Jackson v. Ludeling, 88 U.S. 616 (1874)
U.S. Supreme CourtJackson v. Ludeling, 88 U.S. 21 Wall. 616 616 (1874)
Jackson v. Ludeling
88 U.S. (21 Wall.) 616
1. When two or more persons have a common interest in a security, equity will not allow one to appropriate it exclusively to himself or to impair its worth to the others. Community of interest involves mutual obligation. If, ex. gr., a corporation issue many bonds and give a mortgage on all its estates to secure them, one holder of the bonds -- admitting that he has a right to make use of the mortgage to enforce the payment of the bonds which he holds -- has no right to employ it as an instrument by which he may become the owner of the property mortgaged at the lowest price at which it can be obtained, leaving the bonds held by his associate holders unpaid. His duty, if he uses it at all, is to make it productive of the most that can be obtained for all who are interested in it, and if he seeks to make a profit out of it at the expense of those whose rights in it were the some as his own, he is guilty of fraud.
2. The managers and officers of a company where capital is contributed in shares are in a very legitimate sense trustees alike for its stockholders and its creditors, though they may not be trustees technically and in form. They accordingly have no right to enter into or participate in any combination the object of which is to divest the company of its property and obtain it for themselves at a sacrifice; they have no right
to seek their own profit at the expense of the company, its stockholders, or even its bondholders. Contrariwise, in case of embarrassment to the company, and any necessity to sell the estates of the company, it is their duty, to the extent of their power, to secure for all those whose interests are in their charge, the highest possible price for the property which can be obtained for it.
3. These principles applied to a case where the local managers and officers of an embarrassed railroad, holding a small portion of its bonds, of which a much greater portion was held by nonresidents, got an order of sale under a mortgage to secure the bonds, and proceeded in a hasty and rather secret way to sell it, and to buy it at a price much below its value for themselves, the conditions of sale being made such as to render it difficult for persons generally to purchase, and the whole proceeding of sale being attended also with evidences of gross disregard of the interests of the bondholders generally, and of course of the stockholders.
4. The statute of Louisiana of March 10, 1834, which authorizes purchasers at a sheriff's sale to apply for a monition to all persons interested who can set up any right, title, or claim to the property described, in consequence of any informality in the order, or decree, or judgment of the court under which the sale was made, or any irregularity or illegality in the appointment and advertisement in time or manner of sale, or for any other defect whatsoever, to show cause why the sale should not be confirmed and homologated, and which, if no cause be shown, makes judgment of confirmation conclusive on the world, has relation to mistakes or omissions of the officers of the law, and not any relation to the question whether the purchasers have obtained their title by fraud or whether they are trustees mala fide for others. Accordingly a judgment of homologation under it is conclusive of nothing but that there have been no fatal irregularities of form.
This was a bill in equity filed in the court below by Jackson and many other persons against John T. Ludeling, as a first-named party, and others, his associates, to-wit, John Ray, Francis P. Stubbs, Wesley J. Q. Baker, William R. Gordon, Henry M. Bry, Joseph F. McGuire, John A. McGuire, Robert Ray, Joseph P. Crossley, Charles W. Phillips, Robert C. Strother, Christopher H. Dabbs, George C. Waddell, William M. Pincaird, and James U. Horne; and also against the Vicksburg, Shreveport, and Texas Railroad Company.
The complainants were holders of six hundred and sixty
out of seven hundred and sixty-one bonds of $1,000 each issued by the said company and secured by a mortgage upon the railroad and its appurtenances and upon the franchises and personal effects of the company, together with more than four hundred thousand acres of land. Their bill was filed as well for themselves as for all other bondholders whose situation was similar to theirs. Some of them were also preferred stockholders of the company to a large amount. The mortgage was made by an authentic act on the 1st day of September, A.D. 1857, to John Ray, or bearer, to secure the full, faithful, and punctual payment and redemption of each and all the bonds issued under it to any and all the future holders thereof and to each and everyone of them when the same should become due and payable, together with the interest accruing thereon. The relief sought by the bill was that the mortgage might be declared to be a valid lien upon all the property described therein; that a sale averred to have been made under it in 1866 to the defendant Ludeling and his said associates be set aside and the deed made to them by the sheriff be declared to be fraudulent and void, that the defendants might be enjoined against setting up any title under the sale and the deed, prohibited from selling any of the property, rights, and privileges of the railroad company, and required to account for all money received by them on account of the corporation, and that the mortgaged property might be decreed to be sold for the benefit of the bondholders, the preferred and other stockholders. The bill also prayed for the appointment of a receiver and for other relief.
To the bill and the relief asked the defense set up was what was alleged to have been a judicial sale of the mortgaged property under executory process at the suit of William R. Gordon, one of the defendants, and the question of importance presented by the record was whether that sale, as against these complainants, extinguished the lien of the mortgage.
A minor point, one less relied on, related to the effect of a certain "judgment of homologation" -- as it is called in
Louisiana -- "in a suit of monition," instituted by the defendants under a statute of Louisiana, passed March 10, 1834, and by which judgment the defendants contended that the validity of the sale which the present bill sought to have declared null, was conclusively established and the bill itself barred.
The court below declared that no fraud had been practiced and that the sale must stand. It accordingly dismissed the bill.