Robinson v. Iron Ry. Co., 135 U.S. 522 (1890)

Afterwards, The Iron Railroad Company was consolidated with The Toledo, Delphos and Burlington Railroad Company, an Ohio corporation, and the latter was afterwards p. 524consolidated with The Toledo, Cincinnati and St. Louis Railroad Company, another Ohio corporation. In August, 1883, the latter corporation was put into the hands of a receiver. The earnings of the road of The Iron Railroad Company were at all times sufficient to pay interest on the first mortgage bonds, and to pay a large interest on the second mortgage bonds. The holders of the second mortgage bonds had no voice in either of the consolidations, and the Trust Company never assented to them. Both consolidations were illegal, collusive, fraudulent and void.’ No dividend was ever declared payable to the holders of the second mortgage bonds, though it was fairly earned. So the holders of such bonds had no opportunity to enter for a breach of the conditions of the mortgage and to operate the road. The earnings of The Iron Railroad, which ought to have been applied to keep down the interest on its bonds, were largely diverted, in consequence of its consolidation with the other roads, and applied to pay their expenses: and the holders of the second mortgage bonds have an equitable lien on the property of the companies with which The Iron Railroad Company was consolidated, to have refunded the amount of such diverted earnings, and to have them applied to pay the interest on the two classes of bonds.

In July, 1883, the Trust Company filed a bill in equity, in p. 525the Circuit Court of the United States for the Southern District of Ohio, against The Toledo, Cincinnati and St. Louis Railroad Company, to foreclose the mortgages, and the defendant company appeared and submitted to a default and a decree of foreclosure. A receiver and a special master were appointed, and the receiver was ordered to keep a separate account of the earnings of each division, which he proceeded to do, on November 1, 1883. The special master found that the net earnings of The Iron Railroad for the five months from November 1, 1883, to April 1, 1884, were $33,716.37. On the 15th of July, 1884, five persons, whose names are given, holders to a greater or less amount of the first mortgage bonds, became a committee of the first mortgage bondholders, under a contract whereby they were to purchase The Iron Railroad, with all its property, under the decree of sale. All, or substantially all, of the first mortgage bondholders signed the contract with the committee; but the second mortgage bondholders had no notice thereof, and were not invited to participate in the appointment of the committee. A copy of the agreement is annexed to the bill. It contained a provision authorizing the committee to negotiate for a participation by the second mortgage bondholders in the benefits of the trust created by the agreement. On the 10th of June, 1884, the holders of the second mortgage bonds were called together in Boston, and a committee of five of them, of whom the plaintiff was one, was appointed to confer with the committee of the first mortgage bondholders, in regard to a participation in the reorganization of the company, and to take such other steps as might be necessary to protect the interests of the second mortgage bondholders. On the 19th of June, 1884, the two committees met, and it was agreed between them that the second mortgage bondholders should participate in the reorganization, and should rank therein substantially as they ranked previously, subject to a fair division of expenses, it being understood that a plan of reorganization should be submitted, and that the committee of the first mortgage bondholders should purchase the property at the sale. The railroad and property were sold on the 28th of June, 1884, in p. 526pursuance of the decree, and the defendant Coombs, acting for the committee of the first mortgage bondholders, purchased the same for $500,000, and, as the plaintiff assumed and had reason to believe, for the benefit of both classes of security holders. The sale was confirmed on the 18th of July, 1884, and on the 31st of July, 1884, the committee of the second mortgage bondholders submitted to the committee of the first mortgage bondholders a plan for reorganization, a copy of which is annexed to the bill with a copy of a letter from the committee of the second mortgage bondholders, accompanying it. Meantime, immediately after the sale, the committee of the first mortgage bondholders proceeded to organize, under the laws of Ohio, the defendant corporation The Iron Railway Company, with the intention of transferring the property to it when the sale should be confirmed. The Iron Railway Company is capitalized at $600,000, with the purpose of issuing its stock, dollar for dollar, to the first mortgage bondholders for their bonds, and for two years’ unpaid interest, and for expenses, without recognizing the rights of the second mortgage bondholders. Coombs has transferred the railroad and property to The Iron Railway Company, which is composed of the parties who made up the first mortgage bondholders, and no new or innocent party holds the stock thereof; and the corporation and the holders of its stock had full notice from the beginning of the rights of the second mortgage bondholders. In August, 1884, notice of the claims of the second mortgage bondholders was published in certain newspapers in Boston, where both classes of securities are largely or entirely held. On the 5th of August, 1884, the committee of the second mortgage bondholders served upon each member of the committee of the first mortgage bondholders a notice asserting the rights of the second mortgage bondholders, and a like notice upon The Iron Railway Company, and also published a like notice in two Boston newspapers; all of which was done before The Iron Railway Company issued the stock. In the various statements which appear as a matter of public record, the Trust Company and The Toledo, Cincinnati and St. Louis Railroad Company have p. 527alleged that the earnings of The Iron Railroad Company have been sufficient, if kept separate, to pay the interest on the first mortgage bonds, such statements being made in the papers filed in the various foreclosure proceedings to foreclose the various divisions of The Toledo, Cincinnati and St. Louis Railroad Company. The committee of the first mortgage bondholders have stated repeatedly in a public way that their road was earning sufficient to pay the interest on the first mortgage bonds, and such claim was made by them, and by all that class of bondholders, when The Toledo, Cincinnati and St. Louis Railroad Company first ceased to pay interest on the first mortgage bonds.

The Iron Railway Company and Coombs put in separate demurrers to the bill. The demurrer of The Iron Railway Company alleges want of equity, and also multifariousness, in that the bill seeks both to have the foreclosure proceedings avoided and the sale set aside, and to obtain a participation in the benefits of the purchase of the property at the sale; and also alleges that it appears that the plaintiff has not been injured by the foreclosure proceedings, and that he might, with diligence, have prevented or remedied any injury by intervening in the proceedings; that for all such injury there was a plain, adequate and complete remedy at law, in a suit against the Trust Company; that it is admitted by the bill that default was made in paying the interest due to the holders of the first mortgage bonds, which continued up to the time of the sale of the road and still continues, but it contains no offer to pay the bonds or the interest due on them, or to redeem the property from the first mortgage; that i does not allege any privity with, or duty or liability to, the p. 529second, mortgage bondholders, on the part of the first mortgage bondholders, nor any common interest between them; that as to so much of the bill as rests upon any alleged agreement or undertaking on the part of the committee of the first mortgage bondholders, whose names are given in the bill, it appears that all of them are necessary parties and none of them are made parties ; that all of them and the plaintiff are citizens of Massachusetts, and that this court has no jurisdiction to enforce the alleged agreement; that the agreement is not sufficient in form or certainty to permit its enforcement or to warrant any recovery of damages on account of any breach of it; that no consideration is alleged for it, nor is it alleged to be in such form as imports consideration ; that the committee were not authorized to make any such agreement with the second mortgage bondholders ; that such agreement and this suit admit the competency of the organization of The Iron Railway Company, and such agreement and the alleged authority therefor do not appear to be competent to create any privity with, or duty or liability to, the plaintiff, on the part of The Iron Railway Company and its stockholders; that it does not appear that Coombs was in privity with, or incurred any obligation or liability to, the plaintiff or any of the second mortgage bondholders, or was served with any notice, or had any knowledge, of any undertaking in behalf of any second mortgage bondholders, or of any violation thereof, and no fraud, or knowledge of or complicity in any fraud, on the part of Coombs, is sufficiently alleged in the bill; that it is alleged in the bill that no foreclosure proceedings such as are set forth can bar the second mortgage bondholders from the net profits and income, after the payment of the interest on the first mortgage bonds; and that for the recovery of any property formerly of The Iron Railroad Company which may not have been covered by the first mortgage but may have been covered by the second mortgage, it appears that the parties in interest have a plain, adequate and complete remedy at law.

As to the other allegations in the bill, which question the proceedings which took place in the foreclosure suit prior to the sale, they were matters proper for adjudication in that p. 532suit, and they cannot, under the circumstances of the case, be questioned in this suit. We have considered all of them, and pass them without further observation.

The se were two actions at law brought in the Circuit Court of the United States for the Eastern District of Missouri, on the 12th of July, 1886, by John Glenn, trustee of the National Express and Transportation Company, one against John E. Liggett, and the other against Charles Taussig and Morris p. 534Taussig. The cases were disposed of in the Circuit Court on a demurrer in each case to an amended petition. The demurrer was sustained in each case and judgment entered for the defendants, with costs, to review which the plaintiff has in each case brought a writ of error.

The first cause of action, as set out in the amended petition against Liggett, is as follows: Liggett subscribed for 63 shares of the capital stock of the National Express and Transportation Company, a Virginia corporation, created by an act of the General Assembly of that State, approved December 12, 1865, and thereby promised to pay to that company for each share, $100, in such instalments and at such times as he might be lawfully required to pay the same according to the legal tenor and effect of the laws under which the company was so incorporated, and his subscription to said stock, whereby, and by force of such subscription, he became a stockholder in the company and agreed to sue and be sued, plead and be impleaded, contract and be contracted with, in said corporate name, as to all matters touching the property, rights and obligations of the corporation. On the 20th of September, 1866, the corporation, having become insolvent, by its deed of that date, duly executed, acknowledged and recorded, assigned to John Blair Hoge and C. Oliver O’Donnell, both citizens of Maryland, and John J. Kelly, a citizen of New York, in trust for the benefit of the creditors of the company, all its property, in trust to collect all the debts, claims and moneys payable, to reduce the same to money, and to apply the proceeds to the trusts declared by the deed, including the trust therein declared for the payment of the debts of the company in the order of priority therein provided, and shortly thereafter ceased to do business. The defendant assented to said deed, and thereby promised to pay to said trustees for each share of stock so subscribed for by him the balance o p. 535the $100 due on each share of stock, uncalled for at the time of the making of the deed, whenever he might be lawfully called upon to pay the same, according to the legal tenor and effect of the laws under which the company was incorporated and the subscription made. At the time of the execution and delivery of the deed, the company had called for 20 per cent of the par value of the stock. The trustees appointed by the deed neglected to perform the trusts thereby created^ and the validity and effect of the deed were drawn in question in the courts of various States in which the stockholders resided, and the enforcement thereof was hindered. In November, 1871, William W. Glenn, of Baltimore, being a judgment creditor of the company, filed a bill in the Chancery Court of the city of Richmond, it being a court of competent jurisdiction in such cases, in his own behalf and in behalf of all other creditors of the corporation, against it and certain of its officers and the trustees named in the deed of trust, as defendants; by which bill it was sought to obtain from that court a judicial determination of the validity of the deed, and a judicial construction of it, and the establishment of the legal effect and obligation of it upon all property, rights and persons affected thereby, and also to enforce the trusts thereby declared in favor of the creditors of the corporation. Pending that bill, William W. Glenn died, and in the year 1879 the suit was revived in the name of John W. Wright, sheriff of the city of Richmond, and as such duly constituted official administrator of said Glenn. After such revivor, an amended bill was filed, to which bill the corporation, certain of its officers, and Hoge and Kelly were made defendants (O’Donnell having died). By that bill it was sought to obtain, in addition to the relief prayed for in the original bill, an account and establishment of the debts due by the company and secured by the deed of trust, and an account of the property and estate subject to the terms of the deed, including the amount of capital stock yet remaining unpaid and uncalled by the company and subject to be applied to the payment of its debts, the removal of the surviving trustees, the appointment of a new trustee or trustees in their room, an assessment or call to be made by the court p. 536on the uncalled and unpaid capital stock and the persons liable to pay the same, for the purpose of providing means to pay the debts of the corporation, and other appropriate relief. The company was duly served with process in the cause, in accordance with the laws and practice of the State of Virginia, certain of its officers were summoned, and the surviving trustees appeared voluntarily to the suit and answered the original and amended bills, whereby the court acquired full jurisdiction to decree as to all the matters and things involved in the suit.

Such proceedings were had in the cause that, on the 14th of December, 1880, the court decreed as follows: (1) That the deed of trust of September 20, 1866, was valid under the laws of Virginia and binding upon the corporation; (2) that, at the time of the execution of the deed, the corporation had called for 20 per cent of the amount payable by the subscribers to its capital stock, and that 80 per cent of that amount, being $80 on each share, remained unpaid and uncalled for at the date of the decree, and subject to be applied to the payment of the debts of the corporation secured by the deed of trust; (3) that the right to receive such 80 per cent from the persons liable to pay it, as and when it should become payable by the terms of the contract between the company and the subscribers to the stock, was vested by the deed in the trustees and their survivors, to be applied, when so collected, to the payment of the debts secured by the deed; (4) that the unpaid $80 per share was, by the terms of the contract between the company and the persons liable to pay the same, payable only in such amounts and at such times as the same might be required to be paid by the company through its president and board of directors; that no power or authority to sue for any part thereof was vested in the company or in the trustees under the deed, unless and until such call should first be made by the corporation, and that the trustees acquired no power to make such call by force of the deed of trust or otherwise; (5) that there was no property of the company wherewith to pay its debts, except the amount so remaining uncalled of its capital stock, and it was the duty of the proper officers of the corporation to call upon the persons liable therefor, to pay a p. 537sufficient amount of the unpaid $80 per share to carry out the trusts of the deed and pay the creditors secured thereby, but that the corporation and its proper officers had for many years wrongfully neglected to make such call; (6) that the unpaid and uncalled $80 per share remaining in the hands of the holders of the capital stock constituted a trust fund for the payment of the creditors of the company under the deed of trust; and that, by reason of the neglect and failure of the corporation to call for the payment of a sufficient amount thereof to satisfy its debts under the deed of trust, and thereby enable the trustees to sue for and recover the amount so called, the court possessed and would exercise such power, and would call for so much of the said uncalled amount as would be necessary to perform the trusts declared by the deed and pay the debts secured thereby; (7) the surviving trustees were removed by the decree and the plaintiff was appointed by it in their stead, to execute the trusts of the deed; (8) there were debts owing by the company, entitled to be paid under the deed of trust, amounting to $509,392.41, each of which debts was particularly ascertained and ordered by the decree to be paid. The decree further adjudged that it was necessary and proper that 30 per cent of the par value of each share of the stock should be called for and required to be paid by the subscribers therefor and their assigns, for the purpose of paying the debts of the company under the provisions of the deed of trust; and that a call and assessment be and the same was thereby made upon the stock and stockholders of the company, and their assigns, of 30 per cent of the par value of the stock, being $30 on each share thereof, the same, when paid, to be paid to and received by the plaintiff as trustee under the deed, in the stead of the original trustees therein named.

The plaintiff accepted the appointment so made, and complied with its terms and conditions, and was and is duly qualified to act as such substituted trustee, and to have the rights, and perform the duties, conferred upon and required of him by the decree. By force thereof, and of the statute of Virginia in such case made and provided, he, upon accepting such appointment, and qualifying as such trustee, as required p. 538by the decree, became and still is substituted to all the rights, powers, duties and responsibilities of the trustees named in the deed of trust, and became and is lawfully entitled to receive and collect the assessment or call of $30 per share on each share of stock of the company, from the persons liable to pay the same. By virtue of the premises the defendant became indebted to him in the sum of $1890, being $30 on each of the 63 shares of stock. In the year 1884, the plaintiff instituted suit in the Circuit Court of the United States for the Eastern District of Missouri against the defendant to enforce such liability, and on the 15th of July, 1885, suffered a non-suit in the case.

The demurrer of the defendant Liggett set forth as grounds of demurrer that the amended petition did not state facts su - ficient to constitute any cause of action; that it appeared from its face, that no cause of action accrued to the plaintiff by reason of any of the matters set forth in either the first or t e p. 539second count, at any time within ten years next before commencement of this suit, or at any time within five years next before its commencement, or at any time within ten years next before the commencement of the suit in which the plaintiff alleged that he suffered a non-suit; that both of the causes of action are barred by the statute of limitations of Missouri; and that the Chancery Court of the city of Richmond had no jurisdiction to make the assessment alleged, and it and the further assessment were and are void.

The writ of error is dated the 13th of December, 1886, and was allowed by the district judge, but the allowance bears no date. The writ bears the mark of having been filed in the office of the clerk of the Circuit Court on the 13th of December, 1886. The citation bears date the 13th of December, 1886, and is marked as having been filed on that day in the office of the clerk of the Circuit Court, and appears to have p. 542been served on the attorneys for the defendant on the 22d of December, 1886. The bond bears date the 13th of December, 1886, and was approved by the District Judge, the approval bearing no date, and is marked as filed in the office of the clerk of the Circuit Court on the 14th of December, 1886.

Upon the merits, we are of opinion that the judgment in favor of Liggett must be reversed. The decisions of the Circuit Court were made before the case of Hawkins v. Glenn, 1 JI U. S. 319, was decided by this court, on the 13th of May, 1889. All the points urged on the part of the defendant in the present case were fully argued, considered and decided by this court in Hawkins v. Glenn. The syllabus of that case correctly embodies the rulings of this court, in these words: “ In the absence of fraud, stockholders are bound by a decree against their corporation in respect to corporate matters, and such a decree is not open to collateral attack. Statutes of p. 543hmitation do not commence to run as against subscriptions to stock, payable as called for, until a call or its equivalent has been had, and subscribers cannot object, when an assessment to pay debts has been made, that the corporate duty in this regard had not been earlier discharged. Rules applicable to a going corporation remain applicable notwithstanding it may have become insolvent and ceased to carry on its operations, where, as in this case, it continues in the possession and exercise of all corporate powers essential to the collection of debts, the enforcement of liabilities and the application of assets to the payment of creditors.”

It was also contended in that suit by the defendant, that the decree of the Chancery Court of the city of Richmond p. 544was void as against him, because he was not a party to the suit. On the latter point, this court said: “We understand the rule to be otherwise, and that the stockholder is bound by a decree of a court of equity against the corporation in enforcement of a corporate duty, although not a party as an individual, but only through representation by the company. A stockholder is so far an integral part of the corporation that, in the view of the law, he is privy to the proceedings touching the body of which he is a member ; ” citing Sanger v. Tipton, 91 U. S. 56, 58; Count/y of Morgan v. Allen, 103 U. 8. 498, 509; Glenn n . Williams, 60 Maryland, 93, 116; Hambleton v. Glenn, 13 Virginia Law Journal, 242, and 9 S. E. Rep. 129.

This court further said: “We think it cannot be doubted that a decree against a corporation in respect to corporate matters, such as the making of an assessment in the discharge of a duty resting on the corporation, necessarily binds its members, in the absence of fraud, and that this is involved in the contract created in becoming a stockholder. The decree of the Richmond Chancery Court determined the validity of the assessment; and that the lapse of time between the failure of the company and the date of the decree did pot p. 545preclude relief, by creating a bar through statutes of limitation or the application of the doctrine of laches. And so it has been held in numerous cases referred to on the argument. The court may have erred in its conclusions, but its decree cannot be attacked collaterally, and, indeed, upon a direct attack, it has already been sustained by the Virginia Court of Appeals. Hambleton v. Glenn, supra.. .. Although the occurrence of the necessity of resorting to unpaid stock may be said to fix the liability of the subscriber to respond, he cannot be allowed to insist that the amount required to discharge him became instantly payable, though unascertained, and though there was no request, or its equivalent, for payment. And here there was a deed of trust made by the debtor corporation for the benefit of its creditors, and it has been often ruled in Virginia, that the lien of such a trust deed is not barred by any period short of that sufficient to raise a presumption of payment. Smith v. Virginia Midland Railroad, 33 Grattan, 617; Bowie v. The Poor School, 75 Virginia, 300; Ha/mbleton v. Glenn, 13 Virginia Law Journal, 242. This deed was not only upheld and enforced by the decree of December 14, 1880, but also the power of the substituted trustee to collect the assessment by suit in his own name was declared by the Court of Appeals of Virginia, in Lewis's Administrator v. Glenn, 6 S. E. Rep. 866. See, also, Baltimore & Ohio Railroad v. Glenn, 28 Maryland, 287. By the deed the subscriptions, so far as uncalled for, passed to the trustees, and the creditors were limited to the relief which could be afforded under it, while the stockholders could be subjected only to equality of assessment, and as the trustees could not collect except upon call, and had themselves no power to make one, rendering resort to the president and directors necessary, or, failing their action, then to the courts, it is very clear that the statute of limitations could not commence to run until after the call was made.”

vol . cxxxv—35 p. 546to pay at all until some authorized demand in behalf of creditors was made for payment. The defendant owed the creditors nothing, and he owed the company nothing save such unpaid portion of his stock as might be necessary to satisfy the claims of the creditors. Upon the bankruptcy of the company, his obligation was to pay to the assignees, upon demand, such an amount upon his unpaid stock as would be sufficient, with the other assets of the company, to pay its debts. He was under no obligation to pay any more, and he was under no obligation to pay anything until the amount necessary for him to pay was at least approximately ascertained. Until then his obligation to pay did not become complete.’ And it was held, ‘that when stock is subscribed to be paid upon call of the company, and the company refuses or neglects to make the call, a court of equity may itself make the call, if the interests of the creditors require it. The court will do what it is the duty of the company to do. . . . But under such circumstances, before there is any obligation upon the stockholder to pay without an assessment and call by the company, there must be some order of a court of competent jurisdiction, or, at the very least, some authorized demand upon him for payment ; and it is clear the statute of limitations does not begin to run in his favor until such order or demand.’ Constituting, as unpaid subscriptions do, a fund for the payment of corporate debts, when a creditor has exhausted his legal remedies against the corporation which fails to make an assessment, he may, by bill in equity or other appropriate means, subject such subscriptions to the satisfaction of his judgment, and the stockholder cannot then object that no call has been made. As between creditor and stockholder, ‘ it would seem to be singular if the stockholders could protect themselves from paying what they owe by setting up the default of their own agents.’ Hatch v. Dana, 101 U. S. 205, 214. The condition that a call shall be made is, under such circumstances, as Mr. Justice Bradley remarks in the matter of Glen Iron Works, 20 Fed. Rep. 674, 681, ‘ but a spider’s web, which the first breath of the law blows away.’ And as between the stockholder and the corporation, it does not lie in the mouth of the stockholder p. 547to say, in response to the attempt to collect his subscription, for the payment of creditors, that the claim is barred because the company did not discharge its corporate duty in respect to its creditors earlier. County of Morgan v. AUen^ 103 U. S. 498. These considerations dispose of the alleged error in not sustaining the defence of the statutory bar.”

But the president and directors stand for the corporation, and it is alleged in the amended petition that the corporation was a party to the amended bill, and that it was duly served with process in the cause, in accordance with the laws and p. 548practice of the State of Virginia. The corporation sufficiently represented the president and directors in their official capacity, in which alone they were to act in making a call, and it also, as held in Hawkins v. Glenn, sufficiently represented the defendant.