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December 1, 1868


APPEAL from the Circuit Court for Iowa. The case was thus: The Mississippi and Missouri Railroad Company–a company in Iowa, and by the laws of that State, having power to issue its bonds to carry into effect the purposes for which it was created was incumbered by five several mortgages, given to secure bonds which it had executed, amounting, with arrears of interest, to $7,000,000; a sum greatly beyond what the road was worth. The interest was largely in arrears, and the company was insolvent. The Chicago and Rock Island Railroad Company–another company–made overtures for the purchase of the former road, offering to give for it $5,500,000, a sum more than it was worth, though, as just said, much less than what it owed. But the offer was contingent upon getting a title at once. The directors of the insolvent road had power, under its charter, to sell it on payment of its debts, and with the assent of two-thirds of its stockholders; but the only mode to make a satisfactory title which now seemed possible, was by a foreclosure under one of the mortgages; a matter which it was supposed, apparently, that it might be in the power of the stockholders, by the interposition of difficulties, to delay. Under these circumstances, a meeting of the holders of the stock and of the various classes of mortgage bonds of the company was called, to determine what should be done with the road. And it was resolved, at this meeting, to sell the road for the $5,500,000 offered; provided, that the purchase-money be distributed among the bondholders and stockholders of the company, according to a plan or 'scale' specified, by which the different classes of bondholders were to be paid certain specified amounts, varying from 100 to 30 per cent. of the amount of their bonds, and the stockholders were to receive 16 per cent. of the par value of their stock, amounting to $552.400. A committee was appointed to arrange the details of the sale, and the mode of payment with the purchasing company; and the committee was instructed 'to make an arrangement with some trust company to receive the bonds and stock of the parties assenting and issue certificates therefor, setting forth what the holder thereof is entitled to receive.' In pursuance of these resolutions, a written contract was made between the Mississippi and Missouri Railroad Company and the purchasing company, which in its caption was stated to be made 'in pursuance of resolutions passed by the meeting of the bondholders and stockholders' of the former company, by which it was agreed, 1. That the Mississippi and Missouri Company 'will take the proper steps, with all possible despatch, to cause the mortgages upon its line of road,' &c., & c., 'to be foreclosed, and its entire property, real and personal, sold, so that the purchaser shall be able to transfer a perfect and unincumbered title to such incorporated company as the Chicago and Rock Island Railroad Company may designate to become the purchaser and owner thereof.' 2. That the Chicago and Rock Island Company shall cause a company to be incorporated under the general law of Iowa, which shall purchase the said property for $5,500,000; and the Mississippi and Missouri Company agree that the purchaser, at the foreclosure sale, shall sell to such company so to be incorporated, 'for the sum and upon the terms herein stated and set forth.'The committee appointed at the meeting, to carry into effect the sale of the road, made arrangements as instructed by the resolution appointing them with the Union Trust Company of New York, to act as their agent to receive from the holders of bonds and stock, assenting to the plan agreed on, their bonds and stock certificates, and to give receipts to them therefor. A written agreement was subscribed by the committee, and by each party so depositing bonds or stock, entitled, 'Agreement made between A. B., and other subscribing holders of the stock and bonds of the Mississippi and Missouri Railroad Company of the first part, and G. W. S., J. E., &c. (the committee), of the second part.' By this instrument (after reciting the action of the meeting, and the agreement of sale between the two railroad companies, 'in furtherance of' the resolutions of the meeting; and that the committee to effectuate this clearance and sale were about to foreclose the various mortgages, in order subsequently to convey a clear title to the purchaser or purchasers thereof) the subscribing bond and stock holders ratified and confirmed the authority given to the committee by the meeting, and consented to the foreclosure of mortgages, and sale of the Mississippi and Missouri Road thereunder; and to surrender their bonds and stock certificates, on signing the agreement, to the Union Trust Company, as agent of the committee, to be used in carrying out the sale and foreclosure. The committee agreed to use all diligence in foreclosing; to convey the road, after foreclosure, 'as more fully set forth in the agreement between the two companies for $5,500,000; and to distribute the same among the holders of stock and bonds, according to the following scale, viz.' (specifying the amounts to be paid on the different classes of bonds, and the 16 per cent. to the stockholders, as agreed on at the meeting), the amounts to be paid in the form in which the proceeds of sale were received, and to be either money, or bonds secured as provided in agreement of sale between the railroad companies. The trust company issued certificates to the depositors of stock, acknowledging the receipt of their old certificates of stock, and declaring them to be held subject to the agreement made by the depositors and other holders of the stock and bonds of the company, with the committee; and that the receipt now issued entitled 'the bearer' to so many dollars in the new bonds to be issued, and interest thereon at the rate of 7 per cent. per annum, from December 1st, 1865, less the excess, if any, of the cost of foreclosure, sale, and other expenses of the committee, &c.; over and above $32,164, unappropriated balance of $5,500,000, derived from the sale of said road, and any and all the rights of the said depositor, under and by virtue of the agreement aforesaid. On the back of the receipt was printed the scheme of distribution, specifying the proportion to be paid on each class of bonds and on the stock. The holders of the stock and bonds (with unimportant exceptions) became parties to this agreement by depositing their stock and bonds with the trust company, signing the agreement, and taking their receipts as above. The foreclosure was effected thus: Some holders of bonds, secured by the last mortgage, being dissatisfied with the above plan, caused a suit to foreclose that mortgage to be commenced in the Circuit Court for Iowa, in the name of the trustees of the mortgage, early in 1866. The Chicago and Rock Island Railroad Company subsequently purchased the bonds of these parties, and obtained the control of the suit, which was then turned over to the committee. Under their direction, cross bills to foreclose the other mortgages were filed, and a final decree of foreclosure of all the mortgages and for a sale of the road was had. A sale under this decree took place soon after, and the road was bid off by a new corporation, which had been organized under the Iowa law, for $2,200,000, which sale was afterwards confirmed, and a deed made in pursuance of it. The new company after the sale was consolidated with the Chicago and Rock Island Company, the consolidated company assuming the name of 'The Chicago, Rock Island and Pacific Railroad Company.' The $5,500,000 of bonds, agreed to be given for the property of the Mississippi and Missouri Company, were distributed as agreed on, except that portion thereof which was to have been divided among the stockholders. In regard to that, new claimants now appeared. These were, Howard, Weber, and numerous other persons, who had obtained judgments against the Mississippi and Missouri Railroad Company, on certain bonds of the cities of Davenport, Muscatine, &c., guarantied by the railroad company, but making no part of the bonds already mentioned, as executed by the Mississippi and Missouri Company, nor secured in any way by the mortgages foreclosed, nor provided for in the transactions above set forth. These creditors, on whose judgments executions had been issued and returned nulla bona, now filed a bill in the court below, to obtain satisfaction of their claims out of the fund of 16 per cent. allotted to the stockholders; making the committee who negotiated matters, all three railroads, and the city of Davenport (against which also they had obtained judgment) defendants. Answers were filed by the members of the committee, and by the Chicago, Rock Island and Pacific Railroad Company. The decree made in the case declared the complainants entitled to the fund, as creditors of the Mississippi and Missouri Railroad Company, directed its payment by the Chicago, Rock Island and Pacific Railroad Company to a receiver, its conversion by him into money, and distribution pro rata among the different creditors; providing also for subrogating the defendants to the rights and remedies of the plaintiffs, against the municipalities issuing the bonds, so far as they were paid out of the fund in controversy. From this decree the committee, and the Chicago, Rock Island and Pacific Railroad Company appealed; and this appeal constituted the present case: the principal question being, whether the court below, in allowing the creditors unprotected by mortgage to take away the 16 per cent. which had been allowed to the stockholders, had decreed rightly. The Mississippi and Missouri Railroad Company did not appeal.

The opinion of the court was delivered by: Mr. Justice Clifford delivered the opinion of the court.

Messrs. Emmot, Cook, and Drury, for the appellants:

1. We submit as a preliminary point that the guaranty made by the Mississippi and Missouri Railroad Company, of the Devenport city bonds, was beyond the power of the corporation, and void. A railroad corporation can no more guaranty the payment of a bond issued by a town or a county, than it can the payment of a similar obligation made by an individual, to enable either to raise money to pay their subscriptions to its stock.*fn1

2. Passing to the main matter. The decree below assumed that the 16 per cent. was a dividend of capital on the dissolution of the railroad company to its stockholders, something saved from the bondholders for the company, its property, therefore; and assuming this, it would argue, and argue rightly enough, that the stockholders were entitled to nothing till all creditors were paid. But the assumption made is a false one. This company was hopelessly bankrupt. Its bonded debt was about seven millions, while the proceeds of the sale amounted to but five and a half millions, even this sum being more than it was worth; the real price was, of course, below $2,200,000, that being as much as the road actually brought at a fair public sale. This fact makes it clear that the bound debt of the company completely exhausted its property, and left nothing for general creditors and stockholders. The property of every corporation is a trust fund for payment of the debts of the company, but a fund for their payment in the order in which they are due. This fund was held in trust, not for creditors generally, but for the bond creditors primarily. It was theirs; and as the bond debts far exceeded the fund, it was theirs only. The stockholders were entitled to nothing as a matter of right.

How, then, do they get it? The explanation is obvious. From the fund going to the bondholders, they agree to give to the stockholders 16 per cent. Whatever form, show, or courtesy toward the stockholders (whom it was desired to conciliate, and to treat as if they had some rights of value, though they had really none) the thing had, such was the real operation. No other operation which should have the same effect was possible. Now in this view, a true one, what legal claim have these complainants, creditors of one sort though they be, to this fund; a fund which is really but a surrender by the bondholders of their property to the stockholders? What have the complainants lost by this arrangement? Nothing. If the 16 per cent. had not been given to the stockholders, it would have been retained by the bondholders, and then, certainly, the complainants could not contend that they would be entitled to it.

The argument will be that this was a contract between the bondholders, stockholders, and the railroad company, to divide the proceeds in a certain way, and that the railroad company should sell the road, and should procure a foreclosure of the mortgages.

Any agreement, however, by which the railroad company bound itself to have the mortgages foreclosed and the property sold, so that the purchaser might transfer a perfect title to any company whom the Chicago and Rock Island Road might designate, was, independently of the bond creditors, impossible. How could the railroad company or the stockholders procure a foreclosure of its mortgages? They had no control of them. Suppose that the bondholders had refused to foreclose the mortgages, how could the railroad company or any one else procure the title under the foreclosure so as to transfer a perfect title to any designated person? There would have been no agreement of any value then by the company, even if the company agreed at all.

But the meeting where all was done that was done in this matter was a meeting of the bondholders and stockholders only. The railroad company as a corporation had nothing to do with it. The bondholders and stockholders acted, each man for himself. The question was: 'We being all interested in an insolvent corporation, what can we best do to promote our common interest?' The bondholders say to the stockholders, 'We wish to sell. Confessedly the road will not bring anything like the amount of our mortgages. You have no real interest in the thing under any circumstances. But do not interpose captions and unjust objections. Let us have the money confessedly due to us, and ours, and we will give you a small part of it.' Is there anything unfair in that?

We suppose that no question will be made but that, in the first instance, and aside from any agreement, the bondholders were entitled to every dollar of this money. The road was mortgaged for near three times its value, and the equity of redemption was supremely worthless. If, then, these stockholders have got anything, it must be because the bondholders have surrendered a part of their fund to them. If the fund belonged to the bondholders, they had a right so to surrender a part or the whole of it. And if the bondholders did so surrender their own property to the stockholders, it became the private property of these last; a gift, or, if you please, a transfer for consideration from the bondholders, whose it had before exclusively been in absolute property. What right have these complainants to such property in the hands of the stockholders?

If the road had been worth anything above the mortgage they would have some case. But it is a datum et concessum of this controversy that the road was worth very far less than the mortgage debts upon it, and that these were increasing, while the road of necessity was growing less valuable. In one sense the mortgagees held but liens on the road, but in fact they were the owners; and so, in strict view, they were in form, a mortgage being a conveyance in fee subject to defeasance by redemption; a right that here it was absolutely certain neither would or could ever be exercised.

Some additional points apart from the main one deserve to be suggested, as that––

3. The corporation could not sell its road, and did not undertake to sell it. It could not, because the directors of the company were authorized to sell only provided that, 1. Its debts were first paid. 2. That two-thirds of its stockholders assented to such sale. Now the agreement between the railroad companies was not an agreement for any such sale, and did not satisfy these conditions.

4. There is a defect of parties. Here is a fund amounting to over half a million of dollars, claimed by the stockholders and sought to be recovered by the general creditors of the railroad company, and yet, not a single one of the stockholders is made a party. Their right to this fund is to be determined without allowing them a hearing, or a day in court.

5. The certificates issued by the Union Trust Company were payable to bearer, and therefore negotiable. They have doubtless been sold in the market as other certificates of stock, and are now in the hands of persons other than the stockholders not parties to this suit. If payment of the 16 per cent. is arrested and diverted to the payment of the debts of the railroad company, these innocent third parties will be sufferers. This proceeding thus partakes of the character of a garnishment at law. The trustees are called on to pay these bonds to the creditors of the defendant. Their answer is: 'Our liability is on negotiable paper, and we can't say that we are indebted to the defendant.'

6. The complainants have a remedy at law. Numerous decisions recently made in this court, and especially the late one in Riggs v. Johnson County,*fn2 show that vigorous measures have been taken against these defaulting cities and counties to enforce payment of these judgments. These measures are about to be crowned with success. Writs of mandamus against several cities and counties are now in the hands of the officers of the law. Let them proceed to collect their money. These are the parties who ought to be made to pay, and let the stockholders enjoy the small amount saved by them from a wreck.

Messrs. Grant and Rogers, contra:

1. As to the guaranty and its effect. We doubt not that the road which had, confessedly, power to borrow by executing bonds as a principal, had power to borrow by guaranty as well. But however this may be, as the Mississippi and Missouri Railroad Company, the guarantor, though made a party defendant, made no defence in the court below, and does not appeal, the other defendants are thereby concluded from controverting the status of the complainants as creditors of the railroad company.*fn3

2. Passing to the principal point. The appellants deny our right to the fund in controversy, on the ground that it belonged absolutely to the mortgage bondholders of the railroad company, who have seen fit, as a matter of favor, to surrender it to the stockholders.

Now, the fund in question is a part of the purchase-money agreed to be paid for the road and other property of the Mississippi and Missouri Company, on a voluntary private contract of sale of it to another company, to which contract the two companies and the bondholders and stockholders of the Mississippi and Missouri Company were all alike parties.

The foreclosure and sale thereunder were simply the form of conveyance, concerted and agreed on by the parties, and effected in pursuance and execution of the contract. They bear the same relation to the real transaction, which the forms of a fine, or common recovery (when those ancient modes of conveyance were in use), bore to the real contract in pursuance of which they were gone through with. Those old proceedings wore, on their face, all the outward insignia of a suit at law. There was a plaintiff and a defendant, formal pleadings, and a judgment entered of record. But the whole thing was a form, intended to carry into effect a previous private agreement, and was for centuries before it went out of use, regarded as a mere mode of conveyance, one of the common assurances of the realm, and so treated by legal writers. We read, in connection with the subject, of previous or concurrently executed deeds, in which the one or the other party covenants to levy a fine or suffer a common recovery of the property to be conveyed, and of deeds to declare or lead the uses of such fine or recovery, when levied or suffered; in which deeds, of course, the substance of the whole transaction was to be found. These instruments have their counterpart in the case now before the court. The contract between the two railroad companies, by which the Mississippi and Missouri Company agrees to 'cause the mortgages on ...

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