Galveston Railroad v. Cowdrey

APPEALS from decrees in the Circuit Court for the Eastern District of Texas on bill and cross-bill.

The bill was filed by Cowdrey and others, citizens of New York, against the Galveston, Houston, and Henderson Railroad Company; another company of the same name (the 'successor company' of the one just mentioned); the Galveston and Houston Junction Railroad Company; one Nichols, and fourteen other persons, all citizens of Texas (except one, who was a citizen of Massachusetts), for the foreclosure and sale of the railroad of the said Galveston, Houston, and Henderson company, with all its appurtenances, and all the property of said company, to pay in due order the several outstanding bonds issued under certain mortgages which it had made, to wit, its first, second, and third mortgages, and to call the defendants to account for the tolls, income, and profits of the said railroad and property whilst in their possession. The bill was filed on the 12th of February, 1867, on behalf, not only of the complainants, who alleged that they were large holders of the said bonds, but of all other holders thereof, who might come in and contribute to the costs and expenses of the suit.

It appeared from the pleadings and proofs that the Galveston, Houston, and Henderson Railroad Company was chartered by an act of the legislature of Texas, on the 7th of February, 1853, for the purpose of constructing and operating a railway from the city of Galveston to the city of Houston, and thence to Henderson, with such branches as they might deem expedient; with power, amongst other things, to take lands by condemnation, and to acquire, by purchase, donation, or in payment of stock, such real estate as the directors should think desirable to aid in the construction or maintenance of said road; and to alienate or mortgage the same for the constructing or maintaining said road; such alienation or mortgage to be signed in the name of the president and countersigned by the treasurer; also, with power to borrow money on their bonds or notes, at such rates as the directors should deem expedient; and, generally, to do and perform all such acts as might be necessary and proper for, or incident to, the fulfilment of their obligations and for the maintenance of their rights. And it was expressly declared by the charter that all conveyances and contracts executed in writing and signed by the president and countersigned by the treasurer, or other officer duly appointed by the directors under the seal of the company and in pursuance of a vote of the directors, should be valid and binding. By virtue of supplements to the charter, and by general laws of the State of Texas, the company became entitled to grants of the public lands of the State, in virtue of which they subsequently acquired land certificates for 512,000 acres of land.

The company was duly organized under its charter and began operations for constructing its road.

On the 1st of December, 1853, the company made an issue of bonds-its first issue-consisting of fifteen hundred bonds, each for 100 sterling, payable in London, at the expiration of ten years, with interest at the rate of 6 per cent. per annum. To secure these bonds the company executed a deed of trust, or mortgage, to trustees, upon its railroad, constructed and to be constructed, from Galveston to Houston, and its privileges, rights, and real estate, owned, or that should thereafter be owned, by the company, in connection with its said railroad; and all tolls, issues, and profits, whenever default should be made in paying the bonds, and all the franchises of the company, and all depots, stations, and buildings, and lands, occupied or to be occupied therefor. The terms of the deed were that it should be held in trust for the bondholders; that so long as no default was made by the company in payment of principal or interest, the property should remain in the company's possession; but if it should be in default for the space of three months in payment of either, and on request in writing by any holder of the bonds, the trustees might take actual possession of the railroad and all the property mortgaged, take the receipts thereof, and, on due notice, sell the same to pay the principal and interest due, after paying expenses of management and all costs and charges incident to the trust.

On the 1st of June, 1855, a second issue of bonds was made by the company to the amount of $750,000, payable in ten years, with interest at 10 per cent. per annum, convertible, after three years, into stock of the company, and secured by a second mortgage of similar import to the first, except that it conveyed, 'in addition to what was conveyed by the first mortgage, all the lands which shall or may belong to said company by virtue of any act of the legislature of the State of Texas in connection with said road from Galveston to Houston.' This mortgage contained a declaration that it was 'to take the place of' the former one, which was for an equivalent sum in sterling money, and it had a clause thus:

'And the issue of the bonds referred to in this instrument can take place only by the cancelling of a like amount of the said 6 per cent. sterling bonds, so that this instrument is and shall be a first lien upon all the property donated thereon to the amount of bonds issued.'

On the 8th of October, 1857, a third issue of bonds was made to the amount of $2,625,000, in $100 bonds, payable in 1879, with interest at 8 per cent. per annum; and these bonds were secured by a third mortgage to the same trustees as the last, on the same property as the second mortgage, except that it purports to cover the railroad from Galveston for the full distance of 75 miles. This mortgage declared that it was executed in part 'to take the place of' the preceding one; particulars being stated.

The trustees named in the first mortgage were the Honorable William Kent, of New York, and certain London bankers. These last, however, refused to accept the trust. The trustees under the two later mortgages were Mr. Kent of New York, already named, and Mr. C. B. Haddock, of that city or State. Both these trustees were dead at the time the bill was filed, and there were then no trustees acting under the mortgages.

All the mortgages were executed under the corporate seal, were signed by the president, and countersigned by the treasurer. They did not declare in what place they were executed, but the execution of them was proved in the city of New York, before a commissioner for Texas, it being stated in the affidavit of probate that the president and treasurer resided in that city. The evidence tended also to show that the meetings of the directors, by which the mortgages were authorized to be executed, were held in New York; where the company had an office where its fiscal arrangements chiefly originated and were accomplished.

The bill stated that these bonds were issued to raise money to construct, equip, and supply the railroad; and that the company, by the aid thereof, did complete its road from Galveston to Houston, a distance of 52 miles. It further stated that the company, after the issue thereof, took up and cancelled about 100,000 of the first issue, leaving outstanding only about 50,000, of which the complainants held 32,600, with a large amount of coupons thereon for unpaid interest; that only about $700,000 of the second issue were outstanding, besides the coupons thereon, of which the complainants held $250,000, besides a large amount of unpaid coupons; and that about $2,000,000 of the third issue were outstanding, of which the complainants held a large amount. The bill averred the entire insolvency of the original company.

Upon the filing of the bill and reading divers affidavits, the court below appointed a receiver, who, and a successor since appointed, during the pendency of the suit, carried on the operations of the road and received all the emoluments thereof for the benefit of the parties entitled thereto.

Answers and replications being filed, testimony was taken.

During the examination the complainants produced and scheduled the bonds of the several classes held by them, to the amounts nearly corresponding with those above alleged; the amount of the third issue so produced being $21,800, besides coupons. They were examined as to the manner in which they obtained possession thereof, and proved that they had purchased them of various parties and at various prices, from 30 to 70 per cent. on the par value.

It further appeared that on the 21st of May, 1859, the company executed to one Tucker, as trustee for Robert Pulsford, a fourth deed of trust to secure the payment of 9600 sterling, previously lent to the company by Pulsford on a number of bonds of the third issue, together with other securities, delivered to him to hold as collateral security, and  10,000 advanced at the time of the execution of the deed. This deed covered the same property which was covered by the other trust deeds. It was besides agreed, in a separate article, that Pulsford should have a special lien on a lot of railroad iron which was pledged to him, and which was to be used for completing the track of the railroad between Galveston City and Virginia Point, a distance of about five miles; indicated on the diagram inserted here by a heavier line than the rest of the road.

The bill did not advert to this deed; but Pulsford and his trustee, on their petition for that purpose, were permitted to intervene as defendants, and filed an answer and a cross-bill, claiming a first lien on the portion of road laid with the aforesaid rails. The ground on which Pulsford claimed priority on that portion of the road which was laid with his iron, was that when the mortgages of the complainants were executed that part of the road was not in existence and could not have been conveyed by them, and could only be embraced in them on a principle of equitable estoppel, which was met and paralyzed when it came in conflict with a superior equity; secondly, because the company having become bankrupt and unable to finish the road, the work previously done had become worthless, and the pledge given by the mortgage was without value; and because his iron, applied to the road, saved it, and rendered it capable of being used, which it would not have been otherwise; hence, on the principle adopted by the civil and maritime laws of awarding priority to the last creditor who furnished necessary repairs and supplies to a vessel, that he was entitled to priority in this case. It appeared from vouchers produced on the examination that over $30,000 had been paid to Pulsford on his claim.

It further appeared that on the 6th of March, 1860, the road-bed, track, franchises, chartered rights and privileges of the Galveston, Houston, and Henderson Railroad Company, and the rolling stock thereof, consisting of two locomotives, fourteen platform cars, one passenger car, &c., were sold by the sheriff of Galveston County, under executions issued on a large number of judgments which had been recovered against the company, amounting in all to nearly $120,000. The purchaser was a certain Terry, and the property was bid off for $28,000. Terry and his associates, immediately after the purchase, organized themselves into a new company, and asserting themselves, by virtue of the sheriff's sale and the laws of Texas, to be invested with all the chartered rights and privileges, including the corporate franchises of the Galveston, Houston, and Henderson Railroad Company, organized themselves as such; and they and their successors constituted the present company acting under that name, 'the successor company,' already mentioned. This new organization took possession of the railroad and all its works and property and began to operate it. The last directors of the old company were interested in this purchase and continued in the new company.

It further appeared that Terry and his associates formed themselves into a voluntary company called the Real and Personal Estate Association, for the purpose of raising money to pay some of the pressing claims against the railroad company, which were regarded as assumed by the new company, and for the further purpose of procuring real estate for depots, and rolling stock machinery, and tools needed for the use of the railroad; that in this way they laid out a large sum of money, over $150,000, and leased the property thus acquired to the new railroad company. The rents reserved were stated in the answer of the defendants.

It further appeared that, in order to build a short railroad at the city of Houston, to connect the railroad of the defendants with the Texas Central Railroad, the same persons procured a charter from the legislature, on the 8th of April, 1861, by which they were incorporated as the Galveston and Houston Junction Railroad Company; and were, as such, authorized to construct and operate a railroad to connect the Galveston, Houston, and Henderson Railroad with the Texas Central Railroad. The road was constructed accord-

ingly, and was less than two miles in length, with a bridge over the Buffalo Bayou. (See the diagram above.) The cost of the road was stated to have been about $51,000. The company also purchased $12,000 worth of cars from a yet different railroad company,-the Houston, Trinity, and Tyler Company. These cars were leased to the Galveston, Houston, and Henderson Company at $600 per month.

About the 1st of May, 1865, the Real and Personal Estate Association sold and transferred all its rolling stock, tools, and machinery to the Galveston and Houston Junction Railroad. So that, when the bill in this case was filed, the latter company asserted tiself to be owner of all the rolling stock, tools, and machinery in use on the Galveston road, except the old stock that was in existence in March, 1860; the whole being rented to the Galveston Company for rents, which were charged by the complainants to be exorbitant, and intended to absorb all the earnings of the Galveston Railroad. The evidence showed clearly enough that, by means of the rents paid by the Galveston Company to the Real Estate Association for real estate, depot grounds, &c., and for rolling stock, tools, and machinery, and of similar rents paid to the Junction Company, and of the proportion of the gross receipts retained by said company, the Galveston Company received but a very small portion of the earnings of the works for its share.

It was admitted by the defendants that the stockholders of the new Galveston Railroad Company, the stockholders of the Junction Railroad Company, and the members of the Real and Personal Estate Association were identically the same persons, and that their several interests were proportionally the same in each concern. It was evident, therefore, that the bargains made with the Galveston Railroad Company were bargains made with themselves, and were what they were pleased to make them; and the design manifestly was to make them on such terms that the Galveston Railroad Company should get but a small share of the proceeds. The complainants charged that all this was a fraud; that the tolls and income of the railroad were mortgaged to them, as well as the road-bed itself, and that the individual defendants were bound to account for them.

It was admitted by the defendants that these 'outside companies' were formed because they apprehended difficulty from the creditors of the old company. They did not deem it safe to purchase new property, either real estate or rolling stock, or to construct the connecting road at Houston in the name of the Galveston Railroad Company. The mortgages held by the trustees of the complainants and other claims were clouds hanging over the title of the railroad, and, therefore, they were unwilling to invest their money in the company's name or to invest it with the title to any new property acquired. They urged these circumstances in justification of their mode of proceeding, though they insisted that the rents and the division of the receipts were fair and right.

Among the defences set up, either generally or specifically, by the answer or course of the defendant's testimony, were:

1st. That the mortgages sued on were created without authority by the charter of the railroad company, or by the laws of Texas, and were illegal and void; the argument here being that though the company might have power, under the language of its charter, to mortgage such 'outside' real estate as it was authorized to acquire to subserve to the main design of building its road, yet that there was obviously no express authority, nor any authority by any implication of the particular language in the corporation to mortgage its right of way, track, and franchises; and that without some such power a private railroad corporation could not mortgage these; a point, it was said, determined by numerous State courts, and approved of in this.

2d. That even if such power existed, it could only be exercised through meetings of the directors in proper places, and that all the meetings of this company, including those which authorized these mortgages, were held in the city of New York, where the company was organized; where its office records and seals were kept; where the president and treasurer resided; where probate of the mortgages to enable them to be recorded in Texas was made; all outside of the limits of Texas. The argument here being that a corporation must dwell in the place of its creation, and cannot migrate to another sovereignty; that legislative acts ought to receive a reasonable interpretation, and that it could not be presumed that a legislature authorized an act beyond the reach of its proper jurisdiction; the case of Hiles v. Parrish, in the 14th volume of the New Jersey Chancery Reports, p. 383, with other cases, being here relied on. The case specially named says:

'It is a rule of law that a private corporation, whose charter has been granted by one State cannot hold meetings and pass votes in another State. It exists by force of the law that created it, and where that law ceases to exist and is not obligatory the corporation can have no existence. It appears that the resolutions of the board of directors which authorized the transfer of the stock in question were passed at a meeting held, not in this State, but in the city of Philadelphia. They are therefore void.'

3d. That the bonds sued on had not issued upon a consideration which brought them within the security of the trust-deeds; and that whatever their effect, as bonds or debts of the old company, they were not covered by the lien of those deeds; evidence on this point (not, however, clear) being given, tending (or so alleged by the defendants) to show that the bonds under the second mortgage had been issued, not to take up those under the first, but as a new and independent way of borrowing money; and the argument upon an assumption of that fact, as proved, being, that if a corporation executed a mortgage on its property, on its face, to secure bonds to be issued (only by the cancelling of a like amount of previous bonds), and people bought them without seeing that such like amount had been cancelled, they could not come into equity and claim the security of the mortgage for such second bonds, though they might become bond creditors of the company.

4th. That these complainants could not maintain this bill to foreclose the three mortgages. The casual fact that each of them happened to hold bonds said to have been issued under each of the three mortgages, was not, it was argued, material. This was a suit, it was urged, by four complainants, in behalf of themselves, and all others having a common interest with them. But no one had a common interest with them who did not hold bonds issued under each of the three mortgages, and of the same proportionate amounts as the complainants; and there was no evidence, or any reason even to conjecture that any one did. There was no community of interest between those who held bonds under the several successive mortgages. Each incumbrancer under the second mortgage had a direct interest to show the first invalid, and to reduce the amount secured by it; and so with the third mortgage, in reference to the first and second. There could be no community of interest, and no right of representation, a matter which could exist only by reason of community of interest, where consecutive incumbrances are held by different persons, each of whom has rights adverse to all who precede him. In its foundation and structure, the bill was therefore inconsistent with fundamental principles which govern courts of equity, and it could not be maintained.

The Circuit Court made a decree, amounting in effect to a foreclosure of the three first mortgages, for the sum then found to be due in the aggregate, $5,263.039. The decree included 49,600, issued under the first mortgage, and 41,664 of unpaid coupons, and the whole $750,000 included in the second mortgage and unpaid coupons $675,000.

The decree contained this clause:

'As this decree cannot, on account of the reference hereinafter ordered to a master, be made final as to all matters in controversy, and as certain of the defendants have given notice of their intention to appeal from a final decree, when rendered, the court does not direct a sale of said mortgaged property, but will do so in said final decree; and this decree is without prejudice to the right of the defendants, or any of them, to an appeal, with supersedeas, from this decree and all matters herein, within the time appointed by law, after the final decree which may be made in this cause.'

A reference to a special master (directed by the decree for the information of the court) was had, and documentary and other evidence collected. But there was no reference ordered in this decree for taking the proof of the various bonds that might be produced.

The evidence collected before the master was submitted to the court below, which now made a further or final decree.

By this the original decree was confirmed, so far as related to the foreclosure of all the mortgages, fixing their priorities according to date, and subjecting to their lien the whole road from Galveston to Houston, with the original rolling stock and equipments. But the decree refused any remedy by account, or an enforcement of the lien against any of the property acquired and used in connection with the road since March 6th, 1860, when, as already mentioned, the road-bed, track, franchises, chartered rights, and rolling stock of the company were sold by the sheriff.

The cross-bill of Pulsford for a superior equity was dismissed.

The decree contained this direction:

'And to ascertain more exactly such proportion, and the amount of the several series of bonds and coupons now outstanding, it is hereby ordered that all holders of such bonds or coupons claiming a participation in the distribution of the proceeds of any sale of the property claimed to be mortgaged to secure them in this cause, shall present their bonds and coupons to this court (to be deposited in some National bank to be designated on such presentation, there to remain subject to further order, and to such directions as the court may make to ascertain their genuineness and to classify them), within one year from the date of this decree. And after any such sale, as hereinbefore directed, has been duly made and confirmed, and the amount of the successful bids paid as before stated, the said marshal shall execute in due form a conveyance of the property bought to the purchaser.'

From this decree the 'successor company' appealed to this court. The complainants, Cowdrey and the other bondholders, took a cross-appeal. Pulsford also prayed an appeal.

In this court the same grounds were taken in behalf of the 'successor company' as in the court below, and were urged at length. It was urged additionally that the original decree-the decree of foreclosure-was erroneous, because there had been no reference to a master to ascertain what parties holding bonds would come in and make themselves parties to the suit; and that only the bonds held by parties so coming in, and those held by the complainants in the bill could be included in the decree of foreclosure nisi. All others were excluded from the benefit of the decree. And though the complainants in such a bill might have made proof at the hearing of some bonds, so as to entitle them, in the opinion of the court, to a decretal order of reference, yet that it was settled on sound reasons and by the highest authority, that the complainants themselves in such a bill, must go before the master and prove their claims.

And it was said that it would be difficult to find a case which demanded more imperatively than did this one the application of this rule of procedure; for that plainly many of the bonds-as appeared by the prices paid for them-had been bought at prices from 30 to 70 per cent. below their par, with notice of the way in which they had been issued; that is to say, with notice of the fact that they had been issued in violation of the provisions of the two later mortgages; a matter, however, it was urged, not regarded in the decree.

The claim of Pulsford for a superior equity was pressed anew with much learning of the Roman law and continental jurists, as well as by some authorities in other courts, including Collins v. The Central Bank, in Georgia.

For Cowdrey and the other bondholders it was argued against the view of the court below (that the defendants being in the position of mortgagors of real estate, were not to be held accountable for the income of the road), that while it was a general rule that the mortgagor, while in possession, with the consent of the mortgagee, was not liable for rents, the rule did not apply here; for here the old company had made a specific mortgage of 'the tolls, incomes, issues, and profits of said railroad, whenever the company should make default in making payment,' and after default in interest for three months, had authorized the trustees to take possession, receive the rents, and apply them in payment of the interest; that it was the duty of the agents of the mortgagors to have applied the income in payment of the interest; that they had not only violated this duty, but had undertaken to set up an adverse title and to defeat the mortgagors' title. And that the general rule did not apply here, for the farther reason that trustees who were authorized to give notice and take possession were dead, and that in such case the persons who intruded themselves into the dead men's estates were bound to account for the whole of the property.

Messrs. B. R. Curtis, C. B. Gooderich, and W. P. Ballinger, for the railroad company; Messrs. Albert Pick and R. W. Johnson, for Pulsford; Messrs. Grant and W. G. Hale, for Cowdrey and others.

Mr. Justice BRADLEY delivered the opinion of the court.