Sioux City Terminal R. & W. Co. v. Trust Co., 173 U.S. 99 (1899)
U.S. Supreme CourtSioux City Terminal R. & W. Co. v. Trust Co., 173 U.S. 99 (1899)
Sioux City Terminal Railroad and Warehouse
Company v. Trust Company of North America
Argued January 23-24, 1899
Decided February 20, 1899
173 U.S. 99
The Supreme Court of Iowa having repeatedly decided that in that state the fact that a corporation of Iowa contracts a debt in excess of its charter or statutory limitation does not render the debt void, but, on the contrary, such debt is merely voidable, and is enforceable against the corporation and those holding under it, and gives rise only to a right of action on the part of the state because of the violation of the statute, or entails a liability on the officers of the corporation for the excessive
debts so contracted, this Court holds itself bound by those decisions, without determining whether, as an independent question, it would decide that the issue of stock by a corporation in excess of a statutory inhibition is not void, but merely voidable.
The facts which are relevant to the controversy arising on this record are as follows: the Sioux City Terminal Railroad & Warehouse Company (hereafter designated as the "Terminal Company") was, in 1889, incorporated under the general laws of the State of Iowa, with an authorized capital of one million of dollars. In January, 1890, the corporation, by authority of its board of directors, authorized by its stockholders, mortgaged, in favor of the Trust Company of North America, its
"grounds, franchises, liens, rights, privileges, lines of railway, side tracks, warehouses, storage houses, elevators, and other terminal facilities . . . within the corporate limits of the City of Sioux City,"
all of which property was more fully described in the deed of mortgage. The purpose of the mortgage was to secure an issue of negotiable bonds, with the interest to accrue thereon, the bonds being for the face value of one million two hundred and fifty thousand ($1,250,000) dollars. The form of the bonds was described in the deed, and they were numbered from 1 to 1,250, inclusive. The deed contained a statement that the corporation
"has full power and authority, under the laws of the State of Iowa, to create this present issue of bonds and to secure the same by mortgage of all its property, leases, and franchises."
The bonds thus secured were negotiated to innocent purchasers for value, and the proceeds were applied to the credit of the company.
In 1893, the Terminal Company also mortgaged, in favor of the Union Loan and Trust Company, an Iowa corporation, the property previously mortgaged, as above stated, this second mortgage being to secure one hundred and ninety promissory notes, fifty whereof were for one thousand dollars each, and one hundred forty whereof were for five thousand dollars each, the total aggregating seven hundred fifty thousand ($750,000) dollars. All the notes referred to in this mortgage bore the date of the deed, which contained
the following covenant:
"The said party of the first part [that is, the mortgagor] hereby covenants that the said premises are free from all encumbrances, excepting a deed of trust made on the first day of January, A.D. 1890, by said party of the first part to the Trust Company of North America of Philadelphia, to secure the sum of one million two hundred and fifty thousand ($1,250,000) dollars of bonds, and the said party of the first part will warrant and defend the title unto the said party of the second part, its successors and assignees, against all persons whomsoever claiming the same, subject to the lien of the said prior deed of trust."
On the tenth day of October, 1893, in the United States Circuit Court for the Northern District of Iowa, a bill was filed by certain national banks, citizens of other states than the State of Iowa, against the Terminal Company, E. H. Hubbard, as assignee of the Union Loan and Trust Company, and others, having for its object the foreclosure of the second mortgage above referred to. Without fully recapitulating the averments of the bill, it suffices to say that it alleged that the notes which were secured by the second mortgage had been placed in the hands of the Union Loan and Trust Company in part for the benefit of certain claims against the Terminal Company held by the complainants; that the Union Loan and Trust Company had, in April, 1893, made an assignment to E. H. Hubbard for the benefit of all its creditors, and that Hubbard had succeeded to the rights and obligations of the company of which he was assignee, and in which capacity he held the notes secured by the second mortgage, and the benefit of which the complainants were entitled to invoke for the purpose of procuring the payment of their claims. A receiver was prayed for and was appointed.
On the 23d of December, 1893, the Terminal Company, reciting the fact that the notes which were secured by the second mortgage for $750,000 had been drawn, and the mortgage given for the benefit of certain outstanding creditors whose claims amounted to $728,000, and that the notes covered by the second mortgage had been placed in the hands of the Union Loan and Trust Company for the benefit of such
creditors; that the company had made an assignment to Hubbard, assignee, and in that capacity he had received the notes in question; that in a suit pending in the Northern District of Iowa to foreclose said second mortgage, a question had arisen whether such creditors were entitled to avail themselves of the benefit of the second mortgage. Therefore, in order to allay any such question and to give the creditors intended to be covered by the second mortgage an undoubted right to claim under it, the deed conveyed absolutely to Hubbard, trustee, the property covered by the mortgage, giving to the trustee full power to realize and apply the property and rights to the discharge of the debts secured or intended to be secured as above stated. It suffices for the purpose of this case to give this outline of the deed in question, without stating all the various clauses found in it intended to accomplish the purpose which it had in view. The deed, however, contained this declaration:
"This conveyance is made, however, with full notice of the assertion of the following claims against the said property, to-wit, a certain mortgage or trust deed to the Trust Company of North America, of Philadelphia, Pennsylvania, as trustee, to secure certain bonds for the sum of one million two hundred and fifty thousand ($1,250,000) dollars, and also certain mechanics' liens to the amount of about $55,000, and also certain judgments to the amount of about $20,000. Nor shall said first party (that is, the transferor) be understood to covenant that there are not other claims than those hereinbefore expressly mentioned, none of which, however, are to be considered and assumed by said second party (Hubbard, trustee), nor by the acceptance of this deed is he in anywise held to admit the validity of said trust deed liens, judgments, or of any claims made or that may arise thereunder, nor shall this deed be held in any manner to operate as the merger of said mortgage to said Union Loan and Trust Company, but said mortgage shall at all times be kept in full force until all persons and corporations entitled and claiming benefits thereunder shall consent to its discharge, or so long as it may be necessary to keep said mortgage in force for the protection
of the title herein conveyed, or any interest claimed by virtue hereof."
Default having taken place in the payment of the interest on the bonds secured by the first mortgage, the Trust Company of North America, as the trustee, filed its bill in the Circuit Court of the United States for the Northern District of Iowa for foreclosure. On the 20th of June, 1894, the court ordered the two foreclosure suits -- that is, the one previously brought by certain national banks in October, 1893, and the one brought by the Trust Company of North America -- to be consolidated, and appointed the same person who had been made receiver under the first bill also the receiver under the second. On July 23, 1895, the Credits Commutation Company, a corporation organized under the laws of the State of Iowa, filed its suit against the Terminal Company in the state court of Iowa in and for Woodbury County. It was alleged that the Credits Commutation Company had become the holder and owner of a large number of the claims against the Terminal Company, which were intended to be secured by the second mortgage, and for whose benefit the deed to Hubbard, trustee, had been made. The relief sought was a judgment against the Terminal Company,
"without prejudice to any rights or interests which the plaintiff (the Credits Commutation Company) may have as a holder of said notes in the said trust deed"
-- that is, the deed of trust to Hubbard, trustee for the benefit of the note holders, as already mentioned. On the day the suit was filed, the Terminal Company answered, admitting the correctness of the claim, and judgment was then entered for $692,096.95, with interest, the whole without prejudice to the rights of the parties under the deed of trust, as prayed for.
The Terminal Company, in its answer to the suit for foreclosure brought by the Trust Company of North America, relied upon many defenses, only one of which need be referred to -- that is, that the bonds and the mortgage in favor of the said Trust Company of North America were ultra vires. However, it may be observed that the Terminal Company, by its answer, asserted that the rights of those entitled to claim
under the second mortgage or the conveyance, made for their benefit to Hubbard, trustee, were paramount to the claims of the Trust Company of North America or the bondholders under the first mortgage in favor of that company. The Credits Commutation Company intervened in the foreclosure proceedings, averring that the bonds secured by the deed in favor of the Trust Company of North America were void because the Terminal Company, at the time the bonds were executed, was without lawful power to issue them or to secure them by mortgage. It was also claimed that in virtue of the judgment rendered in the state court, the Credits Commutation Company was a creditor of the Terminal Company to the amount of the judgment, and was entitled to avail itself of the rights accruing to it from the deed of conveyance made by the Terminal Company to Hubbard, trustee, and therefore that the Credits Commutation Company was entitled to be paid from the proceeds of the property sought to be foreclosed before the holders of the bonds secured by the deed which had been made in favor of the Trust Company of North America.
The trial court decided in favor of the validity of the bonds issued to the Trust Company of North America and of the mortgage securing the same. 69 F. 441. On appeal to the Circuit Court of Appeals for the Eighth Circuit, the judgment of the trial court was affirmed. 82 F. 124. The case then, by the allowance of a writ of certiorari, was brought to this Court.