United States v. Union Pacific Railroad Company,
98 U.S. 569 (1878)

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U.S. Supreme Court

United States v. Union Pacific Railroad Company, 98 U.S. 569 (1878)

United States v. Union Pacific Railroad Company

98 U.S. 569


1. The Act of March 3, 1873, 17 Stat. 509, is a valid and constitutional exercise of legislative power. Congress, by requiring the Attorney General to bring a suit in equity in the name of the United States in any circuit court against the Union Pacific Railroad Company and others, intended, not to change the substantial rights of the parties to the suit, but to provide a specific mode of procedure, which, by removing certain restrictions on the jurisdiction, process, and pleading which are in other cases imposed, would give a larger scope to the action of the court, and a more economical and efficient remedy than before existed.

2. The provisions authorizing process to be served without the limits of the district where the suit might be brought, and parties and subjects of controversy to be united which, in an ordinary chancery suit, would render a bill multifarious, are regulations of practice and procedure which are subject to legislative control

3. Statutes have been frequently passed directing suits for specific objects to be brought by an attorney general, and regulating the proceedings in them, such as a quo warranto, or a bill in equity against a corporation to test its right to the exercise of its franchises, or to declare them forfeited, or, if insolvent, to wind up its business and distribute its assets; and the validity of such statutes has uniformly been recognized.

4. This bill having, on demurrer, been dismissed below, its sufficiency must be determined here by the provisions of said act, for it cannot be supposed that Congress, in laying down in specific terms the subject matter of the suit and granting enlarged and peculiar powers to the court, intended that any other matters should be tried in the case.

5. This is confirmed by the fact that the same act provided other remedies for other subjects of controversy with the Union Pacific Railroad Company, and an effectual means of investigating all its affairs.

6. That act authorized a decree in favor of that company for money due for capital stock, for money or property received from it on fraudulent contracts, or which ought in equity to belong to it, and also a decree in favor of it or of the United States for money, bonds, or lands wrongfully received from the latter, which ought in equity to be paid or accounted for.

7. Except in favor of the company or of the United States, there can under that act therefore be no recovery, and none but such as was sanctioned by the principles of equity before it was passed.

8. The company might, by a cross-bill, have availed itself of the act, but it refuses to do so, and demurs to the bill, thereby foregoing any relief in its favor in this suit. As it is conformable neither to the principles of equity nor to those of the common law to render a decree or a judgment in favor of a competent party who asserts no claim and declines to proceed in the case, there can be no recovery in this suit in favor of the company.

9. Though the bill sets up many fraudulent transactions on the part of the directors

Page 98 U. S. 570

of the company and some of its stockholders for which the other stockholders would be entitled to relief, the latter are not parties, and neither the frame of the bill nor the provisions of the act authorize any relief or recovery in their favor.

10. The United States sustains two distinct relations to the company -- namely that of the government creating it and exercising legislative and visitatorial powers and that growing out of the contract contained in the charter and its amendment.

11. This bill exhibits no right on the part of the United States to relief founded on that contract. The company has completed its road, keeps it in running order, and carries all that is required by the government. To the latter nothing is due, and it has the security which by law it provided.

12. Nor does the bill show anything which authorizes the United States as the depositary of a trust, public or private, to sustain this suit.

13. This interference by the Attorney General with corporations on the ground of such a trust in the government is limited to two classes, to neither of which the present case belongs: 1. where religious, charitable, municipal, or other corporations whose functions are solely public, and whose managers have destroyed or misappropriated the fund, or otherwise abused their functions; 2. where other corporations exercise powers beyond those to which they are limited by the law of their organization.

14. While the Court does not say that there is no trust in regard to the duties of the company which the United States can enforce in equity, it is of opinion that none such is shown in this bill, and that no case is made for any relief authorized by the act under which it was brought.

The Act of Congress making appropriations for the legislative, executive, and judicial expenses of the government, approved March 3, 1873, 17 Stat. 509, has the following language in its fourth and last section:

"The Attorney General shall cause a suit in equity to be instituted in the name of the United States against the Union Pacific Railroad Company and against all persons who may, in their own names or through any agents, have subscribed for or received capital stock in said road, which stock has not been paid for in full in money or who may have received, as dividends or otherwise, portions of the capital stock of said road, or the proceeds or avails thereof, or other property of said road, unlawfully and contrary to equity, or who may have received as profits or proceeds of contracts for construction or equipment of said road, or other contracts therewith, moneys or other property which ought, in equity, to belong to said railroad corporation, or who may, under pretense of having complied with the acts to which this is an addition, have wrongfully

Page 98 U. S. 571

and unlawfully received from the United States bonds, moneys, or lands which ought, in equity, to be accounted for and paid to said railroad company or to the United States, and to compel payment for said stock, and the collection and payment of such moneys, and the restoration of such property, or its value, either to said railroad corporation or to the United States, whichever shall in equity be held entitled thereto. Said suit may be brought in the circuit court in any circuit, and all said parties may be made defendants in one suit. Decrees may be entered and enforced against any one or more parties defendant without awaiting the final determination of the cause against other parties. The court where said cause is pending may make such orders and decrees, and issue such process as it shall deem necessary to bring in new parties, or the representatives of parties deceased, or to carry into effect the purposes of this act. On filing the bill, writs of subpoena may be issued by said court against any parties defendant, which writ shall run into any district, and shall be served, as other like process, by the marshal of such district."

Following this, and constituting a part of the same section, are certain provisions for the future government of the railroad company and its officers, to-wit that its books and correspondence shall at all times be open to inspection by the Secretary of the Treasury; that no dividend shall be made but from actual net earnings, and no new stock issued or mortgages created without consent of Congress, and punishing directors who shall violate these provisions. Also enacting that the corporation shall not be subject to the bankrupt law, and shall be subject to a mandamus to compel it to operate its road, as required by law.

A previous section directs the Secretary of the Treasury to withhold from every railroad company which has failed to pay the interest on bonds advanced to it by the government, all payments on account of freights or transportation over such roads, to the amount of such interest paid by the United States, and also the five percent of the net earning of the roads due and unapplied as provided by law, and it authorized the companies who might wish to contest the right to withhold these payments to bring suit against the United States in the Court of Claims for the money so withheld.

The Attorney General, pursuant to said fourth section, filed

Page 98 U. S. 572

a bill in equity in the Circuit Court of the United States for the District of Connecticut against the Union Pacific Railroad Company, the Wyoming Coal Company, the Credit Mobilier Company, and some one hundred and fifty individual defendants.

The bill, after reciting certain provisions of the Acts of July 1, 1862, 12 Stat. 480, and July 2, 1864, 13 id. 356, and other acts amendatory thereof, in relation to the Union Pacific Railroad Company, and alleging that the company was organized in October, 1863, and its road opened in 1869; that a board appointed under the joint resolution of April 10, 1869, reported deficiencies of construction, requiring an expenditure of $1,586,100; that the United States issued to the company bonds to the amount of $27,236,512, which, with the interest, after deducting one-half the compensation for services, made its aggregate liability, Jan. 1, 1873, $33,435,221.77, and that under the mortgage it executed Nov. 1, 1865, to secure the payment of its first mortgage bonds, it has issued and disposed of them to the amount of $27,237,000; charges that, April 16, 1867, it executed a mortgage to secure the payment of its so-called land grant bonds, providing for the application of the proceeds of all sales of its land from time to time in the redemption of such bonds; that it has issued $10,400,000 of them, at seven percent interest, $8,811,000 of which remain outstanding and unpaid; that it intends to sell land and apply the proceeds to redeem them, to that extent impairing the security of the United States for the repayment of its bonds issued to the company; that the company, on Sept. 1, 1869, issued $10,000,000 of so-called income bonds, at ten percent interest, secured by an indenture pledging the net income for the interest, after paying that on the first mortgage bonds and land grant bonds; that it has also issued $2,500,000 of eight percent bonds, secured by mortgage on its bridge across the Missouri River; that for the redemption of the income bonds it intends to issue and put in the market eight percent sinking fund bonds for $16,000,000, secured by mortgage on the property of the company; that it has a floating debt of $2,000,000, and has issued certificates of stock amounting to $36,762,300; that, July 16, 1868, it entered into an agreement with Godfrey & Wardell, which was assigned,

Page 98 U. S. 573

April 1, 1869, to the Wyoming Coal and Mining Company, purporting, among other things, to lease the coal lands of the Union Pacific Railroad Company for fifteen years; that the stock in said coal company, with the exception of one-tenth thereof, is owned by stockholders and managers of the railroad company; that said contract is a fraudulent method of obtaining for them a monopoly of coal supplies and of the coal trade on the line of the road, and was made in contravention of sec. 3 of the act of 1862; that on Sept. 1, 1869, the railroad company made a contract with the Atlantic and Pacific Telegraph Company to transfer to the latter the entire line of telegraph and appurtenances constructed for the railroad company under the acts of Congress; that the managers of the two companies are in part or in whole the same; and that the arrangement is a fraudulent device to make for said managers illegal profits, and to deprive the United States of its lawful security and advantage from the telegraph line.

The bill sets forth an agreement with the Omaha Bridge Transfer Company, and charges that it is a fraudulent arrangement on the part of the managers and stockholders to transfer to themselves personally profits which equitably belong to the railroad company.

The bill then charges, among other things, that the cost of the road was less than one-half of the sum represented by the stock and other pretended outstanding liabilities; that the larger part of the stock and bonds was issued by certain defendants in the name of the company, to enrich themselves; that the greater portion of the stock was never paid for in cash, or in any other thing of equivalent value; that the company is insolvent; that the government bonds and a portion of the first mortgage bonds would have been sufficient to construct the road, without any expenditure from stock subscribed, or from land grant bonds, or from income bonds; and that the stock, if paid in cash or its equivalent, would have been sufficient with less than one-half of the government bonds to complete the road, without the issue of bonds by the company; that at its organization in 1863, $2,177,000 stock was subscribed, on which ten percent was paid; but no considerable

Page 98 U. S. 574

sum was afterward paid thereon, and no considerable amount of other subscriptions was ever made, except as part of the fraudulent transactions set forth; that at the organization of the company the practical management of its business was committed to the executive committee, whereof one of the defendants, Durant, then vice-president, was elected a member; that in August and September, 1864, he and his associates used the name of one H. M. Hoxie to disguise a contract made by them in the name of the company on one side, with themselves in the name of Hoxie on the other, to construct about two hundred and forty-six miles of the road between Omaha and the one hundredth meridian, at the price of $50,000 per mile, which was known to be in excess of a fair price therefor; that on Oct. 7, 1864, certain defendants, directors, and another, a stockholder, agreed with him to take large interests in this contract, with the design of becoming possessed of all the franchises and property of the company, and to use, manage, and dispose of the same for their private benefit; that in execution of said design they obtained, in November, 1864, control of the charter of the Credit Mobilier of America, a corporation of Pennsylvania, and on March 15, 1865, entered into a contract in writing to conduct its operations in connection with the railroad company, outside of its charter, at an agency in New York; that their intention was to substitute the Credit Mobilier as a contractor in the "Hoxie contract," and that on the same day they assigned to it the entire beneficial interest from the beginning in this contract, when the Credit Mobilier was organized to cooperate with the railroad company, defendant Durant being chosen its president; that they, in 1865 and 1866, purchased in the name of the Credit Mobilier, and had conveyed to it, large numbers of shares of stock of the railroad company, originally subscribed for in good faith at its organization; that they caused to be allotted among themselves, as stockholders in the Credit Mobilier, the shares of railroad stock purchased from the original subscribers, and also large numbers of other shares subscribed by, or in the name of, the Credit Mobilier, on which it was pretended that thirty percent had been paid, and also to be distributed among themselves a large amount of scrip procured by the Credit Mobilier from the railroad company in

Page 98 U. S. 575

pretended payment for construction under the "Hoxie contract," which scrip, instead of cash, they used in making pretended payments for the stock, certificates of which they procured to be issued to them severally by the officers of the railroad company.

It then states the division among certain defendants, in February, 1867, of one thousand two hundred and fifty first mortgage bonds ($1,250,000), which they had caused the railroad company, to issue and deliver to the Credit Mobilier, on pretense of payment for roadbuilding under the "Hoxie contract;" that in 1867, they procured transfers to the Credit Mobilier, with few exceptions, of all the outstanding original shares of stock of the railroad company; and that thenceforth they, the holders of all the stock of the Credit Mobilier, became also holders of substantially all the stock of the railroad company, and managed the same without regard to the rights or interests of the United States; that in December, 1867, they fraudulently distributed among themselves, as stockholders of the Credit Mobilier, in the way of dividends, sixteen thousand shares of Union Pacific railroad stock, issued to the credit Mobilier, as assignee of the "Hoxie contract," on account of fifty-eight miles of railroad west of the one hundredth meridian, already constructed and paid for by the railroad company, and charges that they were from the beginning, and throughout, interested in the whole of the profits of the "Hoxie contract," and that all the work thereunder was done, and all measurements thereof and settlements therefor were made, by them in the double capacity of representatives of the two companies.

It then recites the facts and objects of the so-called "Oakes Ames contract," and charges that after the completion of the road, under the "Hoxie contract," to the one hundredth meridian, in October, 1866, they, as managers of the railroad company, went on, constructed, and paid for, at the price of about $27,500 per mile, a section of about one hundred and thirty-eight miles of road west of the one hundredth meridian, which was completed October, 1867; that they then entered into a series of writings intended in effect to constitute a contract with themselves as stockholders of the Credit Mobilier, for constructing at excessive prices six hundred and sixty-seven

Page 98 U. S. 576

miles of road, beginning at the one hundredth meridian, and including the one hundred and thirty-eight miles already built and paid for at much lower rates; that the objects and effects of this transaction were to despoil the company of $3,000,000 of its stock and bonds, distributed among the defendants, under pretext of a contract to build a portion of its road already built and paid for, and to give them, under the disguise of a contract between parties in different interests, excessive prices for constructing other portions of the road, and to place the control of the company in seven trustees, and withhold its management and direction from the stockholders and directors; that the first three dividends under the "Oakes Ames contract" were received by the defendants named; that on June 3 and 7, 1868, all the trusts in the triplicate agreement (one of the writings connected with the "Oakes Ames contract") in favor of the stockholders of the Credit Mobilier, were directly declared in favor of defendants individually, who received the dividends personally, and not as stockholders of the Credit Mobilier; that thereafter defendants proceeded, as general copartners in form as well as in fact, with the seven trustees as their general managers, and that the last three dividends or allotments under the "Oakes Ames contract" were: July 3, 1868, $2,812,500, in first mortgage bonds; July 8, 1868, $1,125,000, in cash; Dec. 29, 1868, seventy-five thousand shares of stock at par value.

It then states the facts in regard to the pretended "Davis contract" in November, 1868, for the construction of about 125.23 miles of the road not embraced in the "Oakes Ames contract," which was assigned to the same persons for the same trusts as in the case of the "Oakes Ames contract;" and that the road to its western terminus was constructed by certain stockholders of the company, acting through the assignees, under cover of the "Davis contract."

After setting forth at large the dates and amounts of the several subscriptions which the defendants caused to be made to the stock of the railroad company by the Credit Mobilier, or to be assumed by it, as required by the "Hoxie contract," and the distribution of the stock among the defendants; also the dates and amounts of the subscription to the stock of the

Page 98 U. S. 577

company made by the trustees under the "Oakes Ames contract" and under the "Davis contract," and its distribution in like manner; that neither the Credit Mobilier nor the trustees ever paid for any portion of their stock, but the excessive contract prices for construction were set off against the subscriptions; that the accounts of the railroad company under the three contracts are unsettled, with large balances claimed against the company; that defendants caused large amounts of money belonging to the company to be expended for unlawful purposes.

Certain alleged fraudulent transactions on the part of one of the defendants, a director, in relation to the sale of bonds, are set forth, in respect of which it is charged he is accountable to the company, which wrongfully refuses to compel him to account.

The bill then charges that the defendants made further divisions and distributions among themselves of the assets of the company, and engaged in other unlawful transactions and dealings with respect to its property, which the complainant is unable to set forth in detail, but which amount to about $17,000,000 in excess of the amounts particularly set forth, and that large amounts of the stock and bonds divided among defendants are still held by them or some of them.

The present condition of the company, with regard to its stock, finances, value of its road, and management, is then set forth, and it is averred to be doubtful whether the road would sell under the first mortgage for more than enough to pay those bonds, and that if the land grant mortgage is allowed to be administered according to its terms, it will exhaust the security of the United States in the lands; that the company had no right to issue first mortgage bonds or land grant bonds or income bonds for distribution among stockholders as profits or for sale to them below their value, and such bonds to the extent so issued and distributed or sold are invalid, unless in the hands of bona fide purchasers without notice; that it has no right to exhaust the security of the United States by paying either principal or interest of land grant bonds or income bonds; that the so-called trustees and assignees, under the "Oakes Ames contract" and "Davis contract," are jointly and severally

Page 98 U. S. 578

responsible for all the stock and bonds issued to them; that the grants to the company in the acts of Congress were grants in aid of a public work of the United States, and are held in trust, to be applied to a public use; and that the property mentioned is also a trust for the payment to the United States of the subsidy bonds; that the present management of the company is in adverse interest to the United States; that the latter is entitled, as further security for its debt, and for the public objects provided for by Congress, to have declared that the management of the company should be subject only to the votes of the stockholders holding full-paid stock; to have the franchises, powers, and means so administered that unreasonable and unnecessary liabilities should not be created, and to have an account of reasonable and necessary expenditures and liabilities as a basis for regulating rates of fare under the eighteenth section of the act of 1862, and for determining the basis for estimating the five percent of net profits; to have the franchises, powers, and property so administered as to secure the United States for the repayment of its bonds and promote the public objects of the corporation; to have maintained by the corporation, as a security for those objects, the character and credit which would ensue from a lawful administration of the franchises, powers, and means granted; and to have the lien of the United States remain a first lien, except as to the priority given to the first mortgage bonds within the limits and for the purposes expressed by Congress; that the company neglects and refuses to state or render an account of cost on a lawful or just basis; that the stock of the Credit Mobilier, and the stock, bonds, and cash of the railroad company, held by and allotted, distributed, and divided among several of the defendants, were received in trust for others, whom complainant asks leave to make parties defendant when discovered.

The relief prayed for is, that the grants by the United States be declared to be held by the company for a public use, &c., and the property granted by the United States, &c., to be a trust fund to secure the bonds lent by them, &c.; that the construction contracts, and the land grant and income mortgages be declared void; that an account be taken of the actual cost, &c., of the Union Pacific Railroad and Telegraph; the United

Page 98 U. S. 579

states bonds issued, &c.; the stock subscribed, sold, issued, &c.; and of the lands, &c., obtained from the United States; that persons unlawfully holding stock or other property of the company restore it, &c.

A large number of the defendants resided out of the District and state of Connecticut. Subpoenas directed to them were issued to the marshals of the several districts in which they respectively resided, and service thereof was there duly made upon them. There were three classes:

1. Those sued in their own right;

2. Those sued as executors of the estates of deceased persons domiciled at the time of their death out of said state; and

3. Corporations organized under laws of some other state.

The railroad company demurred, alleging

"that the complainant hath not, by its said bill, made such a case as entitles it in a court of equity to any discovery or relief from or against this defendant touching the matters contained in the said bill, or any of such matters."

The defendants who were served with process is the district of Connecticut likewise appeared, and filed demurrers to the bill for want of equity and for multifariousness.

A large number of those defendants who were served with process out of the district of Connecticut appeared de bene esse, and filed motions to dismiss the bill as to them, respectively, stating as the grounds of their motion that by the averments of the bill they were respectively nonresidents of Connecticut, and that the process showed that it was served upon them out of the district.

Some of the defendants residing out of Connecticut demurred to the bill for want of equity and for multifariousness; others who were nonresidents of Connecticut filed answers with clauses of demurrer.

The case was argued upon the bill and the pleadings, and the motions to dismiss. The demurrers were sustained, and an order entered overruling the motions.

The several nonresident defendants whose motions to dismiss were thus overruled, thereupon, under a protestando, demurred for want of equity and for multifariousness.

Several defendants who had answered withdrew their answers

Page 98 U. S. 580

after the decision of the court on the demurrers, and demurred.

At the April Term, 1874, the court below entered a general and final decree upon the bill, demurrers, and answers so filed, dismissing the bill as to all the defendants duly served with process. Whereupon the United States appealed to this Court and here assigns the following errors:

The court below erred:

1. In sustaining the demurrers.

2. In dismissing the bill as to certain defendants who had answered.

3. In dismissing it as to parties who had neither pleaded, answered, nor demurred.

Page 98 U. S. 601

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