In 1876, K brought a suit, in a circuit court of the United
States in Missouri to foreclose a mortgage on a railroad, making
the railroad corporation (a citizen of Missouri) and others
defendants. There was a decree of sale, and
a sale, and it was confirmed in October, 1876. In February,
1817, the corporation appealed to this Court. The case was affirmed
here in April, 1880. In June, 1880, the corporation filed a bill in
the same court against another Missouri corporation (a citizen of
Missouri) and other citizens of Missouri, alleging fraud in fact in
the foreclosure suit, in the conduct of the solicitor and directors
of the corporation defendant in that suit, and praying that the
decree in the K suit be set aside. On demurrer to the bill,
held:
1. The record in the K suit, not being made a part of the bill
or the record in this suit, could not be referred to.
2. The charges of fraud in the bill were sufficient to warrant
the discovery and relief based on those charges;
3. The case set forth in the bill, being one showing that no
real defense was
Page 111 U. S. 506
made in the K suit, because of the unfaithful conduct of the
solicitor and directors of the defendant in that suit, was one of
which a court of equity would take cognizance.
4. There was no laches in filing the bill, as the time during
which the appeal to this Court was pending could not be counted
against the plaintiff.
5. As the bill showed hostile control of the corporate affairs
of the plaintiff by its directors during the period covered by the
K suit, mere knowledge by, or notice to, the plaintiff, or its
directors, or officers, or stockholders, of the facts alleged in
the bill during that period was unimportant, a case of
acquiescence, assent, or ratification, or of the intervention of
the rights of innocent purchasers not being shown by the bill, and
the corporation having acted promptly when freed from the control
of such directors.
6. It did not follow that parties who became interested in the
plaintiff's corporation with knowledge of the matters set forth in
the bill, were entitled to the same standing as to relief with
those who were interested in the corporation when the transactions
complained of occurred;
7. The circuit court had jurisdiction of the bill, although the
plaintiff and some of the defendants were citizens of Missouri.
On the 26th of June, 1880, the Pacific Railroad (of Missouri), a
Missouri corporation, filed a bill in equity in the Circuit Court
of the United States for the Eastern District of Missouri against
the Missouri Pacific Railway Company, another Missouri corporation,
and various individual defendants, citizens of Missouri,
Massachusetts, and New York, and a New York corporation. The main
object of the bill is to impeach and vacate for alleged fraud in
fact a decree made by that court, June 6, 1876, foreclosing a
mortgage on railroad property of the plaintiff, and ordering its
sale. The sale was made September 6, 1876, it was confirmed by the
court October 7, 1876, and a deed was given October 24, 1876, by
the master, to the purchaser, who was James Baker. The decree was
made in a suit brought November 11, 1875, by one Ketchum, a citizen
of New York, against the present plaintiff and various citizens of
Missouri and New York, to foreclose a mortgage given by the present
plaintiff July 10, 1875, on its railroad and other property, to
Henry F. Vail and James D. Fish, trustees, called the "third
mortgage," to secure a proposed issue of bonds of $4,000,000. On
the first of February, 1877, the present plaintiff took an appeal
to this Court from the decree of June 6, 1876, and from the order
confirming the sale. The case was returnable at October term, 1877,
was heard here in January,
Page 111 U. S. 507
1880, was decided in April, 1880, the decree below being
affirmed, and a rehearing was applied for and was denied May 10,
1880.
See Pacific Railroad v. Ketchum, 101 U.
S. 289. This bill was then promptly filed.
Copies of the bill in the
Ketchum suit, and of the
decree and the deed of the master and the order of the court
approving the deed are annexed to and made a part of the bill in
this suit. The material allegations of the latter are these:
C. K. Garrison, James Seligman, and Pierce (three of the
defendants in this suit) were made co-plaintiffs in the
Ketchum suit, before the decree was entered, and their
solicitors were directed to receive their instructions from and be
advised by said Baker, who was the solicitor of this plaintiff, and
they did follow Baker's instructions. The decree was procured to be
made by the court by false and fraudulent representations made by
the defendants herein. The decree and the master's deed designedly
and fraudulently embraced more and other property of this plaintiff
than was embraced in the mortgage being foreclosed, in the
following language, which was interpolated without the knowledge of
this plaintiff,
viz.,
"Including, among other things, the track on Poplar Street, and
the levee in the City of St. Louis, commonly known as the 'Poplar
Street track,' the value of which property is more than $200,000.
All of the defendants in this suit (only three of whom, Baker,
Vail, and Fish, were defendants in the
Ketchum suit, and
four others of whom, Ketchum, C. K. Garrison, James Seligman, and
Pierce, were plaintiffs in the
Ketchum suit) had knowledge
of and were parties to the frauds herein complained of, either at
their inception or by 'subsequent subrogation.' The Atlantic &
Pacific Railroad Company (which will be called the Atlantic
Company) was the lessee of this plaintiff's railroad, under a
lease, a copy of which is annexed to the bill as an exhibit, and
which this plaintiff asks leave to refer to with the same effect as
if it were set out at length in the bill, and was in possession of
the property of this plaintiff. By the terms of said lease, the
Atlantic Company assumed certain obligations, including the payment
of a rental to this plaintiff, being unable to pay which, its
manager sought to evade its obligation by destroying this
Page 111 U. S. 508
plaintiff. On and before June, 1872, the chief officers and
directors of the Atlantic Company, who were Andrew Pierce, Jr.,
Joseph Seligman, A. V. Stout, and others unknown, procured the
ownership or control of a majority of this plaintiff's stock, for
the avowed purpose of procuring control of all its assets and road,
and in execution of such purpose, said directors and officers
procured the execution of said lease between the two roads on June
29, 1872. Upon the execution of the lease, the Atlantic Company
became possessed of all the property and franchises of this
plaintiff, and at all times since this plaintiff has not been in
control of any of its property except to receive rents under the
lease, from June, 1872, to July, 1875. Since the making of the
lease, the stockholders of this plaintiff have been paid all dues
under the lease, to July, 1875. All interest on its bonds was also
paid, and this plaintiff was not in default on any mortgage
liability which existed when the lease was made. During the lease,
the Atlantic Company, by false and fraudulent representations that
this plaintiff was indebted to it for improvements made on this
plaintiff's property, procured the execution by this plaintiff of
three issues of bonds, namely income bonds, for $1,500,000;
improvement bonds, for $2,000,000; third mortgage bonds, so-called,
for $4,000,000. The proceeds of all of said issues of bonds went to
the Atlantic Company or the persons by whose false and fraudulent
action their issue was procured. At or before November 11, 1875,
when the
Ketchum foreclosure suit was begun, the Atlantic
Company was indebted to various persons and corporations, whose
names are set forth. C. K. Garrison, on his examination in the
Ketchum suit, said that he was one of the complainants in
that suit, and the owner of over $1,500,000 of the third mortgage
bonds, and represented the owners of the rest. By the terms of the
lease, the Atlantic Company undertook to pay all the debts of this
plaintiff, as well as all operating and repairing expenses and all
interest on bonds to be issued after the date of the lease, for
extending its lines, buying rolling stock, and rentals. The
pretended increase of mortgage debt of $4,000,000, between July 1,
1871, and July 10, 1875, is fictitious, fraudulent, without
consideration, and contrary
Page 111 U. S. 509
to the laws of Missouri. The net income of this plaintiff's road
from the date of the lease to December 31, 1874, was $739,172.68.
The recitals in the third mortgage bonds that they were issued to
procure additional rolling stock for this plaintiff's road were
false. This plaintiff had no legal capacity to execute the third
mortgage or to issue $4,000,000 of bonds. The law of Missouri only
authorized mortgages of railroad property for certain stated
purposes, and no issue of bonds is valid without the vote of the
stockholders. The only pretended authority for making the third
mortgage (a copy of which is annexed to the bill) is shown by a
circular and form of proxy issued to the stockholders by Mr. Hays,
president, of which copies are attached to the bill. The circular
and "
brk:
proxy do not authorize the mortgage of $4,000,000, or of any
amount whatever. The Atlantic Company did not negotiate absolutely
any of the $2,000,000 of improvement bonds, but used them to aid
its own credit, and several of its directors and officers of this
plaintiff were endorsers on obligations of the Atlantic Company
secured by said bonds. The third mortgage was procured to be
executed fraudulently, to be used as additional security for said
endorsements, and $2,500,000 of the third mortgage bonds were used
to secure the payment of obligations of the Atlantic Company, and
said Garrison and Seligman and the defendant Sage, with full
knowledge of these facts, bought at heavy discount the past-due
obligations of the Atlantic Company, with the accompanying third
mortgage bonds. Some of the directors and former officers of this
plaintiff were interested in the bonds or the obligations, and
vigorously prosecuted the foreclosure suit, to the destruction of
the interests of the stockholders of this plaintiff. The defendants
Stout, Fish, D. R. Garrison, Samuels, W. R. Garrison, and C. K.
Garrison were, during all these transactions, up to the
commencement of the foreclosure suit, either directors of the
Atlantic Company or of this plaintiff, or creditors of, or
otherwise interested in, the Atlantic Company, and benefited by
said frauds, and were fully cognizant of the creation of said
fraudulent bonds and of said fraudulent acts, and are not holders
in good faith of said third mortgage bonds. The defendant C.
Page 111 U. S. 510
K. Garrison agreed with Andrew Pierce, Jr., Baker, and D. R.
Garrison that if they, controlling, as they did, the defense to the
Ketchum suit, would consent to a decree therein in the
manner and form in which consent to the entry of said decree was
given, he would pay all their liabilities in connection with the
Atlantic Company. Pursuant to such agreement, said Garrison did pay
said liabilities and took the improvement or third mortgage bonds
which were held as collateral, and thereupon said Pierce, Baker,
and D. R. Garrison caused said decree to be entered, and falsely
set forth that this plaintiff consented to the decree and
authorized the action of Baker in the premises. Prior and
subsequent to November 1, 1875, Baker, one of the directors of this
plaintiff and its general attorney, with Andrew Pierce, another
director, and others unknown, confederated with some of the
defendants herein to institute proceedings to foreclose the third
mortgage for the entire $4,000,000 in order to obtain the entire
property for themselves for greatly less than its real value. In
execution of this scheme they procured the bill of foreclosure in
the
Ketchum case to be printed prior to November 1, 1875,
and filed in the Circuit Court of the United States for the Eastern
District of Missouri, and procured the complainant, Ketchum, to
allow his name to be used therein, and the bill was sworn to before
the coupons were in default, and, without waiting the six months
required by the trust deed or procuring the request of the
requisite number of bondholders, they began suit. Baker admitted
service of subpoena in the name of this plaintiff, without
authority, and without authority filed the answer of this
plaintiff, falsely admitting the due and lawful execution of the
mortgage and the liability of this plaintiff to pay the bonds, well
knowing the said facts invalidating the bonds. As a part of the
fraudulent schemes of the defendants, no replications were ever
filed to put the cause at issue; no reference was ever made to a
master, so as to truly inform the court of the character and amount
of the debt; the cause was hurriedly disposed of, without waiting
for the three months allowed by the rules of that court, in equity;
no defense was ever undertaken to be interposed at any stage of the
proceedings by Baker, who pretended
Page 111 U. S. 511
to act as solicitor for this plaintiff, but who really acted for
Andrew Pierce, W. R. Garrison, C. K. Garrison, Russell Sage, James
Seligman, and others unknown, in procuring the decree of
foreclosure and the sale thereunder; the trustees, who alone had
any right to foreclose the mortgage, never filed any cross-bill or
prayed any relief; the recital in the decree that the cause was
heard on "proofs" was wholly false and fraudulent, and there never
was any judicial hearing whatever; no proofs were ever taken or
offered, but the decree was prepared and entered entirely by
consent of and collusively between the complainants and the counsel
and officers of this plaintiff, who were both carrying out the
common purpose of procuring the speediest decree of foreclosure,
for which the action was originally instituted, and in fraud of the
rights and property of this plaintiff, and without any authority
from it; it was false that Garrison, Pierce, and Seligman were the
owners of the bonds, as recited in the decree, and the complainants
and Baker,
brk:
counsel for them, and the officers of the corporation,
consenting to said decree, knew of all the facts invalidating the
bonds, and wrongfully concealed all such facts from the court; no
decree was entered decreeing what debt was due under the mortgage
or ordering the payment thereof or giving any time or opportunity
for redemption; the third mortgage bonds neither by their face nor
by any provision of the mortgage were due at the time the decree
was made, and no interest thereon was unpaid, except the coupons
which matured on the first of November, 1875, well knowing that
there was cash in the hands of the receivers appointed by the court
in the case and valuable real estate in the City of St. Louis which
could be separately sold which was far more than sufficient to pay
the entire amount of interest justly due on the mortgage debt, even
if valid, the complainants and the attorney for this plaintiff,
jointly, and for the purpose of defrauding this plaintiff, procured
the entry of a decree to sell the entire property of this plaintiff
to pay the principal and interest of the bonds, and the whole
amount of the third mortgage bonds were not then and have not since
been issued, and in any event were not, to the full sum of
$4,000,000, a
Page 111 U. S. 5412
lien upon the premises. Baker, in pursuance of said fraudulent
understanding, purchased the property at the sale not for this
plaintiff, his clients, and received a pecuniary reward from the
defendant the Missouri Pacific Railway for doing the same. He
bought the property upon secret agreements, and in trust for C. K.
Garrison and his associates, for $3,000,000, payable in third
mortgage bonds, a sum greatly less than its actual cash value. C.
K. Garrison was surety for Baker, as purchaser. Baker transferred
his interest in the purchase to the defendant the Missouri Pacific
Railway Company, which has since held it. It has issued to the
holders of the third mortgage bonds of this plaintiff, bonds of
itself for an equal amount, the third mortgage bondholders
receiving accrued interest in cash, and purchasing an equal amount
of the stock of the Missouri Pacific Company. The principal holders
of the third mortgage bonds are and were C. K. Garrison, Sage,
James Seligman, and others, who confederated to procure the decree.
On November 1, 1876, the Missouri Pacific Company made a mortgage
for $4,500,000 to secure a pretended and fraudulent indebtedness,
in which mortgage the defendant the Central Trust Company is now
mortgagee. The defendants the Missouri Pacific Company, C. K.
Garrison, Sage, and James Seligman own and control, or the same are
held for their use, nearly the whole amount of the third mortgage
bonds, and all took them with full knowledge of the want of
authority to issue them and of their fraudulent character. As part
of said fraudulent scheme, the Atlantic Company, in 1872, procured
the passage of an act of the legislature to enable the directors of
this plaintiff to retain control of the company against the will of
the stockholders. From the passage of said act to December, 1876,
the Atlantic Company, through the directors of this plaintiff, who
were false to their trust, have, by means of said law, controlled
the organization and management of this plaintiff's corporation.
The directors of this plaintiff did not properly represent the
interests of its stockholders, but used their position to strip it
of its property. The stockholders of this plaintiff, in writing,
requested said directors to resign, that others might be appointed
in their place who would properly attend to the duties of their
Page 111 U. S. 513
office, and requested them to employ other counsel than Baker to
defend the
Ketchum suit, but said directors allowed Baker,
who had caused the
Ketchum complaint to be prepared before
any cause of action arose and had caused the subpoena to be served
on himself, to put in the answer of this plaintiff in said suit
when said directors and Baker knew that the averments admitted were
many of them false in fact. The defendants C. K. Garrison, W. R.
Garrison, Oliver Garrison, D. R. Garrison, Jay Gould, Russell Sage,
A. V. Stout. George J. Forrest, Webb M. Samuels, and Joseph L.
Stephens, with others unknown, are now, or have been, directors of
the defendant the Missouri Pacific Railway Company and in the
receipt of its income, and had knowledge of all the matters
complained of and were parties to said frauds, and have been, from
October, 1876, to the present time, in possession of this
plaintiff's property.
Answers on oath to interrogatories in the bill are required from
all the defendants except Baker (Stout not being made a defendant
in the prayer for process). The prayer of the bill is that the
improvement bonds, and the third mortgage bonds, and the two
mortgages securing them, and the mortgage to the Central Trust
Company, be declared void; that the decree of foreclosure in the
Ketchum suit be set aside, and that proper accounts be
taken, and this plaintiff be allowed to redeem, and its property be
restored to it. The decree in the
Ketchum suit states that
this plaintiff, as defendant, appears by James Baker, as its
solicitor, and that he appears, as defendant, in his own proper
person, and as solicitor for five other defendants, who are not
defendants in the present suit. It also states that the
"court, being fully advised in the premises, and by the consent
of the parties to this suit, through their solicitors of record,
thereupon and in consideration thereof,"
decrees, but the terms of the consent are not otherwise set
forth in the decree.
There are two demurrers to the bill, one by the Missouri Pacific
Railway Company, O. Garrison, D. R. Garrison, Samuels, and Baker,
the other by Ketchum, C. K. Garrison,
Page 111 U. S. 514
Pierce, and Stephens. The two demurrers are substantially
identical, except that in the first one, O. Garrison, D. R.
Garrison, and Samuels allege that they are not proper or necessary
parties, and in the second one it is alleged that the circuit court
has no jurisdiction over the suit. In other respects, each demurrer
is as follows:
"The defendants, . . . by protestation, not confessing all or
any of the matters or things in the said complainant's bill
contained to be true in such manner and form as the same are
therein set forth and alleged, do demur to the said bill, and for
cause of demurrer show that the said complainant has not, by its
said bill, made such a case as entitles it, in a court of equity,
to any discovery from these defendants respectively, or any of
them, or any relief against them, as to the matters contained in
said bill, or any such matters, and that any discovery which can be
made by these defendants, or any of them, touching the matters
complained of in the said bill, or any of them, cannot be of avail
to the said complainant for any of the purposes for which a
discovery is sought against these defendants by the said bill, nor
entitle the said complainant to any relief in this court touching
any of the matters therein complained of. And for further and more
specific grounds of demurrer, these defendants aver as follows,
to-wit:"
"(1) If or insofar as the said bill of complaint is to be
treated and regarded as a bill of review for errors apparent in the
record, then it clearly appears that the time limited by law for
the bringing of such a bill of review had elapsed long prior to the
bringing of the present suit, and also that said decree has been
affirmed on appeal by the Supreme Court of the United States. If or
insofar as the said bill of complaint is to be regarded and treated
as a bill of review instituted upon the discovery of new matter, or
based upon errors not apparent of record, then it appears that no
leave of this Court has been obtained for the filing of such a bill
of review. It does not appear in the bill of complaint or otherwise
that the matters of complaint therein set forth were not known to
the complainant at the time of the pendency of the foreclosure or
that they could not have been therein set forth or determined, and
the bill of complaint discloses such negligence and laches in the
institution of the suit as destroys complainant's right to the
relief prayed for."
"(2) The bill of complaint contains
Page 111 U. S. 515
no description of the property mortgaged or covered by the
decree, and in reference to which relief is sought to be had."
"(3) The bill of complaint fails to set forth the bill of
complaint or the decree in the proceedings sought to be assailed,
or the tenor or purport thereof, all of which things should appear
in the body of the bill of complaint, in order to entitle the
complainant to any relief or discovery."
"(4) The averments of the bill of complaint show that the
complainant, even if its bill is to be treated as an original one
and not a bill of review, should be precluded by its own laches and
neglect from now instituting the present proceeding, for it is
nowhere averred that the complainant or its stockholders were at
any time ignorant of the various alleged frauds complained of, and
on the other hand it does appear that the complainant and its
stockholders were all along aware of all the facts now sought to be
assigned as grounds for relief and discovery in the bill, and that
the complainant could have instituted its suit under the authority
of the officers now representing it as early as March, 1877, and
that the stockholders of complainant had the means and remedies to
have averted the alleged wrongs, as well as the rendering of the
decree and the foreclosure of the property now complained of,
insofar as they may have had any just defenses thereto."
"(5) It affirmatively appears by said bill of complaint, in
conjunction with the exhibits sought to be made a part thereof,
that the said stockholders of the complainant, having full
knowledge of all the matters now sought to be set up as grounds of
relief and discovery in this case, were allowed full opportunity to
interpose any and all objections they might have to the rendering
of said decree, and not only failed to do so, but actually assented
to said decree in manner and form as it was rendered, and that the
said stockholders actually assented to and ratified the sale of the
property which was made under and by virtue of the foreclosure
proceedings."
"(6) The bill of complaint fails to aver that its stockholders
were at the time ignorant of the various facts alleged as occurring
and existing prior to the foreclosure suit, or during the pendency
of said suit, or that they were in any way precluded from making
any defenses that they might have to said decree of foreclosure,
all which averments, under the facts and circumstances of this
case, should be made to appear by the bill of complaint, in order
to entitle it to any relief or discovery."
"(7) The said bill of complaint is altogether vague,
uncertain,
Page 111 U. S. 516
and inconsistent in its various averments, and abounds in
prolix, redundant, and impertinent matters, and it is not such a
bill as, under the course of proceedings in chancery and of this
Court, these defendants ought to be called upon to make plea or
answer to."
"(8) There is a defect of material and necessary parties
defendant in said suit, for it appears from said bill of complaint
that in order to the obtaining of the relief sought for, J. B.
Colgate & Co., D. L. Caldwell, the National Bank of Commerce of
New York, the National Shoe and Leather Bank, Andrew Pierce, as
well as other corporations and individuals, and especially the
officers of the Atlantic and Pacific Railroad Company at the time
of the perpetration of the alleged frauds, and the former officers
of the Pacific Railroad, are necessary and proper parties to the
suit, in order to the obtaining of the relief sought to be had in
the bill of complaint."
"(9) The thirty-fourth, thirty-seventh, thirty-eighth,
thirty-ninth, fortieth, forty-first, and forty-second clauses of
the bill of complaint contain matters and allegations that are
entirely immaterial and irrelevant, and all of which have been
adjudicated against the complainant on appeal by the Supreme Court
of the United States."
The demurrers were brought to a hearing, and were, by consent,
ordered to stand as demurrers for the Central Trust Company, and
were sustained. 12 F. 461. The plaintiff elected to abide by the
bill, and it was dismissed and the plaintiff has appealed.
The circuit court, in its opinion, regarded the bill as an
original bill to impeach the prior decree for fraud, and not as a
bill of review upon newly discovered facts and evidence. It held
the bill to be insufficient, for want of an affirmative allegation
that the plaintiff was ignorant, during the pendency of the
original suit, of the facts set up in the bill, much less that it
was unable, after due diligence, to ascertain and plead
Page 111 U. S. 517
them. The court added:
"But the demurrer goes further and raises the question whether
the bill and exhibits do not show affirmatively that the present
complainant, through its stockholders, had notice of the
foreclosure suit, knowledge of the defense now insisted upon
against the third mortgage bonds, and ample opportunity to make
that defense. It is, we think, very clear that in considering the
question of notice, no distinction can be made between the
corporation and its officers and stockholders. We cannot separate
them and say the officers and stockholders knew of the fraud, but
the corporation did not. If therefore the stockholders were advised
of the foreclosure suit, and of the facts now charged as
constituting fraud in the execution of the bonds and mortgages sued
on therein, and had an opportunity to intervene and defend, and did
not do so, the corporation is concluded by their laches. That the
stockholders, as a body, were advised of the foreclosure suit, and
took action looking to its defense, and that they did not rely upon
the officers of the corporation, but distrusted and antagonized
them, is clear from the allegations of the forty-fifth count of the
bill, by which it is charged that the stockholders, in writing,
requested the directors to resign, that others might be appointed
in their place who would properly attend to the duties of their
office; also that the stockholders requested said directors to
employ counsel other than James Baker to defend the suit of
Ketchum."
The court in its opinion then makes reference to various matters
which, it states, appear in the record of the
Ketchum
case; that at a meeting of stockholders held in March, 1876 at St.
Louis, several months before the decree of foreclosure was made, a
resolution was adopted requesting the directors to employ counsel
to aid in the defense of the foreclosure suit; that the
stockholders, or their managing committee, afterwards assented to
the decree, and that the stockholders knew the facts now set up by
way of defense.
The record in the
Ketchum suit is not before us on this
appeal. The only allegation in the bill in regard to it is
this:
"Your orator prays liberty to refer to the files and records of
said United States circuit court in the case of
George
E.
Page 111 U. S.
518
Ketchum v. Pacific Railroad et al. to show the
collusive, irregular, and fraudulent character of the legal
proceedings instituted, with advice of said Baker, the counsel of
your orator, to sell all its property for the enforcement of a
security which your orator avers to be fraudulent and void, and for
which your orator had received no valuable consideration."
There is not in the record on this appeal any stipulation that
the
Ketchum record be considered as a part of the bill,
nor is it identified in any way. It is no part of the transcript
certified from the circuit court. The clerk of that court certifies
that what is before us is
"a true transcript of the record in case No. 1,677, of
Pacific Railroad (of Missouri), Plaintiff, against Missouri
Pacific Railway et al., Defendants, as fully as the same
remain on file and of record in said case in my office."
It follows that the record in the
Ketchum case was
never made part of the record in this case so far as appears from
the only record which is before the court on this appeal. In regard
to the bill in the
Ketchum suit, and the decree, and the
master's deed, and the order approving the deed, they are made a
part of the bill in this suit, and identified by the annexing of
copies. But the statement in the bill that the plaintiff prays
liberty to refer to the files and records of the circuit court in
the
Ketchum suit, to show such and such things, can be of
no force or effect to allow either party to claim, in this Court,
the right to produce or refer to anything as answering the
description of such files and records, which it may assert to be
such, or as being what the circuit court considered as before it.
One of the assignments of error on this appeal is that the circuit
court considered matters outside of the record, and matters not
embraced in the bill. We are of opinion that this Court cannot
consider anything which is not contained in the bill and the
exhibits which are annexed to it, and that it cannot look into
anything otherwise presented as the files and records of the
Ketchum suit or of any other proceedings in any court for
the purpose of determining the questions arising on the demurrers
to this bill.
The decision of the circuit court was placed upon the ground
that the stockholders, being dissatisfied with the action of
the
Page 111 U. S. 519
directors and the attorney of the company in defending the
foreclosure suit, were put on inquiry, and bound to do whatever it
was in their power to do to protect their interests; that any
individual stockholder was at liberty to apply to the court for
leave to intervene and defend; that the stockholders were parties
in interest, and, upon representing that fact to the court and
showing that the officers were not defending in good faith, they
would without doubt have been allowed to defend, and that
stockholders of a corporation, though not bound to intervene in a
suit against the corporation for the protection of their rights,
cannot, after having notice that the officers are not faithfully
defending a suit, neglect to intervene or to take any steps in the
way of endeavoring to do so, and permit a final decree to be
entered, and a sale to take place, and then, after years have
elapsed, be permitted to attack the validity of the
proceedings.
The case therefore was made to turn on the question of laches.
The decree was made June 6, 1876, the sale September 6, 1876, the
report of sale September 15, 1876, the confirmation of the sale
October 7, 1876, and the master's deed October 24, 1876. The
present plaintiff took an appeal to this Court from the decree, and
from the order confirming the sale, February 1, 1877. It prosecuted
that appeal in due form, and the case was heard here as soon as the
Court could hear it, as the bill states. It appears from the report
of the case in
101 U. S. 101
U.S. 289 that the present plaintiff contended here that it had not
consented to the decree, and sought to examine the question of the
alleged fraud or unauthorized conduct of its solicitor and its
officers, and also sought to defeat the jurisdiction of the circuit
court and to attack the propriety of the purchase by the solicitor.
The conclusion of this Court was that it could not discover any
error that could be corrected by appeal. But in its opinion it
said:
"The remedy for the fraud or unauthorized conduct of a solicitor
or of the officers of the corporation in such a matter is by an
appropriate proceeding in the court where the consent was received
and acted on and in which proof may be taken and the facts
ascertained."
Thereupon, this bill was immediately filed.
Page 111 U. S. 520
The demurrers in this case are to the whole bill. If any part of
the bill is good, the demurrers fail. The charges of fraud in the
bill, which are admitted by the demurrers for present purposes, are
sufficient to warrant the discovery and relief based on such
charges, leaving for consideration only the questions of laches and
of jurisdiction.
On the admitted allegations of the bill, there was no real
defense made in the
Ketchum suit, and the present
plaintiff was prevented from making that defense by the unfaithful
conduct of its solicitor and its directors, and the directors of
the Atlantic Company. A case of that kind is one of which a court
of equity will take cognizance.
United States v.
Throckmorton, 98 U. S. 61.
As to the question of laches, the pendency of the appeal taken
in the
Ketchum suit suspended the control of the circuit
court, and of every other court except this Court, over that decree
in respect to the relief sought in this suit of setting that decree
aside and declaring it fraudulent and void, all the other relief
asked being consequent on that. The appeal appearing to have been
taken and prosecuted in good faith in view of what appears in the
bill herein and in the report of the case in this Court, we cannot
hold on this demurrer that the time during which that appeal was
pending can be counted against the plaintiff on the question of
laches.
Ensminger v. Powers, 108 U.
S. 292.
As to the frauds alleged in the bill respecting the matters in
the conduct of the suit resulting in the decree, the right to
relief is based on the view that the corporation itself, the
present plaintiff, speaking and acting now for its stockholders as
a body, was powerless then because it was misrepresented by
unfaithful directors who did what was done and refused to do
otherwise, and through whom alone it could then speak and act. The
allegations in the bill of facts showing the existence of hostile
control of the corporate affairs of the plaintiff by its directors,
from before the bringing of the
Ketchum suit till after
the foreclosure sale, are entirely adequate as against a demurrer.
Under such circumstances, mere knowledge by or notice to the
plaintiff, or its directors or officers, or more or
Page 111 U. S. 521
less of its stockholders, is unimportant, and the plaintiff
cannot be concluded by the failure of any number of its
stockholders to do what unfaithful directors ought to have done
unless a case is shown of such acquiescence, assent, or
ratification as would make it inequitable to permit what has been
done to be set aside or unless the rights of innocent purchasers
have subsequently intervened to an extent creating an equitable bar
to the granting of relief. The bill in this case does not show such
a state of things. While stockholders, more or less in number, may
be allowed to interpose, if they have the means or the inclination
to take upon themselves the burden of such gigantic controversies
as are involved in the railroad transactions of the present day, it
would go far to legalize condonation of such transactions as are
set forth in this bill if mere knowledge by helpless stockholders
of the fraudulent acts of their directors were to prevent the
corporation itself from seeking redress if it acts promptly when
freed from the control of such directors. Fruitlessly requesting
unfaithful directors to resign and to employ other counsel, so far
from throwing on the stockholders the peril of losing their rights,
represented by the company, if they do not personally assert them
in place of the directors, operates of itself, without more, only
to aggravate the wrong. At the same time, it by no means follows
that parties who have become interested in the plaintiff's
corporation with knowledge of the matters set forth in the bill,
are entitled to the same standing, as to relief, with those who
were interested in the corporation when the transaction complained
of occurred.
As to the matters alleged which are extrinsic or collateral to
the issues in the
Ketchum suit, to what extent, greater or
less, there is jurisdiction to examine them under this bill is a
question not to be decided on these demurrers to the whole bill.
The bill is sufficient in regard to the other frauds alleged. But
in regard to one of those extrinsic matters, the bill states that
specified property not covered by the mortgage was put into the
decree without the knowledge of this plaintiff.
Upon the question of jurisdiction, there can be no doubt that
the circuit court, as the court which made the
Ketchum
decree
Page 111 U. S. 522
and had jurisdiction of the
Ketchum suit, as this
Court, in
Pacific Railroad v. Ketchum, 101 U.
S. 289, held it had, has jurisdiction to entertain the
present suit to set aside that decree on the grounds alleged in the
bill if they shall be established as facts and if there shall be no
valid defense to the suit, although the plaintiff and some of the
defendants are citizens of Missouri. The bill falls within
recognized cases which have been adjudged by this Court, and have
been recently reviewed and reaffirmed in
Krippendorf v.
Hyde, 110 U. S. 276. On
the question of jurisdiction, the suit may be regarded as ancillary
to the
Ketchum suit, so that the relief asked may be
granted by the court which made the decree in that suit without
regard to the citizenship of the present parties, though partaking
so far of the nature of an original suit as to be subject to the
rules in regard to the service of process which are laid down by
MR. JUSTICE MILLER in
Pacific Railroad v. Missouri Pacific
Railway Co., 3 F. 772. The bill, though an original bill in
the chancery sense of the word, is a continuation of the former
suit, on the question of the jurisdiction of the circuit court.
Minnesota Co. v. St. Paul
Co., 2 Wall. 609,
69 U. S.
633.
We do not see any force in the second and third grounds of
demurrer, nor at present in the eighth. The seventh ground of
demurrer alleges what is, if true, matter for exception, and so
does the ninth in part. As to the rest of the ninth, it is matter
for an answer. All the demurring parties seem to be proper
parties.
If, as has been strenuously argued for the defendants, there are
complete defenses on the merits to the bill, answers should have
been put in and proofs taken. We can act only on what the bill
brings before us, and all it alleges is admitted for present
purposes. The future proceedings in the case may show that the
allegations of the bill are untrue or may disclose perfect defenses
to the suit. But as the suit now stands, the plaintiff is entitled
to have the matters it alleges inquired into and adjudicated.
The decree of the circuit court is reversed and the case is
remanded to that court with direction to overrule the demurrers,
with costs, and to take such further proceedings in the suit as
shall be proper and not inconsistent with the opinion of this
Court.