A debt contracted for "construction" is not entitled to the
priority of payment, in proceedings for the foreclosure of a
mortgage of the property of a railroad corporation, which is
recognized in
Fosdick v.
Schall, 96
Page 128 U. S. 417
U.S. 235, as the equitable right in some cases of a creditor for
"operating expenses."
The doctrine in
Fosdick v. Schall has never yet been
applied in any case except that of a railroad, and whether it will
be applied to any other case,
quaere.
When a third party with his own money takes up maturing coupons
on bonds of a corporation without knowledge of the holders, it is a
question of fact, to be determined by the proof, whether it is
intended to be a payment or a purchase which leaves the coupons
outstanding.
The coupons in dispute in this case, having been dishonored
before they came into the hands of the appellants, were subject in
their hands to all defenses which existed against their assignor,
and, it being evident that without the knowledge of the holders of
the bonds to which those coupons were attached, he used his money
to pay the coupons on bonds which had been sold solely in order to
enable him to float the rest of the issue;
held that it
would be inequitable to allow him either a preference over those to
whom he had sold the bonds or coequal rights with them.
The Court stated the case as follows:
This is an appeal by intervenors in the suit, one branch of
which has been disposed of in the preceding case of
Brown v.
Guarantee Trust & Safe Deposit Company, ante, 128 U. S. 403. In
addition to the facts set forth in that case and which need not be
repeated here, it may be stated that on the 23d of May, 1883, an
order of the court below was entered directing the holders of the
bonds and coupons issued by the City of Joliet Waterworks Company,
and secured by mortgage to the appellee in this case, to present
them to the clerk of the court by a certain day for payment thereon
out of the funds then in the hands of that officer.
Pursuant thereto, appellants in this case filed 473 of said
coupons held by them, and with them a petition praying that said
coupons be decreed to have, in the distribution of said funds,
priority of payment as against any of the holders or owners of the
said bonds or the subsequently maturing coupons.
The petition alleges in substance, that for material sold and
delivered to Jesse W. Starr, which he used in the construction of
his waterworks system, he was in debt to them $14,000, in part
payment of which he transferred to them, in October, 1882, these
473 coupons, at par value, amounting to $7,095,
Page 128 U. S. 418
and interest from maturity; that the said coupons presented by
appellants fell due before the completion of said waterworks; that
upon many of them the amount due at maturity was advanced by Starr
to the bondholders, who transferred the same to him; and that the
said advance was made out of money which Starr ought to have
applied to the payment of his indebtedness for the material so
used, and which now constitutes a part of the system of the said
waterworks.
The answer of the appellee contains substantially the statements
of the cross-bill set forth in the preceding case. It denies that
the coupons presented by appellants had any validity whatever as a
lien upon said funds in the custody of the clerk; alleges that all
of them were delivered after they were due and that of the 473
coupons held by appellants, 279 falling due January 1, 1881, and 77
of the 194 falling due July 1, 1881, were detached from the bonds
by Starr before they were sold and before the coupons themselves
became due, only 117 being sold with the bonds prior to their
maturity. It further alleges that these last coupons were
extinguished, cancelled, and paid; that the holders of the bonds,
who, as requested, presented said coupons for payment at the office
of Starr's broker, had no thought of selling them, and in fact did
not sell them; that all these acts of Starr -- cutting off some and
taking up others of paid coupons -- were withheld from the
knowledge of said bondholders, were deceptive and fraudulent, were
intended to conceal from appellee and the public the fact that the
said waterworks company was insolvent, and in reality making
default in payment of the interest coupons ; and that, as said
coupons were delivered by Starr to appellants long after their
maturity, they took them subject to all defenses which might have
been urged against Starr himself.
On May 12th, 1884, the petition of appellants was dismissed at
their costs, from which action they have brought this appeal.
Page 128 U. S. 420
MR. JUSTICE LAMAR, after stating the facts as above, delivered
the opinion of the Court.
In this appeal, the first claim advanced is that since the 117
coupons, parcel of the lot in controversy, were paid by Starr with
the funds that he had raised for the express purpose of defraying
the expense of constructing the waterworks, it was his primary duty
so to use the money, and that his failure so to do amounted to a
diversion, which will entitle the appellants to a priority under
the doctrine of
Fosdick v Schall, 99 U. S.
235.
Page 128 U. S. 421
The argument is unsound. There are several answers to it. First,
it overlooks the vital distinction between a debt for construction
and one for operating expenses. The doctrine of
Fosdick v.
Schall is applicable wholly to the latter class of
liabilities. In the case of
Cowdrey v. Galveston Railroad,
93 U. S. 352, it
was settled that the doctrine does not apply where it is a question
of original construction. Secondly, it overlooks the important fact
that the doctrine only applies where there is a diversion of the
income of a "going concern" from the purpose to which that income
is equitably primarily devoted,
viz., the payment of the
operating expenses of the concern. In other words, the income must
be first devoted to the expenses of producing the income. In this
case, it is not pretended that the money used in paying the 117
coupons in question was income of the waterworks company. Thirdly,
the doctrine of
Fosdick v. Schall has never yet been
applied in any case except that of a railroad. The case lays great
emphasis on the consideration that a railroad is a peculiar
property of a public nature, and discharging a great public work.
There is a broad distinction between such a case and that of a
purely private concern. We do not undertake to decide the question
here, but only point it out. There is other ample ground upon which
to decide this question.
It is further insisted in reference to the 117 coupons that
appellants are entitled to recover on them in their own right as
owners, and independently of the doctrine of
Fosdick v.
Schall. These coupons matured July 1, 1881. Appellants came
into possession of them in October, 1882 -- fifteen months after
they were dishonored. If any defense existed against them in
Starr's hands, the same defense is available now against Starr's
assignee. It is claimed by the appellee that before the appellants
acquired them, they had been in fact paid. This is denied, and the
case of
Ketchum v. Duncan, 96 U. S.
659, is relied on to support the denial.
The facts and the reasoning of the Court in that case are as
follows.
"Duncan, Sherman & Co., who furnished the money which the
former owners received for the coupons, did not intend to pay them
in any such sense as to relieve the railroad
Page 128 U. S. 422
company from its obligation. By advancing the money and
directing its payment to the holders of the coupons, they intended
to take the place of those holders and to become the owners of the
evidences of the company's debt -- or, in other words, they
intended to obtain for themselves the rights of purchasers. They
did not advance the money either to or for the company. Certainly
they did not intend to extinguish the coupons. Of this the evidence
is very full. The firm had made advances to the company to pay the
coupons due in November, 1873, as well as interest due in January
and March, 1874, amounting to a very large sum. These advances had
not been repaid when the May coupons fell due. Those coupons the
company was then utterly unable to take up. In near prospect of
this inability, William B. Duncan, the head of the firm, on the
28th of April, 1874, telegraphed from New York to the company at
Mobile that his firm would purchase for their own account sterling
coupons, payable in London. The firm also telegraphed to the Bank
of Mobile and to the Union Bank of London to purchase the coupons
there presented for them, charging their account with the cost and
transmitting the coupons uncancelled. The railroad company acceded
to the proposition made them, and the Bank of Mobile and the Union
Bank did also. Similar arrangements were made respecting the
November coupons, except that Duncan, Sherman & Co. arranged
with the Credit Foncier to make the purchase in London. Both these
banks were agents of the firm in the transactions. They were not
agents of the railroad company. They had no funds of the company in
hand. In taking up the coupons, they acted for Duncan, Sherman
& Co., charged the cost to their account, transmitted to them
the coupons taken up without cancellation, and were repaid by them.
In view of these facts, it is manifest that whatever may have been
the nature of the transaction by which the coupons passed from the
hands of the former holders into the possession of Duncan, Sherman
& Co., it was not intended by the firm to be a payment or
extinguishment of the company's liability. Neither they nor the
company nor the Bank of Mobile nor the Union Bank nor the Credit
Foncier
Page 128 U. S. 423
so intended or understood it. Was it, then, a payment? It is as
difficult to see how there can be a payment and extinguishment
thereby of a debt without any intention to pay it as it is to see
how there can be a sale without an intention to sell."
"But that the coupons were either paid or transferred to Duncan,
Sherman & Co. unpaid is plain enough. The transaction, whatever
it was, must have been a payment or a transfer by gift or purchase.
Was it then a purchase? It is undoubtedly true that it is essential
to a sale that both parties should consent to it. We may admit
also, that"
"where, as in this case, a sale, compared with payment, is
prejudicial to the holder's interest by continuing the burden of
the coupons upon the common security and lessening its value in
reference to the principal debt, the intent to sell should be
clearly proved."
"But the intent to sell or the assent of the former owner to a
sale need not have been expressly given. It may be inferred from
the circumstances of the transaction. It often is. In the present
case, the nature of the subject cannot be overlooked. Interest
coupons are instruments of a peculiar character. The title to them
passes from hand to hand by mere delivery. A transfer of possession
is presumptively a transfer of title. And especially is this true
when the transfer is made to one who is not a debtor to one who is
under no obligation to receive them or to pay them. A holder is not
warranted to believe that such a person intended to extinguish the
coupons when he hands over the sum called for by them and takes
them into his possession. It is not in accordance with common
experience for one man to pay the debt of another without receiving
any benefit from his act. We cannot close our eyes to things that
are of daily occurrence. It is within common knowledge that
interest coupons, alike those that are not due and those that are
due, are passed from hand to hand, the receiver paying the amount
they call for without any intention on his part to extinguish them
and without any belief in the other party that they are
extinguished by the transaction. In such a case, the holder intends
to transfer his title, not to extinguish the debt. In multitudes of
cases, coupons
Page 128 U. S. 424
are transferred by persons who are not the owners of the bonds
from which they have been detached. To hold that in all these
cases, the coupons are paid and extinguished, and not transferred
or assigned, unless there was something more to show an assent of
the person parting with the possession that they should remain
alive, and be available in the hands of the person to whom they
were delivered, would, we think, be inconsistent with the common
understanding of businessmen."
That case clearly settles the proposition that in such a matter
as this, the question, as between payment and purchase, is one of
fact, rather than of law, to be settled by the evidence, largely
presumptive, generally, in the case. It is a question of the
intention of the parties.
In
Ketchum v. Duncan, stress was laid on these
circumstances,
viz., that the persons alleged to have paid
the coupons had no connection with the company issuing the coupons,
or interest in it, that they had repeatedly and publicly notified
the holders of the bonds and coupons that the coupons were to be
purchased, not paid, and that the coupons were carefully received
and preserved uncancelled. In the case at bar, the conditions are
radically different. Starr is essentially (that is, from a business
point of view) the waterworks company, owning, as he does, 19,500
of its 20,000 shares of stock. Its prosperity is manifestly his
prosperity, its disaster his disaster, and any disbursement made by
it is substantially made by him. There is therefore no inherent
improbability that he intended to pay the coupons, as he, indeed,
instructed his agents, the brokers, that he did. Moreover, such
notice as was given to call in the coupons was notice of payment,
not of purchase, so far as the evidence discloses the character at
all. Finally, the coupons were cancelled by Starr, all of them
being punctured and defaced by mucilage, and about onehalf having
the word "Paid" written across them, in which condition they were
received by the appellants. Looking to the testimony, we decline to
disturb the finding of the master and of the circuit court.
The same consideration of the substantial identity between
Page 128 U. S. 425
Starr and the waterworks company is of great weight in the
determination of the remaining question as to the other 356
coupons. Whatever might be the right of a holder of overdue coupons
cut from a bond which is afterwards sold to a
bona fide
purchaser, as between such purchaser and the coupon holder, that
question does not arise here.
The case before us is a peculiar one, and must be adjudged on
its own facts. As we have already said, Starr was, from a business
point of view, substantially the company. Not only was it his
object to float the bonds, but to float the company as well. Hence,
when he came to sell these bonds, he arranged with his brokers,
Beasly & Co., in reference to the July coupons (series No. 2).
Under that arrangement, such of the coupons as were attached to,
and had been sold with, the bonds sold early in the year 1881, were
paid by Beasly & Co., the price was charged to Starr, and the
coupons were delivered to him. Such of the coupons as were attached
to bonds not themselves sold until the month of June, 1881, were
detached from the bonds before sale, and were not charged to Starr,
but were delivered to him as property of the company. The coupons
of January, 1881, were all detached from the bonds before they were
deposited with Beasly.
Now why all this arrangement and management? To use the language
of Mr. Beasly:
"It would have been irregular and unbusinesslike to offer for
sale or attempt to dispose of the bonds,
not then known in the
market, with overdue coupons attached."
In brief, Starr was engaged in floating these bonds. They were
not, as the testimony and the history of the case shows, good
bonds. He was very careful to prevent anything from transpiring
that would injure their credit. He cut off the coupons that were
due and unpaid, so long as the bonds remained in his possession,
and put up some money to redeem coupons which fell due on bonds
that had been sold, so long as he was still engaged in selling
other bonds. It looks very much as if Mr. Starr had dug a pit, and
was anxiously keeping the pathway to it in good order. It would be
inequitable, in our opinion, to allow him to bring forward these
coupons as the basis of any preference over, or of even coequal
rights with,
Page 128 U. S. 426
those to whom he sold his bonds, and the plaintiff, having taken
these coupons when overdue, had no greater rights than he had in
this respect. If the courts were to sanction such claims, the
commercial securities of the world would be nullified.
The decree of the circuit court is affirmed.
