Kent v. Lake Superior Ship Canal Railway Iron Company/Opinion of the Court

By this bill plaintiff, as succeeding to the rights of Wells, seeks relief in respect of so much of the decree of the circuit court of the United States for the eastern district of Michigan of February 12, 1877, as adjudged that the release by Birdseye was invalid, and the receiver's certificates a prior lien.

It appears that the canal company defaulted in the payment of interest due upon its several issues of bonds; that bills were filed to foreclose the trust-deeds securing them; that receiver's certificates were issued by order of court; that a decree was entered in all the causes heard as one cause; and that the property was advertised and sold under the decree.

The right to a decree and sale cannot be controverted, and at the sale any or all the bondholders had the right to buy. If there was error in the decree, or in the sale, the remedy of plaintiff was in the court which rendered the decree and confirmed the sale. Blossom v. Railroad Co., 1 Wall. 655; Christmas v. Russell, 5 Wall. 290, 305; Michaels v. Post, 21 Wall. 398, 427; Robinson v. Railway Co., 135 U.S. 522, 531, 10 Sup. Ct. Rep. 907. Application was made to that court, and was denied, but no further step was taken.

Suit to foreclose was commenced by Sutherland, May 25, 1872, the trustees in the other trust-deed, Birdseye, Frost, and the trust company, being parties defendant. The receiver was appointed in this suit June 13, 1872, and on June 17th the order was entered for the issue of the certificates for the purpose of completing the construction of the canal. This order declared 'that the indebtedness created by said receiver's certificates shall constitute a first and paramount lien over all other liens and incumbrances upon the ship canal, real and personal property, and franchises of said defendant corporation, and on all the future earnings and income thereof, and shall be entitled to priority and payment over all other claims out of said real and personal property, earnings, and income, etc.; and in case said canal, real and personal estate, and franchises, or any part thereof, shall be sold under and in pursuance of any judicial decree, said certificates of indebtedness remaining unpaid shall first be paid out of the proceeds of sale,' etc.

'Under the provisions of the acts of congress granting the lands covered by the mortgages,' said Mr. Justice STRONG, Speaking for the court in Jerome v. McCarter, 94 U.S. 734, 738, 'the lands reverted to the United States, unless the ship canal should be finished within a fixed period, and that period was passing away when the order was granted to the receiver to raise money for completing the canal by the issue of certificates secured by his mortgage. The canal was unfinished, and there were in the receiver's hands no funds to finish it. Hence there was a necessity for making the order which the court made,-a necessity attending the administration of the trust the court had undertaken. The order was necessary alike for the lien creditors and for the mortgagors. Whether the action of the court could make the receiver's mortgage superior in right to the mortgages which existed when it was made it is needless to inquire. None of the creditors secured by those other mortgages objected to the order when it was made, though they were all then in court. None of them object to its lien or its priority now.'

Johnston & Co. and Ayer & Co. purchased the certificates thus issued for the construction of the canal.

On July 5, 1872, Birdseye, trustee, filed a bill to foreclose his trust-deed. August 11, 1873, Birdseye executed the release to Wells. Neither Johnston & Co. nor Ayer & Co. nor the receiver were in any way parties or assented to this release. It was given a year after the order for the issue of the certificates was entered, as we have said, in a suit to which Birdseye, trustee, and Frost, trustee, (succeeded by McCarter,) were parties.

In Richter v. Jerome, 123 U. § 233, 246, 8 Sup. Ct. Rep. 106, a bill was filed by Richter as the holder of 230 of the bonds issued under the fourth trust-deed, and it was charged that other bondholders had conspired to obtain the mortgaged premises, and that the solicitor who foreclosed was their attorney. This court said, Mr. Chief Justice WAITE delivering the opinion: 'All the rights the bondholders have or ever had in the mortgage, legal or equitable, they got through the trust company, to which the conveyance was made for their security. As bondholders claiming under the mortgage, they can have no interest in the security, except that which the trustee holds and represents. If the trustee acts in good faith, whatever binds it in any legal proceedings it begins and carries on to enforce the trust, to which they are not actual parties, binds them. Kerrison v. Stewart, 93 U.S. 155, 160; Corcoran v. Canal Co., 94 U.S. 741, 745; Shaw v. Railroad Co., 100 U.S. 605, 611. Whatever forecloses the trustee, in the absence of fraud or bad faith, forecloses them.'

The paramount lien of the certificates was recognized by Birdseye in the bill exhibited by him, and his action, so far as appears, was within the discretion reposed in him by his deed.

August 27, 1872, the company was adjudicated a bankrupt, and in September, 1873, its assignees filed their bill, setting up the facts relating to the Birdseye release, and praying to have it declared valid, to which Wells appeared, and stipulated that the bill might be taken pro confesso against him; but Birdseye, trustee, McCarter, trustee, the Union Trust Company, trustee, Tappan, trustee, for the certificate holders, and others, were parties, and Wells could not cut off their rights or create rights in his own favor by admission. The decree complained of covered this suit as well as the others, and the question of the operation and effect of the release was raised upon the pleadings.

Upon what ground can another court rescind the decree or set aside the sale because either is erroneous?

Wells clearly could not insist upon matters which he had or could have insisted upon prior to the decree or upon the motion to confirm the sale. If the confirmation were without notice, he should have applied to the court which entered the order.

Neither Birdseye nor McCarter, the trustees under whose deeds the bonds were issued which Wells held, are charged with fraud or any conduct in bad faith, and neither is a party to this bill.

The matters alleged to be fraudulent are the steps taken to have the property foreclosed and the purchase thereon ensuing, and what is charged is that the holders of large amounts of the bonds and of all the receiver's certificates combined to bring about the foreclosure and to make the purchase.

Epithets do not make out fraud, and the averments are substantially of legal conclusions not admitted by the demurrers, (Fogg v. Blair, 139 U.S. 118, 127, 11 Sup. Ct. Rep. 476,) and in themselves insufficient as stating a case of fraud practiced directly upon Wells, and preventing him from seeking redress in the premises. The case attempted to be made was not a new one arising upon new facts, but one involving matters which the court was, or might have been, called upon to determine. And if, as asserted by his counsel, appellant's 'remedy grows out of the fraud, his right arises out of the errors committed to his prejudice,' then the remedy ought to have been sought in the court which rendered the decree and confirmed the sale. This, if there were error in respect of the certificates and the release, (which forms the basis of plaintiff's claim;) but if none were committed, then relief through the enforcement of a lien upon 8,000 acres, and adjudging the same or the profits therefrom to be held in trust for Wells, or through a money decree in lieu thereof, could not be awarded.

Nor do we think that plaintiff has any better standing by reason of the allegation that the circuit court for the eastern district of Michigan had no jurisdiction of the Sutherland suit, because Sutherland was not a citizen of New Jersey, but was a citizen of the same state as Birdseye. This defense was interposed by Birdseye in his answer, and was determined against him. That determination cannot be questioned here. Moreover, to the consolidated suit Wells was himself a party, as were the trustees named in the various trustdeeds, and all were bound by the decree and the subsequent proceedings thereunder.

Suggestion is made in argument that plaintiff was entitled under the prayer for general relief to invoke the aid of the court to let him in to share in the benefits of defendants' purchase, but it is sufficient to say that such relief would not be conformable to the case made by the bill.

The demurrers were properly sustained, and the decree is affirmed.