Railroad Company v. Soutter, 80 U.S. 517 (1871)

U.S. Supreme Court

Railroad Company v. Soutter, 80 U.S. 13 Wall. 517 517 (1871) Railroad Company v. Soutter

80 U.S. (13 Wall.) 517

APPEAL FROM THE CIRCUIT COURT

FOR THE DISTRICT OF WISCONSIN

Syllabus

A railroad belonging to an incorporated company, and then under a first and second mortgage, was sold on execution and bought in by certain bondholders whom the second or junior mortgage was given to secure. These purchasers organized themselves (as they were allowed to do by statute in the state where the road was) into a new corporation, and worked the road themselves and for their own profit. After a certain time, the mortgagees under the first or senior mortgage pressed their debt to a decree of foreclosure, and to prevent a sale of the road, the new corporation paid the mortgage debt. Subsequently to this, and on a creditors' bill, the sale made to the creditors under the second mortgage was set aside as fraudulent and void as against other creditors of the corporation which owned the road originally. Held that no bill in equity would lie by the new corporation against the mortgagees under the first mortgage to be paid back (as paid under a mistake of fact) what had been thus paid to them by the new corporation, or to be subrogated to their decree of foreclosure.

The Milwaukee & Minnesota Railroad Company filed a bill in equity, in June, 1859, against Soutter (survivor of

Page 80 U. S. 518

Bronson), Russell Sage, and several other natural or individual persons, as also against the Milwaukee & St. Paul Railway Company, a corporation, to recover back certain large sums of money, amounting in all to $462,057.80, which they had paid into court, in December, 1865, in part liquidation of certain bonds held by the individual defendants in this suit, which bonds had been issued by the La Crosse & Milwaukee Railroad Company in 1857, and were secured by a mortgage upon a portion of the railroad of the last named company. By way of alternative relief, the complainants prayed that they might be subrogated to the benefit of the decree of foreclosure of the mortgage, under which they had paid they money in question. The Milwaukee & St. Paul Railway Company were made defendants because they were the parties now in possession of the railroad and other mortgaged premises and asserted themselves to be the owners thereof.

The facts on which the complainants rested their claim, as set forth in their bill, were substantially as follows:

The La Crosse & Milwaukee Railroad Company, in 1858, after giving the bonds and mortgage above mentioned, gave two other mortgages, one on their road and one on their land grants, to secure certain other bonds issued by them. Failing to pay the interest coupons on the latter bonds, William Barnes, the trustee named in the mortgages, in May, 1859, sold the mortgaged premises and all the franchises of the company at public auction and became the purchaser thereof in trust for the bondholders under the laws of Wisconsin for the sum of $1,593,333. The bondholders thereupon, in May, 1859, organized a new company by the name of the Milwaukee & Minnesota Railroad Company (the corporation now complainant in the case), and Barnes conveyed the property to the said company, which thereafter conducted its business under and in pursuance of the charter of the La Crosse & Milwaukee Railroad Company, and immediately entered into possession of the said property and franchises.

But the prior mortgage of 1857 still subsisted on a portion of the road. Of this mortgage Bronson and Soutter

Page 80 U. S. 519

were the trustees, and they filed another bill to foreclose their mortgage, and, after protracted litigation (of which the part in this Court is reported in Bronson v. La Crosse Railroad Company) obtained a final decree in 1865 [Footnote 1] for the amount of interest coupons due on the bonds secured thereby, amounting to upwards of $450,000, which decree contained a proviso that if the Milwaukee & Minnesota Railroad Company (the now complainants) should pay the amount of the decree before a sale of the mortgaged premises, the receiver (the road being then in the hands of a receiver) should deliver the property to them -- that is to say, they had the usual privilege of redeeming the property by paying the decree. Thereupon the complainants, on the 30th of December, 1865, paid into court the amount of $462,057.80, as above stated, the money being afterwards distributed to the holders of the various bonds secured by the Bronson and Soutter mortgage, who are the individual defendants in this suit. The money thus paid was paid by the complainants as purchasers, and claiming to be owners, of the property upon an acknowledged encumbrance and in relief of the property claimed.

Prior to this payment, however, certain judgment creditors of the La Crosse & Milwaukee Railroad Company filed in the United States District Court for Wisconsin a creditor's bill against the present complainants, alleging that the sale by Barnes was fraudulent and void and praying that it might be set aside as such and that the complainants might be enjoined from any further interference with the property or franchises of the La Crosse & Milwaukee Railroad Company. This suit had been pending for some considerable period, and was pending here on appeal -- the case of James v. Railroad Company [Footnote 2] -- when the complainants paid their money into court, as before stated, and, some time after its payment and distribution, a decree was made on said creditor's bill, in accordance will the prayer thereof, and directing that the property should be resold, and the proceeds

Page 80 U. S. 520

applied, after payment of prior liens, to the satisfaction of the judgments on which the creditor's bill was founded.

The complainants accordingly now asked to have their money returned to them on the ground that they paid it under a mistake. Their allegation was that they supposed they owned the property when they did not; that they supposed they were lifting an encumbrance off of their own property when they were, in fact, lifting it off of property decided to belong to other parties. Their bill, speaking of the order allowing them to pay the amount of the decree, represented that the

"said order was made by this court upon the understanding and theory entertained and believed by the judges of said court, and by your orator, and by all persons and parties interested in said cause, that your orator was the owner of said equity of redemption."

And again, that

"your orator paid said sum of money into this court, this court distributed the same, and the several persons hereinbefore named in that behalf received the same with, upon, and under, and only with, upon, and under, the belief, understanding, and theory, that your orator was the owner of the equity of redemption of the mortgaged premises and property in said cause, and that your orator was thereby paying and extinguishing a lien, charge, and encumbrance upon property owned by your orator as aforesaid."

It further stated that

"after paying the money, your orator for the first time discovered that the said foreclosure of the Barnes mortgage was fraudulent and void as to the creditors of the La Crosse & Milwaukee Railroad Company, and as against the said last-named company, and that, in fact and in law, your orator never was the owner of the said equity of redemption, and that the payment made by your orator into court, and the distribution of the said moneys and the receipt thereof by the said defendants was made, had, and received in mistake of fact as aforesaid."

The bill further stated that Russell Sage, one of the defendants, who received a large portion of the money paid into court, was also a large holder of bonds under the Barnes mortgages, and had advised and encouraged the sale by

Page 80 U. S. 521

Barnes, and participated in the organization of the complainants' company, and alleged further that the board of directors of the corporation complainant became totally changed, and was at the time of such payment wholly composed of persons who had not participated personally in the foreclosure of the Barnes mortgage, and that a large majority of the stockholders and directors at the time of the said payment were persons who had no interest at the time of the foreclosure and no participation in the proceedings.

The defendants demurred to this bill, and on the hearing of the same the demurrer was sustained, and the bill dismissed. From the decree dismissing the complainants' bill, this appeal was taken.

Page 80 U. S. 523

MR. JUSTICE BRADLEY, having stated the case, delivered the opinion of the Court.

The bare statement of the claim, even presenting it in the language of the bill itself, seems to us sufficient to condemn it. Who are the complainants? Are they not the very bondholders, self-incorporated into a body politic, who, through their trustee and agent, effected the sale which was declared fraudulent and void as against creditors, and made the purchase which has been set aside for that cause? Was it ever known that a fraudulent purchaser of property, when deprived of its possession, could recover for his repairs or improvements, or for encumbrances lifted by him whilst in possession? If such a case can be found in the books, we have not been referred to it. Whatever a man does to benefit an estate under such circumstances he does in his own wrong. He cannot get relief by coming into a court of equity. By the civil law, the possessor, even in bad faith, may have the value of his improvements if the real owner choose to take them. The latter has an option to take them or to require their removal. But this rule has never obtained in the common law nor in the system of English equity. One of the maxims of the latter system is "He that hath

Page 80 U. S. 524

committed iniquity shall not have equity." And various illustrations of it are furnished by the books. [Footnote 3]

But the complainants are wrong in asserting that the property was not theirs. It was theirs. Their purchase was declared void only as against the creditors of the La Crosse & Milwaukee Railroad Company. In other words, it was only voidable, not absolutely void. By satisfying these creditors, they could have kept the property, and their title would have been good as against all the world. The property was theirs, but, by reason of the fraudulent sale, was subject to the encumbrance of the debts of the La Crosse company. This was the legal effect of the decree declaring their title void. Therefore they were in fact paying off an encumbrance on their own property when they paid into court the money which they are now seeking to recover back.

They are wrong also in asserting that they made the payment under a mistake of fact. If it was made under any mistake at all, it was clearly a mistake of law. They mistook the legal effect of transactions of which they were chargeable with notice. They were the persons for whose benefit the purchase was made which was declared to be fraudulent. They were the principal defendants in the creditors' bill, upon which this decree was rendered. All the evidence in that suit had been taken when they made the payment in question. The cause was pending on appeal in this Court. There was not a fact, therefore, of which they were ignorant. They had full and actual notice of all the transactions and all the evidence on which the decree was ultimately founded.

All this appears from the statements of the bill in this case. We do not see how such a bill can possibly be sustained. The pleader who drew it evidently felt the force of these objections, and interjected some special circumstances for the purpose of showing that the case is distinguishable from the class of cases referred to. It is stated that Russell Sage, one of the defendants, who received a large portion

Page 80 U. S. 525

of the money paid into court, was also a large holder of bonds under the Barnes mortgages, and advised and encouraged the sale by Barnes, and participated in the organization of the complainants' company. All these facts may be true, and on the demurrer to the bill must be taken as true, but they do not show, nor is it alleged, that Sage was personally a participant in the fraud which was committed in the sale under the Barnes mortgage. And if it were so alleged, can one fraud-doer obtain relief in equity against his particeps criminis?

Again, it is alleged that the board of directors of the complainant was totally changed, and was, at the time of such payment, wholly composed of persons who had not participated personally in the foreclosure of the Barnes mortgage, and that a large majority of the stockholders and directors at the time of the said payment were persons who had no interest at the time of the foreclosure and no participation in the proceedings. This cannot alter the case. A corporation aggregate retains its identity through all the changes that may take place in its individual membership. This corporation, by its own statement, was adjudged to be the child of a fraudulent and corrupt transaction, and entered upon its career as purchaser of the property with all the risks of its illicit origin and fraudulent purchase upon its head. Change of membership cannot change its rights. If it can, when is the change effected? How many, or what proportion, of the members must be changed?

It is needless to pursue the subject further. If the present individual stockholders of the complainants have been wronged, that wrong cannot be redressed in this proceeding without violating the clearest principles of equity jurisprudence. The bondholders who received the money that was paid into court were entitled to that money. It was due them. Had not the complainants interposed, they could have sold the property and realized their claim from the proceeds. How can they be called to account? The present owners of the road have purchased it (it is to be presumed) under the proceedings had in favor of the judgment creditors.

Page 80 U. S. 526

How can their title be disturbed by the complainants? What equity would there be in subjecting the property in their hands to an encumbrance from which it was free when their purchase was made?

The decree must be

Affirmed.

[Footnote 1]

69 U. S. 2 Wall. 283.

[Footnote 2]

73 U. S. 6 Wall. 752.

[Footnote 3]

See Francis' Maxims, Maxim VII.

MR. JUSTICE FIELD, dissenting.

I differ from Brother BRADLEY in the construction of the bill in this case, and therefore differ from him in the conclusions to be drawn from the facts which it discloses. To my mind, it presents a clear case where money amounting to over four hundred and sixty thousand dollars was paid under a mistake of fact into which the complainant was led by the decision of this Court. And it would be, in my judgment, only administering simple justice to the company to compel the defendants to make restitution or to give to the company the benefit of the decree in the foreclosure suit upon which the money was paid. I therefore dissent from the judgment rendered.

THE CHIEF JUSTICE and MR. JUSTICE MILLER also dissented.