U.S. Supreme Court
Van Weel v. Winston, 115 U.S. 228 (1885)
Van Weel v. Winston
Argued October 21-22, 1885
Decided November 2, 1885
115 U.S. 228
Unless transactions set forth in a bill in equity constitute a fraud or breach of trust for which the court can give relief, charges that the acts set forth are fraudulent are not sufficient grounds of equity jurisdiction.
A bill in equity by a holder of railway mortgage bonds against the president of the company which alleges that the defendant received money from the sale of the mortgage bonds, but does not aver that the creditor has obtained judgment against the company upon his bonds and that execution issued on the judgment has been returned nulla bona shows nothing entitling the plaintiff to relief in equity as a creditor of the company.
The president of a railway company holds no fiduciary relation to mortgage bondholders of the company which requires him as their trustee or agent to see to the proper application of the funds received by the company from the sale of the mortgage bonds, or to account to the bondholders for any surplus from the proceeds of their bonds after constructing the works for which they were issued; his relations and duties in these respects are to the company and its stockholders, not to creditors of the company.
A, as president of a railway company and acting in its behalf, signed and caused to be issued a circular inviting subscriptions to mortgage bonds of the company issued for the purpose of constructing "a branch from the main line to Atchison, Kansas, a distance of about fifty miles." The mortgage made to secure these bonds described the road as
"the branch railroad of said party of the first part as the same now is or may be hereafter surveyed and being constructed, and leading from the Missouri River"
at a point opposite . . . Atchison . . . by the most practicable route, not exceeding fifty miles in length, to a junction with the main line.
The bonds were further secured by a second mortgage on the main line. The branch road, as located and constructed, was only twenty-nine miles in length. The first mortgage on the main line was subsequently foreclosed, whereupon B, a holder of a branch mortgage bond, commenced proceedings to foreclose that mortgage, which resulted in a foreclosure and sale of the branch to C, also one of the bondholders. B then filed his bill in equity against A personally on behalf of himself and other holders of the branch mortgage bonds, among whom was C. The bill set forth the above facts, and the relief sought for was redress against an alleged fraud in the representation that the proposed branch would be "about fifty miles in length." On demurrer, held:
1. That the representations in the circular were representations of the company, and were in no respect the personal representations of A. chanroblesvirtualawlibrary
2. That the complainant had no right to rely on the statement concerning the length of line as materially affecting his security.
3. That it was the duty of persons purchasing the bonds to look to the mortgage for the description of the property mortgaged to secure them.
4. That the description in the mortgage contemplated that if the best interests of the company should require a line shorter than fifty miles, the company should have the right to adopt it.
5. That the bill showed no right in the complainant to use the names of the company or stockholders to obtain redress for a tort committed on them, and no equities in these respects against
6. That the bill showed no privity between A and the bondholders as to his use of money which they had loaned to the company.
The original bill in this case was filed December 12, 1876. The amended and supplemental bill, on which judgment was rendered below, was filed May 22, 1850. Van Weel, an alien holder of bonds of the Chicago and Southwestern Railway Company of Iowa and Missouri, secured by mortgage on the Atchison Branch of that road, was complainant. The railway company, and Frederick H. Winston and Campbell, both citizens of Illinois, were defendants. Winston was former president of the company. The trustees of the mortgage of the Atchison Branch, viz., Burnes of Missouri and Doves and Frederick S. Winston of New York, were also made parties defendant, but were not served with process. Doves appeared voluntarily. The other trustees did not appear. The bill alleged that there were several intervening petitioners, joining as complainants, among whom was one Johannes Berg, also a bondholder. The bill, after setting forth the formation of the company and a business connection with the hock Island Railroad Company, made sundry allegations respecting fraudulent obtaining of the money of the complainants for the construction of the Atchison Branch by the issue of a circular inviting subscriptions to the mortgage branch bonds. These averments are transcribed verbally in the opinion of the Court, post, pp. 115 U. S. 239, 115 U. S. 241, to which reference is made.
There was attached to the bill as an exhibit a copy of the mortgage of the branch road. It was recited in this mortgage that the railway
"company has acquired and now possesses the right, under and by virtue of the laws of the State of Missouri,
to construct, maintain, and operate a branch railway from the Missouri River, opposite the City of Atchison, Kansas, by the most practicable route, not exceeding fifty miles in length, to a junction with the main line of the said first party, and whereas the said first party has already commenced the construction of said branch line and stanch in need of money to complete the same."
The property mortgaged was described in the following language:
"All and singular the branch railroad of the said party of the first part, as the same now is or may be hereafter surveyed, and being constructed and leading from the Missouri River in the State of Missouri at a point opposite the City of Atchison, in the State of Kansas, by the most practicable route, not exceeding fifty (50) miles in length to a junction with the main line of the railway of said first party, together with all and singular the right of way for said branch road belonging to the party of the first part,"
&c. There were several other provisions in the mortgage, of which only the following are material in connection with the opinion of the court.
"The said party of the first part hereby agrees to and with the said parties of the second part that the amount of bonds issued hereunder shall not exceed in the aggregate the sum of one million of dollars upon the whole of said branch line of railway from said Missouri River to said main line of the said Chicago and Southwestern Railway, a distance not exceeding fifty miles. . . . Said Chicago and Southwestern Railway Company further covenant and agree that the money borrowed or procured for the purpose aforesaid upon the security of said bonds shall be faithfully applied to the building and completing of said line of railway and to no other purpose, and that said application shall be made with due diligence."
The principal fraud (so far as considered in the opinion of the court) was charged in the following language:
"Your orator further states that it was also untrue, and known to be untrue by said Frederick H. Winston, that said branch line was designed to be fifty miles in length, and therefore, with the intention to mislead and deceive the purchasers of said proposed bonds, said branch was stated in said circular to be 'about'
fifty miles in length, and your orator says that before said circular was issued a contract had been entered into with one H. M. Aller for building said branch, and said Winston then knew it would not be over twenty-nine miles in length. Your orator further states that it was untrue that it was intended by said Winston that said line should pass through the Counties of Buchanan, Clinton, and Platte, as stated in said circular; that said line did not in fact enter the County of Clinton; but your orator states that said Winston, with intention to deceive and mislead the purchasers of said proposed bonds, caused a map to be attached to said circular whereon the junction of the branch and main line appeared to be near Cameron, and showing that said branch would of necessity pass through said Clinton County."
After making some other allegations referred to in the opinion of the court, the bill further charged that the complainants and other purchasers of the bonds were induced by these fraudulent representations to purchase them; that the whole sum realized from their sale was first deposited with the Rock Island Company and then came into the hands of "Winston and his Confederates . . . in trust to be faithfully expended in the building and completion of said branch road;" that the parties who loaned the money for the construction of the branch road were defrauded of their promised security to the extent of twenty-one miles; that Winston, while acting as president, made a large profit in the construction of the branch, the larger part of which he converted to his own use, and the remainder divided among Confederates; that the road was not properly constructed; that the branch road from the outset was substantially valueless; that Winston, as president, did not faithfully apply the sums received from the Rock Island Company in the building and completion of the branch road, but converted them to the use of himself and associates; that the mortgage on the main line was foreclosed at the instance of the Rock Island Company, and the mortgaged property sold and conveyed to the purchaser at the foreclosure sale; that the complainant then instituted his suit to foreclose the mortgage on the branch road, and obtain judgment of foreclosure, and the mortgaged property chanroblesvirtualawlibrary
was sold under the foreclosure to Johannes Berg for $10,000; that after these foreclosures, the Southwestern Railway Company was divested of all its property, franchises, power and capacity to carry on business as a railroad company, and to carry out the purposes for which it was incorporated; that the Southwestern Company has failed to call to an accounting Winston and his associates, although requested by complainant so to do, with like allegations as to the trustees of the mortgage, who were made defendants, but not served with process; that these facts became known to complainant only shortly before the bringing of this bill; that Winston had fraudulently concealed from the complainant the fact of his interest in the construction of said road, so that the same was not discovered till shortly before the bringing of this suit, and that sufficient bonds of indemnity had been tendered to F. S. Winston, Burnes, and Dows, trustees under the mortgage, with a request that they should appear as defendants, and that Dows had appeared, but the other trustees had refused and neglected to appear. The relief asked for was the following:
"That the defendants, Frederick H. Winston and George C. Campbell, may be required to render a full, strict, and exact account of their and each of their transactions in relation to the business of the Chicago and Southwestern Company, and particularly the Atchison Branch thereof, from the 1st day of June, A.D. 1571, to the present date; that the amount of moneys, bonds, stocks, subscriptions, lands, or parcels of land received or taken by said Chicago and Southwestern Railway Company, or by said Frederick H. Winston and Campbell, or either of them, in connection therewith or in any way relating to said branch railway be ascertained; that all proper disbursements or expenditures of moneys, bonds, stocks, or other property made in the necessary construction of said branch railway be also ascertained, and that the defendants, Frederick H. Winston and Campbell, may be charged by the decree of this court to pay the ascertained balance of receipts above proper expenditures, and if it shall appear that said Winston or Campbell, or either of them, have now in their possession or under their control any of the bonds or stocks subscribed or donated in aid of
said branch railway, and which by virtue of said contract or otherwise became the property of said Southwestern Company, or if said Winston and Campbell, or either of them, or if any other person or persons in trust for them, or either of them, hold any lands, or parcels of land, or interests in either, derived directly or indirectly through or by means of their, or either of their connection with said railway or branch, or in aid of the construction of said branch, that they be required by the decree of this Court to account for and surrender the same as this honorable court shall hereafter direct. And that if it shall appear that the said Frederick H. Winston and the said Campbell, or either of them, misapplied and converted to their own use any portion of the said fund so advanced by your orator and the other purchasers of said bonds as aforesaid in trust to be expended in the construction of said branch road, that they may be respectively charged with the amount so converted and misapplied by them, as well as all other amounts which they aided and caused to be applied for other purposes than the building and completion of said road, and that they be decreed to refund and restore the same to your orator and the other purchasers of said bonds, by whom or in whose behalf the said fund was so advanced as aforesaid; or, if some other method of relief shall appear more consistent with the character of this case, as it may be disclosed, your orators pray that said defendants, Winston and Campbell, may be required to pay into court the just and full sum due your orator upon said bonds, assuming and declaring the same to be due, together with the interest thereon, as in said bonds is provided, and that upon such payment being made, together with such further costs as may properly be imposed, your orator may surrender his said bonds for cancellation or otherwise, as may be ordered, and that your orator may have such other and further or different relief as to equity shall seem meet."
Winston demurred to this bill on the ground of nonjoinder of indispensable parties, because other indispensable parties (F. S. Winston and Burnes) had not been served with process; that the bill was multifarious; that there was no privity between chanroblesvirtualawlibrary
complainant and defendant; that the complainant had a complete and adequate remedy at law which he had not exhausted; that the complainant had no right to commence a suit in his own name; that the supposed cause of action did not accrue within five years next before filing the amended bill; that the amended bill set up new causes of action; that when the Southwestern Railway Company was first made party in an amended bill, the alleged causes of action were barred, and that the bill did not state a case for relief in equity. The demurrer of the defendant Campbell was to the like effect. The railway company also demurred. chanroblesvirtualawlibrary
The cause was heard below, on the amended bill and demurrer, before Mr. Justice Harlan, August 1, 1881. He held, as to the alleged fraudulent representations in the circular, that if a fraud was committed, the remedy was adequate at law; that as to the alleged violations of duty by Winston as president, and conversion to his own use of moneys realized from sale of the bonds, the right of action was barred by the statute of limitations, and that no trust was disclosed by the bill to exempt the complainant from the operation of the statute. The demurrers were accordingly sustained and the bill was dismissed. Whereupon the complainant appealed to this Court.