New Albany v. Burke

APPEAL from the Circuit Court for the District of Indiana; the case being thus:

Burke and others, complainants in the court below, were equitable owners of a judgment recovered on the 14th day of November, 1857, in the Circuit Court of Floyd County, Indiana, against the New Albany and Sandusky City Junction Railroad Company, an insolvent corporation. The judgment was obtained in a suit brought by certain trustees to foreclose a mortgage given by the company to secure the payment of 110 bonds of $1000 each, and such proceedings were had in the suit that there was not only a decree of foreclosure and an order to sell the mortgaged property, but a personal judgment against the company. The mortgaged premises were sold under the order, and, the proceeds of sale having proved insufficient to satisfy the judgment, an execution was issued for the residue, which, December 1, 1858, was returned unsatisfied. Nothing further was done until January 29, 1868, when Burke having purchased the interest of several of the equitable owners of the judgment, this bill was filed by him and the other equitable owners whose interests he had not acquired, against the railroad company, the city of New Albany, and others. It averred the ownership of the judgment by the complainants, the failure of the company to put any portion of its railroad into operation or to lay any part of the track thereof, and its having become insolvent about the 30th day of April, 1857. It charged further that the company, having expended all its means, abandoned all further efforts to build the road, and that its roadbed and right of way had been sold. It also charged that since the year 1858 it had not kept up its organization or elected any new officers. The bill then proceeded to charge that the city of New Albany was indebted to the company in the sum of $393,000, besides interest, growing out of a subscription to its capital stock, made on the 19th of November, 1853, in part payment of which 200 bonds of $1000 each had been delivered to the company, and that certain other parties, whom the bill made defendants, were indebted in smaller sums in a similar manner. The bill further charged that none of these bonds except 7 had been negotiated by the company, but that, on the contrary, 197 of them had been returned to the city in pursuance of an illegal compromise, and that the city subscription to the stock had been cancelled. The complainants therefore charged that the city still remained a debtor to the company, and they prayed relief that the amount of debt that might be ascertained, and that so much thereof as was necessary to satisfy the judgment might be decreed to be thus applied.

To this bill the city of New Albany set up several defences; some of form, some to the merits. Among these last, it set up:

1st. That the city was not indebted to the company when the bill was filed; that the adjustment by the city and the company was, at the time it was made (September 7th, 1857), a compromise, made in good faith, by which the city ceased to be indebted to the company, and that the adjustment was effective and valid as against all persons.

2d. That if the complainants had rights against the city and might have impeached the validity of the arrangement by which the city recovered its bonds and obtained a cancellation of its subscription, they had slept so long upon these rights that a court of equity would not afford them relief.

These two defences were the only ones which the court considered; the others having been of such a character, as that if these two were sufficient, it was unnecessary to say anything about them.

As to the facts, it appeared that in November, 1853, pursuant to an ordinance of the common council of the city, a subscription had been made by the city to the stock of the railroad of $400,000, payable in city bonds, upon the call of the company, and that the council assumed the power to pass an ordinance which some persons asserted to be void, but which others considered had been subsequently ratified, if void originally, by an ordinance of March 7th, 1855; the railroad company now, upon the passage of this ordinance of ratification, agreeing and binding itself that not more than $250,000 of bonds should be called for until the road should be completed and put into order to its junction with the Ohio and Mississippi Railroad, and then but for the purpose of furnishing it, &c. Pursuant to the subscription, the officers of the city delivered to the railroad company 200 city bonds, for $1000 each, payable to bearer, and redeemable in ten and payable in twenty years. At the time of thus delivering the bonds the railroad company was actively engaged in prosecuting its enterprise, and represented to the officers of the city that it was essential to the completion of its road that the company should obtain money by the sale of the bonds. Shortly, however, after the delivery of the bonds, and while all of them, except 7, remained unsold, several suits were instituted by taxpayers of the city to resist the payment of a tax levied for the payment of interest; the ground of the suits being that the subscription was void. These suits led to protracted litigation, and raised such doubts as to the validity of the bonds, as to render it impossible for the railroad company to sell or negotiate them except at a ruinous sacrifice. In August, 1857, the railroad company represented to the city that in consequence of this failure to obtain money on the bonds, the company had found itself without means to carry on the work, and had abandoned its enterprise. It had apparently expended all the cash and real estate received by it in payment for stock, and had pledged the 200 city bonds (except the 7 sold) to different persons, for sundry sums, borrowed for the purpose of prosecuting the work. It thus had no means to pay the amounts so borrowed upon pledge of the city bonds, and it appeared that unless the city provided the means, the whole of the bonds were in danger of being sold for the payment of the loans, and that owing to the doubts cast upon their validity, the whole of them would not have sold for more than sufficient to pay the sums for which they were pledged.

The railroad company therefore proposed to the city that if the latter would provide means for the payment of the sums so borrowed, and redeem the bonds from the pledgees, they should be returned to the city and cancelled.

The city, relying, apparently, on the representation of the railroad company as to the condition of its affairs, passed an ordinance, published immediately afterwards, by which it accepted the proposition of the railroad company, upon condition that the latter would cancel the subscription of the city, and consent to the repeal of all ordinances and amendments relating thereto. This condition was accepted by the railroad company, and the agreement was carried into effect. The city paid the sums of money for which the bonds were pledged, amounting to more than $36,000. All the bonds, except the 7 that had been sold, were returned to the city and cancelled, and the subscription of stock was cancelled.

The arrangement seemed to have been made in good faith by the city, and for the purpose of preventing the large amount of its bonds being sacrificed for the payment of the debts for which they stood pledged.

As to the second of the above-mentioned defences, it seemed that neither the complainants nor any other person, had ever controverted the validity of the adjustment made between the city and the railroad company, nor instituted proceedings to have it set aside as fraudulent and void, until the bill of complaint in this case was filed, more than ten years after the agreement was concluded. However, one of the complainants was a non-resident of Indiana, and swore that he never knew of the city subscription until after the suit was brought. It was shown, nevertheless, that he had gone to New Albany in 1858, in order to examine the company's concerns. His attorney knew of it, and one witness thought that he did also.

The court below decreed in favor of the complainants for the balance due on their judgments, amounting to over $70,000 in the aggregate, against the railroad company and the city, and dismissed the bill as to the other defendants. The city appealed to this court.

Messrs. Burke, Porter, and Harrison, in support of the ruling below:

Is the compromise set up by the city valid?

1. Clearly not, upon the principles settled by this court in the case of Bell v. Railroad Company, that the officers of a municipal corporation authorized, by special statute and vote of the people, toi subscribe for stock in a railroad company, have no power to compromise such subscription and abandon the enterprise, and that all their power is derived from the statute and the vote of the people, and that whenever the subscription is made and the corporate bonds delivered, their power ceases, and they have no more power to compromise the subscription or abandon the enterprise than any other residents of the municipality.

2. The compromise, as the case shows, was fraudulent in fact, and it can hardly be doubted that there was a design upon the part of the city and railroad officers to withdraw from the reach of creditors all the available means of the railroad company.

3. The compromise is still more clearly fraudulent in law.

The transaction was an attempt upon the part of the officers of an insolvent and failing corporation, which had expended all its cash and other subscriptions in a vain attempt to construct its railroad, and had no means to meet the demands of clamorous creditors, to release its principal debtor and stock subscriber from the payment of what was due to the company without receiving the money due. Now repeated judicial decisions have settled the rule, that the officers of a money corporation are trustees for the creditors, and that they cannot give away the assets of the corporation, release its debtors without payment, or do any other act prejudicial to its creditors. That the capital stock of such a corporation is a trust fund irrevocably pledged to the creditors of the corporation, and that such capital stock cannot be diminished or squandered under the name of dividends or otherwise. No court has more firmly adhered to this rule than this court. In one case the court say:

'When that portion of the capital, not paid in cash, is required to pay the creditors of the company, the stockholders cannot be allowed to refuse payment unless they show such an equity as would entitle them to a preference over the creditors, if the capital had been paid in cash.'

II. Another objection urged is, staleness; that this suit should have been commenced sooner. But it appears that some of the owners of the judgments were non-residents of Indiana, and that they had no knowledge of the facts on which equitable relief is demanded.

Moreover, the bonds of the city, the interest of which is now sought to be subjected, were not to fall due for twenty years, that is, not until 1874; and there was at no time interest enough due on them to pay the amount due on complainant's judgment, up to about the time this bill was filed.

Mr. T. A. Hendricks, contra.

Mr. Justice STRONG delivered the opinion of the court.