A city subscribed to the stock of a railroad and issued bonds
for a part of the subscription, agreeing to issue them for the rest
of it when the road should be completed up to a certain point. The
sale of the bonds was the chief source which the railroad company
had of raising money to make it. The right of the city to subscribe
to the road and to issue bonds being denied by taxpayers of the
city, they filed bills to enjoin the levy of any tax to pay
interest on the bonds. Their value in the market was thus largely
destroyed. The company being in debt had pledged the bonds to
creditors for a part only of their nominal value, and the
embarrassments of the company increasing, the creditors threatened
to sell the bonds for whatever they would bring. It being doubtful
whether, with the questioned right of the city to issue them, the
bonds would bring the principal and interest due on the debts for
which they stood pledged, the company applied to the city to pay
the sums due, take back the bonds pledged, and be discharged from
the issue of the balance of the bonds (not yet issued), which the
impossibility of now completing the road showed could never, by the
terms of the original agreement, be called for by the company. The
arrangement was concluded in 1857, both city and company acting in
good faith and for the interests of the road as well as for those
of the city. In 1868, a purchaser of a judgment against the
company, to execution on which, in 1858, a return of
nulla
bona had then been made, filed a bill against the city,
alleging that the compromise was illegal, and praying an
ascertainment of what the city owed on its subscription (assuming
it to be yet existing), and an application of so much as would pay
his judgment. The court admitting that
"the subscribed capital stock of a corporation is a fund held by
it in trust for its creditors, and that had the company released
the city without equivalent consideration, or given its bonds away,
its action would have been fraudulent, and might have been set
aside by a court of equity."
Held:
1. That this transaction was not invalid.
2. That there were laches in filing the bill.
Burke and others, complainants in the court below, were
equitable owners of a judgment recovered on the 14th day of
November, 1857, in the Circuit Court of Floyd County, Indiana,
against the New Albany & Sandusky City Junction Railroad
Company, an insolvent corporation. The judgment was obtained in a
suit brought by certain trustees to foreclose a mortgage given by
the company to secure the
Page 78 U. S. 97
payment of 110 bonds of $1,000 each, and such proceedings were
had in the suit that there was not only a decree of foreclosure and
an order to sell the mortgaged property, but a personal judgment
against the company. The mortgaged premises were sold under the
order, and, the proceeds of sale having proved insufficient to
satisfy the judgment, an execution was issued for the residue,
which, December 1, 1858, was returned unsatisfied. Nothing further
was done until January 29, 1868, when Burke having purchased the
interest of several of the equitable owners of the judgment, this
bill was filed by him and the other equitable owners whose
interests he had not acquired, against the railroad company, the
City of New Albany, and others. It averred the ownership of the
judgment by the complainants, the failure of the company to put any
portion of its railroad into operation or to lay any part of the
track thereof, and its having become insolvent about the 30th day
of April, 1857. It charged further that the company, having
expended all its means, abandoned all further efforts to build the
road, and that its roadbed and right of way had been sold. It also
charged that since the year 1858 it had not kept up its
organization or elected any new officers. The bill then proceeded
to charge that the City of New Albany was indebted to the company
in the sum of $393,000, besides interest, growing out of a
subscription to its capital stock, made on the 19th of November,
1853, in part payment of which 200 bonds of $1000 each had been
delivered to the company, and that certain other parties, whom the
bill made defendants, were indebted in smaller sums in a similar
manner. The bill further charged that none of these bonds except 7
had been negotiated by the company, but that, on the contrary, 197
of them had been returned to the city in pursuance of an illegal
compromise, and that the city subscription to the stock had been
cancelled. The complainants therefore charged that the city still
remained a debtor to the company, and they prayed relief that the
amount of debt that might be ascertained, and that so much thereof
as was necessary to satisfy the judgment might be decreed to be
thus applied.
Page 78 U. S. 98
To this bill the City of New Albany set up several defenses;
some of form, some to the merits. Among these last, it set up:
1st. That the city was not indebted to the company when the bill
was filed; that the adjustment by the city and the company was, at
the time it was made (September 7, 1857), a compromise, made in
good faith, by which the city ceased to be indebted to the company,
and that the adjustment was effective and valid as against all
persons.
2d. That if the complainants had rights against the city and
might have impeached the validity of the arrangement by which the
city recovered its bonds and obtained a cancellation of its
subscription, they had slept so long upon these rights that a court
of equity would not afford them relief.
These two defenses were the only ones which the court
considered, the others having been of such a character as that if
these two were sufficient, it was unnecessary to say anything about
them.
As to the facts, it appeared that in November, 1853, pursuant to
an ordinance of the common council of the city, a subscription had
been made by the city to the stock of the railroad of $400,000,
payable in city bonds upon the call of the company, and that the
council assumed the power to pass an ordinance which some persons
asserted to be void but which others considered had been
subsequently ratified, if void originally, by an ordinance of March
7, 1855, the railroad company now, upon the passage of this
ordinance of ratification, agreeing and binding itself that not
more than $250,000 of bonds should be called for until the road
should be completed and put into order to its junction with the
Ohio & Mississippi Railroad, and then but for the purpose of
furnishing it &c. Pursuant to the subscription, the officers of
the city delivered to the railroad company 200 city bonds for
$1,000 each, payable to bearer and redeemable in ten and payable in
twenty years. At the time of thus delivering the bonds, the
railroad company was actively engaged in prosecuting its
enterprise, and represented to the officers of the city that it was
essential to the completion of
Page 78 U. S. 99
its road that the company should obtain money by the sale of the
bonds. Shortly, however, after the delivery of the bonds, and while
all of them except 7 remained unsold, several suits were instituted
by taxpayers of the city to resist the payment of a tax levied for
the payment of interest, the ground of the suits being that the
subscription was void. These suits led to protracted litigation and
raised such doubts as to the validity of the bonds as to render it
impossible for the railroad company to sell or negotiate them
except at a ruinous sacrifice. In August, 1857, the railroad
company represented to the city that in consequence of this failure
to obtain money on the bonds, the company had found itself without
means to carry on the work, and had abandoned its enterprise. It
had apparently expended all the cash and real estate received by it
in payment for stock, and had pledged the 200 city bonds (except
the 7 sold) to different persons for sundry sums borrowed for the
purpose of prosecuting the work. It thus had no means to pay the
amounts so borrowed upon pledge of the city bonds, and it appeared
that unless the city provided the means, the whole of the bonds
were in danger of being sold for the payment of the loans and that,
owing to the doubts cast upon their validity, the whole of them
would not have sold for more than sufficient to pay the sums for
which they were pledged.
The railroad company therefore proposed to the city that if the
latter would provide means for the payment of the sums so borrowed
and redeem the bonds from the pledgees, they should be returned to
the city and cancelled.
The city, relying apparently on the representation of the
railroad company as to the condition of its affairs, passed an
ordinance, published immediately afterwards, by which it accepted
the proposition of the railroad company upon condition that the
latter would cancel the subscription of the city and consent to the
repeal of all ordinances and amendments relating thereto. This
condition was accepted by the railroad company, and the agreement
was carried into effect. The city paid the sums of money for which
the bonds were pledged, amounting to more than $36,000. All the
bonds,
Page 78 U. S. 100
except the 7 that had been sold were returned to the city and
cancelled, and the subscription of stock was cancelled.
The arrangement seemed to have been made in good faith by the
city, and for the purpose of preventing the large amount of its
bonds' being sacrificed for the payment of the debts for which they
stood pledged.
As to the second of the above-mentioned defenses, it seemed that
neither the complainants nor any other person had ever controverted
the validity of the adjustment made between the city and the
railroad company, nor instituted proceedings to have it set aside
as fraudulent and void, until the bill of complaint in this case
was filed more than ten years after the agreement was concluded.
However, one of the complainants was a nonresident of Indiana, and
swore that he never knew of the city subscription until after the
suit was brought. It was shown, nevertheless, that he had gone to
New Albany in 1858 in order to examine the company's concerns. His
attorney knew of it, and one witness thought that he did also.
The court below decreed in favor of the complainants for the
balance due on their judgments, amounting to over $70,000 in the
aggregate, against the railroad company and the city, and dismissed
the bill as to the other defendants. The city appealed to this
Court.
Page 78 U. S. 102
MR. JUSTICE STRONG delivered the opinion of the Court.
Assuming that the subscription made by the city to the capital
stock of the company in 1853, though undoubtedly invalid at first,
became valid by the ratification ordinance adopted March 7, 1855;
that thereby the city came under obligation to give its bonds to
the company in payment for the stock, so far as they had not
already been given, we come directly to the question what was the
effect of the arrangement made in August and September, 1857? Here
the situation of the parties at the time is of importance to be
considered.
The railroad company had undertaken to build a railroad from New
Albany to Sandusky City, and it had commenced the work, relying
mainly upon the bonds of the city to raise the money necessary. It
had, however, been disappointed. Suits had been commenced for
injunctions to restrain the collection of a tax for paying the
interest, and the consequence was that the bonds could not be sold
without a ruinous sacrifice, if sold at all. These suits were still
pending. Meanwhile the company had borrowed thirty-six thousand
dollars, pledging the bonds to the amount of eighty thousand
dollars as collateral security. The loan had fallen due, and the
holders were demanding payment, and threatening to sell the
collaterals. The company was utterly unable to redeem the pledge.
Its available means were completely exhausted. It could neither go
on with its work nor in any manner relieve itself. According to the
weight of the evidence, the bonds pledged, together with all the
others still held by the company, would not have sold for enough to
have paid the thirty-six thousand dollars borrowed.
Page 78 U. S. 103
Turning now to the condition of the city. It had ratified its
invalid subscription with an irrevocable engagement on the part of
the company, that not more then $250,000 should be called for until
the railroad should be completed and put in running order at least
to its junction with the Ohio & Mississippi Railroad, and then
only for the purpose of furnishing the road with depots, rolling
stock &c. It had paid its bonds to the extent of $200,000 on
the subscription, and it was liable to be called upon for $50,000
more. For the remainder it was liable only upon a contingency that
has never happened, and that never can happen. The consideration
for its subscription, it is true, had not failed, though the motive
that induced it, namely, the construction of the railroad, no
longer existed. The credit of the bonds which it had issued was
gone, and had it issued the remaining fifty thousand dollars, they
could not have been sold for more than $8,000 or $10,000. It was in
these circumstances that the company applied to the city, stating
its own helplessness, and it was then that the arrangement was made
by which the city assumed to pay the debt of $36,000 due by the
company, and sundry other moneys, and in consideration thereof
obtained from the company one hundred and ninety-three bonds, which
had not been negotiated, and a cancellation of the stock
subscription. Was this transaction valid?
The bonds were negotiable instruments, payable to bearer in not
less than ten and not more than twenty years, and, of course,
passing from hand to hand by delivery. Had the whole subscription
been paid, it must have been with similar bonds. And the manifest
design of the subscription was to create bonds for sale in the
market as the convenience or the necessities of the railroad
company might require. There was no restriction in the contract
upon the power of disposition, and none at law, or in equity,
unless it be that the company could not part with the bonds in
fraud of its stockholders or its creditors. And it had the right,
which all other debtors had at the time, to make preferences among
its creditors -- to pay one rather than another. It is not to be
disputed that, situated as the company was at the time
Page 78 U. S. 104
when the contract of August and September, 1857, was made, with
the debt of $36,000 pressing upon it, and with no other means of
relief, it might have sold the entire lot of two hundred and
forty-three bonds which it held, or was entitled to call for, at
the best price that could have been obtained, and might have
applied the entire proceeds, had they been needed, to pay that
single debt. Of this neither the stockholders nor the other
creditors could have complained. What more has been done now? No
doubt such a course would have involved an equal sacrifice to the
company, and would, in the end, have been more disastrous to the
city. Time has revealed that the bonds were worth more than they
could have been sold for, but we are to look at the circumstances
as they were when the transaction took place, in considering what
was its nature and whether it was legal. But if a sale by the
company at the market price, and an application of the whole
proceeds to the payment of the $36,000 debt, would have been
unimpeachable, why is it less so because the city became the
purchaser? Beyond doubt, the city might lawfully buy its own bonds.
Had the company sold to a stranger, and then the city become a
purchaser from the stranger, it will not be contended that any
creditor of the company could complain. And it can make no
difference whether the purchase was made directly or indirectly
from the first holder of the bonds, assuming that there was no
fraud. The transaction, or the arrangement of August and September,
1857, was, in substance, plainly nothing more than a purchase by
the city of its own bonds, some of which had been issued and others
of which it was under obligation to issue, at the call of the
vendor. The price paid was $36,000, besides some thousands more
which the purchaser undertook to pay. Looking at it in the light of
subsequent events, it was no doubt an advantageous purchase for the
city, and if the uncontradicted evidence is to be believed, it was
deemed at the time an advantageous sale or arrangement for the
company. Certainly it did not place the company in any worse
position than it must have held had it not been made.
Page 78 U. S. 105
It is, however, contended by the complainants that the
arrangement was fraudulent both in law and in fact, and that
neither the common councils of the city nor the directors of the
railroad company had power to make it. In support of the
proposition that the transaction was
ultra vires, we are
referred to
Bell v. Railroad Company, [
Footnote 1] but that case is very unlike the
present. There, a popular vote, under legislative sanction, had
instructed the police board to subscribe a defined amount, leaving
to them no discretion. The police board were agents to carry out
the popular will with limited powers. It was not, therefore, for
them to subscribe a less amount or make any other contract than the
one they had been directed to make, and this Court well said that a
municipal corporation like the board of police could not modify or
alter the stock subscription voted by the people in the absence of
power from the legislature. The decision, however, was placed upon
other grounds. But in the present case, the common council were
free to exercise their own discretion. They were under no
obligation to subscribe at all, and they might take as little or as
much stock as they pleased, not exceeding six hundred thousand
dollars. Besides, as we have seen, the arrangement assailed by the
complainants was not a modification of the subscription previously
made or a bonus given for a release. It was rather a purchase of
the city debt. We think it was not beyond the power of the
contracting parties.
And we are not able to perceive that it was fraudulent, either
in law or in fact. It may well be doubted whether the complainants
can be heard in alleging fraud. It is clear the arrangement made is
binding upon the railroad company through which as well as against
which they claim. They can therefore have no standing in court
unless the arrangement was absolutely null for want of power in the
parties to make it or unless it was fraudulent as against them, and
therefore voidable at their suit. We have already seen that it was
not a nullity, and the bill does not charge
Page 78 U. S. 106
that it was fraudulent. It avers that the arrangement and
compromise and attempted cancellation of the subscription were
entirely null and void, but it does not allege that they were
fraudulently made. In urging fraud now, the complainants are
setting up a case not made by the pleadings. But it is not
necessary to place our decision on this ground. No doubt the
subscribed capital stock of a corporation is a fund held by it in
trust for its creditors, as is also all its other property, and had
the railroad company released, without equivalent consideration, or
given it away, its action would have been fraudulent, and might
have been set aside by a court of equity. But certainly it was in
the power of the directors to apply the subscription on bonds taken
in payment to the extinguishment of debts, and, if thus applied in
good faith, all being obtained for it that it was worth, no one has
been wronged. It is therefore a question of fact to be determined
by the evidence whether the bonds and the balance of the city's
subscription were thus applied. Upon this subject we have already
remarked at considerable length. We may add the evidence is
convincing that the contract between the city and the company was
made in the utmost good faith, with no intention to wrong creditors
of the latter, that it was at the time considered advantageous to
the company, and it is not proved that all was not paid for the
bonds issued and to be issued that they could have been sold for in
the market.
We will not pursue this branch of the case further. Were it even
conceded that the arrangement of August and September, 1857, might
have been set aside at the instance of creditors of the company,
the laches of the complainants is fatal to their bill. This suit
was not brought until the 29th day of January, 1868. The contract
assailed was consummated September 8, 1857. It was not made in
secret. There was no attempt at concealment. On the contrary, the
ordinance of the city was published at the time. The insolvency of
the company, as well as its abandonment of its work on the
railroad, was known. It is asserted in complainants' bill.
Injunction suits were then pending against the city.
Page 78 U. S. 107
The return of
nulla bona to the complainants' execution
against the railroad company was made on the first of December,
1858. Then their right, if any they had, to attack the compromise
as fraudulent was perfect. Yet they remained inactive more than
nine years, and it was not until after a speculator had purchased a
large part of the judgment that this bill was brought. An attempt
has been made to excuse this long delay by the testimony of one of
the complainants that he had never heard of the compromise of the
city's subscription until a time which was subsequent to the
commencement of the suit. But he does not say that he had not full
possession of the means of detecting the fraudulent arrangement, if
it was fraudulent, or that there had been any concealment, and the
possession of such means of knowledge is, in equity, the same as
knowledge itself. [
Footnote 2]
Moreover, the other evidence in the case is irreconcilable with
this statement of the witness. He had attorneys who knew of the
compromise from the first. He himself went to New Albany in the
spring of 1858 for the purpose of making a thorough examination of
the affairs of the company, and another witness thinks he was then
informed of the arrangement. There is not the slightest evidence
that any other one of the complainants was not fully apprised of
what had been done from the time of the transaction, and certainly
they all had the fullest means of knowledge. No excuse is therefore
shown for their long delay, and it is difficult to see why they are
not barred by the rule in equity analogous to the statute of
limitations. Upon this subject it is unnecessary to cite
authorities. They are to be found in numbers in the decisions of
this Court, as well as elsewhere. It is not to be questioned that a
direct suit at law, founded upon alleged fraud in making the
compromise, would have been barred by the Indiana statutory
limitation of six years. It cannot be maintained that supine
negligence and lapse of time are less efficient in a court of
equity.
These views of the case render it unnecessary to consider
Page 78 U. S. 108
the other defenses set up against the complainants' right to
recover.
Decree reversed and the cause remanded with instructions to
dismiss the complainants' bill as against the City of New
Albany.
[
Footnote 1]
71 U. S. 4 Wall.
598.
[
Footnote 2]
Farnam v. Brooks, 9 Pickering 212; 2 Story's Equity ยง
1521.
