It is a general principle of law that a trust estate must bear
the expense of its administration.
Assignees in bankruptcy, although not in possession of the
bankrupt's property, are nevertheless required to look out for the
interests of all, and are entitled to compensation, the lack of
possession being important only in determining the amount of the
compensation.
A corporation in Michigan was the owner of a large and valuable
real estate. Three successive mortgages on this property were
created, and a large amount of corporation bonds secured by them
were issued. Suits being begun for the foreclosure of these
mortgages, a receiver was appointed by the court to take possession
of and hold all the mortgaged property. The corporation was then
adjudged to be a bankrupt. Assignees were appointed, who appeared
by counsel in the foreclosure suits and contested them. The
property remained with the receiver, and never passed into the
possession of the assignees. Negotiations took place looking
towards a sale of the property and a reorganization, which
contemplated that a certain proportion of shares in the
reorganization should be delivered to W. In the course of the
negotiations, the amount which the assignees were entitled to
receive, and the amount which should be paid to their counsel, were
determined, with the assent of all parties. W. agreed to pay this
sum to D. for them out of the moneys to be received by him. These
negotiations fell through. New negotiations then took
Page 151 U. S. 334
place looking towards a different scheme for reorganization.
Under these, a decree of foreclosure was obtained under which the
property was sold to M. and W. No provision was made in the decree
for the payment of the sums agreed to be due to the assignees and
their counsel, but the court was informed that satisfactory
arrangements had been made therefor. In the reorganization, a large
amount of stock was allotted to W., but not so much, in proportion
to the full amount, as had been allotted to him by the previous
arrangement. The claims of the assignees in bankruptcy being
transferred to their counsel, the latter filed their bill in equity
against W. to charge him as trustee with the payment of the claims
of both assignees and counsel by virtue of his holding the shares
which had been allotted to him in the new company. A large amount
of proof was taken, much of which is referred to by the Court in
its opinion, and as the result of examination, it was
held
(1) That W. had assumed the payment of the claims of the
assignees in bankruptcy and of their counsel, and that these claims
were a lien in equity upon the stock of the new corporation in his
hands.
(2) That W., having received in the final arrangement a less
amount of stock than was awarded to him when the amount of the
claims in litigation was determined, those claims were subject to
be scaled down proportionately.
(3) And the majority of the court further held that, under the
peculiar circumstances of the case, the plaintiffs should not be
allowed interest.
This was a suit brought in the Supreme Court of the District of
Columbia by the appellants, seeking to charge the defendant as
trustee for them of 897 shares of the capital stock of the Lake
Superior Ship Canal, Railway and Iron Company. The bill was filed
June 6, 1881, the answer September 13, 1881. Proofs were taken, and
on April 5, 1881, a decree was entered dismissing the bill, which
decree was affirmed by the general term on March 3, 1888. From that
decree of affirmance an appeal was taken to this Court.
The following are the undisputed facts in the case: the Lake
Superior Ship Canal, Railway and Iron Company was a corporation
organized under the laws of the State of Michigan. On July 1, 1865,
it issued bonds to the amount of $500,000, secured by a mortgage
upon its property and franchises. Subsequently, and on July 1,
1868, it issued another series of bonds amounting to $500,000, also
secured by mortgage, all of which two series of bonds were
outstanding in the hands of
bona fide holders at the date
of the decree hereafter mentioned.
Page 151 U. S. 335
On the 1st day of July, 1870, it issued a third series of bonds,
amounting to $1,250,000, also secured by mortgage; $250,000 of
which bonds were retired, and only $1,000,000 thereof were
outstanding at the time of said decree. On May 1, 1871, it executed
to the Union Trust Company, as trustee, a mortgage deed to secure a
further issue of bonds to the amount of $3,500,000, of which,
however, only $1,300,000 were issued, and the remainder were in the
custody of the Union Trust Company at the time of said decree.
Suits were brought to foreclose these several mortgages. While
these suits were pending, and in August, 1872, the company
mortgagor was adjudged a bankrupt in the District Court of the
United States for the Eastern District of Michigan, and George
Jerome and Fernando C. Beaman were appointed assignees, and the
plaintiffs, Meddaugh & Driggs, their counsel. These assignees
never took possession of any property, for all of it was in the
hands of a receiver appointed by the circuit court in the
foreclosure suits. They however, through their counsel, appeared in
and contested the foreclosure suits. They also filed a bill in the
nature of a cross-bill. Litigation was carried on for some years.
On February 12, 1877, the several suits having been consolidated, a
single decree was entered foreclosing all the mortgages. Pending
the foreclosure proceedings, as appears from the terms of the
decree, the receiver had, under the authority of the court, issued
receiver's certificates to the amount of $625,300.
The principal creditors and security holders were J. C. Ayer and
Co., J. Boorman Johnston & Co., Theodore M. Davis, as receiver
of the Ocean National Bank, and James C. Ayer and George C.
Richardson, jointly. Certain English capitalists entered into
negotiations for the purchase of the property. Don M. Dickinson was
acting for the corporation, and interesting himself to bring about
a closing of the litigation and a sale of the property to these
English capitalists. On September 24, 1875, the four principal
creditors above named entered into a written agreement with
Dickinson in which the amounts which each creditor was willing to
accept were named, which provided that the parties should consent
to a decree of foreclosure,
Page 151 U. S. 336
and an order for the sale of the mortgaged property as an
entirety; that the securities should all be deposited with Messrs.
S. G. and G. C. Ward, with instructions to deliver them to
Dickinson on his making payment of the aggregate amounts due the
creditors as provided, this payment to be in four equal parts at
intervals of sixty days each -- the entire contract being
conditioned upon the ability to purchase the property named, which
included all the property covered by the mortgages and certain
other lands and stocks at a gross price not exceeding $2,250,000.
It is stated that there was on the same day another agreement
entered into between Dickinson and the owners of the balance of the
property for its purchase, but that agreement is not in evidence.
Also on the same day, a contract was made between Dickinson and the
defendant by which Wilson agreed to assist in perfecting the title
to the property and carrying through the prior agreements, and
which, contemplating that, by the use of bonds and receiver's
certificates, the entire purchase might be made at a sum less than
that named, $2,250,000, stipulated that whatever of surplus there
might be should be paid over to Wilson. The negotiations for the
purchase by the English syndicate were continued from time to time,
but for reasons not disclosed, the matter was never consummated. On
February 27, 1877, another agreement was prepared for execution by
the creditors aforesaid and Don M. Dickinson, which, referring to
the prior agreements, and also to the fact a of a decree having
been entered, stipulated that the securities belonging to the
creditors should be placed under the control of Albon P. Man, of
New York, and the defendant, as trustees; that such trustees should
attend the foreclosure sale or sales, and, to the extent of the
means furnished them for that purpose, bid in the property; that,
the title being vested in them, they should organize a new
corporation with a capital stock of $8,000,000, to which
corporation they should convey the property they had purchased;
that the corporation should, besides issuing the $8,000,000 of
stock, also issue bonds to the amount of $4,000,000, properly
secured by deed of trust, which stock and bonds and deed of trust
should be deposited with Drexel, Morgan & Co., with
Page 151 U. S. 337
directions to deliver all to Don M. Dickinson or such person or
persons as he should designate on his or their depositing, on or
before the 1st day of June, 1887, to the credit of the said
trustees, the sum of $1,886,251.40, which moneys the trustees were
to dispose of, first, in paying the expenses of the sale, purchase,
reconveyance, and issue of certificates of stock and bonds, and the
formation of the corporation; second, in the payment of any moneys
that should be furnished them for the purpose of enabling them to
perfect the title to said property; third, in the payment of the
sums due to the creditors under the agreement of September 24,
1875, amounting to the sum of $1,296,103.41. The fourth stipulation
in reference to the disposition of the money was as follows:
"Any balance remaining in the hands of said trustees shall be
delivered to Nathaniel Wilson, and his receipt therefor shall be a
full discharge to the said Albon P. Man of all liability therefor,
and the said Nathaniel Wilson shall not be liable to account to the
parties hereto, or any of them, in respect to the moneys so paid to
him as aforesaid, and, upon the payment of said moneys to said
Wilson, the terms and conditions of the trust hereby created shall
be considered satisfied."
It was further provided that in case the sum named was not paid
on or before June 1, 1877, Drexel, Morgan & Co. should
redeliver to the trustees the stocks, bonds, and securities
deposited with them by the trustees, and that thereupon the said
trustees should transfer and deliver to Dickinson, or to such
person or persons as he should direct in writing, one full tenth
part of the stock and bonds, and to the creditors, in such manner
as they might in writing appoint and direct, all the residue and
remainder of said stock and bonds. That agreement was signed by Man
and Wilson, who accepted the trust created by the instrument and
agreed to perform its duties, and also by Dickinson, J. Boorman
Johnston & Co., and Theodore M. Davis as receiver, but not by
the Ayers. It was therefore not a fully executed agreement. It is
significant, however, as expressive of the intent of the parties
signing, and as showing the relations of Wilson to the transaction.
But on April 9, 1877, two contracts were entered into, executed
by
Page 151 U. S. 338
all the creditors above named, together with Albert G. Cook,
also a creditor, as well as by Dickinson, Man, and Wilson, the
first of which contained provisions for the disposition of the
moneys in case Dickinson should make the payment to Drexel, Morgan
& Co., similar to those found in the contract of February 27;
the stipulation as to the payment to Wilson being in those
words:
"Fourth. The balance, if any, remaining after the payments
aforesaid, shall be paid to and retained by said Nathaniel Wilson,
his personal representatives or assigns, discharged from this
trust, and shall be held, used, and disposed of by him or them
without accountability therefor to the parties aforesaid, or any of
them, by reason of anything herein."
The other provided that if Dickinson should not make the payment
at the time specified, the trustees should take the bonds and
stock, cancel all the former, and issue to Dickinson one-tenth of
the shares, and then, after a sale of a portion, should distribute
the balance as follows: to the creditors, respectively, in the
proportion which the sums of money they would have received, in
case the English sale had been consummated, bear to $1,693,311.74,
and to Wilson as follows:
"To the said Nathaniel Wilson, his personal representatives or
assigns, the same proportion of said shares remaining as aforesaid
which the sum of three hundred and ninety-five thousand dollars is
of one million six hundred and ninety-three thousand three hundred
and eleven dollars and seventy-four cents ($1,693,311.74)."
The agreement contained also this stipulation:
"And the said Wilson, in consideration of the interests secured
to him by the said indenture and this agreement, doth hereby agree
unto and with the said parties of the first part, and each of them,
that in the event of the purchase of said property by said trustees
(Man and Wilson) or the survivor of them, he will indemnify said
parties of the first part, and each of them, against, and will pay,
all the charges and expenses of said trustees (Man and Wilson) and
their said associates, for and in and about the execution of their
said trusts, all lawful charges of the trustees under the mortgages
in foreclosure
Page 151 U. S. 339
whereof said property shall be sold, the taxable costs in the
suits and proceedings for foreclosure of said mortgages, the
charges of the master or masters in chancery, or other officers, in
or for the sale of said property, all claims or demands of Alfred
Russell remaining unpaid for services and expenses in said suits or
proceedings, and for any portion or interest in said property, or
any shares in the capital stock, of said proposed corporation."
The sale of the property was duly made on May 11, 1877. It was
bid in by Man and Wilson, the corporation provided for was duly
organized under the name and style of the Lake Superior Ship Canal,
Railway and Iron Company, the English capitalists failed to make
the purchase, and thereupon the stock was distributed to the
various parties, as named in the last agreement of April 9,
1887.
At the time the decree was prepared and submitted to the court
for approval and signature, the circuit judge inquired whether
provision had been made for the compensation of the assignees and
their counsel, and was told that satisfactory arrangements had been
made therefor. The arrangements which had been made were these:
Dickinson represented to Meddaugh & Driggs the negotiations
which were pending with the English syndicate, and which he was
sanguine would be successful, and, the fees of the assignees in
bankruptcy having been fixed at $13,000, the claim for which was
subsequently transferred to plaintiffs, and of their counsel at
$25,000, Dickinson agreed to pay those sums out of the moneys which
he should receive from the English syndicate when and if the sale
was carried through, and this was the agreement which was
pronounced by the plaintiffs to be satisfactory. On February 13,
the day after the signing of the decree, he wrote to Meddaugh this
letter:
"Detroit, Mich. February 13, 1877"
"E. W. Meddaugh, Esq., Detroit."
"Dear Sir: I attended a session of the referee's court last
night, and also this morning from 9 to 12 o'clock, so that I have
had no time before to write you on the ship canal matter. "
Page 151 U. S. 340
"I am so entirely confident that I can make an arrangement by
which, if the English negotiation now in the hands of Avery is
carried out, that I can pay out of the $2,250,000 the fees of
Meddaugh & Driggs and of the assignees, that I am willing to
bind myself by the following statement:"
"If the English negotiation is consummated, so that the money
shall be paid through it for the property and for the discharge of
the syndicate indebtedness, I will pay from it to you $38,000.00 as
and for fees of Meddaugh & Driggs and of Jerome and Beaman,
assignees."
"Yours, very truly,"
"Don M. Dickinson"
On March 7th, Dickinson wrote to Davis this letter:
"March 7, 1877"
"Theo. M. Davis, Esq., 20 Nassau Street, New York."
"Dear Sir: Please have the papers signed by Messrs. Man and
Wilson, and forward to me at your earliest convenience. It is of
importance to all of us, as Messrs. M. and D., having learned of my
return from New York, are after me for their voucher."
"I wish you would telegraph me on receipt of this when you will
send it, so that I can show them the telegram."
"Yours, truly,"
"Don M. Dickinson,"
"Per A."
To which Davis replied as follows:
"New York, March 10th, 1877"
"Don M. Dickinson, Esq., Detroit, Mich."
"D'r Sir: Yours of the 7th inst. came duly to hand."
"I herewith enclose Wilson's agreement, duly signed. The other
agreement has been signed by Messrs. J. Boorman Johnston & Co.
and myself, and will be signed by the Ayer party as soon as a
guardian is appointed, its provisions having been approved by Judge
Bonney."
"Said agreement has been delivered to Wm. M. Sebrey."
"Yours truly,"
"Theo. M. Davis"
Page 151 U. S. 341
The only agreement signed by Wilson in which Meddaugh &
Driggs' names appear is the following:
"Referring to the extension agreement of the 'Dickinson
contract' this day signed, and under which Albon P. Man and myself
are appointed trustees, it is provided therein that certain moneys
shall be paid to me for which I shall not be held accountable by
any party to said agreement, and in case of the success of what is
known as the English negotiations referred in said agreement, and
of the consequent payment of the money thereunder as contemplated
thereby, in consideration that said Don M. Dickinson has or does
agree to pay to Messrs. Meddaugh & Driggs, att'ys of Detroit,
as and for cash and expenses (by them and their clients incurred
and expenses) amounting to thirty-eight thousand dollars, I do
agree to and with said Dickinson to pay to him, for said Meddaugh
& Driggs, that sum out of said money so to be received by me as
aforesaid."
"Dated February 27, 1887."
"Nathaniel Wilson"
MR. JUSTICE BREWER, after stating the facts in the foregoing
language, delivered the opinion of the Court.
The argument in support of the conclusion reached below is a
simple one, and may be briefly stated thus: the only promise made
by the defendant looking to a payment to Meddaugh & Driggs was
conditioned on a sale to the English syndicate. That failed, and
therefore the promise failed. The promise made by him in the second
of the two agreements
Page 151 U. S. 342
of April 9, 1877 -- that agreement under which the matter was
finally disposed of -- specified certain payments, but among them
was none to the plaintiffs. In other words, he received the stock
transferred to him burdened with certain express trusts. The
plaintiffs were not named as beneficiaries therein, and therefore
they can claim nothing by virtue of any express promise. In the
foreclosure suits, their services were antagonistic to the
interests of the mortgage creditors, the parties to the agreements
with Wilson. Nothing was charged against the property in their
behalf in those suits. The mortgagees were under no obligations to
them, because in that litigation they represented adverse
interests. Thus, neither by express decree nor upon any principle
of equity was the property, when purchased for the benefit of the
mortgagees, burdened with a charge in their favor. Hence not only
was Wilson under no express promise to or for them upon which an
action at law would lie, but also he received the stock free from
any express or implied burdens in their favor. There was no trust
attached to the property which they could enforce.
While this reasoning is direct and clear, there are
considerations many and persuasive which show that equity will not
be satisfied, nor will justice be done, unless and until the
plaintiffs are admitted to a share in the stock transferred to the
defendants. And first must be considered the situation of the
parties at the time the decree was entered. The mortgagor had been
thrown into bankruptcy and Beaman and Jerome appointed as
assignees. As such assignees, they represented not merely the
mortgage creditors, but all the creditors and all the stockholders
in the company. It was no single interest which was committed to
their care, but it was their duty, as assignees, to look after the
interests of all having claims upon the property. Acting in good
faith, as it must be supposed that they did, they conceived it
their duty to defend the foreclosure suits, and to file a
cross-bill looking to the administration of the entire assets of
the corporation. Their services in this respect not being to any
party or parties, but in respect to the property itself, and to
Page 151 U. S. 343
secure its proper application among all parties interested, it
is clearly in accordance with settled rules of equity
jurisprudence, as well as with the practice in bankruptcy
proceedings, that compensation for their services, including the
pay of their counsel, should be made a direct charge upon the
property, and a charge prior in right to the claims of creditors or
stockholders. "It is a general principle that a trust estate must
bear the expenses of its administration."
Trustees v.
Greenough, 105 U. S. 527,
105 U. S. 532.
It is true that ordinarily the assignees in bankruptcy have
possession of the property, and such possession adds to their cares
as well as to their compensation. In this case, they did not have
possession, the property being already in the custody of the court
through its receiver. But the lack of possession did not relieve
them from all duty nor destroy their right to compensation. The
duty of looking out for the interests of all was as pronounced as
though they had the actual possession, and the lack of possession
was only to be considered in determining the amount of
compensation.
It was in this situation of things that a decree was entered for
the foreclosure and sale of the properties, without any express
provision for their compensation. This decree was entered in
pursuance of negotiations which had been for some time pending
between the creditors and the representative of the corporation and
its stockholders, in which the amount that the creditors would take
in cash was agreed upon, and out of the difference between that sum
and the amount which such representative was hoping to obtain from
a proposed purchaser were to be paid all the expenses of the
litigation. The representative was sanguine of the success of his
proposed sale. The plaintiffs were doubtless affected with his
confidence, and so accepted his promise to pay their compensation
out of the moneys received from that purchaser, and waived any
incorporation of an express provision therefor into the terms of
the decree. But while as it seems they were unduly sanguine, is it
for a moment to be supposed that they were intending to donate
their services in case the proposed sale should not be
accomplished, or that the
Page 151 U. S. 344
creditors or defendant understood that they so intended? The
question carries its own answer. The case is not such as would
arise if these plaintiffs had accepted an absolute promise from
Dickinson or defendant in lieu of a charge upon the property
provided in the decree. If, for instance, either had promised them
absolutely to pay the $38,000, it might have been argued that they
wholly waived any right to look to the property, were willing that
provision for a charge thereon should be omitted from the decree,
and were content to take the responsibility of such promisor. But
here the promise was only a conditional one -- that if a proposed
sale was accomplished, out of its proceeds payment should be made.
Evidently, confidence in the accomplishment of the proposed sale
was so great that it was deemed unnecessary to provide for the
contingency of its failure. But the unexpected did happen -- the
sale failed. But their equitable right to have their charges paid
out of the proceeds of the property did not cease. They would have
been entitled at any time before the final consummation of the
foreclosure proceedings to have had the decree modified or an order
entered making their fees a charge upon the property. These
mortgage creditors and the defendant knew of the existence of the
claims of the plaintiffs, and the amount thereof, and must as a
matter of law, be presumed to have known that they were properly
charges against the property, and could, if need be, by express
order be made a prior lien thereon. In this situation, the trustees
named in the creditors' agreement, one of whom was the defendant,
became the purchasers of the property. They purchased it at the
master's sale, knowing that these charges of plaintiffs, rightfully
existing against the property, were only conditionally provided
for. If the condition happened and the contemplated sale to the
English syndicate was made, then defendant, out of the moneys that
would come into his hands, would pay their charges. This he had
expressly covenanted to do. If the property was bought and the
condition never happened, can it be that he took the property free
in equity from the burden of such charges?
Page 151 U. S. 345
Suppose that the case was relieved from the embarrassment of
conflicting testimony, and that the facts as claimed by the
defendant were free from dispute. The decree was entered without
any provision for the payment of fees of the assignees or their
counsel, such omission being upon the conditional promise of
Dickinson and the defendant. Suppose that thereafter, and before
the sale under the decree, the creditors, the defendant, and
Dickinson, finding that the negotiations with the English syndicate
were going to fail, agreed and determined to say nothing to the
plaintiffs about such failure, to let the decree stand without any
provision for their compensation, to purchase the property in the
same way that purchase had theretofore been contemplated, and then
to divide it among themselves without making any provision for the
plaintiffs, and that all this was carried into effect, the
plaintiffs being ignorant of the changed condition of affairs and
the altered purposes until after the stock had been distributed;
can it be said that, under such circumstances, equity would be
powerless to interfere -- that if the plaintiffs were willing to
trust the matter of their compensation to the conditional promise,
the parties who made it and the parties interested in the property
could, upon the failure of that condition, ignore their claims for
compensation and secure a title to the property discharged of all
liability to them? If that be so, it would seem that equity lies
under the imputation of sometimes preferring the form to the
substance of things. Suppose that the second of the agreements of
April 9 had never been signed, and that the creditors (sharing in
the confidence apparently possessed by Dickinson and the plaintiffs
in the successful carrying through of the pending negotiations) had
stipulated for the purchase of this property by Man and Wilson, and
the disposition of it only through the means of the proposed sale
to the English syndicate, and that thereafter such proposed sale
had failed of accomplishment; can it be doubted that Man and Wilson
would hold the title in trust for their benefit, and for each of
them according to his proportionate interest? Could they say,
"We took this property with an express promise to dispose of it
in a certain way, and, because that way has
Page 151 U. S. 346
failed, we hold it discharged of all liability?"
Is the rule any different when these plaintiffs, who had a claim
of equal equity against the property, come into court and say that
the condition expressly provided for has failed? Have they not the
same right to be recognized, and paid out of the property? It is a
cardinal rule of equity that it assumes that that is done which
ought to be done; that it looks rather at the substance of rights
than at the forms of proceedings. Unquestionably when Man and
Wilson, the trustees, purchased at the master's sale, the time for
the completion of the proposed sale to the English syndicate not
having then expired, they took the property burdened with an
implied obligation to the plaintiffs. It was to be satisfied by the
payment of money if the contemplated sale was carried through. This
promise of Dickinson and the defendant to the plaintiffs was not a
donation -- a mere gratuity, something done out of the abundant
kindliness of their hearts -- but it was in discharge of an
obligation equitably resting upon the property, and to relieve it
from the burden thereof.
This is not the case of a stranger making a purchase, who might
be justified in relying on what appeared upon the face of the
record, and upon a purchase take the property free from all
liabilities, for here the decree of the court, and the sale in
pursuance thereof, were but steps in the schemes originated by the
creditors with Dickinson and the defendant for the purpose of
securing to themselves an absolute title and one free from
burdens.
But what was really the understanding and intent of the parties,
and especially of the defendant? This is his testimony:
"Mr. Dickinson said to me that it might be necessary, in order
to effect a sale, to pay some money to Meddaugh & Driggs, the
attorneys for the assignees in bankruptcy, and to the assignees in
bankruptcy, for their fees and expenses, which had been
considerable, so that he might have to provide for them for the
expenses and costs. Whether anything was said about fees as fees, I
do not recollect. He said, if the money came into my hands, as it
was anticipated it might, I could
Page 151 U. S. 347
very well afford to pay him whatever he had to pay them. I at
first objected, and something was said concerning the amount which
he would have to pay, and concerning the amount of their costs and
expenses, and finally the sum of $38,000 was mentioned as being the
amount of the costs and expenses of all the parties -- the
assignees, and the attorneys of the assignees -- which was as much
as he expected, in any event, to be called upon to pay, and
immediately afterwards the same representations and statements were
made by Mr. Theodore M. Davis in the same room, and I think at the
same time. It was in New York. And then I said that I would agree,
if the English negotiations went through, and the money secured by
the agreement was paid to me, that out of that money I would pay to
him whatever he had agreed, or should agree, or might have, to pay
to Meddaugh & Driggs and the assignees in bankruptcy for
expenses and costs, to the extent of $38,000. I do not recollect
that anything was said about fees."
This shows that the defendant, at the commencement, understood
that this $38,000 was part of the costs and expenses of the
litigation then pending.
The description of the claim as costs and expenses, and not as
fees, is significant. It interprets the meaning of Wilson's express
stipulation in the second of the two contracts of April 9, 1877,
for he stipulates to pay "the taxable costs in the suits and
proceedings for foreclosure of said mortgages" -- not the taxed,
but the taxable, costs. Strictly speaking, that which is allowed to
trustees and counsel as compensation for their services is not a
part of the taxable costs, and ordinarily those sums which they pay
out for their personal expenses and other costs of the trial are
included with their compensation in a gross allowance, and yet the
money which they pay out for such costs and expenses may, if
separately stated and charged, be not inaptly called part of the
taxable costs. If this were the only matter throwing light upon the
understanding of the parties, it might be said that this was a mere
refinement as to the meaning of words; but immediately following
the stipulation referred to is this language:
"Neither of said parties of the first or second parts shall, by
reason of anything
Page 151 U. S. 348
herein, be personally liable for or on account of any moneys
procured, advanced, or used by said trustees in the purchase of
said property, nor for any expenses or charges in or for the
execution of the trust herein created."
The trust herein created, as shown by the previous language of
the agreement and that made contemporaneously with it, was the
purchase by the trustees, Man and Wilson, of all the property, the
securing of a perfect title, the creation of a corporation, the
conveyance to it of the property thus purchased, and the
distribution of the stock, or, as the duty was expressed in the
agreement:
"First. To the payment of the expenses and charges of said sale
and purchase of said property, the establishment of said
corporation, and the execution by said Man and Wilson and their
said associates of the trusts hereby created."
"Second. To the repayment of any moneys by said trustees
procured or advanced, and used in the purchase of, and payment for,
said property to the extent authorized and limited by said
agreement of even date herewith."
"To the payment of the expenses and charges of said sale and
purchase of said property."
This means, of course, all the expenses and charges. All the
express liens had passed into the foreclosure decree, and had been
provided for in the agreement by specific appropriations of stock,
and the scope of the general language here used was obviously to
cast upon Man and Wilson, as trustees, the duty and the burden of
removing every charge or encumbrance which in law or in equity
could, as a consequence of the legal proceedings, rest upon the
property. Such duty and burden passed, by the clear language of the
agreement from Man and Wilson to Wilson, as the recipient of the
residuum of the stock.
The parties of the first and second parts were respectively the
creditors named and Dickinson. Upon them, by the provision above
quoted, none of the expenses or charges of the execution of the
trust were to fall. Necessarily it follows that whatever had to be
paid was to be paid by Wilson, and out of the stock which was
coming to him as his portion. Nor is this strange. The sums which
the creditors were to receive, whether
Page 151 U. S. 349
in cash or in stock, by one or the other of the agreements, were
for securities of the old corporation, whose form and amount were
specified, and which were to be surrendered by them to the
trustees, Man and Wilson. In other words, they agreed to receive a
certain specified sum for the securities which they turned in, and
the figuring as to the amount was, in most cases, carried to the
very cent. While the consideration for the one-tenth transferred to
Dickinson is not in terms expressed on the face of these contracts,
it clearly appears from the testimony that it was the services
rendered by him in bringing the litigation to a close, the equity
of redemption belonging to the mortgagor corporation, and the
satisfaction of claims in behalf of some of the stockholders. As
for Wilson, there was no specific statement in detail as to items
and amounts of all the consideration for the money or stock to be
paid to him. Evidently the odds and ends of closing out this
transaction were to be thrown upon him. Dickinson and the creditors
were to have so much stock absolutely; he was to take the
remainder, pay out of it, or its proceeds, all that had to be paid
to perfect the title and remove all charges and encumbrances upon
the property, and the balance was compensation for his services and
risk. So the stipulation was that Dickinson and the creditors
should be liable for nothing, and, as the scheme involved the
entire settlement of the affairs of the corporation, it follows
that Wilson was the party upon whom the residuary burden was cast.
It is not strange, therefore, that the witnesses, speaking from
memory as to what took place in the various negotiations, do not
agree as to the items composing this residuum. It is not to be
wondered that all the items were not named or the amounts fixed,
and hence naturally arises some contradiction in the testimony as
to what was said and understood between the parties. The parties
all looked to the defendant as the one to relieve them of all
liability. He was, as may be said, the residuary legatee of all the
burdens and expenses.
With reference to the obligation assumed by him in case, the
sale to the English syndicate was carried through, when asked what
was to become of the balance that would remain
Page 151 U. S. 350
in his hands after paying the creditors and whether it was
intended as a gift or otherwise, he testified:
"Out of that balance, whatever it was, I was to pay for
receiver's certificates, for bonds, for trustees' commissions. I
was to pay counsel fees to Alfred Russell, whatever they might be,
and I was to pay $38,000 under and in pursuance of the agreement I
had made with Dickinson of February 27, 1877, in reference to his
obligation to Meddaugh & Driggs. Whatever was left was for my
own compensation."
And further, with reference to the same matter, appear these
questions and answers:
"Q. In case there was a deficiency, and the balance which was
expected to remain applicable to that purpose should not be
sufficient to pay and discharge the whole amount of all of the
several claims so provided for, by whom was the remainder to be
paid?"
"A. By myself. That was a responsibility and risk that I
assumed."
"Q. If there should turn out to be an unexpended remainder of
said balance after the discharge of all of said claims, what were
you to do with such balance? Was it to be kept by you for your own
benefit, or to whom was it to go?"
"A. It was to be my own, for my own benefit."
It is admitted that the written stipulation in the last contract
did not express all that he agreed to do in consideration of the
stock transferred to him. Thus, he testifies, referring to that
contract:
"A. I have stated what my liability was under that contract, and
there were things undoubtedly to be provided for not specifically
mentioned in that contract. For instance, no mention is made of
receiver's certificates, or of bonds, or of stock. The trustees'
commissions were provided for, I think, and there was no mention of
my compensation."
And again:
"A. There was no other written agreement to which I was a party,
but it was understood that I was to pay or take care of certain
bonds and receiver's certificates, and the claims that
Page 151 U. S. 351
I have enumerated. The charges of the trustees, and compensation
to them, were provided for in the agreement."
And when asked between whom was that understanding, and when was
it made, he answered:
"A. It was made before the agreement of April 9, and was between
the members of the syndicate, Mr. Davis individually, and
myself."
The written promise was therefore, by his own admission, not the
full measure of his obligations.
In 1880, there was a congressional investigation, having
reference mainly to the transactions of Davis as receiver of the
Ocean National Bank. On that investigation the defendant was a
witness, and testified as follows:
"As against the stock still in my hands, there are outstanding
claims -- at least one, and perhaps more -- on the part of persons
who claim that they were employed by the syndicate, and that money
is due to them, and that they are to look to me for it. One claim
is made by Meddaugh & Driggs, who were counsel in the
bankruptcy proceedings. They claim to be entitled to $34,000
[$38,000] for their professional services, and they have threatened
to bring suit against me for it. I do not think they are entitled
to that under the agreement that was made with them, but if there
is any liability to them under that agreement with them which I
signed, I am the person on whom it rests. It was for the purpose of
providing for these contingencies that this amount was fixed in the
way it was."
And again, responding to this question:
"Q. Out of that $395,000 I understand that you were to pay the
expenses of litigation, and whatever money was due Mr. Russell
under his agreement with those people?"
He answered, "Yes, sir."
And still again, when asked for what he received the stock,
after naming some things, he said:
"In addition to which was the liability that I came under to pay
all the charges that any one had against this 'syndicate,' as it
has been called."
Could language be used to more clearly affirm that his agreement
was, as he understood it, to pay, among others, this claim of
Page 151 U. S. 352
plaintiffs, which, as we have seen, was equitably a charge upon
the property, and, of course, therefore against the syndicate?
Another matter: in the spring of 1878, Alfred Russell, whose
name appears in the stipulation signed by the defendant, not having
received the payment which he expected, prepared to commence a suit
against defendant. The latter was advised of this fact, and on
April 1, 1878, he wrote to him a letter containing this
statement:
"My obligation, as I understand it, is to pay to you whatever
stock you are entitled to under any agreement that you may have
with the so-called 'syndicate.' You and Mr. Davis do not agree as
to what that agreement was. I have no knowledge of it except as I
learn of it from others. One thing, I believe, is admitted, and
that is, if the English negotiations had gone through, of the
$587,967 which was to come into my hands, $50,000 was to be paid to
you in cash. The English negotiations did not go through, and no
$587,967 came to me. Instead of that, the conditions of the
agreement of April 9, 1877, take its place. Instead of $587,967, I
am to receive $395,000, or so much of the capital stock as is the
proportion between that sum and $1,600,000 -- that is to say, I now
have $395,000 to pay to the same persons who were to have been paid
$587,967."
"Are you entitled to receive precisely the same sum or amount of
stock as if I had $587,967, or should you submit to a
pro
rata reduction, just as I and everyone interested in the fund
will submit to? My own opinion is that you are fairly entitled to
the same proportion of the $395,000 that you were to receive of the
587 M, and should unhesitatingly say that such was your just due.
If you were to receive the sum which I have already mentioned, I
would not hesitate, on my own responsibility, and without the
approval of any of the syndicate, to make a declaration of trust in
your favor to the effect that you are entitled to the same
proportion of the stock which I receive as you were to receive
under the original agreement -- that is to say, your share in the
whole capital stock is diminished in the rate that 587 M has to 395
M. This would be easily expressed in figures. "
Page 151 U. S. 353
Herein is an express declaration, made within a year of the
signing of the last agreement, that out of the stock received under
that agreement, he was to pay the same persons who were to receive
payment out of the moneys which he would have received under the
first agreement, and an argument therefrom that, as he was to
receive under the latter agreement less than under the former, the
parties to receive payment should proportionately scale down the
amounts they should be satisfied with.
In the bill filed by Russell was a copy of a memorandum which he
alleged had been made by Davis, the receiver of the Ocean National
Bank, who was clearly, as shown by the testimony, a leading spirit
in the negotiations, as follows:
100 bonds and 10 certificates . . . . . . . . . $ 30,699.09
2/3
Int. acc't since Jan. 1, 1871, and certi-
ficates since May 8, 1874, other
interests equal cost of. . . . . . . . . . . . 24,470.79 1/3
Int. on 50 bonds am't to prin. cost. . . . . . . 12,344.63
1/3
20 certificates 12,136.16 call, total for both 70,000.00
Certificates par 10%, etc. . . . . . . . . . . . 76,000.00
Bal. certificates and int., int. 10% . . . . . . 63,700.00
Man trustee Hubbell. . . . . . . . . . . . . . . 10,500.00
Frost, Sutherland, Birdseye and McCarter,
$5,000 each. . . . . . . . . . . . . . . . . . 20,000.00
-----------
Over . . . . . . . . . . . . . . . . . . . . $170,200.00
Forward. . . . . . . . . . . . . . . . . . . $170,200.00
Russell. . . . . . . . . . . . . . . . . . . . . 50,000.00
Davis. . . . . . . . . . . . . . . . . . . . . . 115,000.00
Meddaugh & Driggs. . . . . . . . . . . . . . . .
38,000.00
Sundries, including said Wilson. . . . . . . . . 21,800.00
-----------
Total . . . . . . . . . . . . . . . . . . $395,000.00
On August 2, 1878, the defendant wrote this letter:
"My Dear Mr. Russell:"
"In the memorandum referred to in your bill, a sum appears which
is to be paid to Meddaugh & Driggs, and which makes up, in
part, the 395 M which was to have been paid to me. I
Page 151 U. S. 354
have rec'd, and now enclose, a copy obtained from Mr. Dickinson
of my agreement with Meddaugh and D., from which you will see that
I was to pay them only in the event of the success of the English
negotiations and the payment to me of the cash. I send you this to
show that the mem. could not have been intended to definitely fix
the disposition of the stock that was to be issued to me. If that
mem. is conclusive, then M. and D. have a right to a portion of the
stock which I hold, and that liability I can never admit, because I
never assumed it. I am willing to pay, and to act upon the
assertion of your right to so much of the stock in my hands as I
designated in a former letter. Have you anything to offer or
suggest as to a method of settlement? Will you state [abate]
anything of your first demand? I am very anxious that you should
have your stock without any delay. Delay may be injurious to both.
. . . Write to me at your convenience. Let us make an effort at
adjustment before it is too late."
Do not these letters tend to show that the claim now made that
plaintiffs were not to be compensated out of the stock transferred
under the last agreement to defendant was an afterthought,
springing from the fact that the defendant had noticed, or had his
attention called to, the omission of their names in the stipulation
in that agreement? How easily the defendant would be led to such a
conclusion! His obligation was expressly to the "creditors'
syndicate" (so-called) and Dickinson. His promise was to save them
harmless. Whatever debt rested against the property, or could be
made a personal obligation of theirs growing out of the
transaction, he was to discharge. The less he had to pay in this
direction, the larger were his own profits. At first he recognized
his liability to the plaintiffs -- spoke of it in the way that
might be expected as one of the things that he had to take care of;
but discovering himself, or having his attention called to, the
omission of plaintiffs' names from the stipulation, he proceeded to
insist upon his nonreliability for their claim.
Another matter throws light upon this. It appears that the
corporation, as finally organized had stock of $4,000,000 --
Page 151 U. S. 355
40,000 shares of $100 each. The number of shares transferred to
the defendant was 8,387 shares. Of these, he issued and
transferred, in satisfaction of various claims which he recognized,
including those to Russell, 4,640 shares, leaving in his hands
3,747 shares, in respect to which he testifies:
"The remainder of the stock was owned by me, and I have issued
no other shares except temporarily for use in borrowing money in my
own private transactions."
For what was this balance of stock given to Wilson? It must be
remembered that these creditors were not claiming any general
amounts. They figured to a cent the sums which each except the
Ocean National Bank was to receive. Each evidently was anxious to
secure for himself as much as possible. Negotiations were carried
on for months, even into years. All the liabilities, conceded and
doubtful, must have been known to them. Davis, the receiver,
testifies: "We knew how many bonds and receiver's certificates Mr.
Wilson had and represented." It is not to be supposed that they
would throw away anything, or make generous donations to anyone.
While of course it was reasonable and to be expected that they
would leave for the defendant, who assumed the general residual
liability, a margin above all obligations actually known, in order
to compensate him for the risk, as well as to pay him for his
services, it is not to be supposed that they were so ignorant of
the situation -- so misunderstood the real obligations growing out
of their negotiations and foreclosure proceedings and all the
litigation -- as to give to him stock amounting, according to the
value then placed upon it, to the sum of $175,000 and over.
Evidently they understood, and he understood, that that surplus
stock represented other obligations than those he has provided for.
And while he testifies to having purchased some receiver's
certificates and bonds with his own money, he shows no investment
in excess of a few thousand dollars. Indeed, the significance of
the testimony in this respect is chiefly in its indefiniteness and
omissions. As a witness in this case, he testified that Mr. Girard
and himself at first bought 40,000 certificates for between $25,000
and $30,000, and that the
Page 151 U. S. 356
money that the two expended and paid into the hands of the
receiver for bonds amounted to between $50,000 and $60,000 in cash.
In the list of persons to whom stock was issued, he names Edwin
Girard as receiving 1,026 shares. An entry made in his memorandum
book at the time the receiver's certificates were purchased shows
that one-half of the cash was paid by him, and one-half by Girard,
and his statement of the manner in which the subsequent purchases
were made indicates that such purchases were on their equal
account. During the congressional investigation, he was asked this
question:
"Q. I want to get at how you came into possession of 3,694
shares of this valuable stock. What did you give for it?"
To this he replied:
"I will give you the figures as nearly as I can. I got
possession of that stock by paying, in the year 1874, $25,000, and
between $35,000 and $37,000."
And then, after one or two intermediate questions, there
appearing to have been some interruption, the question was again
asked, "For what did you receive this stock?" and his reply
was:
"I am telling you. When you interrupted me, I had gone so far as
to say that it cost me $37,000, and the costs of the suit were
$2,000 or $3,000 more, in addition to which was the liability that
I came under to pay all the charges that any one had against this
'syndicate,' as it has been called."
It may be noticed that the $25,000, which he here says he paid
in 1874, was, as shown by the memorandum referred to, paid by
Girard and himself in equal proportions.
Again, he testifies that in fixing the amount of $395,000,
$10,000 was estimated for his services, and $20,000 for those of
the trustees, Man and Wilson, and it appears that Man received a
certificate of stock of 203 shares as compensation for his
services.
He testifies that
"the stock to Edwin Girard was for receiver's certificates and
bonds which he and I had bought together -- 40,000 receiver's
certificates, $75,000 of bonds, and $10,000 of stock of the old
corporation, my recollection is."
Putting this testimony together, it will be perceived that he
retained 3,694 shares as his own property. Girard received
Page 151 U. S. 357
1,026 shares on account of their joint purchases, and it is to
be presumed that on like account he was entitled to the same
number. 1,026 from 3,694 leaves 2,668 shares. If Man received 203
shares, he, as co-trustee, would be entitled to the same number,
and for his subsequent services, according to his own statement of
the estimate, another equal sum, or 406 shares for those two items.
Subtracting that, there still remain 2,262 shares for which no
satisfactory explanation is given.
It is true that when asked what was included within, and covered
by, the $395,000 in the last agreement, he testified as
follows:
"A. $90,000, receiver's certificates; $40,000, trustees'
commission; $160,000, stock and bonds; $50,000 to J. Boorman
Johnston and Company or Gordon Norrie on account of bonds; $25,000
or $35,000, I do not remember which, to Alfred Russell; $10,000 to
defray the expenses provided for in the agreement, and $10,000 for
my compensation. That must have made Russell $35,000, if these
figures are right."
This shows $300,000 out of $395,000 for bonds, stocks, and
certificates, but the application of the stock transferred to him
shows no such proportionate disposition thereof for such
purposes.
Another item of testimony is a memorandum said to have been
made, during the negotiations prior to the signing of the last
contract, by one who was present, as follows:
"What Davis must pay out of amo. which he receives on failure of
English negotiations,
viz., to Sept. 1, '75:"
Probable amo. required for Gerrard's
bonds (75 @ 43 M. and int.) . . . . . . . . $ 60,000
" " " " 79 certif.,
2d issue, May 8,'74 and int., say . . . . . 89,000
" " " " A. P. Man's
trustee bonds (Hubbell), say. . . . . . . . 11,500
" " " " Chs. L
Frost, trustee. . . . . . . . . . . . . . . 25,000
" " " " other trustees,
Birdseye, Sutherland and McC.'s, 5,000 each 15,000
Page 151 U. S. 358
" " " " Russell claimed 25,000
" " " " Man and Wilson,
trustees. . . . . . . . . . . . . . . . . . 15,000
" " " " costs of court . . 10,000
" " " " expenses pre-
paring bonds. . . . . . . . . . . . . . . . 4,000
" " " " for wagon-road
lands, 4,700 acres; T. M. Davis' profit . . 140,500
--------
$395,000
The last item therein is significant, especially taken in
connection with the testimony given by defendant to the effect
that, of the $250,000 going to the Ocean National Bank, only
$150,000 represented stock and bonds, and $100,000 was for
compensation of the receiver, Davis.
We must not be misunderstood as imputing to the defendant a lack
of truthfulness, or suggesting that his testimony as false. On the
contrary, his truthfulness doubtless compelled this very omission
and indefiniteness. It does not seem reasonable that a man of the
business capacity shown in these transactions by the defendant
would have entered into any obligation of this character without
knowing exactly, or nearly so, the items and amounts which he was
to become charged with, and that if, in the settling up of the
affairs, any item failed, wholly or in part, he would be able to
disclose it exactly, and the fact that the testimony is so
indefinite and unsatisfactory in these respects is additional
reason for believing that it was part of the understanding of the
parties that the plaintiffs were to be paid out of this stock
transferred to the defendant.
We have, in our consideration of the case, thus far endeavored
to eliminate all matters of conflicting testimony, and to determine
what are the fair inferences from the undisputed facts. There is,
in addition to this, the direct testimony of witnesses that this
claim of plaintiffs was embraced in the matters provided for by
this last contract. Still, we do not care to notice in detail that
testimony, for it is contradicted by witnesses apparently equally
reliable, and upon that conflicting
Page 151 U. S. 359
testimony alone it could not be affirmed that the plaintiffs had
established their case.
In conclusion on this branch of the case, we think it may be
affirmed that the property was, in equity, chargeable with the
claim of plaintiffs; that the charge was not incorporated into the
decree by virtue of a reliance upon the conditional promise; that
the defendant became one of the purchasers and interested in this
property with full knowledge of the consideration and the equitable
obligation to the plaintiffs; that the arrangement between the
parties in interest and himself resulted in fixing the amounts
which they should receive absolutely, and under no further
liability for expenses or otherwise, while he, for the
considerations named, assumed all the liabilities, fixed as well as
unsettled, growing out of the perfection of the title to that
property; that he at one time recognized this liability to
plaintiffs as one of those assumed by him in this arrangement with
the creditors and others interested, and that it still remains an
undischarged obligation resting upon him, and is, in equity, a lien
upon the stock of the new corporation in his hands.
We have thus far considered only the question of the fact of
liability. Upon that is the stress of the case, and to it was
devoted most of the testimony, as well as of the argument. Having
reached the conclusion that the defendant is under obligations to
the plaintiffs, there remains the further question as to the
measure of such liability. On the one hand, it may be said that the
amount of the plaintiffs' claim was, by agreement, fixed at
$38,000, and that that was the sum which the defendant promised to
pay in case the English negotiations were carried through. On the
other hand, it is said that if those English negotiations had been
carried through he was to have received $590,000 in cash, while
under the arrangement as finally consummated he received stock
representing only $395,000, and that therefore to that extent, the
claim of plaintiffs should be scaled down.
We have heretofore referred to the fact that the evidence is
unsatisfactory as to what was intended to be included within, and
provided for by, these two respective amounts. There is
Page 151 U. S. 360
testimony to the effect that, in arriving at the latter amount,
those claims included in the former which did not represent cash,
such as commissions to trustees, were to be reduced, though
apparently not by any uniform ratio. Russell, who had a claim for
$50,000 under the first arrangement, settled at a much less figure
paid in stock. It may fairly be said that the plaintiffs have not
proven that their claim was to be exempted from a reduction
corresponding to that made in others of like character, and, of
course, the burden is on them to make out their case. If it be said
that the amount of $38,000 was agreed upon in the first instance, a
sufficient reply is that that agreement was not made with the
creditors, and was only in view of the proposed sale to the English
syndicate. There is no testimony as to the real value of those
services. Equity would seem to say that the claim of plaintiffs
should be scaled down proportionately to the amount allotted to
Wilson under the two contracts, which, as we figure it, would
reduce the sum to $25,440. A majority of the Court are of the
opinion that, in view of the peculiar circumstances of the case,
the plaintiffs should not be allowed interest.
The decree of the court below must therefore be reversed,
and the case remanded, with instructions to enter a decree in favor
of the plaintiffs, awarding to them the sum of $25,440, and
adjudging it a lien upon the stock of the Lake Superior Ship Canal,
Railway and Iron Company remaining in the hands of
defendant.
