Bonds issued by a canal company, pledging the real and personal
property of the company for the payment of the debt and interest
and containing other corresponding stipulations, will be treated by
a court of equity as a mortgage, and enforced according to the
intention of the contracting parties.
Bonds issued in payment for the completion of the canal were not
usurious by the laws of Indiana, although they purport to be for a
loan and although the sum for which they were issued was largely
greater than the estimated cost of the work.
The power to issue these bonds is derived from the charter of
the company. Moreover, the contract was sanctioned by a special law
of the state. And if the contract had been originally illegal, this
law of the state would have prevented either party from setting up
the illegality as a defense.
The decree of the circuit court appointing a receiver &c. is
therefore affirmed.
Page 62 U. S. 415
This was a bill filed on the equity side of the court by
Vallette, a citizen of Ohio, against the White Water Valley Canal
Company, a corporation created by a law of the State of Indiana.
The whole suit was conducted according to the rules of a court of
chancery. After the decree, the company prayed an appeal in open
court, filed a bill of exceptions, which was allowed and signed by
the district judge, and upon this a writ of error was sued out.
The nature of the contract and form of the bonds are set forth
in the opinion of the court.
The heading of the bonds was as follows,
viz.,
"UNITED STATES OF AMERICA,"
"
State of Indiana"
"
$1,000 No. 18"
"
The White Water Valley Canal Company"
"Canal Loan. Seven percent bond under the act of the General
Assembly of the State of Indiana, entitled 'An act to incorporate
the White Water Valley Canal Company,' January 20, 1842."
"Know all men by these presents, that there is due from 'the
White Water Valley Canal Company' to Henry Vallette, or bearer, the
sum of &c. "
Page 62 U. S. 419
MR. JUSTICE CAMPBELL delivered the opinion of the Court.
This controversy originated in a contract between the appellants
and the appellee, Vallette, in which the latter agreed to complete
that portion of the canal through the valley of White Water River
that lies between the Cities of Laurel and Cambridge, in
Indiana.
In the year 1836, the State of Indiana projected the
improvement
Page 62 U. S. 420
of which this is a part, and prosecuted the work until 1842, at
an expenditure of more than one million of dollars. In that year
the appellants were incorporated, and the state surrendered the
unfinished work to them, in investing them with powers to continue
it till its completion. In 1844, this corporation became
embarrassed in their affairs, and were unable to negotiate loans
upon the pledge of their property. Their resources were inadequate
to the demands of their enterprise, and there was fear that it
would be abandoned, or at least inconveniently postponed. In July,
1844, the president of the company applied to the appellee Vallette
for assistance, and the result of their negotiation was that the
latter submitted a proposal to the company to supply materials and
to complete at his expense the canal, according to the plan of the
chief engineer, by the 1st of September, 1845, for one hundred and
twenty-five bonds of the company, of $1,000 each, upon ten years'
time, drawing interest at seven percent per annum, payable
semiannually, he (Vallette) to pay in the paper of the company $500
as a bonus.
This proposal was accepted, and a detailed contract was drawn
out and executed, embracing some modifications not material to this
dispute. The appellee agreed to construct in a substantial and
workmanlike manner the sections of the canal, under the directions
of the chief engineer, and according to particular specifications.
The engineer was to decide whether the work had been performed
agreeably to contract and the instructions of the engineer; and
payment was to be made upon his certificate of the work done at the
end of every sixty days. The contract was punctually performed by
the appellee to the satisfaction of the company, and upon a final
settlement one hundred and sixteen bonds of $1,000 each were issued
to him, one hundred and twelve bearing date the 1st of February,
1845, with interest at the rate of seven percent per annum, payable
semiannually at New York, the principal to be paid at ten years
from date. These bonds contain recitals and stipulations as
follows: that the principal sum is the first and only loan created
by the company under their charter for the completion of the canal;
that the faith of the company and
Page 62 U. S. 421
their effects, real and personal, are pledged for the payment of
the debt and interest; that these bonds shall have a preference
over all debts to be thereafter contracted; that in default of the
payment of interest, the holder of the bonds might enter into
possession of the tolls, water rents, and other incomes of the
company, and might apply to any court of the state federal or state
for the appointment of a receiver, and that the company would not
appeal to any other court; that they would pay ten percent as
liquidated damages on the amount of the interest thus collected.
The interest on these bonds was paid until August, 1854, since when
the corporation has been in default.
The appellees hold the one hundred and twelve bonds above
described, and have filed this bill to enforce the covenants they
contain by the appointment of a receiver. They allege that the
company is insolvent, that its stock has no value, and that the
canal is exposed to dilapidation and ruin, and they have no ability
to remedy such disasters.
The defendants resist the demand of the appellees. They aver
that the president of the company applied to Vallette for a loan of
money; that Vallette was willing to advance the sum required if he
could make a profit of one hundred percent, and the president and
directors were ready to concede this profit. That the contract was
made between them as a device and contrivance to evade the laws of
Indiana upon the subject of interest and usury, and that the
contract between the parties in its essence and spirit was a loan
of money at that exorbitant and usurious rate of interest. That the
work was done by the company through the superintendence of their
engineer, and that Vallette paid out the money to contractors
merely to secure its appropriation to the improvement of the canal
to strengthen his security. That the amount expended was but
$56,000, and the estimates of the engineer prior to the making of
the contract did not exceed $65,000; and that the contract was
arranged so that the profit of one hundred percent might be
realized.
They complain that the exactions of the appellee were exorbitant
and oppressive. That the canal has been exposed to
Page 62 U. S. 422
disasters from heavy floods, and a debt has been created for
reparations and improvements that is superior in dignity and merit
to that of the appellee, and that he had waived his preference to
induce them to make the advance.
In the absence of objections to the validity of these bonds,
there can be no question concerning their legal operation and
effect, or of the jurisdiction of a court of equity to enforce
them. That court treats an agreement for a mortgage or pledge of
bonds, or other property, as binding, and will give it effect
according to the intention of the contracting parties.
Duncan
v. Company of Proprietors of the Manchester Water Works, 8
Pri. 697;
Fector v. Philpott, 12 Pri. 197;
Seymour v.
Canandaigua & N.F. R. Co., 25 Barb. 284
In
Fripp v. Chard Railway Company, 21 Law & Eq. 53,
the Vice Chancellor decided that the court of chancery might
appoint a receiver of the property of a corporation created by act
of Parliament in favor of a mortgagee, although by the act a
committee was constituted to whom all the powers of management were
referred. And at the present term of this Court a receiver for the
tolls of a bridge erected by a corporation in Indiana was allowed
by this Court in favor of a judgment creditor, whose legal remedy
had been exhausted.
Covington Drawbridge Company
v. Shepherd, 21 How. 112.
The question then arises whether the contract between these
parties, as disclosed by the pleadings and proofs, is valid. It is
essential to the nature of usury in Indiana that a certain gain
exceeding the legal rate of interest should accrue to the lender as
a consideration for the loan. Where there is no loan, there can be
no usury.
State Bank v. Coquillard, 6 Ind. 232
And where there is a loan, although the profit derived to the
lender exceeds the legal rate, yet if that profit is contingent or
uncertain, the contract, if
bona fide and without any
design to evade the statute, is not usurious.
Cross v.
Hepner, 7 Ind. 357
The testimony does not support the averment of the answer that
this contract involved a device or contrivance to elude the
prohibition of the statute. The president of the corporation (Mr.
Helm) testifies:
"I know nothing of any such device or
Page 62 U. S. 423
arrangement; I thought it was all right, and there was none, so
far as I know or believe, to evade the usury laws of Indiana; nor
was there any device or arrangement to cover up a loan of money
from Vallette to said company, as I know of no such loan."
The testimony of the solicitor of the corporation, Mr. Parker,
who superintended all the negotiations and drew the papers, is
equally explicit. He says:
"I am satisfied there was no device or management had or
intended between said Vallette and the canal company, in the matter
of this contract or otherwise, whatever, in this connection, to
avoid any usury laws of the State of Indiana or any other state. I
never thought of such a thing myself, and never had an intimation
of it from any other source, and had there been anything of the
kind, I would certainly have known it, as I have said the whole
matter in every shape it assumed was presented to me for my
consideration. Vallette had all the risk of his contract on his own
hands until completed and taken off his hands by the company. And I
have a strong impression in my own mind that in one if not more
instances he suffered by that risk in consequence of damage done
his work, while in progress, by high waters."
In the absence of simulation in the contract, the reason
assigned in the last sentences quoted from the testimony of this
witness is conclusive on the question of the usury. These witnesses
are sustained by their fellow members of the board. The recital in
the bonds, that this was a loan, is explained by the fact that the
form of the bonds was settled after the work was finished, and with
reference to their negotiability in New York, and the contract was
regarded with favor by the corporation, and the payment of interest
was made without exception for several years. It is admitted that
the contract provided prices for the work done far exceeding the
cash estimates of the engineer. This, the witnesses say, was the
natural consequence of the embarrassment of the company and their
want of credit. But they prove that the proposal of Vallette was
understood and considerately examined; that it was adopted by the
board, with only one dissentient vote; that its conditions were
performed in good faith by the appellee, and that the final
settlement between the contracting parties was
Page 62 U. S. 424
amicable. There was on the part of the appellee no fraud or
circumvention.
These facts oppose an insuperable bar to any relief from the
contract on the ground of lesion or oppression.
Harrison v.
Guest, 35 Law & Eq. 487.
The remaining question for consideration is whether it was
competent for this corporation to execute such securities as these
bonds in fulfillment of their covenants in a construction contract,
fairly made and executed by the other party. The first section of
the act of incorporation endows the corporate body with faculties
for suits, contracts, and all other things legitimate for such
company to do; and "all the powers and privileges in any wise
necessary and expedient to carry into effect the proper business"
of the association. The seventeenth section establish the president
and directors as the governing body, and that "their regular and
efficient doings not inconsistent with this charter" "shall in all
cases be deemed the doings of the company, and forever held valid
as such."
The 18th section invests them with
"full power to negotiate any loans that may be deemed expedient
for carrying out all the objects contemplated by this act; and for
the payment of such loans, agreeably to the terms agreed upon, said
company shall bind themselves by their bonds, which bonds,"
&c.,
"shall be a valid lien upon all the stock and effects of said
company in the order of their issue, and all the effects of the
company, both real and personal, shall be deemed and taken as a
pledge for the punctual payment of the interest on said bonds, and
the ultimate redemption of the principal, agreeably to
contract."
It is well settled that a corporation, without special
authority, may dispose of land, goods, and chattels, or of any
interest in the same, as it deems expedient, and in the course of
their legitimate business may make a bond, mortgage, note, or
draft, and also may make compositions with creditors, or an
assignment for their benefit, with preferences, except when
restrained by law.
Partridge v. Badger, 25 Barb. 146;
Barry v. Merchants' Ex. Co., 1 Sand.Ch. 280;
Burr v.
Phoenix Glass Co., 14 Barb. 358;
Dater v. Bank of the
U.S., 5 W. &
Page 62 U. S. 425
S., 223;
Frazier v. Wilcox, 4 Rob. 517;
U.S. Bank
v. Huth, 4 B.M. 423;
State v. Bank of Md., 6 G. &
J. 323;
Pierce v. Emery, 32 N.H. 486
But, in addition to the general powers of the corporation, in
this instance there is "full power" specially conferred to
negotiate any loan or loans that the company might deem expedient
for carrying out any or all of the objects of the act. We should
find great difficulty in deciding that the corporation was
restrained by the laws concerning interest and usury, in view of
the comprehensive language of the 18th section of the act. Those
laws rest upon considerations of policy applicable, for the most
part, to individuals engaged in their ordinary business; and the
legislature might well conclude that a numerous body, engaged in a
public enterprise, under the direction of an intelligent board,
might be trusted with a plenary control of their property or
credit, to accomplish the aim of the association.
If the rights of the appellees depended upon the act of
incorporation alone, it would be difficult to resist them. But in
January, 1845, the Legislature of Indiana passed an act that
recites the corporation had entered into a contract with Vallette
to complete the canal, and was to be paid in their bonds, drawing
the legal interest in New York, and doubts were entertained as to
the legality of the issue of these bonds, and thereupon it was
enacted, that all the bonds which might be issued in accordance
with the contract existing between the company and Vallette were
legalized. A large portion of the work specified in the contract
was performed after this enactment, and the settlement under which
these bonds were issued took place subsequently. This act implies
that there was no illegality in the fact that bonds were employed
as a medium of payment for supplies of materials for, or work and
labor done upon, the canal.
The objection that a contract is illegal, and that no judgment
can therefore be rendered upon it, is not allowed from any
consideration of favor to those who allege it. The courts, from
public considerations, refuse their aid to enforce obligations
which contravene the laws or policy of the state. When the
Page 62 U. S. 426
legislature relieves a contract from the imputation of
illegality, neither of the parties to the contract are in a
condition to insist on this objection.
Andrews v. Russell,
7 Black 475; 8 Ind. 27.
Upon a review of the whole case, it is the opinion of the court
that the contract between these parties was made without fraud or
surprise; that there is no illegality in the cause, or
consideration; that the priority of payment has not been released
or defeated; and that the relief sought is within the competency of
a court of equity to allow.
Decree affirmed.