St. Louis, V. & T. H. Railroad Company v. Terre Haute & I. Railroad Company/Opinion of the Court

The object of this suit between two railroad corporations, as stated in the amended bill, is to have a contract, by which the plaintiff transferred its railroad and equipment, as well as its franchise to maintain and operate the road, to the defendant for a term of 999 years, set aside and canceled, as beyond the corporate powers of one or both of the parties.

The contract, dated February 10, 1868, recites that the plaintiff is a corporation of Illinois, and the defendant a corporation of Indiana; that their railroads connect at the line between the two states; that it is desirable that the two roads should be operated by the defendant as one road; and that the defendant has 'proposed to lease and operate' the plaintiff's road for a period of 999 years. 'It is therefore agreed' that, upon the completion of the plaintiff's road to the state line, the defendant 'shall take charge of and operate the same with its equipment' for that period, and 'shall be allowed 65 per cent. of the gross receipts from all traffic moved over the line, or business done thereon, and from the property of the company as a consideration for working and maintenance expenses,' and shall appropriate the rest of such receipts to the payment of interest on the plaintiff's mortgage bonds, and pay any surplus to the plaintiff, for the benefit of its stockholders. Within a year afterwards, the contract was modified by providing that the defendant should be allowed 70, instead of 65, per cent. of the gross receipts, 'but if the working and maintenance expenses of said road shall be less than 70 per cent. of the gross receipts aforesaid, then all of such excess shall be paid over to the' plaintiff. It is further agreed in the contract that the defendant 'shall enjoy all the rights, powers, and privileges of the' plaintiff, 'so far as the same may be needful to maintain and operate said railroad,' and may 'impose and collect tolls and rates for transportation, and do all other acts and things, as fully and as effectually as the' plaintiff 'could do if operating said line.'

In short, by this contract one railroad corporation undertook to transfer its whole railroad and equipment, and its privilege and franchise to maintain and operate the road, to another railroad corporation for a term of 999 years, in consideration of the payment from time to time by the latter to the former of a certain portion of the gross receipts. This was, in substance and effect, a lease of the railroad and franchise for a term of almost a thousand years, and was a contract which neither corporation had the lawful power to enter into, unless expressly authorized by the state which created it, and which, if beyond the scope of the lawful powers of either corporation, was unlawful and wholly void, could not be ratified or validated by either or both, and would support no action or suit by either against the other. Thomas v. Railroad Co., 101 U.S. 71; Pennsylvania R. Co. v. St. Louis, A. & T. H. R. Co., 118 U.S. 290, 630, 6 Sup. Ct. Rep. 1094, and 7 Sup. Ct. Rep. 24; Oregon Ry. & Nav. Co. v. Oregonian Ry. Co., 130 U.S. 1, 9 Sup. Ct. Rep. 409; Central Transp. Co. v. Pullman's Palace Car Co., 139 U.S. 24, 11 Sup. Ct. Rep. 478.

Upon the question whether this contract was ultra vires of either corporation, this case cannot be distinguished in principle from Pennsylvania R. Co. v. St. Louis, A. & T. H. R. Co., above cited.

By the statute of Illinois of February 12, 1855, all railroad companies incorporated under the laws of the state were empowered to make 'contracts and arrangements with each other, and with railroad corporations of other states, for leasing or running their roads, or any part thereof.' Priv. Laws Ill. 1855, p. 304; Rev. St. 1874, c. 114, § 34. By the grammatical and the natural construction, the words 'their roads' include roads of Illinois corporations, as well as roads of corporations of other states, and the power conferred on corporations of Illinois to make contracts 'for leasing' such roads includes making, as well as taking, leases thereof. Such was the opinion expressed in the case just cited, at page 309, 118 U.S., and page 1102, 6 Sup. Ct. Rep., and we see no reason for departing from it.

The plaintiff relies on the statute of Illinois of February 16, 1865, (in force at the date of this contract, but since repealed by the Revised Statutes of 1874,) by which it was enacted that 'it shall not be lawful for any railroad company of Illinois, or for the directors of any railroad company of Illinois, to consolidate their road with any railroad out of the state of Illinois, or to lease their road to any railroad company out of the state of Illinois, or to lease any railroad out of the state of Illinois, without having first obtained the written consent of all of the stockholders of said roads residing in the state of Illinois, and any contract for such consolidation or lease which may be made without having first obtained said written consent, signed by the resident stockholders in Illinois, shall be null and void;' and it was provided 'that nothing in this act shall be so construed as to authorize the consolidation of any of said railroads with railroads out of the state of Illinois.' Pub. Laws Ill. 1865, p. 102.

Although this statute, in terms, declares that any such lease, made without the written consent of the Illinois stockholders, 'shall be null and void,' it would seem to have been enacted for the protection of such stockholders alone, and intended to be availed of by them only. It did not limit the scope of the powers conferred upon the corporation by law, an excess of which could not be ratified or be made good by estoppel; but only prescribed regulations as to the manner of exercising corporate powers, compliance with which the stockholders might waive, or the corporation might be estopped, by lapse of time, or otherwise, to deny. Zabriskie v. Railroad Co., 23 How. 381, 398; Central Transp. Co. v. Pullman's Palace Car Co., 139 U.S. 24, 42, 60, 11 Sup. Ct. Rep. 478; Davis v. Railroad, 131 Mass. 258, 260; Beecher v. Rolling Mill Co., 45 Mich. 103, 7 N. W. Rep. 695; Thomas v. Railway Co., 104 Ill. 462.

The decision of the supreme court of Illinois in Archer v. Railroad Co., 102 Ill. 493, cited by each party at the argument, does not appear to have any important bearing upon this case. The point there decided was that the contract now in question, not being satisfactorily proved in that case to have been either assented to or ratified by the stockholders residing in Illinois, had no effect, as a lease, to convey title to the defendant, and could be sustained, if at all, only as a contract for the connection of the two railroads, and, in either aspect, did not confer on the defendant any right to maintain a bill in equity against collectors of taxes to restrain the collection of taxes assessed to the present plaintiff. Upon questions discussed in the opinion and not necessary to the judgment, or not considered at all, the case cannot be regarded as a decision, because, as observed by Mr. Justice CURTIS, speaking for this court, 'to make it so, there must have been an application of the judicial mind to the precise question necessary to be determined to fix the rights of the parties.' Carroll v. Carroll, 16 How. 275, 287.

It is unnecessary, however, to express a definitive opinion upon the question whether the contract between these parties was beyond the corporate powers of the plaintiff, because, as is established by the decisions of this court, already cited, a contract beyond the corporate powers of either party is as invalid as if beyond the corporate powers of both, and the contract now in question was clearly beyond the corporate powers of the defendant.

The case in this respect is governed by the direct adjudication of this court in the case of Pennsylvania R. Co. v. St. Louis, A. & T. H. R. Co., above cited, which was much considered, both upon argument at the bar, and upon petition for a rehearing. The only differences between that case and this are that the contract in that case was for 99 years, whereas in this it is for 900 years more; that the rent is computed in a different way, which does not alter the nature and effect of the transaction; and that in that case the two roads did not connect at the state line, but a few miles east of it, which was held to be immateral. 118 U.S. 295-297, 6 Sup. Ct. Rep. 1095, 1096.

The plaintiff in that case, like the defendant in this, sought to support the validity of the contract under the statute of Indiana of February 23, 1853, c. 85, of which section 1 authorized any railroad company of Indiana 'to intersect, join, and unite its railroad with any other railroad' constructed in an adjoining state, at any point on the state line, or elsewhere, to which the charters of the two companies authorized their roads to go, and to consolidate the stock of the two companies; section 2 authorized any railroad company of Indiana, whose road went to the state line, 'to extend its said railroad into or through any other state,' under such regulations as might be prescribed by the laws thereof; and section 3 authorized any railroad company of Indiana, whose road met and connected at the state line with a railroad in an adjoining state, 'to make such contracts and agreements with any such road, constructed in an adjoining state, for the transportation of freight and passengers, or for the use of its said road, as to the board of directors may seem proper.' Rev. St. Ind. 1881, §§ 3971-3973.

At the argument of that case, indeed, the third section, being the one affording the most plausible ground, was principally relied on, and was the only section of this statute discussed in the original opinion. 118 U.S. 312, 6 Sup. Ct. Rep. 1104. But in that opinion reference was made to Tippecanoe Com'rs v. Lafayette, etc., R. Co., in which the supreme court of Indiana held that this statute did not authorize one railroad corporation to lease its railroad to another with a right of perpetual renewal, and said. 'To connect one road with another does not fairly mean to lease or sell it to another.' 50 Ind. 85, 110; 118 U.S. 312, 6 Sup. Ct. Rep. 1104. And upon the petition for rehearing, all three sections of the statute in question, as well as other statutes of Indiana, were cited by counsel and examined by the court, although its conclusions were briefly stated, according to its usage in an opinion delivered on a petition for rehearing. 118 U.S. 633, 634, 7 Sup. Ct. Rep. 25.

It is argued for the defendant that this suit is distinguished from the former one, in being brought, not, as that was, in Indiana, but in Illinois, and must therefore be controlled by the law and policy of Illinois; and it is contended that the statute of Illinois of 1855, above cited, empowered the defendant, though an Indiana corporation, to take a lease of a railroad in Illinois. But such a suit as this is governed, so far as regards the validity of the contract, not by the law of the forum, but by the law of the contract; and the statute of Illinois was manifestly intended to confer power on domestic corporations only, leaving the powers of corporations incorporated elsewhere to be determined by the laws by and under which they were incorporated, even if a state could confer on a foreign corporation powers which it did not have by the laws of its own state. Railway Co. v. Gebhard, 109 U.S. 527, 537, 3 Sup. Ct. Rep. 363; Christian Union v. Yount, 101 U.S. 352; Starkweather, v. Bible Soc., 72 Ill. 50; Santa Clara Academy v. Sullivan, 116 Ill. 375, 385, 6 N. E. Rep. 183.

It may therefore be assumed, as contended by the plaintiff, that the contract in question was ultra vires of the defendant, and therefore did not bind either party, and neither party could have maintained a suit upon it, at law or in equity, against the other.

It does not, however, follow that this suit to set aside and cancel the contract can be maintained. If it can, it is somewhat remarkable that, in the repeated and full discussions which the doctrine of ultra vires has undergone in the English courts within the last 50 years, no attempt has been made to bring a suit like this. The only cases cited in the elaborate briefs for the plaintiff, or which have come to our notice, approaching this in their circumstances, are in American courts not of last resort, and present no sufficient reasons for maintaining this suit. Auburn Academy v. Strong, Hopk. Ch. 278; Atlantic & P. Tel. Co. v. Union Pac. Ry. Co., 1 McCrary, 541, 1 Fed. Rep. 745; Western Union Tel. Co. v. St. Joseph & W. Ry. Co., 1 McCrary, 565, 3 Fed. Rep. 430; Union Bridge Co. v. Troy & L. R. Co., 7 Lans. 240; Railway Co. v. Simpson, 21 Fed. Rep. 533.

The English cases relied on by the plaintiff were either suits to set aside marriage brokage bonds, as in Drury v. Hooke, 1 Vern. 412, and Smith v. Bruning, 2 Vern. 392, nom. Goldsmith v. Bruning, 1 Eq. Cas. Abr. 89; or to recover back money paid for the purchase, without leave of the crown, of a commission in the military or naval service, as in Morris v. McCullock, Amb. 433, 2 Eden, 190. Those cases have sometimes been justified upon the ground that, the agreement being against the policy of the law, the relief was given to the public through the party. Debenham v. Ox. 1 Ves. Sr. 276; St. John v. St. John, 11 Ves. 526, 536; Cone v. Russell, 48 N. J. Eq. 208, 21 Atl. Rep. 847. But Sir WILLIAM GRANT explained them as proceeding upon the ground that the plaintiff was less guilty than the defendant. Osborne v. Williams, 18 Ves. 379, 382. And Morris v. McCullock can hardly be reconciled with his decision in Thomson v. Thomson, 7 Ves. 470, or with the current of later authorities.

The general rule, in equity, as at law, is in pari delicto potior est conditio defendentis; and, therefore, neither party to an illegal contract will be aided by the court, whether to enforce it, or to set it aside. If the contract is illegal, affirmative relief against it will not be granted, at law or in equity, unless the contract remains executory, or unless the parties are considered not in equal fault, as where the law violated is intended for the coercion of the one party and the protection of the other, or where there has been fraud or oppression on the part of the defendant. Thomas v. Richmond, 12 Wall. 349, 355; Springs Co. v. Knowlton, 103 U.S. 49; Story, Eq. Jur. § 298.

While an unlawful contract, the parties to which are in pari delicto, remains executory, its invalidity is a defense in a court of law; and a court of equity will order its cancellation only as an equitable mode of making that defense effectual, and when necessary for that purpose. Adams, Eq. 175. Consequently, it is well settled, at the present day, that a court of equity will not entertain jurisdiction to order an instrument to be delivered up and canceled, upon the ground of illegality appearing on its face, and when, therefore, there is no danger that the lapse of time may deprive the party to be charged upon it of his means of defense. Story, Eq. Jur. § 700a, and cases cited; Simpson v. Howden, 3 Mylne & C. 97; Ayerst v. Jenkins, L. R. 16 Eq. 275, 282.

When the parties are in paridelicto, and the contract has been fully executed on the part of the plaintiff, by the conveyance of property, or by the payment of money, and has not been repudiated by the defendant, it is now equally well settled that neither a court of law nor a court of equity will assist the plaintiff to recover back the property conveyed or money paid under the contract. Thomas v. Richmond, above cited; Ayerst v. Jenkins, L. R. 16 Eq. 275, 284. For instance, property conveyed pursuant to a contract made in consideration of the compounding of a crime, and the stifling of a criminal prosecution, and therefore clearly illegal, cannot be recovered back at law, nor the conveyance set aside in equity, unless obtained by such fraud or oppression on the part of the grantee that the conveyance cannot be considered the voluntary act of the grantor. Worcester v. Eaton, 11 Mass. 368, and 13 Mass. 371; Atwood v. Fisk, 101 Mass. 363; Bryant v. Peck & Whipple Co., 154 Mass. 460, 28 N. E. Rep. 678; Williams v. Bayley, L. R. 1 H. L. 200; Jones v. Society, [1892,] 1 Ch. 173, 182, 185, 187.

In the case at bar, the contract by which the plaintiff conveyed its railroad and franchise to the defendant for a term of 999 years was beyond the defendant's corporate powers, and therefore unlawful and void, of which the plaintiff was bound to take notice. The plaintiff stood in the position of alienating the powers which it had received from the state, and the duties which it owed to the public, to another corporation, which it knew had no lawful capacity to exercise those powers or to perform those duties. If, as the plaintiff contends, the contract was also beyond its own corporate powers, it is certainly in no better position. In either aspect of the case, the plaintiff was in pari delicto with the defendant. The invalidity of the contract, in view of the laws of which both parties were bound to take notice, was apparent on its face. The contract has been fully executed on the part of the plaintiff by the actual transfer of its railroad and franchise to the defendant; and the defendant has held the property, and paid the stipulated consideration, from time to time, for 17 years, and has taken no steps to rescind or repudiate the contract.

Upon this state of facts, for the reasons above stated, the plaintiff, considered as a party to the unlawful contract, has no right to invoke the assistance of a court of equity to set it aside. And so far as the plaintiff corporation can be considered as representing the stockholders, and seeking to protect their interests, it and they are barred by laches. Harwood v. Railroad Co., 17 Wall. 78; Graham v. Railway Co., 2 Hall & T. 450, 2 Macn. & G. 146; Flooks v. Railway Co., 1 Smale & G. 142, 164; Gregory v. Patchett, 11 Law T. (N. S.) 357 This case is not like those in which the defendant, having abandoned or refused to perform the unlawful contract, has been held liable to the plaintiff, as upon an implied contract, for the value of what it had received from him, and had no right to retain. Springs Co. v. Knowlton, 103 U.S. 49; Bank v. Townsend, 139 U.S. 67, 11 Sup. Ct. Rep. 496, and cases there cited.

But the case is one in which, in the words of Mr. Justice MILLER, in a case often cited in this opinion, the court will not disturb the possession of the property that has passed under the contract, but will refuse to interfere as the matter stands. Pennsylvania R. Co. v. St. Louis. A. & T. H. R. Co., 118 U.S. 290, 316, 317, 6 Sup. Ct. Rep. 1094. See, also, Union Trust Co. v. Illinois M. Ry. Co., 117 U.S. 434, 468, 469, 6 Sup. Ct. Rep. 809; Central Transp. Co. v. Pullman's Palace Car Co., 139 U.S. 24, 56, 57, 61, 11 Sup. Ct. Rep. 478.

Decree affirmed.