Schlesinger v. Kansas City S. Railway Company

This was a bill in equity brought by Barthold Schlesinger and Sebastian B. Schlesinger, doing business under the name of Naylor & Co., against the Kansas City & Southern Railway Company, the Kansas City & Southern Construction Company, the Farmers' Loan & Trust Company, and James I. Brooks, to subject certain railroad property in the possession of the defendant railway company to their demands against the defendant construction company. There was a decree below dismissing the bill (39 Fed. 741), and the complainants appeal.

This is an appeal from a decree dismissing, for want of equity, a bill brought by the appellants to subject, in satisfaction of their demand against the Kansas City & Southern Construction Company, certain railroad property in the possession of, and claimed by, the Kansas City & Southern Railway Company.

The facts, so far as it is necessary to state them, are as follows: On the 11th day of January, 1877, the roadbed, masonry, rights of way, and appurtenances of the Kansas City, Memphis & Mobile Railroad Company, a Missouri corporation, were sold at public auction under the order of the district court of the United States for the western district of Missouri, sitting in bankruptcy; John D. Bancroft, of Kansas City, becoming the purchaser, at the price of $15,025, in cash paid. And a deed was made to the purchaser on the 25th day of April, 1877.

Bancroft, by deed of April 27, 1877, conveyed to Thomas K. Hanna, Benjamin McLean, and himself, as trustees for sundry residents of Kansas City, who had contributed the purchase money, and in whose behalf the property was purchased.

By deed executed January 13, 1880, Hanna, McLean, and Bancroft, trustees, in consideration of $19,156.87, cash in hand paid, conveyed to James I. Brooks all the property and rights so purchased, upon the following terms and conditions:

'Said party of the second part is to build said railroad from Kansas City to Harrisonville or Belton, as said second party may elect, on or before January 1st, 1881, so as to be ready for use as a railroad, and also to build said railroad to the coal fields of Bates county, to a point south of Butler, on or before July 1st, 1881, so as to be ready for like use as aforesaid; and if said second party shall fail to build said railroad to said coal fields as aforesaid, then the property hereby sold as aforesaid shall revert to said first party, and reinvest in them, the same as they now hold the same: provided, however, that as soon as said second party shall expend the sum of fifty thousand dollars in the construction of a roadbed for said railroad, commencing at Kansas City and running southwardly, then the said provision shall become null and void and of no effect whatever, and upon said expenditure being made in the building of said railroad as aforesaid, by said second party, of said sum of fifty thousand dollars, then said trustees are to execute to said second party or his assigns an instrument in writing acknowledging the waiver and extinguishment of said forfeiture. In the event of a disagreement between the said trustees and said second party as to the expenditure in fact by said second party of said fifty thousand dollars as aforesaid, as said second party may hereafter claim, said trustees and said second party shall each select an arbitrator, and they, in case of disagreement between them, shall select a third arbitrator, and, in case either party refuses to select an arbitrator, then the arbitrator chosen by the other party shall select two additional arbitrators; and the arbitrators selected in any of the above-mentioned modes shall determine whether such expenditure has been made by said second party, and such determination of said arbitrators shall be binding on both parties, and may be enforced by judgment as provided by the laws of this state. Said first party covenants and warrants to and with said second party that they, the said trustees, have not in any wise incumbered the said property, and that the same is free from all incumbrances done or suffered by them.' By a declaration in writing executed February 27, 1880, Brooks acknowledged that the property conveyed to him was held in trust for the benefit of the Kansas City & Southern Construction Company, and covenanted that he would, by a sufficient quitclaim deed, transfer it to that company or their assigns, as they might direct and require. And by deed of April 1, 1880, he conveyed the property, by quitclaim deed, to the construction company.

On the 2d day of March 1880, the construction company made a written contract with the appellants, under the name of Naylor & Co., for the furnishing of steel rails to be used in completing the railroad. But, on the 18th of May, 1880, Naylor & Co. were notified by the construction company that it was unable to carry out its contract with them, and they were authorized to sell the rails for account of that company, but without prejudice to any rights or claims of Naylor & Co. for damages.

The construction company, by deed of May 24, 1880, conveyed the property to the Kansas City & Southern Railroad Company; the consideration recited being $300,000 of the capital stock of the railroad company, for which certificates were to be issued, and $300,000 of its first mortgage bonds, to be secured by mortgage upon the property. But in fact there was at that time no such corporation. Brooks, the president of the construction company, contemplated the organization of a railroad company to be named the Kansas City & Southern Railroad Company, but he failed to effect such an organization.

By deed of September 18, 1880, the construction company conveyed to the Kansas City & Southern Railway Company, a corporation of Missouri, the Kansas City, Memphis & Mobile Railroad, running from Kansas City, in the direction of Memphis and Mobile, together with all its rights of way, roadbed, masonry, property, rights of property, and appurtenances, etc. This deed was executed in the name of the grantor company by Henry Ashley, agent, and is attested by its corporate seal, which, the acknowledgment of Ashley states, was affixed thereto by order of the board of directors. The consideration recited was $250,000 cash in hand paid.

Hanna, McLean, and Bancroft, as trustees, made, December 15, 1880, a written contract with the Kansas City & Southern Railway Company, as follows: 'Whereas, the Kansas City, Memphis and Mobile Railroad Company, with all its roadbed, rights of way, and appurtenances and property and rights of property, whatsoever, connected with the said railroad, with all the franchises of the Kansas City, Memphis and Mobile Railroad Company, were, by deed dated January 13th, A. D. 1880, sold and conveyed by the undersigned trustees to one James I. Brooks, on certain conditions contained and specified in said deed; and whereas, the title to said property subject to the conditions has by sundry mesne conveyances passed to and vested in, and is now owned and held by, the Kansas City and Southern Railway Company; and whereas, said last-named company has not been able to comply with and perform said conditions within the time specified in said first-named deed for their performance, but is now willing to deposit and has deposited with the said trustees the sum of $25,000 as a guaranty by said last-named company of the good faith of its purpose to build a railroad southeasterly from Kansas City, Missouri, through the coal fields of Henry county, Missouri, and the iron fields of St. Clair county, Missouri, the receipt of which sum of twenty-five thousand dollars by said trustees is hereby acknowledged; and whereas, since the making of said deed to said James I. Brooks, various sums of money have been expended for rights of way, for engineering, and other necessary expenses connected with the enterprise of building said railroad, in addition to the purchase price paid to said trustees on the execution of the said first-named deed by them; and whereas, the owners of more than two-thirds of the money and shares furnished by the persons and firms in the deed of said property to said trustees, dated April 27th, 1877, have directed the undersigned trustees to execute and deliver this instrument to said Kansas City and Southern Railway Company: Now, therefore, in consideration of the premises, and the sum of one dollar in hand paid, the receipt of which is hereby acknowledged, it is agreed, stipulated, and covenanted by and between said trustees, for themselves and their said beneficiaries and said Kansas City and Southern Railway Company, as follows: 1st. The conditions provided and expressed in said deed of said trustees to said James I. Brooks are hereby annulled, extinguished, and the said Kansas City and Southern Railway Company are hereby forever released and discharged from the performance of the same or any part hereof, and in lieu the following conditions are hereby provided, that is to say, said trustees or a majority of them shall, as said railroad from Kansas City, Mo., southeasterly through the coal fields of Henry county, Missouri, and the coal fields of St. Clair county, Missouri, shall be constructed, pay out said $25,000 on the estimates and orders made and given in the building of said road by the chief engineer of said K. C. and S. R. W. Co., and as soon as said $25,000 is so paid out, and the additional sum of fifteen thousand dollars is expended by said last-named company, in the building of said road, the last-named company shall hold said property so conveyed free from any and all claims, of whatsoever kind, on the part of said trustees or their beneficiaries, or any of them. 2d. It is further provided and covenanted that if said last-named company shall not expend the full sum of $25,000 in the building of said railroad before July 1st, 1881, then so much of said $25,000 so deposited as shall on the last day aforesaid be unexpended shall be forfeited to, and become the money and property of, said trustees, for the benefit of their beneficiaries. 3d. It is further provided and covenanted that as soon as said $25,000 so deposited shall be paid out, and as soon as the chief engineer of said last-named company shall make the certificate of expenditure by said last-named company of said $15,000 shall be expended before October 1st, 1880, then said trustees shall deliver to said last-named company an instrument in writing, duly executed and acknowledged, evincing the full compliance with and performance of all the conditions herein contained by said last-named company, and if the sum of forty thousand (40 M) dollars shall not, as above provided, be expended by said company before October 1st, 1881, then said property shall revert to said trustees, as by said deed to said Brooks is provided.' This agreement was executed by the trustees, Hanna, McLean, and Bancroft, with the consent in writing of the requisite number of those whom they represented.

On the 11th day of May, 1881, the construction company, by James I. Brooks, its president, in consideration of one dollar and other good and valuable considerations, and 'by virtue of a vote of the directors of said corporation,' conveyed this property to said Brooks, in trust to secure 'the payment to him of all indebtedness of whatsoever nature, whether in cash or stock or bonds, due said Brooks under the vote whereby the property herein conveyed was deeded by said Brooks to the Kansas City and Southern Construction Company to the date of this conveyance,' and after the execution of these trusts to hold the same for the benefit of whom it might concern.

On the 7th day of October, 1881, the present appellants claiming that the construction company was largely indebted to them on the contract of March 2, 1880, for steel rails-instituted an action at law in the circuit court of Jackson county, Mo., against that company, on said alleged liability. Upon affidavit and bond for attachments, writs of attachment and summons issued to the counties of Jackson, Cass, Henry, and St. Clair, Mo., and were levied by the sheriffs of those counties, respectively, on the 7th, 11th, and 12th days of October, 1881, upon all the right, title, interest, and property of the construction company, in the Kansas City, Memphis & Mobile Railroad, in such counties, with its right of way, roadbed, masonry, property, rights of property, and appurtenances,-the same property described in the deeds of May 24, 1880, and September 18, 1880,-to the Kansas City & Southern Railway Company. The construction company answered, and denied all the material allegations of the petition. In that action, which was removed into the circuit court of the United States for the western district of Missouri in April, 1882, the Kansas City & Southern Railway Company, after such removal, filed their interplea asserting their ownership, prior and subsequent to the attachment suit, of all the property attempted to be levied on as the property of the construction company. In that action a verdict was returned against the construction company for $49,448.11, for which a judgment was rendered October 20, 1885, on which execution was allowed 'to be levied on the property and effects attached, and other property of the defendant.' Subsequently (a motion for a new trial having been made) the plaintiffs remitted $13,546.72 of the verdict. Thereupon, the former judgment was set aside, and it was adjudged, February 1, 1886, that the plaintiff recover of the construction company $35,901.39, and their costs, 'and that they have thereof execution, and that the judgment and execution thereon hold, not only the property attached heretofore in this case, but the other property of the defendant, but execution shall not issue, without special leave of court, until after final decree in chancery in case No. 401, in the case of Barthold Schlesinger et al. v. The Kansas City and Southern Railway Company et al.'

The equity case here referred to is the present suit, which was brought November 10, 1881, by Barthold Schlesinger and Sebastian B. Schlesinger, doing business as Naylor & Co., against the Kansas City & Southern Railway Company, the Kansas City & Southern Construction Company, the Farmers' Loan & Trust Company, and James I. Brooks. The Farmers' Loan & Trust Company was made a defendant because it was the trustee in a mortgage given by the railway company January 1, 1883, to secure $6,500,000 of its first mortgage bonds, which mortgage covered all of the property and income of the mortgagor, and warranted the title to the property. The relief sought was a decree adjudging the deeds of May 24, 1880, and September 18, 1880, to the Kansas City & Southern Railway Company, and the deed to the Farmers' Loan & Trust Company, to be voluntary, fraudulent, and void, as against the demands of the plaintiffs, and that the property and rights of the construction company, attempted to be conveyed by said deeds, and levied upon and attached as aforesaid, be subjected, charged, and sold for those demands and the costs of the attachment proceedings, and that in the mean time a receiver be appointed to take charge of the property, receiving the profits thereof, and paying all taxes and assessments against it.

Some time after the institution of this suit, and before it was determined in the court below, the appellants sold their claim to one Sargent, of Boston, for $4,000.

Wallace Pratt, J. Brumback and Frank Hagerman, for appellants.

Charles O. Tickenor, for appellees.

Mr. Justice HARLAN, after stating the facts in the foregoing language, delivered the opinion of the court.