A corporation acquiring stock control of a railroad company and
leasing it becomes liable to account to the leased company for the
amount of bonds in the treasury of the leased company diverted by
it; that liability can be enforced by a creditor of the leased
company who is unable to collect his judgment on account of the
insolvency of the leased company which has resulted from the lease
itself.
Chicago Railway v. Chicago Bank, 134
U. S. 277.
A lessor railroad company which has once become liable for
diversion of bonds from the treasury of a lessee company remains so
until the bonds are restored; nor is the obligation lessened by
disbursements made on account of the roadbed of the leased
company.
Improvements of a roadbed leased for 999 years from another
company are expenditures for the benefit of the lessee, and not the
lessor; they cannot be regarded as an offset to a debt owed by the
lessee to the lessor.
Chicago Railway v. Chicago Bank,
134 U. S.
277.
Contracts for reorganization made between bondholders and
stockholders of corporations, insolvent or financially embarrassed,
involving the transfer of the corporate property to a new
corporation, while proper and binding as between the parties,
cannot, even where made in good faith, defeat the claim of
nonassenting creditors; nor is there any difference whether the
reorganization be made by contract or at private sale or
consummated by a master's deed under a consent decree.
Even in the absence of fraud, any device, whether by private
contract or under judicial sale, whereby stockholders are preferred
to creditors is invalid.
Louisville Trust Co. v. Louisville
Railway, 174 U. S.
683.
The decree in a proceeding brought by one of a class to permit
that class to participate in a reorganization is not
res
judicata as against another of the same class who was not a
party thereto and had no notice of the proceeding.
Rights of creditors of corporations undergoing reorganization do
not
Page 228 U. S. 483
depend upon whether the property was sufficient on the day of
sale to pay them and prior encumbrances, but on fixed principles
established by law.
The property of a corporation, in the hands of the former owners
under a new charter is as much subject to existing liabilities as
that of a . defendant who buys his own property at a tax sale.
The fact that property of great value belonging to an insolvent
corporation is bid in by the reorganization committee at the upset
price fixed by the court at a judicial sale cannot be used as
evidence to disprove the recital as to its actual and far greater
value when subsequently transferred by the reorganization committee
to the new corporation.
A creditor of a corporation undergoing reorganization cannot
prevent stockholders from retaining an interest in the reorganized
corporation; if he is given a fair opportunity to protect his
interests and refuses to avail of it, he may be cut off by the
decree.
Laches is not to be measured as statutory limitations are. There
is no necessary estoppel from mere lapse of time where
complainant's nonaction is excusable, and has not damaged defendant
or caused him to change his position.
Townsend v.
Vanderwerker, 160 U. S.
186.
In this case, the delay in bringing the suit was excusable if
not unavoidable, and, as complainant's silence did not mislead the
stockholders and his inaction did not induce any of them to become
parties to the reorganization, laches cannot be imputed to him.
177 F. 804 affirmed.
The Circuit Court of Appeals for the Ninth Circuit affirmed a
decree subjecting the property of the Northern Pacific Railway
Company to the payment of a judgment for $71,278, which Joseph H.
Boyd had revived against the Coeur D'Alene Railway & Navigation
Company. The record on this appeal is very lengthy, and the
transactions so overlap that any chronological statement would
necessarily be confusing. It will conduce to clearness to refer
first to those between the Coeur D'Alene and the Northern Pacific
Railroad and then set out as succinctly as possible the facts
connected with the foreclosure of the Northern Pacific
Railroad and its purchase by the Northern Pacific
Railway.
In 1886, the Coeur D'Alene Railroad & Navigation
Page 228 U. S. 484
Company constructed a narrow gauge railroad from Burke, Idaho,
on the Northern Pacific Railroad, to Old Mission. Spaulding, in
1887, brought suit in an Idaho court to recover $23,675 for work
done and material furnished in building it. Owing to the
inaccessibility of the county seat in which the territorial court
was held, and the fact that the terms were generally devoted to
criminal business, there was much delay in getting a hearing. At
last, there was a trial, lasting forty days, but the presiding
judge died before making his findings and entering judgment. His
successor, having been of counsel for one of the parties, was
disqualified, so that it was not until 1896 that Spaulding
recovered judgment against the Coeur D'Alene. Boyd claimed that
this judgment belonged to him, and, learning that Spaulding had
threatened to transfer the judgment, Boyd, in 1898, instituted a
suit to establish his title. It terminated in his favor in May,
1901. When the appeal was dismissed, the judgment against the Coeur
D'Alene was about to become dormant. Boyd thereupon (1903) began
proceedings in Idaho to have it revived, and on October 23, 1905,
obtained a judgment against the Coeur D'Alene Company for $71,278,
being the original debt with accumulated interest and costs. An
appeal was taken, which was dismissed, and thereupon Boyd, in
September, 1906, brought in a state court this suit against the
Northern Pacific Railroad and the Northern Pacific Railway Company,
claiming that the Rail
road was liable for this debt of the
Coeur D'Alene, and that the Rail
way in turn was liable for
this debt of the Rail
road. The case was removed to the
United States Circuit Court for the Eastern District of
Washington.
The Coeur D'Alene Railway and Navigation Company, in 1886, built
a narrow gauge railroad 33 miles in length. D. C. Corbin was
president, and controlled 5,100 shares, which constituted a
majority of the stock, which had been increased to $1,000,000, and
all of which was unpaid.
Page 228 U. S. 485
In 1888, while the Spaulding suit was pending, Corbin entered
into a contract with the Northern Pacific Railroad in which he
agreed to sell it his stock, stated to be full paid and
nonassessable, to secure for it a lease of the Coeur D'Alene's
property for 999 years and authority to issue $825,000 of mortgage
bonds. The Northern Pacific was to pay the interest of six percent
on those bonds issued at the rate of $25,000 per mile on the 33
miles of road constructed, or to be constructed, and after a
certain date to create and maintain a sinking fund for the
redemption of the bonds at maturity; to pay for the value of
material on hand, and $20,000 to cover amounts expended for
surveys.
Corbin secured the adoption of resolutions authorizing the lease
and the issuance of the bonds. On September 18, 1888, 5,100 shares
of stock were transferred to the railroad, which entered into
possession as lessee October 1, 1888, taking charge of all the
matters relating to the Coeur D'Alene, including its litigation,
although Corbin and the other officers did not immediately
resign.
The resolution provided for the immediate issuance of $825,000
of bonds, $360,000 of which were to be retained to redeem the
outstanding bonds for that amount. The agreement was silent as to
what should be done with the remaining $465,000 of bonds, and the
parties are at issue as to what use was, in fact made of them. The
railway insists that the records show that they were delivered by
the mortgage trustee on October 29 and 30, 1888, upon the order of
Corbin, president, part to him and part to another person. Boyd,
however, contends that these bonds, $465,000, or their proceeds,
were used to pay Corbin for the 5,100 shares of stock sold by him
to the Northern Pacific Railroad, while the latter insists that the
consideration for the transfer was, as stated in the contract, the
railroad's guarantying the principal and interest of
Page 228 U. S. 486
the bonds, and taking a lease of the property for 999 years,
which provided for rental to be paid out of net earnings.
The evidence on this branch of the case is meager. On behalf of
the defendant, the records showed that, on October 29 and 30, 1888,
the bonds were turned over on the order of Corbin, president of the
Coeur D'Alene Company. Corbin, who was an old man at the time of
taking the testimony in 1907, stated that he received none of the
bonds, but so much cash; that neither he nor his associates
received any benefit from the mortgage,
"though I presume it was probably used to pay us. I know we got
our money. . . . I do not think we received any bonds, unless
possibly we might have received bonds with an agreement with
somebody to take them off our hands and pay us the money, because I
never had any bonds. . . . If they ever came into my hands at all,
they just passed through my hands."
A witness for the Northern Pacific, who had been its auditor in
1888, had no personal knowledge of the transaction, but testified
that there was nothing on the books of the Northern Pacific which
showed that it had ever received the $465,000 of bonds, or that it
had ever paid anything for this stock. He did not think that the 33
miles of railroad cost $825,000, and supposed that the $465,000 of
bonds went to Corbin and his associates. "His rights and so on were
worth something."
In December, 1889, the railroad obtained, through Corbin, the
remaining 4,900 shares of stock in the Coeur D'Alene, paying
therefor $250,000. It changed the road from a narrow to a broad
gauge at a cost of $150,000, and extended the line 16 1/2 miles at
a cost of $750,000, and, as provided in the mortgage, issued
$413,000 of additional bonds, being at the rate of $25,000 per
mile. The cost of this extension, change in grade, and other
betterments amounted to $910,000, or about $500,000 more than
the
Page 228 U. S. 487
Northern Pacific Railroad received from the sale of this last
issue of $413,000.
The first twenty-one months after the lease, the Coeur D'Alene's
net earnings amounted to $176,000, and, as the lease provided that
net earnings should be paid as rental, a dividend of six percent
was declared. Thereafter the earnings rapidly decreased, and
ultimately the books showed a loss. But the Northern Pacific
Railroad, in accordance with the terms of the lease, paid the
interest on the bonds until it was itself put in the hands of a
receiver in 1893. He failed to pay the interest in 1895, and
proceedings were instituted to foreclose the mortgages on the Coeur
D'Alene Company. The property was sold under foreclosure in
January, 1899, for $220,000, to the newly organized Northern
Pacific Railway Company.
This left nothing for payment of Boyd's debt, and he insists
that the lease and the diversion of the funds in purchase of
Corbin's stock made the railroad responsible for the debts of the
Coeur D'Alene, including his judgment. He further claims that the
Rail
way became liable for the payment of the same debt by
virtue of new and independent proceedings now to be stated, under
which the Northern Pacific Rail
way in 1896 acquired the
property of the Northern Pacific Rail
road.
On August 15, 1893, Winston and others filed in the United
States court for the Eastern District of Wisconsin a creditors'
bill against the Northern Pacific Railroad, alleging that it was
insolvent, its mortgage bonds amounting to about $140,000,000 and
its floating debts to $11,000,000, and praying for the appointment
of a receiver to preserve the property as an entirety, and to
prevent it from being dismembered by separate sales under
attachments and other liens. The company owned or controlled 54
subsidiary companies, and main and branch lines 4,700 miles in
length. It also owned or was entitled to receive about 40,000,000
acres under land grants. There
Page 228 U. S. 488
were six mortgages -- some on one part of the property, some on
another -- and a general mortgage on the entire railroad lines. It
also owned a large body of land which was not encumbered by liens.
Interest had been paid on some of the bonds, but there had been a
default in the interest on those secured by the junior
mortgages.
Shortly after the filing of the creditors' bill, a suit was
brought in the same court by the trustees to foreclose these latter
mortgages. The cases were consolidated, and the receivership
continued under the consolidated causes. The railroad demurred. As
the road ran through several states, there were many questions of
conflicting jurisdiction which were not settled until January 31,
1896, so that, except for administrative orders, no steps were
taken in the litigation proper.
The representatives of the stockholders intended to resist the
foreclosure, and, while recognizing the superior claim of the
bonds, advised that "if properly protected, stockholders can secure
equitable terms in any reorganization." There were also
representatives of the bondholders, and ultimately the two
interests agreed upon a plan, the terms of which were stated by the
reorganization committee which, March 16, 1896, issued a circular
to "the holders of bonds and stocks issued or guaranteed by the
Northern Pacific Railroad." This circular outlined a plan under
which all of the stocks and bonds of the railroad were to be
transferred to a new company (the present Northern Pacific Railway
Company), which was to purchase the property of the railroad, issue
new bonds, part of which were to be sold to raise money with which
to discharge receivers' certificates, purchase needed equipment and
make necessary betterments. The balance was to be issued in
exchange for the bonds of the old company.
The plan also contemplated the issuance of preferred and common
stock, part to be used in paying debts of the subsidiary companies,
for which the Northern Pacific
Page 228 U. S. 489
Railroad was liable, part for the expenses of the
reorganization, and the balance to be issued in exchange for the
outstanding stock of the Northern Pacific Railroad. Under the
proposed plan, the holder of $100 of preferred stock in the old
company, upon paying $10 per share, was to receive $50 of preferred
and $50 of common stock in the new company. For each $100 of common
stock, the holder was to receive one share of common in the new
corporation upon paying $15 per share. The aggregate of these cash
payments on stock was about $11,000,000.
The records showing the cost of the original construction were
not accessible, and in some particulars the costs of the main and
subsidiary lines appear to have been combined. But there is
testimony tending to show that the cost of the railroad property,
subject to the mortgage, was about $241,000,000. What was the value
of the 40,000,000 acres of land is not stated. For several years
prior to the receivership, the road's net earnings had varied
between $10,000,000 and $4,449,000. Its fixed charges amounted to
$11,000,000 -- showing an annual deficit of about $5,000,000. The
bonds, unpaid interest, and receivers' certificates aggregated at
date of sale $157,000,000. The unsecured debts proved before the
master amounted to about $15,200,000. The reorganization
contemplated an issue of new bonds for $190,000,000 at lower rates
of interest, $75,000,000 of preferred stock, $80,000,000 of common
stock -- a total in bonds and stock of $345,000,000.
The reorganization agreement contained a statement that the
property intended to be purchased was mutually agreed to be of the
value of $345,000,000, payable in the stocks and bonds as above
described.
The plan of reorganization was accepted, and on April 27, 1896,
the decree of foreclosure was entered and the property ordered to
be sold, on a date later fixed for July 25, 1896.
Page 228 U. S. 490
On June 23, 1896, an order was entered directing the special
master to give notice by publication requiring each and every
creditor of the railroad to present their claims against the
company or specific property before November 1, 1896; in default of
which they should be excluded from the benefit of the reference.
Publication was made as directed.
On July 22, 1896, Paton and others, holding contingent and
unsecured claims for $5,500,000 against the Northern Pacific R.
Co., filed a bill, in the same court that had jurisdiction of the
creditors' bill and foreclosure suit, charging that the sale was
the result of a conspiracy between bondholders and stockholders to
exclude general creditors, and to award to stockholders in the old
company rights in the new which were valuable and could not be
legally reserved for the stockholders until first offered to and
declined by the general creditors. It prayed that the decree of
foreclosure should be opened; that the court would formulate a just
and fair plan for distribution, and that the sale be enjoined. This
was later modified so as to permit the sale to proceed, but asking
an injunction to prevent the distribution of the proceeds and
securities. The court held that the company was insolvent; that the
assets were insufficient to pay the mortgage debts; that practical
operation had demonstrated that the net earnings would not pay the
fixed charges; that there was no equity in the property out of
which unsecured creditors could be paid, and no reason existed why
the stockholders could not go into a reorganization plan whereby
they would become stockholders in the new company, if it should
become the purchaser. The prayer for injunction was denied. No
appeal was taken.
On July 25, the railroad property was sold at public outcry to
the newly organized railway company at a price representing
$61,500,000, or $86,000,000 less than the secured debts. On July
27, the sale was reported to the
Page 228 U. S. 491
court, and, all parties consenting, was three days later
confirmed. The railway company entered into possession, and the
first year its earnings were $489,000 above fixed charges, which
had been lessened under the reorganization. The second year, it
declared a dividend of $3,000,000 and carried $3,000,000 to
surplus. Since that time, the earnings have been continually large,
the business profitable, and the value of the securities
correspondingly great; but for a year after the sale, stock on
which $10 and $15 had been paid in cash sold at prices varying from
$18 to $51 for preferred and $13 and $18 for common.
In addition to the property covered by the mortgage, the
Northern Pacific Railroad owned large quantities of land which was
not encumbered, and in May, 1896, the Farmers' Loan & Trust
Company filed its supplemental bill describing this unmortgaged
property and alleging that various intervening creditors had
obtained judgments against the railroad company, some of which had
been assigned to the trust company. It prayed that these lands of
the railroad should be sold and the proceeds applied to the
satisfaction of the unsecured claims. On the same day that this
supplemental bill was filed, the railroad company and other parties
to the consolidated causes answered, the court adjudged that the
complainant was entitled to the decree asked for, and appointed a
receiver of the property.
It was not, however, until April 27, 1899, that the sale was
ordered. The property was thereupon sold to the Northern Pacific
Railway for $1,623,000. The parties stipulated that the sale should
be confirmed, and on the same day in September, 1899, this was
done.
Out of the proceeds of this unmortgaged land a dividend of
$108,000 was paid on the Coeur D'Alene bonds held by the Northern
Pacific Railway. The Northern Pacific Railway had a claim against
the old railroad of $86,000,000 for deficiency between the bid at
foreclosure sale and
Page 228 U. S. 492
the lien debts held by it. It had also purchased about
$14,000,000 of other unsecured claims. On this $100,000,000, it was
paid a dividend of $1,200,000, or a little over one percent
But, during these years, the litigation between Spaulding and
the Coeur D'Alene to recover judgment for work done, between Boyd
and Spaulding over the title to the judgment, and between Boyd and
the Coeur D'Alene to revive the judgment, had been in progress, and
did not terminate until 1905, when the judgment was revived. When
the appeal was dismissed, Boyd brought this bill in equity against
the Northern Pacific Railroad Company and the Northern Pacific
Railway Company, insisting that the railroad was liable for this
debt of the Coeur D'Alene, and that the railway was in turn liable
for this debt of the railroad. There was no demurrer, but both
answered and much evidence was taken. A decree in favor of Boyd and
against the railway was made a lien on the property purchased,
subject, however, to the mortgages placed thereon. The decree was
affirmed by the circuit court of appeals (170 F. 779, 177 F. 804),
and both defendants appealed. In this Court, a brief was filed by
an
amicus curiae, insisting that the complainants' remedy
was against stockholders of the Northern Pacific Railroad, and not
against the Railway Company or its property.
Page 228 U. S. 498
MR. JUSTICE LAMAR, after making the foregoing statement,
delivered the opinion of the Court.
Boyd's judgment against the Coeur D'Alene Railway &
Navigation Company was rendered in 1896, in an action begun in 1887
in a court of the Territory of Idaho. After he had established his
title to the judgment and revived it in 1906 for $71,278, there was
nothing on which an execution could be levied, because, in the
meantime, all of the property of the Coeur D'Alene had been sold
under foreclosure. He thereupon brought this suit, claiming that
the Northern Pacific R. Co. was liable in equity as for a diversion
of $465,000 of bonds belonging to the Coeur D'Alene, but used by
the Northern Pacific in payment of 5,100 shares of stock bought
from Corbin in 1888.
At that time, the Coeur D'Alene was solvent, owning
Page 228 U. S. 499
and operating at a profit a narrow gauge railroad, 33 miles in
length, constructed at a cost of about $12,000 a mile, and paid for
mainly out of the proceeds of $360,000 of first-mortgage bonds. The
original capital stock of $500,000, increased to $1,000,000, had
been issued, but the subscriptions were unpaid. A majority of this
stock was controlled by Corbin, the president.
On August 1, 1888, he, in his individual capacity, entered into
a written contract with the Northern Pacific in which he undertook
to have the Coeur D'Alene issue $825,000 of bonds, $360,000 of
which were to be retained to retire those then outstanding. He also
agreed to cause the Coeur D'Alene to lease its property for 999
years to the Northern Pacific, which, in turn, was to guarantee the
payment of the principal and interest of the bonds. The contract
further recited that, in consideration of the execution of the
lease and guaranty, Corbin would transfer to the Northern Pacific
5,100 fully paid and nonassessable shares of the capital stock of
the Coeur D'Alene. The agreement was promptly carried into effect.
A resolution was passed by the directors of the Coeur D'Alene,
authorizing the issue of $825,000 of bonds for properly
constructing, completing, and equipping the road; the 999-year
lease was made and Corbin transferred his stock. Shortly
afterwards, the trust company, named in the mortgage, issued to
Corbin, president, or order, $465,000 of the new bonds. They were
not used for completing or equipping the road, paying the debts, or
other corporate purpose, and although the Northern Pacific was the
then holder of a majority of the stock and in charge of the
business and litigation of the Coeur D'Alene, no steps were taken
to trace or recover them. Corbin testified that he was paid for the
stock, in cash, about the par value of the bonds; that he had never
received them, or if so, that they only passed through his hands
"with an agreement that somebody was to take them off of our hands
and pay us the money."
Page 228 U. S. 500
1. The buyer would naturally have been the person to make
arrangement for the payment. But the railway insists that the
payment was not made in cash, but that, as recited in the written
contract, the stock was transferred by Corbin in consideration of
the Northern Pacific's guarantying the bonds and entering into the
lease. But even if Corbin sold his 5,100 shares for a consideration
nominally moving to the Coeur D'Alene, that would not change the
character of the transaction if, in fact, Corbin made the transfer
with the further understanding that he was to have the proceeds of
the guaranteed bonds. In that event, the purchaser would be as much
liable for the diversion of the $465,000 as the seller.
Chicago, M. & St.P. Ry. Co. v. Third Nat. Bank,
134 U. S. 276. The
terms of the contract, Corbin's control of the Coeur D'Alene, the
failure to produce or account for the absence of the agent who
represented the Northern Pacific Railroad in the purchase, together
with Corbin's testimony that the stock was paid for out of the cash
proceeds of the bonds, support the concurrent findings of the two
courts that the Northern Pacific combined with him to divert
$465,000 of the assets of the Coeur D'Alene. And even if, as
claimed, liability for a diversion of trust funds was dependent
upon the insolvency of the Coeur D'Alene, that insolvency was
brought about in the very act of carrying the illegal contract into
effect, for thereby the Coeur D'Alene was encumbered with a
mortgage for twice its value, and the lease for 999 years, with
rental payable only from net profits, left nothing out of which
debts could be made by levy and sale.
134 U. S. 134
U.S. 277.
2. Being liable for this diversion of $465,000, the Northern
Pacific Railroad remained so liable until the funds were restored
to the true owner.
Chicago, M. & St.P. R. Co. v. Third Nat.
Bank, 134 U. S. 277.
The obligation was not lessened by set-offs, nor discharged in
whole, because the Northern Pacific spent $500,000 of its own
Page 228 U. S. 501
money in broadening the gauge, extending the line, equipping the
road, or for other purposes, which may have been thought by it
advantageous to the Coeur D'Alene. Such disbursement was not a
restoration of what had been taken, but an expenditure by the
Northern Pacific, for its own benefit, in improving a road which it
practically owned by virtue of the 999-year lease.
3. Although this diversion of $465,000 of bonds in 1888 made the
Northern Pacific liable, in equity, for the payment of Boyd's
judgment for $71,278, recovered in 1896 and revived in 1906, yet
his right was apparently not enforceable because, in 1896, all of
the property of the Northern Pacific railroad had been sold under
foreclosure to the newly created Northern Pacific Railway Company.
He thereupon brought this suit against the mortgagor and purchaser,
seeking to subject the property bought to the payment of this
liability. He claimed that the foreclosure sale was void because
made in pursuance of an illegal plan of reorganization, between
bondholders and stockholders of the railroad, in which, though no
provision was made for the payment of unsecured creditors, the
stockholders retained their interest by receiving an equal number
of shares in the new railway. There was no question as to parties,
and no demurrer to the bill. The railway answered, and on the trial
of the merits offered evidence, tending to support its contention
that the decree was regular in form, free from fraud, and that the
property brought a fair price at public outcry. Both courts found
against this contention, and entered a decree making Boyd's claim a
lien upon the property of the railroad in the hands of the railway,
but subject to the mortgages placed thereon at the time of the
reorganization.
The appellants attack the ruling from various standpoints based
upon many facts in the voluminous record. But, having been
summarized in the statement, they will not be discussed in detail,
inasmuch as the case, though
Page 228 U. S. 502
presenting various aspects, is controlled by a single
proposition. For although Boyd was not a party to the foreclosure,
and was not made such by the publication notifying creditors to
prove their claims, yet the original and supplemental decrees were
free from any moral or actual fraud, and were, in form and nature,
sufficient to have passed a title good against him unless the
contract of reorganization, reserving a stock interest in the new
company for the old shareholders, left the property still subject
to the claims of nonassenting creditors of the Northern Pacific
Railroad.
4. Corporations, insolvent or financially embarrassed, often
find it necessary to scale their debts and readjust stock issues
with an agreement to conduct the same business with the same
property under a reorganization. This may be done in pursuance of a
private contract between bondholders and stockholders. And though
the corporate property is thereby transferred to a new company,
having the same shareholders, the transaction would be binding
between the parties. But, of course, such a transfer by
stockholders from themselves to themselves cannot defeat the claim
of a nonassenting creditor. As against him, the sale is void in
equity, regardless of the motive with which it was made. For if
such contract reorganization was consummated in good faith and in
ignorance of the existence of the creditor, yet when he appeared
and established his debt, the subordinate interest of the old
stockholders would still be subject to his claim in the hands of
the reorganized company.
Cf. San Francisco & N.P. R. Co. v.
Bee, 48 Cal. 398;
Grenell v. Detroit Gas Co., 112
Mich. 70. There is no difference in principle if the contract
reorganization, instead of being effectuated by private sale, is
consummated by a master's deed under a consent decree.
5. It is argued that this is true only when there is fraud in
the decree, the appellants insisting that in all other
Page 228 U. S. 503
cases, a judicial sale operates to pass a title which cuts off
all claims of unsecured creditors against the property. They rely
on
Wenger v. Chicago &c. R. Co., 114 F. 34;
Farmers' Loan & Trust Co. v. Louisville &c. R.
Co., 103 F. 110;
Pennsylvania Transportation Co.'s
Appeal, 101 Pa. 576;
Kurtz v. R. Co., 187 Pa. 59;
Paton v. N.P. R. Co., 85 F. 838;
Shoemaker v.
Katz, 74 Wis. 374;
Bame v. Drew, 4 Denio 287;
Ferguson v. Ann Arbor R. Co., 17 App.Div. 336;
MacArdell v. Olcott, 104 App.Div. 263, s.c., 189 N.Y. 368,
384;
Candee v. Lord, 2 N.Y. 269. Some of these cases hold
directly, and others inferentially, that, in the absence of fraud,
as here, a judicial sale is binding upon nonassenting creditors
even though the decree was entered and the sale was made in
pursuance of a contract, to which the stockholders were parties,
and by which they were to retain a stock interest in the purchasing
company. This makes the creditor's legal right against the
shareholders' interest depend upon the motive with which they act
and the method by which they carry out the scheme. If they do so by
means of a private contract, though in ignorance of the existence
of the creditor, the property remains liable for his debts. If they
do so by means of a judicial sale under a consent decree, and in
like ignorance or disregard of his existence, the result is said to
be different, although the shareholders should reserve exactly the
same interest and deprive the creditor of exactly the same
right.
Such and similar possibilities at one time caused doubts to be
expressed as to whether a court could permit a foreclosure sale
which left any interest to the stockholders. But it is now settled
that such reorganizations are not necessarily illegal, and, as
proceedings to subject the property must usually be in a court
where those who ask equity must do equity, such reorganizations may
even have an effect more extensive than those made without judicial
sale, and bind creditors who do not accept fair
Page 228 U. S. 504
terms offered. The enormous value of corporate property often
makes it impossible for one, or a score, or a hundred bondholders
to purchase, and equally so for stockholders to protect their
interests. A combination is necessary to secure a bidder and to
prevent a sacrifice. Cooperation being essential, there is no
reason why the stockholders should not unite with the bondholders
to buy in the property.
That was done in the present case. And while the agreement
contained no provision as to the payment of unsecured creditors,
yet the railway company purchased unsecured claims aggregating
$14,000,000. Whether they were acquired because of their value, to
avoid litigation, or in recognition of the fact that such claims
were superior to the rights of stockholders does not appear, nor is
it material. For, if purposely or unintentionally a single creditor
was not paid or provided for in the reorganization, he could assert
his superior rights against the subordinate interests of the old
stockholders in the property transferred to the new company. They
were in the position of insolvent debtors who could not reserve an
interest as against creditors. Their original contribution to the
capital stock was subject to the payment of debts. The property was
a trust fund charged primarily with the payment of corporate
liabilities. Any device, whether by private contract or judicial
sale under consent decree, whereby stockholders were preferred
before the creditor, was invalid. Being bound for the debts, the
purchase of their property by their new company for their benefit
put the stockholders in the position of a mortgagor buying at his
own sale. If they did so in good faith and in ignorance of Boyd's
claim, they were nonetheless bound to recognize his superior right
in the property when, years later, his contingent claim was
liquidated and established. That such a sale would be void, even in
the absence of fraud in the decree, appears from the reasoning in
Louisville Trust Co. v.
Louisville
Page 228 U. S. 505
Ry., 174 U. S. 683,
where,
"assuming that foreclosure proceedings may be carried on to some
extent at least, in the interests and for the benefit of both
mortgagee and mortgagor (that is, bondholder and stockholder),"
the Court said that
"no such proceedings can be rightfully carried to consummation
which recognize and preserve any interest in the stockholders
without also recognizing and preserving the interests not merely of
the mortgagee, but of every creditor of the corporation. . . . Any
arrangement of the parties by which the subordinate rights and
interests of the stockholders are attempted to be secured at the
expense of the prior rights of either class of creditors comes
within judicial denunciation."
6. The Railway seeks to distinguish that case from this,
insisting that, even if the stockholders' participation in the
reorganization would have invalidated the proceeding, such result
does not follow here because the court having charge of the
foreclosure passed on this very question before the sale in 1896
and dismissed the bill of Paton, an unsecured creditor, when he
made exactly the same attack upon the reorganization as that by
Boyd in this bill. That court then held that, as the property was
insufficient to pay the mortgage debts of $157,000,000, there was
nothing which could come to the unsecured creditors, and they
therefore had no ground to complain if the bondholders were willing
to give new shares to the old stockholders. No appeal was taken
from that decision, possibly because the Paton claim was purchased
by the Railway. But inasmuch as Boyd was not a party to the record,
that decree was not binding upon him as
res judicata, and
the opinion, not being controlling authority, cannot be followed in
view of the principles declared in
Chicago,
R.I. & P. R. Co. v. Howard, 7 Wall. 392;
Louisville Trust Co. v. Louisville R. Co., 174 U.
S. 674.
In saying that there was nothing for unsecured creditors, the
argument assumes the very fact which the law contemplated
Page 228 U. S. 506
was to be tested by adversary proceeding in which it would have
been to the interest of the stockholders to interpose every valid
defense. If, after a trial, a sale was ordered, they were still
interested in making the property bring its value, so as to leave a
surplus for themselves as ultimate owners. Even after sale, they
could have opposed its confirmation if the bids had been chilled,
or other reason existed to prevent its approval. In the present
case, all these tests and safeguards were withdrawn. The
stockholders, who, in lawfully protecting themselves, would
necessarily have protected unsecured creditors, abandoned the
defense that the foreclosure suit had been prematurely brought. The
law, of course, did not require them to make or insist upon that
defense if it was not meritorious, nor does it condemn the decree
solely because it was entered by consent. But the shareholders were
not merely quiescent. They, though in effect defendants, became
parties to a contract with the creditors, who were in effect
complainants, by which, in consideration of stock in the new
company, they transferred their shares in the Railroad to the
Railway. The latter, then owning the bonds of the complainant and
controlling the stock in the defendant, became the representative
of both parties in interest. In such a situation, there was nothing
to litigate, and so the demurrer to the bill was withdrawn. An
answer was immediately filed, admitting all the allegations of the
bill. On the same day, "no one opposing," a decree of foreclosure
and sale was entered. Two months later, the property was sold to
the agreed purchaser at the upset price named in the decree. In a
few days and by consent, that sale was confirmed. As between the
parties and the public generally, the sale was valid. As against
creditors, it was a mere form. Though the Northern Pacific Railroad
was divested of the legal title, the old stockholders were still
owners of the same Railroad, encumbered by the same debts. The
circumlocution
Page 228 U. S. 507
did not better their title against Boyd as a nonassenting
creditor. They had changed the name, but not the relation. The
property in the hands of the former owners, under a new charter,
was as much subject to any existing liability as that of a
defendant who buys his own property at a tax sale.
The invalidity of the sale flowed from the character of the
reorganization agreement, regardless of the value of the property,
for in cases like this, the question must be decided according to a
fixed principle, not leaving the rights of the creditors to depend
upon the balancing of evidence as to whether, on the day of sale,
the property was insufficient to pay prior encumbrances. The facts
in the present case illustrate the necessity of adhering to the
rule. The railroad cost $241,000,000. The lien debts were
$157,000,000. The road sold for $61,000,000, and the purchaser at
once issued $190,000,000 of bonds and $155,000,000 of stock on
property which, a month before, had been bought for
$61,000,000.
It is insisted, however, that not only the bid at public outcry,
but the specific finding in the Paton case established that the
property was worth less than the encumbrances of $157,000,000, and
hence that Boyd is no worse off than if the sale had been made
without the reorganization agreement. In the last analysis, this
means that he cannot complain if worthless stock in the new company
was given for worthless stock in the old. Such contention, if true
in fact would come perilously near proving that the new shares had
been issued without the payment of any part of the implied stock
subscriptions except the $10 and $15 assessments. But there was an
entirely different estimate of the value of the road when the
reorganization contract was made. For that agreement contained the
distinct recital that the property to be purchased was agreed to
be
"of the full value of $345,000,000, payable in fully paid
nonassessable stock, and the prior
Page 228 U. S. 508
lien and general lien bonds to be executed and delivered as
hereinafter provided."
The fact that at the sale, where there was no competition, the
property was bid in at $61,000,000 does not disprove the truth of
that recital, and the shareholders cannot now be heard to claim
that this material statement was untrue, and that, as a fact, there
was no equity out of which unsecured creditors could have been
paid, although there was a value which authorized the issuance of
$144,000,000 fully paid stock. If the value of the road justified
the issuance of stock in exchange for old shares, the creditors
were entitled to the benefit of that value, whether it was present
or prospective, for dividends or only for purposes of control. In
either event, it was a right of property out of which the creditors
were entitled to be paid before the stockholders could retain it
for any purpose whatever.
7. This conclusion does not, as claimed, require the impossible,
and make it necessary to pay an unsecured creditor in cash as a
condition of stockholders retaining an interest in the reorganized
company. His interest can be preserved by the issuance, on
equitable terms, of income bonds or preferred stock. If he declines
a fair offer, he is left to protect himself as any other creditor
of a judgment debtor, and, having refused to come into a just
reorganization, could not thereafter be heard in a court of equity
to attack it. If, however, no such tender was made and kept good,
he retains the right to subject the interest of the old
stockholders in the property to the payment of his debt. If their
interest is valueless, he gets nothing. If it be valuable, he
merely subjects that which the law had originally and continuously
made liable for the payment of corporate liabilities.
8. Lastly, it is said that Boyd was estopped from attacking, in
1906, a reorganization completed in 1896, and, ordinarily, such a
lapse of time would prevent any creditor
Page 228 U. S. 509
from asserting a claim like that here made. For along with the
policy to encourage reorganizations goes that of requiring prompt
action by those who claim that their rights have been injuriously
affected. The fact that improvements are put upon the property --
that the stock and bonds of the new company almost immediately
became the subject of transactions with third persons -- calls for
special application of the rule of diligence. But the doctrine of
estoppel by laches is not one which can be measured out in days and
months, as though it were a statute of limitations. For what might
be inexcusable delay in one case would not be inconsistent with
diligence in another, and unless the nonaction of the complainant
operated to damage the defendant, or to induce it to change its
position, there is no necessary estoppel arising from the mere
lapse of time.
Townsend v. Vanderwerker, 160
U. S. 186.
In this case, the defendants and their stockholders have not
been injured by Boyd's failure to sue. His delay was not the result
of inexcusable neglect, but in spite of diligent effort to put
himself in the position of a judgment creditor of the Coeur D'Alene
so as to be able to proceed in equity to collect his debt. He
accomplished this result only after protracted litigation,
beginning in 1887 and continuing through the present appeal (1913).
The more important chapters of the different cases, with lawsuits
within lawsuits, are reported in 5 Idaho 528; 6 Idaho 97; 6 Idaho
638; 85 F. 838;93 F. 280; 170 F. 779; 177 F. 804. They involve a
series of independent transactions, in different courts, between
Spaulding and the Coeur D'Alene Company; Boyd and Spaulding; Boyd
and the Coeur D'Alene Company; the Northern Pacific Railroad and
Coeur D'Alene, and finally the foreclosure of the Northern Pacific
Railroad and its purchase by the Northern Pacific Railway.
Page 228 U. S. 510
When Spaulding recovered against Coeur D'Alene, it required
years for Boyd to establish his title to the judgment. To prevent
it from becoming dormant, it was necessary promptly to institute
proceedings against the Coeur D'Alene in the nature of
scire
facias to revive the judgment. There is no reason suggested by
this record why it should have done so, unless it was to avoid the
enforcement of this very claim, but the Northern Pacific Railway,
by its counsel, defended that revivor suit against the Coeur
D'Alene, and when, in 1906, it terminated in favor of Boyd, he at
once filed this bill, alleging that the Railroad was liable for the
debts of the Coeur D'Alene, and the Railway liable for the debts of
the Railroad.
The delay in beginning the present suit -- the the last of a
remarkable series of legal proceedings -- was excusable, if not
absolutely unavoidable. Boyd claims that he had no notice of the
fact that the stockholders were to retain an interest in the new
company, and that, in part, the delay to begin proceedings was
occasioned by the Railway company itself, since it, as the
purchaser of the Coeur D'Alene property, resisted his attempt to
revive the judgment. Boyd's silence in 1896 did not mislead the
stockholders, nor did his nonaction induce them to become parties
to the reorganization plan. They have not in any way changed their
position by reason of anything he did or failed to do, and the mere
lapse of time under the peculiar and extraordinary circumstances of
this case did not estop him, when he revived the judgment, from
promptly proceeding to subject the shareholders' interest in
property which in equity was liable for the payment of his debt.
The decree of the circuit court of appeals is
Affirmed.
Page 228 U. S. 511
Dissenting opinion by MR. JUSTICE LURTON:
I find myself unable to agree with the opinion of the Court. The
consequences which may result from the decision to the numerous
reorganizations of railroad companies which occurred about the time
of this reorganization or since are, to my mind, alarming.
Arrangements and agreements in advance of judicial sales between
creditors interested for the common benefit are the usual incidents
of foreclosures, and, if fairly and openly entered into and
approved by the court, are not subject to criticism.
Nor do I agree that every plan of reorganization which in any
way includes stockholders of the reorganized company is for that
reason alone to be regarded as an illegal withholding from
creditors of corporate property which should go to the payment of
corporate debts. That corporate property must be applied to
corporate debts before shareholders can participate is plain. But I
think every case should stand upon its own facts, and the remedy be
shaped to do justice and equity in the particular case, and not
tried out by any hard and fast rule such as indicated when this
Court says that the invalidity of a judicial sale must turn upon
the character of the reorganization agreement, and is not affected
by actual consequences to creditors.
Here is a single creditor who comes forward many years after a
judicial sale under a general creditors' bill and a mortgage
foreclosure bill which had been pending several years, and asserts
the right to ignore the judicial sale and the title resulting, and
asks to have the property of the old company subjected to his
non-lien claim not because of any actual fraud in the sale, nor
because he can show that he has in any way suffered a loss by
reason of the plan of reorganization under which the sale was
conducted, but
Page 228 U. S. 512
solely and simply because the shareholders of the debtor company
are said to have participated in some way in the benefits of the
sale. I think this goes too far, and that there is no just
foundation for upsetting a judicial sale upon the complaint of an
unsecured creditor of the debtor company in the absence of proof of
fraud in the decree. The cases supporting this view, which I
venture to say should control this case, are cited in the opinion
of the Court. It is not a case of the transfer by stockholders of
one company to themselves as stockholders of another. The railroad
company was hopelessly insolvent. Its annual deficit was about five
million dollars. Its general creditors, represented by the general
creditors' bill, and its mortgage creditors, represented in the
mortgage foreclosure proceeding, were endeavoring to prevent a
disintegration, and to bring the property to sale. The
stockholders, represented by the company, were resisting. The
receivership had already lasted for several years, and the
situation was growing steadily worse. The lien creditors, to save
themselves, devised a plan for the sale and purchase of the
property by a new company which should assume their claims, so far
as possible, and put the new company in shape to meet its
obligations. A large sum of actual money was necessary, and also
the consent of the stockholders, to bring about a speedy sale. This
money might be in part procured by the sale of the bonds of the new
company; but if fixed charges were to be reduced, and the deficit
of the old company turned into a surplus, the bonded debt and
interest must be reduced. Therefore it was that most of this
necessary money must come from the sale of stock. That was not a
hopeful outlook. The value of this new stock was obviously
speculative. The very basis of the plan to receive any large sum
upon stock sales was believed to depend upon making a market among
the stockholders of the old company. This was the motive that led
to the proposal that they should exchange their
Page 228 U. S. 513
shares for those in the new company, paying the price stated.
This actually produced about eleven of the twenty-five million
dollars deemed essential to any arrangement which would save to the
bondholders any large part of their debt. The price fixed turned
out to be little below what the stock actually sold for on the open
market for the year following the operation of the property by the
purchasers. The subscription price to the shareholders, as the
situation then appeared, was deemed fair, full, and just by the
very court which had approved the plan and decreed the sale, as is
shown by the opinion of Judge Jenkins in the
Paton case,
85 F. 838.
It is true that Boyd was not a party to that suit. But it was a
bill filed after the decree and before the sale, attacking the
reorganization plan upon the precise grounds here advanced, and is
highly persuasive as to the good faith of the plan and the fairness
of the subscription price.
The upset price of $61,000,000 was fixed by the court --
probably as large as could be expected at the sale. As observed by
this Court in
Louisville Trust Co. v. Louisville &c.
Ry., 174 U. S. 674,
174 U. S.
683,
"Railroad mortgages, or trust deeds, are ordinarily so large in
amount that, on foreclosure thereof only the mortgagees, or their
representatives, can be considered as probable purchasers."
Hence, it was that the upset price must be fixed at such a sum
as was reasonably within the range of any bidding which the
property might be started at by the only probable bidders. The case
last cited goes to the very verge of the law, but in that case, the
denunciation of such a plan of reorganization goes no farther than
to condemn any arrangement by which the subordinate rights of
stockholders are saved at the expense of creditors. That was not
done here. The sale price was about eighty million dollars less
than the lien claims entitled to be paid before creditors of the
class to which Boyd belongs. Many of his class were actual parties
to the consolidated cause in which the reorganization
Page 228 U. S. 514
plan was approved and the sale decreed. They might have sought a
larger upset price, but did not. They might have objected to the
plan upon the grounds now brought forward, but they did not. They
consented to the decree. They were doubtless hopeless of any sale
price which could by any possibility save them, and therefore they
stood aside. Technically, Boyd was not a party, though, under the
order of the court, every creditor was by publication, all along
the line of the Railroad, and in many states, notified to come in
or be barred from participation in the proceeds. He had actual
knowledge of the pending of the foreclosure proceedings, and yet
took no steps to assert his rights. I do not find from the facts of
this case any such diligence in his litigation against the real
debtor company -- the Coeur D'Alene -- and the determination of his
claim to ownership of the judgment against that company in the name
of Spaulding, as to excuse the long delay in the assertion of his
rights against the railroad company or its successor, and it is not
explained why he did not intervene and set up his contingent claim
before the sale, or at least, after the sale, many years before he
did. I think he waited too long, and that no court of equity should
upset a judicial sale after such unreasonable delay. What was said
by this Court in
Alsop v. Riker, 155
U. S. 459,
155 U. S. 460,
applies with great force to this case:
"The record discloses no element of fraud or concealment upon
the part of the trustees or of any of them. What they did was done
openly and was known or might have been known by the exercise of
the slightest diligence upon the part of everyone interested in the
property of the old corporation. The plaintiff unquestionably knew,
or could easily have ascertained, before the trustees bought the
property at the foreclosure sale -- at any rate, before they
transferred it to the new corporation -- that their purchase would
be, and was, exclusively for the benefit of certificate holders
interested in the trust.
Page 228 U. S. 515
Although his bonds had not then matured, he could have taken
steps to prevent any transfer of the property that would impair his
equitable rights in it, or instituted proper judicial proceedings,
of which all would be required to take notice, to have his interest
in the property adjudicated. He allowed the trust to be wound up
and postponed any appeal to a court of equity based upon an alleged
breach of trust by the trustees, until six out of the seven
original trustees had died."
In
Foster v. Mansfield &c. R. Co., 146 U. S.
88,
146 U. S.
99-100, it was said:
"If a person be ignorant of his interest in a certain
transaction, no negligence is imputable to him for failing to
inform himself of his rights; but if he is aware of his interest
and knows that proceedings are pending, the result of which may be
prejudicial to such interests, he is bound to look into such
proceedings so far as to see that no action is taken to his
detriment."
Boyd had actual knowledge. If he had sought to intervene, I have
no doubt he would have been permitted to do so. He chose to do
nothing, and now asks a court of equity, after the purchaser has
been for more than a decade in undisturbed possession and
ownership, to declare the judicial sale invalid as against him. The
case is without merit, and the bill should have been dismissed.
THE CHIEF JUSTICE, MR. JUSTICE HOLMES, and MR. JUSTICE VAN
DEVANTER concur in this dissent.
