Section 1255 of the Code of North Carolina of 1883 provides that
mortgages of corporations shall not exempt the property mortgaged
from execution for judgments obtained in the state courts against
the corporation for torts and certain other causes. A corporation
constructed a plant for supplying a city with water, having
received exclusive authority there for from the city. It executed
two mortgages, under the foreclosure of the second of which its
plant was sold, subject to the first mortgage, to a new
corporation, which then executed a further mortgage. Subsequently,
judgments were rendered in actions brought by property owners
against the new corporation for damages caused, as charged in the
complaints and recited in the judgments, by its negligence. On
foreclosure of the outstanding mortgages, the holders of these
judgments were given priority over the mortgagees notwithstanding
the contention of the latter that the property owners had no
contractual relations with, or right to maintain these actions
against, the water company, that the judgments were not conclusive,
the mortgagees not being parties thereto, and that only the equity
acquired by the new company was subject to any judgment lien. In
affirming the decision,
held that:
Page 200 U. S. 58
Under the statute, the mortgagees agreed to accept the judgments
as conclusive of the amounts due. And the record, showing that
negligence was alleged in the complaints and adjudged by the state
court, discloses judgments in actions of tort.
One may by contract acquire an opportunity for acts and conduct
in which parties other than those with whom he contracts are
interested and for negligence in which he is liable to such other
parties.
While a citizen may have no individual claim against a company
contracting to supply water to a city for its failure to do
anything under the contract, he may have a claim against it, after
it has entered upon a contract and is engaged in supplying the city
with water, for damages resulting from negligence, and in such a
case, the action is not for breach of contract, but for a tort.
Section 1255 is not a penal statute, but remedial, and should be
liberally construed to give effect to the intent of the legislature
to make the property of corporations security against its torts,
and imposes upon the plant of a corporation responsibility for
torts which cannot be avoided by a conveyance to a new
corporation.
Section 1255 of the Code of North Carolina of 1883 reads:
"Mortgages of incorporate companies upon their property or
earnings, whether in bonds or otherwise, hereafter issued, shall
not have power to exempt the property or earning of such
incorporations from execution for the satisfaction of any judgment
obtained in courts of the state against such incorporation for
labor performed [nor for material furnished such incorporation],
nor for torts committed by such incorporation, its agents or
employees, whereby any person is killed or any person or property
injured, any clause or clauses in such mortgage to the contrary
notwithstanding."
This was subsequently amended by leaving out the matter enclosed
in brackets.
In 1887, a corporation was organized under the laws of North
Carolina, which, soon after secured the passage of an ordinance by
the City of Greensboro giving to it the exclusive right to the use
of the streets, sidewalks, and public grounds for the purpose of
constructing, operating, and maintaining a complete system of
waterworks. A later ordinance provided that
"said water company shall be responsible for all damage
sustained by the city, or any individual or individuals,
Page 200 U. S. 59
for any injury sustained from the negligence of the said
company, either in the construction or operation of their
plant."
The corporation constructed the waterworks and also executed a
mortgage or deed of trust conveying its entire property and plant
to secure the payment of fifty thousand dollars of bonds. A
subsequent mortgage or deed of trust was foreclosed, and the title
to the property passed to a new corporation, subject to the lien of
the first mortgage. After its purchase, the new corporation
executed a further mortgage or deed of trust. Subsequently two
fires occurred, destroying property belonging to the respondents.
Actions were commenced in the Superior Court of Guilford County by
the owners of the property destroyed against the new corporation,
and judgments recovered, the judgment entries each reciting that
the recovery was "for the injury and damage done him by the
negligence of the defendant." 128 N.C. 375. Proceedings having been
commenced in the circuit court of the United States to foreclose
the existing mortgages, a decree was entered and a sale made.
Thereupon the judgment creditors intervened, insisting that, in the
distribution of the proceeds, they were entitled to priority over
the mortgage liens by virtue of the statute above referred to. The
circuit court decided in their favor. 115 F. 184. Its judgment was
taken on appeal to the court of appeals, from which court the case
was brought here on certiorari.
Page 200 U. S. 64
MR. JUSTICE BREWER delivered the opinion of the Court.
It is contended that neither the plaintiff in the pending suit
nor the bondholders whom it represents were parties or privies to
the actions in the state court; that therefore the judgments of the
latter court were not conclusive in the foreclosure proceeding as
to the nature of the causes of action; that whether they were for
torts or breaches of contracts is for the determination of the
federal court, and further, that, when the property passed from the
old to the new water company, it passed subject to the fifty
thousand dollar mortgage, and that, under this statute, if
applicable at all, only the interest in the property acquired by
the second water company was responsible for the damages caused by
its negligence. On the other hand, it is contended that the statute
deals with judgments, not claims for damages caused by negligence;
that the decision of the state court as to the nature of the cause
of action is as much a part of the judgment as the determination of
the amount to be recovered; that a judgment which in terms is for
damages caused by negligence, if entered by a court having
jurisdiction, is made by the statute superior to any mortgage;
that, by the mortgage, the mortgagee and the bondholders it
represents agree to accept such judgment as conclusive, and to
subordinate their mortgage to its lien; that to hold that the
transfer of property encumbered by a mortgage from one company to
another puts that mortgage outside the statute practically destroys
its beneficial intent; that such has been the holding of the
supreme court of the state, and is a holding which the federal
courts will follow.
Page 200 U. S. 65
We shall assume, without deciding, that the nature of the causes
of action upon which the state judgments were rendered is open for
consideration in the federal court in the foreclosure proceeding.
The statute subordinates the mortgage to judgments for torts. Now
what is the judgment? It is a determination that, upon the facts
stated, the plaintiff is entitled to recover so much money. It may
not be essential that it recite whether the facts stated show a
breach of contract or a tort, but it is essential that the judgment
should be considered as a determination that, upon those facts, the
plaintiff is entitled to recover. And it must be assumed that,
under the statute, the mortgagee and the bondholders it represents
agree to accept the judgment as conclusive in this respect, or, if
not conclusive, at least
prima facie evidence. In this
foreclosure proceeding, the record of the proceedings in the state
courts was introduced in evidence. Taking the
Fisher case
for illustration, the complaint set out fully the contract made
between the City of Greensboro and the water company, and the
proceedings by which the title to the property passed from the one
company to the other; alleged the destruction by fire of the
plaintiff's property, and that he was free from all negligence in
the matter. It added:
"The plaintiff alleges . . . that the defendant company was
culpably negligent and willfully careless of its duty and
obligations, both to the City of Greensboro and its inhabitants,
under the said contract, and by virtue also of the duties,
obligations, and responsibilities which it assumed when it
undertook to supply water to the City of Greensboro and its
inhabitants for a stipulated price, which was paid to it by the
said city."
It then set forth as matters of negligence on the part of the
water company the
"carelessly, willfully, and negligently failing to keep a
sufficient quantity of water in its storage water tank in the said
City of Greensboro, necessary for the purpose of extinguishing
fire, together with the other uses to which it was applied;"
also a failure
"to keep its pumping engine
Page 200 U. S. 66
ready at all times, and particularly on the day of the fire
above referred to, to supply the needed fire pressure, in that it
negligently failed to keep a suitable person at said engine or
pumping house, or near the same, for the purpose of responding to
the demands for water for the extinguishment of fire, and
especially did it fail so to do at the time the property of the
plaintiff was burned,"
and closed with this averment:
"That it was through no fault of the plaintiff that the said
fire occurred, or that the same was not immediately extinguished;
but that the negligence and omissions of duty, heretofore
complained of on the part of the defendant company, was the
proximate cause of the destruction of his property, whereby the
defendant company becomes liable therefor."
The answer consisted mainly of denials in separate paragraphs of
the averments in corresponding paragraphs of the complaint,
specifically denying the validity of the contracts between the city
and the original water company. Questions were submitted to the
jury, and answers returned, establishing the making of the
contracts, the attempt on the part of the company to perform its
stipulations, its failure to do so successfully, and also that the
plaintiff was injured by the negligence of the defendant.
Upon this record, the Supreme Court of North Carolina ruled that
the action was one in tort, saying:
"We think the plaintiff was entitled to judgment as prayed for.
There was an express and legal obligation upon the part of the
defendant to provide and furnish ample protection against fires,
and a breach of that obligation and a consequential damage to the
plaintiff. Although action may have been maintained upon a promise
implied by law, yet an action founded in tort was the more proper
form of action, and the plaintiff so declared. He stated the facts
out of which the legal obligation arose, fully, and also the
obligation itself, and the breach of it, and the damage resulting
from that breach. 1 Chitty, Pl. 155; 5 Thompson on
Corporations,
Page 200 U. S. 67
vol 5, sec. 6340."
128 N.C. 375, 379.
From the conclusion thus reached we are not inclined to dissent,
and for these reasons: one may acquire by contract an opportunity
for acts and conduct in which parties other than those with whom he
contracts are interested, and for negligence in which he is liable
in damages to such other parties. A company is chartered to
construct and operate a railroad. Proceeding thereunder, it
constructs and operates its road. Nothing may be said in the
charter in reference to the manner in which the road shall be
operated or the particular acts which it must do. Yet, without any
such specification, it is under an implied obligation to exercise
reasonable care in both construction and operation. If, from undue
speed, failure to give proper warnings, or other like acts or
omissions individuals are injured, they may recover for such
injuries, and their actions to recover sound in tort. Doubtless in
the same transaction there may be negligence and breach of
contract. If a railroad company contracts to carry a passenger,
there is an implied obligation that he will be carried with
reasonable care for his safety. A failure to exercise such care,
resulting in injury to the passenger, gives rise to an action
ex contractu for breach of the contract, or as well to an
action for the damages on account of the negligence -- an action
sounding in tort. But where there is no contract, and the injuries
result from a failure of the corporation to exercise reasonable
care in the discharge of the duties of its public calling, actions
to recover therefor are strictly and solely actions
ex
delicto. Pollock, in his treatise, groups torts into three
classes, in the last of which he specifies
"breach of absolute duties specially attached to the occupation
of fixed property, to the ownership and custody of dangerous
things, and to the exercise of certain public callings."
Webb's Pollock on Torts, p. 7. This, it is said, implies the
existence of some absolute duty not arising from personal contract
with the other party to the action.
Page 200 U. S. 68
And here we are met with the contention that, independently of
contract, there is no duty on the part of the water company to
furnish an adequate supply of water; that the city owes no such
duty to the citizen, and that contracting with a company to supply
water imposes upon the company no higher duty than the city itself
owed, and confers upon the citizen no greater right against the
company than it had against the city; that the matter is solely one
of contract between the city and the company, for any breach of
which the only right of action is one
ex contractu on the
part of the city. It is true that a company contracting with a city
to construct waterworks and supply water may fail to commence
performance. Its contractual obligations are then with the city
only, which may recover damages, but merely for breach of contract.
There would be no tort, no negligence, in the total failure on the
part of the company. It may also be true that no citizen is a party
to such a contract, and has no contractual or other right to
recover for the failure of the company to act; but, if the company
proceeds under its contract, constructs and operates its plant, it
enters upon a public calling. It occupies the streets of the city,
acquires rights and privileges peculiar to itself. It invites the
citizens, and if they avail themselves of its conveniences, and
omit making other and personal arrangements for a supply of water,
then the company owes a duty to them in the discharge of its public
calling, and a neglect by it in the discharge of the obligations
imposed by its charter, or by contract with the city, may be
regarded as a breach of absolute duty, and recovery may be had for
such neglect. The action, however, is not one for breach of
contract, but for negligence in the discharge of such duty to the
public, and is an action for a tort.
"The fact that a wrongful act is a breach of a contract between
the wrongdoer and one person does not exempt him from the
responsibility for it as a tort to a third person injured
thereby."
Osborne v. Morgan, 130 Mass. 102, 104.
See also
Emmons v. Alvord, 177 Mass. 466, 470. An individual may be
Page 200 U. S. 69
under no obligation to do a particular thing, and his failure to
act creates no liability; but if he voluntarily attempts to act and
do the particular thing, he comes under an implied obligation in
respect to the manner in which he does it. A surgeon, for instance,
may be under no obligation, in the absence of contract, to assume
the treatment of an injured person, but if he does undertake such
treatment, he assumes likewise the duty of reasonable care in such
treatment. The owner of a lot is not bound to build a house or
store thereon, but if he does so, he comes under an implied
obligation to use reasonable care in the work to prevent injury
therefrom to others. Holmes, Common Law, p. 278. Even if the water
company was under no contract obligations to construct waterworks
in the city or to supply the citizens with water, yet, having
undertaken to do so, it comes under an implied obligation to use
reasonable care, and if, through its negligence, injury results to
an individual, it becomes liable to him for the damages resulting
therefrom, and the action to recover is for a tort, and not for
breach of contract.
With reference to the contention that only the interest in the
property acquired by the second water company was responsible for
the damages caused by its negligence -- a contention which, if
sustained, would result in giving priority to the fifty thousand
dollar mortgage -- the argument is that, by the statute,
"mortgages of incorporate companies . . . shall not have power
to exempt the property or earnings of such incorporations . . . for
torts committed by such incorporation;"
that the torts were committed by the second water company; that
its purchase was of the property of the first company, subject to
the fifty thousand dollar mortgage, and therefore over that
property thus encumbered, and that only, were the judgments given
priority. There is doubtless force in this contention. But this is
not a penal statute, to be construed strictly, but remedial in its
nature, and to be construed liberally, to carry into effect the
intention of the legislature and provide the adequate remedy which
it intended.
Page 200 U. S. 70
The obvious purpose was to make the corporate property situate
in the state security against torts committed by its owner, and it
would materially impair, if not wholly destroy, the statute, and
thus set at naught that purpose, if the corporation constructing
the plant could place a mortgage thereon for its entire value, and
then, by sale, to a new corporation, enable the purchaser to use
that property discharged of all substantial responsibility. In
reference to a kindred question arising under the same statute, the
Supreme Court of North Carolina said in
Railroad Co. v.
Burnett, 123 N.C. 210, 214, that, under such construction,
"this statute would be a false light held out to such claimants
to induce them to furnish material and labor -- thinking they had a
security, when in fact they had none."
It is more reasonable to hold that the statute imposes upon the
investment made by a corporate company in its plant a
responsibility for torts committed by it or any subsequent
corporate owner, and that that responsibility cannot be avoided by
any mortgage or other encumbrance voluntarily placed upon the
property. Security to the individual citizen is to go hand in hand
with the franchise and privilege granted by the state. We see no
other question requiring notice, and the decree of the Circuit
Court is
Affirmed.
MR. JUSTICE WHITE, MR. JUSTICE PECKHAM, and MR. JUSTICE McKENNA
dissented.
