Drury v. Cross

APPEAL from the Circuit Court for Wisconsin.

The case was this: Bailey & Co., of Liverpool, England, held notes against the Milwaukee and Superior Railroad Company, indorsed by four of its directors, for about $21,000 (the price of iron furnished to lay the road), and as collateral security for payment, $42,000 in mortgage bonds of the road. Two hundred and eighty thousand dollars in similar bonds, but which had never been issued, were sealed up and deposited with M. K. Jesup & Co., not to be issued until the debt to Bailey & Co. was paid, and twenty-seven miles of the road were built. The company was managed by a board of seven directors; of whom four made a quorum.

The company having made about five miles of the road, became thoroughly insolvent, and abandoned their enterprise. Bailey & Co. being unpaid, and not being willing to trust to and proceed on their mortgage, brought actions against the four directors on their indorsement. These, desirous to throw the debt on the company, where it belonged, procured, at their own expense and risk, a suit to be commenced to foreclose the mortgage, so that they could make their debt out of the collaterals in their hands. In this suit certain bonds issued to the city of Milwaukee, and the $42,000 of bonds held by Bailey & Co., were spoken of; but no mention was made of the $280,000 of bonds deposited with Jesup & Co., and no relief asked in relation to them. On the 19th of March, 1859, the bill was taken as confessed, decree rendered, and the case referred to the master to compute and report the amount that was due.

Prior to the decree, in consequence of negotiations between the directors and Cross, Luddington & Scott (Cross & Co.), an arrangement was made by which these persons were to purchase the claim of Bailey, and protect the directors from their indorsement. The directors, on their part, were to aid Cross & Co. to acquire the entire property of the road.

In furtherance of this plan, the $280,000 of bonds in the hands of Jesup & Co. were delivered, by resolution of the board of directors, to Bailey & Co., as additional security for their claim. Bailey & Co. did not ask for further security, and refused, at first, to receive these bonds, and, in fact, did not receive them until they had sold their claim, with their collaterals, to Cross & Co. This was after the decree in the foreclosure suit. Cross & Co. having thus got possession of $322,000 in bonds, transferred by Bailey & Co., as collaterals, in order, as they said, to become the absolute owners of them, sold them, with consent of the railroad corporation, at the Exchange in Milwaukee, on five days' notice; bought them for a small sum of money; produced them before the master, who allowed them as a lien on the road, and the final decree in the foreclosure suit was rendered upon the said $322,000 bonds, and no others.

The sum paid by Cross & Co. to Bailey & Co., for all the judgments obtained, was $13,380.20.

Under the decree of foreclosure, the entire railroad, its franchises, rolling stock (two locomotives and tenders, with ten platform cars) and fixtures, were sold, in August, 1859, to Cross & Co., for $20,100. The iron tracks, which were now torn up, some evidence showed had been sold for $22,500. The locomotives (little used) had cost $18,000; the cars about $5000. The company, it was said, had paid between $15,000 and $20,000 for their right of way. There were also railroad chairs, spikes, ties, some fences, &c.; the value not being exactly shown.

In this state of things, Drury & Page, having obtained judgment for $21,634 against the railroad company for locomotives sold to it, filed a bill in chancery in the court below against the company, Cross and his co-purchasers, alleging that the sale was fraudulent, and seeking to reach the franchises and property of the company sold to Cross & Co. under the decree of foreclosure. The court below dismissed the bill as to Cross and his co-purchasers; and from this decree of dismissal the present appeal came.

Mr. M. H. Carpenter, for the appellants, contended, that it was plain that the directors had agreed to sacrifice, and did sacrifice, the entire property of the company, which it was their duty as trustees to protect, to secure the personal advantage of discharge from their indorsements. That the case was the same in principle as James v. Railroad Company, in which the court, setting aside a sale, animadverted with severity on the conduct of the parties concerned, and said that the notice of sale 'was calculated to destroy all competition among the bidders, and, indeed, to exclude from the purchase every one except those engaged in the perpetration of the fraud.' Upon this assumption the counsel argued that Cross and his co-purchasers should be charged with the full value of the property they received, and converted to their own use, fixed by him on the evidence (not very exact), at

$66,100.00

Less what they paid,............. 13,380.20

$52,719.80

Mr. Palmer, contra, argued that the complainants had not acquired any lien upon the property of the railroad company, or upon the bonds deposited with Jesup & Co., and that by making the transfer to Bailey & Co. of the $280,000 bonds which had been deposited with Jesup & Co., the directors had only given a preference to a meritorious creditor; a preference which it had been repeatedly determined by this court was lawful.