A state is an indispensable party to any proceeding in equity in
which its property is sought to be taken and subjected to the
payment of its obligations.
The North Carolina subscribed in 1856 for capital stock in a
railway company which had been incorporated by its legislature,
issued its bonds with thirty years to run, sold them, and with the
proceeds paid its subscription, and received certificates of stock
therefor, which certificates it never parted with and still holds.
In the act incorporating the company and authorizing the issue of
the bonds, it was provided that, as security for their redemption
"the public faith of the state . . . is hereby pledged to the
holders, . . . and in addition thereto all the stock held by the
state " in the railroad company "shall be pledged for that purpose"
and that "any dividend" on the stock "shall be applied to the
payment of the interest accruing on said coupon bonds." The state
being in default in the payment of the interest due on the bonds
since 1868, a
Page 133 U. S. 234
bondholder, who was a citizen of Virginia, brought suit in the
Circuit Court of the United States in the Eastern District of North
Carolina against the Railroad Company, its president and directors,
the person holding the proxy of the state upon the stock held by
it, and the treasurer of the state, praying to have the
complainant's bonds decreed to be a lien upon the stock owned by
the state and upon any dividends that might be declared thereon,
and that such dividends might be paid to complainant and to such
bondholders as might join in the suit, and for the sale of the
stock if the dividends should prove insufficient, and for an
account, and for the appointment of a receiver, and for an
injunction
Held that as the state was an indispensable party to
the suit, the bill must be dismissed.
In equity. Decree dismissing the bill, from which the
complainants appealed. The case is stated in the opinion.
Page 133 U. S. 235
MR. JUSTICE BRADLEY delivered the opinion of the Court.
The State of North Carolina, by virtue of an Act of its
Legislature passed 12th February, 1855, and through its board of
internal improvement, subscribed for $1,066,600 of the capital
stock of the Atlantic and North Carolina Railroad Company, a
corporation created by act of the legislature of said state for the
purpose of building a railroad from Beaufort to Goldsborough. In
order to raise money to pay for this stock, the board of internal
improvement, by virtue of the same act, issued the bonds of the
state, signed by the governor and countersigned by the public
treasurer, each for the sum of $500, and in the following form,
to-wit:
Page 133 U. S. 236
"
$500.00 UNITED STATES OF AMERICA $500.00"
"It is hereby certified that the State of North Carolina is
justly indebted to _____, or bearer, five hundred dollars,
redeemable in good and lawful money of the United States at the
Bank of the Republic, in the City of New York, on the first day of
January, eighteen hundred and eighty-six, with interest thereon at
the rate of six percent per annum, payable half-yearly at the said
bank, on the first days of July and January in each year from the
date of this bond until the principal be paid, on surrendering the
proper coupon hereto annexed. In witness whereof, the governor of
the said state, in virtue of power conferred by law, hath signed
this bond and caused the great seal of the state to be hereunto
affixed, and her public treasurer hath countersigned the same at
the seat of government of the said state this first day of January,
eighteen hundred and fifty-six."
"[Signed] THOMAS BRAGG,
Governor"
"[Contersigned] D. W. COURTS,
Public Treasurer"
"Issued under an act to amend an act entitled 'An act to
incorporate the Atlantic and North Carolina Railroad Company and
the North Carolina and Western Railroad Company,' chapter 232."
The act which authorized the issue of these bonds contained the
following guaranty of their payment (sect. 10):
"
Be it further enacted that, as security for the
redemption of said certificates of debt, the public faith of the
State of North Carolina is hereby pledged to the holders thereof,
and in addition thereto, all the stock held by the state in the
Atlantic and North Carolina Railroad Company, hereby created, shall
be pledged for that purpose, and any dividend of profit which may
from time to time be declared on the stock held by the state, as
aforesaid, shall be applied to the payment of the interest accruing
on said coupon bonds; but until such dividends of profit may be
declared, it shall be the
Page 133 U. S. 237
duty of the treasurer, and he is hereby authorized and directed,
to pay all such interest as may accrue out of any moneys in the
treasury not otherwise appropriated."
The state received certificates for the stock subscribed, and
still holds the same, which stock is represented in the meetings of
the stockholders of the railroad company by a proxy appointed by
the governor of the state, by virtue of the charter of the railroad
company. William E. Christian, a citizen of Virginia, the complaint
in this suit, is the holder of ten of the bonds issued as
aforesaid, and, as no interest had been paid thereon since the year
1868, he filed this bill in July, 1883, in behalf of himself, and
all other holders of the bonds referred to who should come in and
contribute to the expenses of the suit, and he made defendants to
the suit the Atlantic and North Carolina Railroad Company, the
president and directors of said company, personally, F. M. Simmons,
the proxy representing the stock owned by the state, and J. M.
Worth, treasurer of the state. The bill sets forth the material
parts of the acts in question; which acts created the company, and
authorized the board of internal improvements, on behalf of the
state, to subscribe for two-thirds of the capital stock of the
company, and for that purpose to borrow money on the credit of the
state and issue bonds therefor. It particularly sets forth the
section before referred to, which guaranteed the payment of the
bonds, and thereto pledged the stock held by the state. It states
the fact of the subscription of the stock, and the issue of the
bonds, and alleges that the complainant is the
bona fide
holder for value of ten of the bonds, whose numbers are given, all
having interest coupons attached, the first payable January 1,
1869, and one on each bond for every six months thereafter. The
bill then avers that ever since the year 1868, the state has
neglected and refused to make any provision for the payment of the
interest, and that all interest accruing since that time remains
due. As the next averment indicates the legal view on which the
bill seems to be founded, we quote it in full. It alleges as
follows, to-wit:
Page 133 U. S. 238
"That the aforesaid certificates of debt or bonds are, by virtue
of the act of the General Assembly of the said State of North
Carolina, hereinbefore recited, and of the pledges therein made by
the said state, a lien upon the 10,666 shares of stock owned and
held by said state in the said the Atlantic and North Carolina
Railroad Company in payment for which the said bonds or
certificates of debt were issued, and upon all dividends of profits
that have been, and that may hereafter be, declared upon said
stock, and that the holders of said certificates, among whom is
your orator, are, in equity and good conscience, entitled to have
and receive all such dividends and profits as the same are paid for
and upon account of the interest due and accruing on said
certificates."
The bill then states that it appears from the report of the
officers of the railroad company made to the annual meeting of
stockholders in June, 1881, that for the preceding fiscal year, the
company had received more money than was expended in running and
operating the road, and that on the 1st of July, 1881, the company
leased all its property to the Midland North Carolina Railroad
Company for the sum of $40,000 per year, the lessee to keep the
same in good repair, and then adds:
"That these sums, not being required for the necessary expenses
of said company, or a large part thereof, should have been
distributed to and among the stockholders of said company by way of
dividends, and that the holders of the coupons of said bonds or
certificates, among whom is your orator, are entitled in equity and
good conscience to have whatever sum may be received by the state
as and for dividends on the stock owned by said state in said
company appropriated to the payment of the interest due and in
arrears on said bonds."
The bill further states that the Midland Company having failed
to comply with its contract, the lease has been declared forfeited
and rescinded, and the property has been restored to the management
of the Atlantic and North Carolina Railroad Company. The bill then
states, on information and belief, that it is the purpose and
intent of the directors to again lease the road and
Page 133 U. S. 239
property of the company, to which the complainant objects for
reasons set forth in the bill, and asks for an injunction to
prevent the same being done; but, as this part of the bill, and the
relief sought in relation thereto, was abandoned at the hearing in
the court below, and is not urged on this appeal, it is unnecessary
to notice it further, except to quote the concluding paragraph,
which states the nature of the claim of the bondholders upon the
stock owned by the state in the railroad company, and is apposite
to a full understanding of complainants' position. It is as
follows, to-wit:
"XXII. That the holders of said bonds, having a lien on the said
stock for the payment of the principal and interest of their said
debt, are in equity the real owners of said stock, and that the
same should be applied by said state, through its proper officers,
to the payment of said debt, and that the state should do nothing
herself, nor allow anything to be done by her officers, or by her
associates in said company, which would destroy or impair the value
of this security to her said creditors, and he insists, being so
advised, that it is contrary to equity and good conscience for the
proxy of the state to give his consent, and thereby the consent of
the state, to any contract of lease to be made by said company,
without the consent and concurrence of the holders of said bonds,
until the state shall have made adequate provisions for the payment
of said debt, both principal and interest."
The prayer of the bill, so far as relates to the stock held by
the state in the railroad company, and to the dividends thereon, is
substantially as follows, to-wit:
1st. That the bonds or certificates of debt held by the
complainant and others may be decreed to be a lien upon the said
stock and dividends until paid or redeemed.
2d. That all dividends on said stock may be paid to the
complainant, and the other bondholders who may join him in the
suit.
3d. That if said dividends prove insufficient for this purpose,
a sale of said stock, or so much thereof as may be necessary to pay
said certificates, may be made under the decree of the court.
Page 133 U. S. 240
4th. That an account may be taken of the amount due for
interest, etc.
5th. That a receiver may be appointed to take possession of the
dividends hereafter payable to the state
6th. That the officers of the railroad company may be enjoined
from paying to the state treasurer, or to any other person, on
behalf of the state, any dividends which may accrue to the state,
and that the treasurer may be enjoined from receiving the same.
To this bill Simmons, the proxy of the state stock, and Worth,
the state treasurer, filed a joint answer separate from the other
defendants, admitting the material statements of the bill so far as
relates to the origin and character of the stock and bonds referred
to, but denying that any dividends were or could be made on the
stock in consequence of the expenses and legitimate obligations of
the railroad company. The concluding averment of their answer is as
follows, to-wit:
"VII. These defendants, further answering, say that two
certificates of stock -- one for one thousand and sixty-six shares,
and the other for two hundred shares -- have been issued to the
State of North Carolina by the defendant company, which
certificates, together with the stock represented thereby, are the
property of the state and are in her possession, and have been for
a long time before the commencement of this suit, with authority in
no one to part with the same except by the direction of the General
Assembly of the state, and these defendants are advised that, so
being the property of the state and in her actual possession, they
cannot be taken therefrom or in any wise be affected by any decree
rendered in a cause to which the state is not a party, and these
defendants rely upon the fact that the state is not a party to this
suit, as if the same had been specially pleaded."
The other defendants also filed answers to the bill, but it is
unnecessary to refer to them or to other incidental proceedings
which took place in the cause. The important facts on which relief
is claimed are as above recited from the statements of the
pleadings. The bill was dismissed by the court below, and from that
decree the present appeal was taken.
Page 133 U. S. 241
From the foregoing summary of the statements and prayer of the
bill, we see that its object and purpose is to obtain, in behalf of
the complainant and other bondholders, the adjudication of a lien
upon the stock held by the State of North Carolina in the Atlantic
and North Carolina Railroad Company, and upon the dividends on said
stock, and the enforcement of that lien, by requiring said
dividends to be paid to the bondholders in satisfaction of the
amount due on their bonds, and if these are insufficient, by a sale
of said stock or so much thereof as may be necessary, aided by the
appointment of a receiver to take possession of said dividends, and
an injunction to restrain the railroad company and its officers
from paying to the state treasurer, or to any other person, on
behalf of the state, and to restrain said treasurer from receiving,
any moneys accruing and payable as dividends on said stock.
How the dividends due to the state can be seized and
appropriated to the payment of the bonds, or how the stock held and
owned by the state can be sold and transferred, through the medium
of a suit in equity, without making the state a party to the suit,
it is difficult to comprehend. The general rule, certainly, is that
all persons whose interests are directly to be affected by a suit
in chancery must be made parties.
Russell
v. Clark's Executors, 7 Cranch 98;
Shields v.
Barrow, 17 How. 130,
58 U. S. 139;
Ribon v. Railroad
Cos., 16 Wall. 446;
Williams
v. Bankhead, 19 Wall. 563;
McArthur v.
Scott, 113 U. S. 340. The
exceptions to the rule are pointed out in these cases, and do not
touch the present case. The state has a direct interest to be
affected by such a proceeding. The proposal is to take the property
of the state, and apply it to the payment of its debts due to the
plaintiffs, and to do it through the instrumentality of a court of
equity.
The ground on which it is contended that this may be done is
that the property is affected by a pledge, and may therefore be
dealt with
in rem. But a pledge, in the legal sense,
requires to be delivered to the pledgee. He must have the
possession of it. He may then, in default of payment of the debt
for which the thing is pledged, sell it for the purpose of raising
the amount by merely giving proper notice to the
Page 133 U. S. 242
pledgeor. In the case of stocks and other choses in action, the
pledgee must have possession of the certificate or other
documentary title, with a transfer executed to himself or in blank,
unless payable to bearer, so as to give him the control and power
of disposal of it. Such things are then called "pledges," but more
generally "collaterals," and they may be used in the same manner as
"pledges" properly so called. If there is no transfer attached to
or accompanying the document, it is imperfect as a pledge, and
requires a resort to a court of equity to give it effect.
These propositions are so elementary that they hardly need a
citation of authorities to support them. Reference may be made,
however, to Story on Bailments ยง 297
et seq.; Casey v.
Cavaroc, 96 U. S. 467.
The stock and dividends of the State of North Carolina now in
question have nothing about them in the nature of a pledge. The
tenth section of the act of 1855, relied on by the complainant for
creating a pledge, must be understood as using the word in a
popular, and not in a technical, sense. That section declares first
that, as security for the redemption of said certificates of debt,
the public faith of the state is hereby pledged to the holders
thereof. This is no more than a solemn promise on the part of the
state to redeem the certificates. The section next, in addition to
the pledge of the public faith, declares that all the stock held by
the state in the Atlantic and North Carolina Railroad Company shall
be pledged for the same purpose, and any dividend of profit
declared thereon shall be applied to the payment of the interest on
said bonds. This was nothing more than a promise that the stock
should be held and set apart for the payment of the bonds, and that
the dividends should be applied to the interest. There was no
actual pledge. It was no more of a pledge than is made by a farmer
when he pledges his growing crop, or his stock of cattle, for the
payment of a debt without any delivery thereof. He does not use the
word in its technical, but in its popular, sense. His language may
amount to a parol mortgage, if such a mortgage can be created; but
that is all. So, in this case, the pledge given by the state in a
statute may have amounted
Page 133 U. S. 243
to a mortgage, but it could amount to nothing more, and, if a
mortgage, it did not place the mortgagee in possession, but gave
him merely a naked right to have the property appropriated and
applied to the payment of his debt. But how is that right to be
asserted? If the mortgagor be a private person, the mortgagee may
cite him into court, and have a decree for the foreclosure and sale
of the property. The mortgagor or his assignee would be a necessary
party in such a proceeding. Even when absent, beyond the reach of
process, he must still be made a party, and at least constructively
cited, by publication or otherwise. This is established by the
authorities before referred to, and many more might be cited to the
same effect. The proceeding is a suit against the party to obtain,
by decree of court, the benefit of the mortgage right; but where
the mortgagor in possession is a sovereign state, no such
proceeding can be maintained. The mortgagee's right against the
state may be just as good and valid, in a moral point of view, as
if it were against an individual. But the state cannot be brought
into court or sued by a private party without its consent. It was
at first held by this Court that, under the Constitution of the
United States, a state might be sued in it by a citizen of another
state, or of a foreign state; but it was declared by the Eleventh
Amendment that the judicial power of the United States shall not be
construed to extend to such suits.
New Hampshire v.
Louisiana, 108 U. S. 76;
Louisiana v. Junel, 107 U. S. 711;
Marye v. Parsons, 114 U. S. 327;
Hagood v. Southern, 117 U. S. 52;
Ex Parte Ayers, 123 U. S. 443.
There is a class of cases, undoubtedly, in which the interests
of the state may be indirectly affected by a judicial proceeding
without making it a party. Cases of this sort may arise in courts
of equity, where property is brought under its jurisdiction for
foreclosure or some other proceeding, and the state, not having the
title in fee or the possession of the property, has some lien upon
it or claim against it, as a judgment against the mortgagor,
subsequent to the mortgage. In such a case, the foreclosure and
sale of the property will not be prevented by the interest which
the state has in it, but its
Page 133 U. S. 244
right of redemption will remain the same as before. Such cases
do not affect the present, in which the object is to take and
appropriate the state's property for the purpose of satisfying its
obligations.
The Siren, 7
Wall. 152,
74 U. S. 157;
Briggs v. Light Boats, 11 Allen 158, 173.
It remains true, therefore, that a bill will not lie to effect a
foreclosure and sale, or to obtain possession of property belonging
to the state, and for the very plain reason that in such a case,
the state is a necessary party, and cannot be sued. This was
distinctly held by this Court in the case of
Cunningham v.
Macon & Brunswick Railroad, 109 U.
S. 446. In that case, the State of Georgia had endorsed
the bonds of a railroad company, taking a lien upon the railroad as
security. The company failed to pay the interest of the endorsed
bonds, and the governor of the state, under the power vested in
him, took possession of the road and put it into the hands of a
receiver, who sold it to the State of Georgia and made a conveyance
to the state accordingly. Thereupon the state, by the governor and
other officers and directors, took possession of and operated the
road. The holders of a second mortgage on the same property filed a
bill to foreclose their mortgage and to set aside the sale made by
the receiver as invalid, and to have priority of lien for reasons
stated in the bill. They made the governor, the state treasurer,
and the state directors of the road parties defendant. This Court
held that the bill would not lie, because the state was an
indispensable party. MR. JUSTICE MILLER, delivering the opinion of
the Court, said:
"Whenever it can be clearly seen that the state is an
indispensable party to enable the court, according to the rules
which govern its procedure, to grant the relief sought, it will
refuse to take jurisdiction."
Again:
"In the case now under consideration, the State of Georgia is an
indispensable party. It is in fact the only proper defendant in the
case. No one sued has any personal interest in the matter or any
official authority to grant the relief asked. No foreclosure suit
can be sustained without the state, because she has the legal title
to the property, and the purchaser under a foreclosure decree would
get no title, in the absence of the state. The
Page 133 U. S. 245
state is in the actual possession of the property, and the court
can deliver no possession to the purchaser. The entire interest
adverse to the plaintiff in this suit is the interest of the State
of Georgia in the property, of which she has both the title and
possession."
These remarks are strikingly applicable to the present case. The
State of North Carolina is the only party really concerned. The
whole proceeding is virtually against her. The object of the suit
is to get possession of her property, to sequester her dividends,
if any there may be, and to compel the payment of them to the
complainants; to seize and sell her stock in the railroad, stock of
which she is in sole possession. Be it true that the bondholders
have a lien on said dividends and stock, it is not a lien that can
be enforced without suit, and that a suit against the state.
We are referred to a decision made at the circuit by Chief
Justice Waite in the case of
Swasey v. North Carolina Railroad
Company, 1 Hughes 17, in which, in a case similar to the
present, it was held that inasmuch as the shares of stock belonging
to the state were pledged for the payment of the complainants'
bonds, they were held by the railroad company as trustee for the
bondholders as well as the state, and that if the trustee was a
party to the suit, it was not necessary that the state should be a
party. We are not certain that we are fully in possession of the
facts of that case, but, if they were the same as in the present
case, with the highest respect for the opinions of the lamented
Chief Justice, we cannot assent to the conclusions to which he
arrived. In the general principles that a state cannot be sued;
that its property, in the possession of its own officers and
agents, cannot be reached by its creditors by means of judicial
process, and that in any such proceeding the state is an
indispensable party, Chief Justice Waite certainly did express his
emphatic concurrence, in the able opinion delivered by him on
behalf of the Court, in the case of
Louisiana v. Junel,
107 U. S. 711. His
views in the
Swasey case seem to have been based on the
notion that the stock of the state was lodged in the hands of the
railroad company as a trustee for the parties concerned, and was
not
Page 133 U. S. 246
in the hands of the state itself or of its immediate officers
and agents. But if the facts in that case were as he supposed them
to be, the facts in the present case are certainly different from
that. No stockholder of any company ever had more perfect
possession and ownership of his stock than the State of North
Carolina has of the stock in question. There may be contract claims
against it, but they are claims against the state, because based
solely on the contract of the state, and not on possession.
We think that the state is an indispensable party to any
proceeding in equity in which its property is sought to be taken
and subjected to the payment of its obligations, and that the
present suit is of that character, and cannot be sustained.
The decree of the circuit court is
Affirmed.