquiries made by said Kennedy, or any of the

Page 120 U. S. 307

trustees in said mortgages, or by any of the holders of any of the bonds secured thereby, or by anyone interested in the property under his charge as manager or receiver, he [the plaintiff] at all times gave full and true answers and information to the best and utmost of his knowledge and ability, and kept the said Kennedy fully informed of all facts, matters, and things coming to his knowledge affecting said property, and in all things acted honestly and in good faith toward all persons interested in the property under his control as receiver and manager as aforesaid."

That the defendant railway company was a corporation organized under the laws of Minnesota in May, 1879, by Kittson, Hill Smith, and Stevens, for the purpose of taking, holding, and managing the mortgaged railroads, for the use and benefit of the parties interested in the purchase of the bonds, and that those four persons were directors and officers of this company, and had control of it.

That in March and April, 1879, foreclosure decrees were entered in the pending suits, directing the sale by auction of the mortgaged railroads, and allowing outstanding bonds to be taken in payment for an amount equal to what they would be entitled to by way of dividends under those decrees; that in May and June, 1879, the railroads were sold accordingly, and, by direction and procurement of Kittson, Hill Smith, and Stevens, purchased by the defendant railway company, for the use and benefit of the parties interested in the purchase of the bonds, as aforesaid, including the plaintiff, and all the bonds purchased were then used in payment; that the defendant company paid nothing for the railroads, but took them without consideration, except the consideration furnished and provided by the plaintiff and Kittson, Hill Smith, and Stevens, which consideration, aside from the bonds, was furnished by Smith and Stevens, as aforesaid; that property worth in all over $15,000,000 was thereby vested in the company, for the use and benefit of the plaintiff and Kittson, Hill Smith, and Stevens, in proportion to their respective interests, and the company had notice at the time of the purchase that the plaintiff was jointly interested with Kittson and Hill.

Page 120 U. S. 308

That the defendant company in June, 1879, issued and negotiated new bonds to the amount of $8,000,000, secured by mortgage of the railroads, and with these bonds paid for all the bonds purchased as aforesaid, and all other expenses of the enterprise, and had since, under the control and management of Kittson, Hill Smith, and Stevens, held and operated the railroads, and made large net profits.

That the capital stock of this company was $15,000,000, which represented the property acquired, and was part of the profits resulting from the enterprise; that other profits, amounting to many hundred thousand dollars, had also been divided between Kittson, Hill Smith, and Stevens, and that a large amount of stock had been distributed among them, of which Kittson and Hill received 57,646 shares, being part of that to which the plaintiff, Kittson, and Hill were entitled under the arrangement with Smith and Stevens, but that the company neglected and refused to deliver any of the stock to the plaintiff.

That Kittson and Hill never questioned, but always admitted, the plaintiff's right to share equally with them, until after the organization of the defendant company in May, 1879, and then at first only suggested to him that his share ought not to be equal to theirs, because they had, as they claimed, been required to advance some money in carrying out the enterprise; but now the defendants, confederating to defraud the plaintiff, refused to account with him, or to deliver to him any stock, or to pay him any of the profits of the enterprise, and ignored and disregarded all his rights in the premises.

The bill prayed for a discovery, for an account, and that the plaintiff be adjudged to be entitled to an equal share with Kittson and Hill in the enterprise and its profits, and they be ordered to pay and turn over to him one-third of the moneys, bonds, and stocks received by them, and the railway company be ordered to issue to him his proportion of stock, and to recognize his rights in its stock and property as equal to those of Kittson and Hill and for further relief.

To this bill the St. Paul, Minneapolis and Manitoba Railway Company demurred, for want of equity, and Kittson and Hill filed a plea.

Page 120 U. S. 309

The plea, after setting out with particularity the various issues of bonds, secured by mortgages, by the St. Paul and Pacific Railroad Company, and by the First Division of the St. Paul and Pacific Railroad Company, and the appointment of successive trustees under those mortgages, and alleging that, upon a bill filed in 1873, by Kennedy and others, on behalf of all the bondholders under a mortgage of $15,000,000 on the first of those railroads, Farley was appointed by the court, on August 1, 1873, receiver of that railroad, and accepted the trust, and took possession of and managed the road from that date until it was sold and delivered to the defendant railway company under a decree of foreclosure, as stated in the bill; that on October 9, 1876, Kennedy and two others, as trustees, under and pursuant to mortgages on the second of those railroads, took possession of it, and that from that date, until it was delivered to the purchaser under a decree of foreclosure, those trustees held and operated it, and Farley was the general manager of it for them, and had full control of the management thereof, continued and concluded as follows:

"That the said plaintiff never at any time informed the said Kennedy, nor any of the holders of any of said mortgage bonds, of his interest in the project for purchasing said bonds, or of his interest in the project of acquiring by means of said bonds the said mortgaged property, which he alleges in his bill of complaint; nor did the said Kennedy nor any of said bondholders know, suspect, or have any information or belief at any time until after the confirmation of all said foreclosure sales, that the plaintiff ever claimed to have any such interest, or any interest in said projects, or either of them."

"And these defendants say that, as receiver of said lines covered by said $15,000,000 mortgage, the said plaintiff could not lawfully make the agreement with these defendants mentioned in the bill of complaint or engage in the enterprise therein mentioned of purchasing the bonds of said $15,000,000 issue or in the enterprise of purchasing the said mortgaged property, and that the making of such an agreement and the embarking in such an enterprise by him was a breach of trust on his part as such receiver and a fraud on the holders of the

Page 120 U. S. 310

bonds of said $15,000,000 issue, and was a fraud upon this court, whose receiver he was, and that, as general manager for the trustees in said mortgages of the lines of railroad of said First Division Company, the said plaintiff occupied a position of trust and confidence toward his employers, the said trustees, and toward the holders of the bonds secured by said mortgages, and that by making the agreement and engaging and continuing in the enterprise of purchasing the said bonds and said mortgaged property mentioned in his said bill, the said Farley was guilty of a breach of trust toward, and a fraud upon, the said trustees and the said bondholders."

"And these defendants say that by reason of the said fiduciary positions occupied by the plaintiff, as aforesaid, he is not entitled to the aid of a court of equity to enforce, as against these defendants, any of the agreements mentioned in said bill, or any rights claimed by him and growing out of said agreements."

"Therefore these defendants do plead all and singular the matters aforesaid in bar to the plaintiff's said bill, and pray the judgment of this honorable court whether they should be compelled to make any further answer to the said bill, and pray to be hence dismissed, with their reasonable costs and charges in this behalf most wrongfully sustained."

Annexed to the plea were a certificate of counsel that it was, in their opinion, well founded in point of law, and an affidavit of the defendant Hill that the plea was true in point of fact, and was not interposed for delay, and that the defendant Kittson was absent from the state and district of Minnesota.

The plaintiff filed a general replication to the plea, and on his motion the demurrer of the railway company and the plea of Kittson and Hill were set down for hearing. The demurrer of the company was overruled, and, on its application, it was ordered that the plea of Kittson and Hill should stand as the joint and several plea of all the defendants.

The case was then heard upon the bill, plea, replication, and proofs. The only evidence introduced was a stipulation in writing of counsel that the averments of the plea, preceding those

Page 120 U. S. 311

above quoted in full, were true; the bill on which the plaintiff was appointed receiver; an order passed by the court on that bill on May 31, 1878, reciting that Stevens, Smith, Kittson, and Hill under an agreement between them and the bondholders, dated March 13, 1878, were the equitable owners of $11,400,000 of the $15,000,000 issue of bonds, and authorizing Farley as receiver to finish the roads with money to be supplied by them, and the deposition of the plaintiff, the substance of which was that, before the completion of the purchase of the bonds, he informed Kennedy by a letter (which could not be found) that Kittson and Hill had offered him an interest in it, in answer to which Kennedy, on February 25, 1878, wrote him a letter (which he produced), acknowledging the receipt of his letter, and saying: "We think it will pay you to take an interest with Kittson and Hill and we are glad to hear that they have offered it to you;" but that the plaintiff did not disclose to Kennedy that he had already the same interest that Kittson and Hill had, because he had agreed with them that he would not make the fact public, for fear that the stockholders might hear of it, and apply to the court to have him removed, and another receiver appointed, to the detriment of the enterprise, and of the interests of the bondholders, and that he did not inform the court of his interest when the order of May 31, 1878, was made.

The circuit court, assuming it to be proved that the plaintiff informed Kennedy of his interest, yet held that the agreement of the plaintiff with Kittson and Hill was unlawful and void, and on that ground sustained the plea and dismissed the bill. 14 F. 114. The plaintiff appealed to this Court.

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