Carey v. Hou. & Tex. Cent. Ry. Co., 150 U.S. 170 (1893)

Stephen W. Carey, a citizen of New Jersey, and several other persons, citizens of New York and Great Britain respectively, who sued as stockholders of the Houston and Texas Central Railway Company in their own behalf and in behalf of others similarly situated, filed their bill, December 23, 1889, and an amended bill, March 3, 1890, in the Circuit Court of the United States for the Eastern District of Texas, against the Houston and Texas Central Railway Company (No. 1), the Houston and Texas Central Railroad Company (No. 2), the Central Trust Company of the city of New York, and the Farmers’ Loan and Trust Company, corporations organized under the laws of New York, and a number of other corporations and individuals, citizens of Kentucky, Texas, New York, and Louisiana, seeking to vacate and set aside, upon the ground of collusion and fraud, and want of jurisdiction, a decree of foreclosure and sale entered by that [p. 172] 1V2 OCTOBER TERM, 1893.

“Complainants further allege that, as they are advised and believe and charge, the said decree was and is absolutely invalid and void and beyond the power of the court to grant; that there was no foundation for said decree or jurisdiction m the court to award it, and that the same was entered by consent and agreement, and without any investigation or adjudication by the court, but was the result of agreement simply, and was procured, as complainants allege on information and belief, by collusion and fraud on the part of said Huntington and his associates and the directors and officers of said Houston and Texas Central Railway Company, and was and is a part of the scheme-to acquire possession of said railway in the interest of said Huntington and the said Southern Pacific Company, without regard to the rights or interests of the holders of< the stock of said company No. 1, and in direct [p. 173] disregard of the provisions and terms of the mortgages; that the defences interposed that the principal of the mortgages had not become due and that the said railway could not be sold without a sale first of the lands and the other defences interposed were substantially abandoned and withdrawn as part of the said wrongful and fraudulent scheme herein referred to; that the said defences were never submitted to the court for adjudication or determination, nor was evidence heard or offered to sustain the same, but the decree was the result of the agreement which the bondholders had made with the said Southern Pacific Company and Central Trust Company, and the rights of the stockholders were not considered or protected by any of the parties to the record in said cause, nor submitted to the court for adjudication or investigation, nor were the stockholders in any way advised or permitted to be informed of the transaction herein complained of.

The prayer of the bill was that the decree rendered by the court below on May 4, 1888, in the consolidated cause, be vacated and set aside, and adjudged and decreed to be frauducnt, collusive, illegal, and void, and that complainants be permitted to intervene and become parties defendant in said [p. 174] suit, and to be heard and defend the same; that the sale of the railroad and lands of the Houston and Texas Central Railway Company, No. 1, under said decree be vacated and set aside, and the said railway and lands be restored to the possession of the receivers appointed by the court; that the defendants be enjoined temporarily and perpetually from executing, delivering, or recording any mortgage upon the property of the company referred to in said decree, and from issuing, alienating, or parting with any shares of stock of the new or reorganized Houston and Texas Central Railroad Company, No. 2, or any bonds secured by mortgage upon any property claimed to be possessed by said company, or any stock or bonds issued or intended to be issued pursuant to said reorganization agreement, and for further relief.

at no evidence whatever as to the issues raised was taken and no hearing had, and by the terms thereof the mortgages which [p. 176] 176/ OCTOBER TERM,’ 18933

In order to bring this appeal within the first of these classes, the jurisdiction of the Circuit Court must have been in issue in this case, and, as appeals or writs of error lie here only from final judgments or decrees, must have been decided against appellants; and the question of jurisdiction must have [p. 180] been certified. We do not now say that the absence of a formal certificate would be fatal, but it is required by the statute, and its absence might have controlling weight where the alleged issue is not distinctly defined. This record contains no such certificate, nor was it applied for, nor does it appear that the jurisdiction of the Circuit Court was in issue. Appellants by filing their bill invoked the jurisdiction of the court below over the entire case, the defendants did not contest that jurisdiction, and the court adjudicated accordingly. This is conceded, but it is contended that the question of jurisdiction was in issue because the bill attacked the jurisdiction of the Circuit Court over the foreclosure suit, or its jurisdiction to make the decree of foreclosure and sale of May 4, 1888, passed in that suit. But the fifth section of the act of March 3, 1891, does not authorize a direct appeal to this court in a suit upon a question involving the jurisdiction of the Circuit Court over another suit previously determined in the same court. It is the jurisdiction of the court below over the particular case in which the appeal from the decree therein is prosecuted, that, being in issue and decided against the party raising it and duly certified, justifies such appeal directly to this court. This suit to impeach the decree of May 4,1888, and to prevent the consummation of the alleged plan of reorganization, was a separate and distinct case, so far as this inquiry is concerned, from the suit to foreclose the mortgages on the railroad property; and no question of jurisdiction over the foreclosure suit or the rendition of the decree passed therein can be availed of to sustain the present appeal from the decree in this proceeding.

The collusion and fraud charged in the institution and conduct of the prior litigation, and in the procurement of the decree against the railway company, and in the other transactions in respect of which relief was sought against the defendants, seem to form the gravamen of the case; but whether the bill be treated as a bill of review, an original bill of the same nature, or an original bill on the ground of fraud, it was a distinct proceeding in which the moving parties were shifted, and the fact that it put in issue the jurisdiction in the [p. 181] proceedings it assailed would not change the appeal from this, into an appeal from the prior decree.

The appellants, being the holders of nearly the entire issue of 887,000 in bonds of the county of Dixon, which were^by that county issued and donated to the Covington, Columbus and Black Hills Railroad Company, January 1, 1876, filed their bill in May, 1888, in the Circuit Court of the United States for the District of Nebraska, setting forth, among other things, that by a vote of the electors of the county, held on December 27, 1875, the bonds in question were authorized to be issued to the railroad company; that they became the holders thereof, relying upon recitals contained therein, and the certificates endorsed thereon, and believing them to be binding and valid obligations of the county; that, when the interest coupons matured, payment was refused by the county officials, who alleged that the bonds were invalid, because they exceeded in amount ten per cent of the assessed valuation of the property of the county at the time of their issuance. The hill further alleges that complainants had offered to surrender up for cancellation such amounts of the bonds as exceeded ten [p. 184] per cent of the assessed valuation of the property of the county, each holder surrendering his proportionate share of such excess; that this offer was refused by the county, which complainants insist cured any infirmity in the bonds, and that the county was equitably bound to recognize as valid the residue thereof, because it and its citizens had received in the construction of the railroad, which the bonds were issued to promote, all the consideration that was intended to be secured thereby. The prayer of the bill was that an account might be taken to ascertain the excess of the issue over ten per cent of the assessed valuation of the property of the county; that such excess might be distributed among the holders of the bonds, or be applied to reduce the amount of each bond ratably, so as to bring the entire issue within the limit authorized by law; that the residue might be declared good and valid, and that the county might be decreed to pay the same, with interest, at the rate of ten per cent from January 1, 1876, to the date of the decree.

The bonds in question were made payable to the Covington, Columbus and Black Hills Railroad Company, or bearer, and were put in circulation by that company with its indorsement thereon guaranteeing to the holders the payment of the principal and interest of the bonds, according to the tenor thereo, at the place where, and as the same became due and payab e. The only consideration received by the county in the transaction was the incidental benefit derived from the construction of the railroad — the proceeds of the bonds, when negotiate, being received directly by the railroad company. The theorj of the bill is that the bonds are void only to the extent t a they exceed ten per cent of the assessed valuation o property of the county at the time of their issuance, and upon [p. 185] the abatement of that excess the holders are entitled to have the residue thereof — which the county could have lawfully issued — treated as valid, because of the incidental benefits derived from the construction of the road which was sought to be secured by the donation of bonds.

While the complainants concede that the issue of bonds was in excess of what the county was authorized to donate under this provision of the constitution, and for that reason were invalid at law, they insist that a promise to pay so much thereof as could have been lawfully issued should be implied and enforced against the county, under the principle applied in Louisiana v. Wood, 102 IT. S. 294, and in Read v. Plattsmouth, 107 IT. S. 568. Those cases are clearly distinguishable from the present. In Louisiana v. Wood, by the act of the C1ty, the bonds bore a false date which apparently made them obligatory and binding; they were sold by the city and purchased by the holder in good faith, and the money paid therefor went directly into the city’s treasury. This court held that the city was in the market as a borrower and received the money in that character, notwithstanding the transaction assumed the form of a sale of her securities, which being [p. 186] defectively executed a suit could not be maintained thereon, and that the holder was entitled to recover the money paid, with interest thereon from the time the obligation of the city to pay was denied.

But aside from this view of the subject the bill proceeds upon the false assumption that the bonds in question were partly valid and partly void, and that the case is brought [p. 188] within the principle announced in Daviess County v. Dickvnr son, 117 U. S. 657. In that case, under authority conferred by statute, the county voted a subscription of $250,000 to a railroad company, which was made, and, by order of the county court, bonds of the county to that amount were ordered to be sold and disposed of by a committee, for the purpose of paying such subscription. The officers of the county, without authority, executed and issued bonds in the amount of $300,000. The bonds, as they were delivered, were separately numbered and entered upon the county register. The court held that the power to issue bonds was limited to $250,000, and that the bonds issued in excess of that amount were unlawful and void. It was further held that bonds to the amount authorized, which were first issued and delivered, were valid and entitled to payment. In that case there was a clear and well-defined line between the legal and illegal issues, which enabled the court to declare invalid such of the bonds as exceeded the amount authorized, and to hold that the illegal excess did not vitiate the bonds which were authorized and legally issued. There was no scaling of the entire issue in that case so as to bring it within the limits of the county’s authority. The $250,000, which the court pronounced valid, had been expressly authorized by the county, and the bonds for that amount were readily separated from the $50,000 excess which had not been authorized. It did not, therefore, involve any investigation on the part of the court to ascertain what the county could lawfully issue, but was merely the identification of the bonds which it intended to issue. Again, the amount of the bonds issued was not based upon the assessed valuation of the property of the county, but was limited to the amount which the people of the county, by an election duly held, had determined should be issued. There is a radical difference in these respects between that case and the one under consideration.

What the county authorized and carried into execution in the present case, both by the vote and by the donation, was one entire transaction, and if it should be so reformed as to curtail the entire issue of bonds to such an amount as was within the constitutional limits of the county to donate, i [p. 189] would be something different from that which was voted by the county, and carried into effect by the issue of the bonds. This would involve the making of a different donation from what the county voted and intended to make to the railroad company.

Again, if a right to the equitable relief sought by the complainants could be worked out on the theory of a contract between the county and the railroad company, it would be necessary to establish that such contract actually existed and was valid. In the present case, however, the county had no authority to vote the donation. In Reineman v. Covington, Columbus (& Black Hills Railroad, 7 Nebraska, 310, where an excessive issue of bonds had been voted by the county in aid of internal improvements, it was held by the Supreme Court of Nebraska that the vote was simply a void act, and conferred no authority on the county officials to issue the bonds of the county, either to the amount voted or for any amount. It was urged in that case, as in this, that even if it should be held that t e proposition submitted to the electors was in excess of the amount authorized to be voted, still to the extent that the county could have lawfully voted and issued such bonds, they uoula be treated as constituting a contract between the county [p. 190] and the railroad company, and to that extent he upheld. The Supreme Court of the State declined to accede to this view of the subject, and ruled that “ the proposition submitted to the electors was an entirety and indivisible. It exceeded the statutory limit, and was therefore wholly unauthorized. The election was simply a void act, conferring no authority whatever upon the county commissioners to issue bonds of the county in any amount whatever.”

In Buchanan v. Litchfield, 102 U. S. 278, bonds were issued by the city of Litchfield under authority of a statute of Illinois and an ordinance of the city, for the construction of a system of water works for the use of the municipality. Neither the statute nor the ordinance contained any reference to the provisions of the constitution prohibiting any county, city, township, or school district from becoming indebted in any manner, or for any purpose, to an amount, including existing indebtedness, in the aggregate exceeding five per cent of the taxable property therein. The ordinance of the city made no reference to or mention of the indebtedness of the city, although at that time it exceeded the constitutional limit. A bona fide holder of the bonds brought suit upon the unpaid coupons thereto attached, and it was held that they were void and could not be recovered. In this case the city was directly benefited by the issue of the bonds, which were negotiated for the sole purpose of erecting a system of public works. The holders of the bonds thereafter sought relief by a bill in equity against the city of Litchfield to enforce the payment [p. 191] of the money loaned, or which the city had received upon the issue of the bonds, and used in the construction of its public works. The question of their right to recover on the equitable consideration came before this court in Litchfield v. Ballou, 114 U. S. 190, and it was held that a provision in a state constitution that a municipal corporation shall not become indebted in any manner, or for any purpose, to an amount exceeding five per cent of its taxable property therein, forbids implied as well as express liability for the amount or amounts received on bonds issued contrary to such provision, and that a court of equity could not afford relief in such a case either on an express or implied obligation ; that the transaction being invalid at law, was equally invalid in equity. This conclusion was reached after a full review of the authorities on the question, and the court denied the relief sought.

uP°n the town by the appropriation to the railroad company, 1 became entitled in equity to claim the payment of the [p. 192] amount represented by the bonds on the basis of the original consideration. This contention was not sustained, and the complainant was denied the equitable relief sought.