McKittrick v. Arkansas Central Railway Company/Opinion of the Court

, after stating the case as above reported, delivered the opinion of the court.

1. The principal question in this case is whether the acts of July 21, 1868, and April 10, 1869, taken together, created any lien upon the property of a railroad company for whose benefit state bonds were issued. That question was determined in Tompkins v. Railway Co., 125 U.S. 109, 126, 127.

[p493] After observing that if the statutes in question read in the light of the circumstances attending their passage, disclosed an intention to charge the road of any company to which bonds were issued with liability for the repayment of any loan to it, a court of equity should enforce that charge, Chief Justice Waite, delivering judgment in that case, said: "But after a careful consideration of the statutes, and construing them liberally in favor of the state, we have been unable to find that any such intention did in fact exist. There was a plain and simple way in which such a lien could be created, and that was by providing in express terms for it. That way had been adopted by the state in a statute passed March 18, 1867, and it was the way usually adopted by other states when granting similar aid to their own companies. The wide departure which Arkansas made in this statute from the accustomed form of proceeding, both at home and elsewhere, is strongly indicative of an intention to waive security any further than was embraced in the reserved power of sequestration. The constitution of the state gave authority to issue bonds in aid of such works of internal improvement, if assented to by the people. If the people gave their consent, then the bonds when issued became the debt of the state, and there was power in the general assembly, under the constitution of 1868, to levy taxes for their payment, if necessary. This disposes of the cases, and renders it unnecessary to consider any of the other questions discussed at the bar or in the briefs. In our opinion, the new companies took the roads free from incumbrance in favor of the state, and neither the state nor its bondholders are entitled to a sequestration of the income and revenue arising therefrom in their hands."

An attempt is made to distinguish this case from Tompkins v. Railway Co. upon the ground that the act of March 18, 1867, referred to in that case, and entitled, "An act loaning the faith and credit of the State in aid of the construction of railroads," was in force when the bonds here in question were issued, and that the plaintiff, and those in whose behalf he sues, could avail themselves of the lien given by that act for securing the payment of bonds issued by the [p494] State in aid of the construction of railroads. The section of the act of 1867 giving the lien referred to is in these words: " 5. That the receipt of any railroad company for the bonds loaned to it by the state shall immediately operate as a lien upon the road, its rights, franchises, and all its property of every description, real and personal; and this lien shall be a mortgage on all the property, rights, and credits of the road, and shall have priority over any and all other debts, contracts, or liabilities of said road; and said mortgage shall continue until the entire amount loaned to the said road by the state shall have been paid off." Laws of Arkansas, 1866–67, No. 166, pp. 428, 430.

The suggestion that the act of 1867 was in force after the passage of that of 1868 is based upon the twelfth section of the latter act, which provides: "At the next general election to be holden under the provisions of section three of article fifteen of the constitution of this state, the proper officers having charge of such election shall, upon a poll, as in other cases, take and receive the ballots of the electors qualified to vote for officers at such election for and against this act, in compliance with section 6 of article 10 of the constitution; such ballot to contain the words 'For Rairoads' or 'Against Railroads,' and if it appears that a majority so voting have voted 'For Railroads,' this act shall immediately become operative and have full force, and all laws heretofore passed for loaning the credit of this state in aid of railroads shall cease and be void, but if a majority shall be found to have voted 'Against Railroads,' this act shall be void and of no effect." In State v. Little Rock, Mississippi & Texas Railway, 31 Arkansas, 701, 721, it was held that the election in 1868 at which the people of Arkansas voted "For Railroads" was a nullity, having been held before the act of 1868 took effect under the constitution of Arkansas, and, consequently, any bonds based upon that election were void. The state court, in its opinion, also suggested reasons why the act of 1868 might be held void as not having been read the requisite number of times, on different days, as required by the state constitution. But it disclaimed any purpose to rest its decision [p495] upon that ground, and placed it upon the one above stated, observing that "the bonds of the State of Arkansas, issued by the governor of the State, her agent, are void, even in the hands of innocent purchasers, because the authority to contract did not exist at the time the bonds were issued."

Upon the basis of this decision of the state court it is contended that the act of 1867 was not repealed – the argument being that the laws, in force at the date of the act of 1868, authorizing the credit of the state to be loaned in aid of the construction of railroads, were to "cease and be void" only when the act of 1868 became operative and in full force, which, according to the terms of that act, could not, it is claimed, occur until a majority of the qualified electors voting should, at a valid election, have voted "For Railroads."

This argument would be entitled to consideration if the act of 1867 was in force after the adoption of the state constitution of 1868, which provided that "the credit of the state or counties shall never be loaned for any purpose without the consent of the people thereof, expressed through the ballot box." Art. 10, § 6. The state constitution of 1864, in force when the act of 1867 was passed, contained no such restriction upon legislation. As that act authorized the loaning of the credit of the state in aid of the construction of railroads, without first ascertaining by vote the will of the people upon the subject, no bonds could be issued under it, after the adoption of the constitution of 1868, without popular sanction given at a valid election. The express prohibition in that constitution against loaning the credit of the State for any purpose without the previous assent of the people, expressed at the polls, had the effect to withdraw all authority given in previous statutes to lend the credit of the State without first obtaining the consent of the people. Aspinwall v. Daviess county, 22 How. 364; Wadsworth v. Supervisors, 102 U.S. 534. In this view, it is unnecessary to consider whether the act of 1868 was void as not having been passed in conformity with the constitutional provision declaring that "every bill and joint resolution shall be read three times, on different days, in each house, before the final passage thereof, unless two-thirds of the house where the [p496] same is pending shall dispense with the rules." Const. Arkansas, 1868, Art. 5, § 21. Even if that act became a law, and if the election of 1868 was valid, still no lien was given by the act of 1868 upon the road of any company receiving bonds from the state. Such was the express decision in the Tompkins case, and we again so adjudge upon the authority of that case.

What has been said shows that the plaintiff cannot take anything on account of the act of April 10, 1869, which assumed to make provision for the payment of the interest on the bonds issued under the act of 1868, in case a company receiving bonds failed to meet such interest at maturity. That act authorized the treasurer of the state to obtain a writ of sequestration, and also the appointment of a receiver, who should take the income and revenues of the defaulting company, and all moneys arising from the operation of its road. Upon this point, it is quite sufficient to say that it was adjudged in the Tompkins case that the companies that subsequently took a road under foreclosure proceedings took it "free from incumbrance in favor of the state, and that neither the state nor its bondholders are entitled to a sequestration of the income and revenues arising therefrom in their hands."

2. Apart from any question of lien upon the road of the defendant, does the bill disclose any ground for the relief asked by the plaintiff? Undoubtedly the Arkansas Central Railway Company, to which the bonds were delivered, became liable under its guaranty, indorsed on each bond, of the payment by the state of the principal and interest as they respectively became due. But that only made each holder of bonds a general creditor of the company, without any lien for their security upon its property or revenues. The existence of this liability did not prevent the company from giving a mortgage upon its property to secure any bonds it might issue. The bill shows that the Arkansas Central Railway Company executed to the Union Trust Company in 1871 a mortgage or deed of trust, covering all of its property, to secure the payment of coupon bonds amounting to $1,200,000, and that that mortgage was foreclosed, and the property sold in 1877 in a suit brought [p497] by the mortgagee against the mortgagor. We find nothing in the bill impeaching the validity of that sale, or that would justify the court in holding that the title to the mortgaged property did not pass to the purchaser, S. H. Horner, trustee, free from any claims upon the part of the company's creditors.

It is true that the bill charges that Johnson was president of the railway company as well when the foreclosure proceedings were instituted as while they were pending, and that he "brought about" the foreclosure. By what means did he bring about such foreclosure? Upon that point the bill is silent. It is not suggested that the railway company was able to meet the interest on the bonds secured by the mortgage to the Union Trust Company, or that it was possible for Johnson, or any one else connected with the railway company, to have prevented a foreclosure and a sale of the mortgaged property. So that the charge that Johnson "brought about" the foreclosure does not necessarily impute to him any fraud of which the general creditors of the railway company could complain, or which would affect the integrity of the purchase at the sale in the foreclosure suit. If, then, the purchase by S. H. Horner, trustee, could not be impeached by the holders of state bonds, the payment of which had been guarantied by the railway company, it is of no consequence to those holders what the purchaser did with the property, or to whom he sold it. So far as the bill discloses, the purchaser took title free from any claim upon it by any creditor of the railway company.

We attach no consequence to the allegation that S. H. Horner "pretended" to have purchased the road as trustee for Johnson. If the former, in fact, purchased for Johnson, and if that circumstance could have affected the validity of Horner's purchase, as against the creditors of the railway company, the allegation upon this subject should have been more direct and positive. Besides, if the sale of the road was not "brought about" by Johnson in violation of his duty as an officer of the company, his official relations to the company prior to the foreclosure did not prevent him from bidding for the property, or from being interested in its purchase by S. H. Horner, as trustee. So far as is disclosed by the bill, the sale, under [p498] the decree in the suit brought by the Union Trust Company was fairly conducted, with full opportunity to all persons to become bidders.

Nor is the fact that Johnson was the holder of receiver's certificates, which became a charge upon the property superior to the mortgage bonds in suit, material in the present inquiry; for it does not appear that, if there had been no such certificates in existence, anything would have been left for the general creditors of the railway company after satisfying the holders of mortgage bonds. There is no suggestion in the bill that any receiver's certificates were issued that ought not to have been issued, or in respect to which the court was not fully informed. The mere fact that Johnson obtained receiver's certificates – even assuming that his ownership of them was inconsistent with the relations he held to the mortgaged property – does not affect the validity or integrity of the foreclosure proceedings and the sale of the property under the decree of the court.

Some stress is placed upon the fact that neither the State nor the holders of its bonds were parties to the suit brought by the Union Trust Company. The State could not have been made a party defendant without its consent. Besides, it had, as we have seen, no lien upon or interest in the property, and was under no liability in respect to the bonds issued under the act of 1868. Clearly, the holders of bonds were not necessary parties. They had no lien upon the property, and, at most, were only creditors of the company in virtue of its guaranty indorsed upon the bonds. The only necessary parties were the mortgagee and nortgagor companies.

In respect to the charge that Johnson and J. J. Horner fraudulently procured the issuing by the state of the bonds in question, we do not perceive how such conduct upon their part can constitute a ground for the relief asked in this case. The wrong charged was a wrong to the State of which it could have complained, if the bonds, so fraudulently procured to be issued, had become valid obligations. But, as we have seen, the bonds were invalid as against the State. The fraud alleged to have been practised in procuring the issuing [p499] of them had no connection, in law, with the mortgage executed by the railway company to the Union Trust Company, under which the property was purchased by S. H. Horner at public sale ordered by the decree of a court that had full jurisdiction of the parties and the subject-matter.

Looking at all the allegations of the bill, we are of opinion that the plaintiffs were not entitled to the relief asked.

Decree affirmed.

, not having been a member of the court when this case was argued, took no part in its decision.