U.S. Supreme Court
Memphis & Little Rock R. v. Dow, 120 U.S. 287 (1887)
Memphis and Little Rock Railroad v. Dow
Argued November 11-12, 1886
Decided January 24, 1887
120 U.S. 287
The provision in the Constitution of Arkansas of 1874 that
"No private corporation shall issue stock or bonds except for money or property actually received, or labor done, and all fictitious increase of stock or indebtedness shall be void"
does not prevent the carrying out of an agreement between mortgage bondholders of an embarrassed railroad company in that state by which it was agreed that trustees should buy in the mortgaged property on foreclosure, and convey it to a new company to be organized by the bondholders which should issue new mortgage bonds to pay the expenses of the sale, and other new mortgage bonds to be taken by the bondholders in lieu of their old bonds, and full paid up stock subject to the mortgage debt, to be delivered to and held by the bondholders without any payment of money, and the bonds issued under such an agreement are not subject to the provisions of § 5, 488 Rev.Stat.Ark., Mansfield's Digest, page 1057, respecting the legal rate of interest for certain classes of railroad securities.
Trustees under a mortgage from a railroad company with covenants of warranty are entitled to protect the trust property against a forced sale under a prior encumbrance, and upon the payment of that encumbrance to have the benefit of its lien as against the company, and to be reimbursed the amount so paid by them with legal interest, but the rate of interest in such case should be determined by the law in force at the time of the subrogation.
The appellant, the Memphis and Little Rock Railroad Company (as reorganized), an Arkansas corporation, conveyed, by deed of May 2, 1877, to Pierson, Matthews, and Dow, trustees, its road and connections and all its property, rights, and privileges, including its franchise to be a corporation, to secure the payment of its bonds of the same date, aggregating $2,600,000, chanroblesvirtualawlibrary
and payable in thirty years, subject to a mortgage for $250,000, executed May 1, 1877. The deed provided for the employment at the expense of the trust estate of such attorneys and agents as were reasonably necessary for the execution of the trust, and also for the payment of charges, costs, expenses, and compensation incurred by the trustees, from time to time, "in and about or for the execution of the trust."
On the 4th day of March, 1882, the Supreme Court of Arkansas, in a suit to which that corporation was a party, rendered a decree adjudging that the state had a lien upon its road and rolling stock to secure the payment of $202,133.32, with interest from December 22, 1879, until paid at the rate of eight percent per annum, that being the aggregate principal and interest then due on a loan of $100,000 made January 10, 1861, by the state to the (old) Memphis and Little Rock Railroad Company, and secured by a mortgage upon its rolling stock, and upon the same road now operated by the appellant. On the 25th of March, 1882, five days before the day fixed for the sale directed to be made in satisfaction of that decree, the appellees (Moran having succeeded Pierson), as trustees in the deed of May 2, 1877, paid into the Treasury of Arkansas the sum of $239,672.71 in full discharge of the state's claim.
The appellees seek by this suit to be subrogated to the rights of the state and to charge the mortgaged property and interests with the amount so paid by them, with interest thereon, and also with such sums as may be ascertained to be due by reason of liabilities incurred, and costs, time, and labor expended by them in and about the trust.
The company resists each of the claims asserted by the appellees. Its answer proceeds mainly upon the ground that the bonds secured by the deed of May 2, 1877, were and are void under the Constitution and laws of Arkansas, having been issued, it is alleged, to the stockholders of the appellant without consideration in money, labor, or property actually received, of which fact the plaintiffs and every original taker of the bonds were advised, and as to which subsequent takers, if such there were, were put upon inquiry by the chanroblesvirtualawlibrary
recitals in the mortgage securing their payment. Consequently it is contended the appellees were under no duty, and had no legal right as trustees or in any other capacity, to intervene and satisfy the decree in favor of the state or to incur liability or costs in reference to the defendant's property.
The company also filed a cross-bill, setting forth the same grounds and praying that upon final hearing, the deed of May 2, 1877, and the bonds thereby secured be declared void.
The court sustained exceptions to the answer and a demurrer to the cross-bill, dismissing the latter for want of equity and rendering a decree in accordance with the prayer of the bill. By the decree, the appellees were subrogated to all of the rights of the state under the decree of March 4, 1882, and for the amount so paid by them, with interest thereon from March 25, 1882 at the rate of eight percent per annum, aggregating $261,456.27, together with interest on the latter sum at the same rate from the date of the decree herein, they were adjudged to have a line upon the property, rights, and interests embraced by the deed of May 2, 1877, subject -- the appellees having consented thereto -- to the lien created by that deed, as well as by a deed executed May 1, 1877. A decree was also entered against the company for $29,580.87, the amount found due to the plaintiffs for services rendered in and about the trust, and for counsel fees and costs in this suit. To this provision of the decree the appellant also objects upon grounds to which reference will be hereafter made.
The principal question relates to the validity of the $2,600,000 issue of bonds secured by the deed of May 2, 1877.
The principal facts, chronologically stated, which bear upon this and other questions in the case, are as follows:
The Memphis and Little Rock Railroad Company was incorporated in 1853 under the laws of Arkansas, with authority to increase its capital to a sum sufficient to complete and operate a railroad between Memphis and Little Rock, by opening books for new stock or by selling new stock, or by borrowing money secured by mortgage of its charter and stock. Its stockholders at a meeting held February 20, 1860, adopted a resolution authorizing the board of directors, for the purpose of chanroblesvirtualawlibrary
building and equipping the road, to increase the capital stock of the company to $1,300,000, by issuing coupon bonds of $1,000 each, bearing eight percent interest, convertible at any time within ten years thereafter into shares of stock, such bonds to be secured by mortgage upon the company's road, charter, works, and real estate, or either of them. The action of the stockholders having been ratified by the directors, the company by deed of trust executed May 1, 1860, conveyed to Tate and others its franchises, property, privileges, road, roadbed, right of way, rolling sty by deed of trust executed May 1, 1860, conveyed to Tate and others its franchises, property, privileges, road, roadbed, right of way, rolling sty by deed of trust executed May 1, 1860, conveyed to Tate and others its franchises, property, privileges, road, roadbed, right of way, rolling stock, and works, in trust to secure its bonds, aggregating $1,300,000, payable thirty years after date, with interest at the rate of eight percent per annum. On the 10th of January, 1861, it placed a mortgage upon its road and rolling stock to secure the before-mentioned state loan of $100,000, with interest from that date until paid at the rate of eight percent. By deed of March 1, 1871, it conveyed its franchises, property, and net income to Henry F. Vail, in trust to secure other bonds, amounting to $1,000,000, payable thirty years thereafter, with interest at the rate of eight percent per annum. The company having made default in the payment of interest on the latter bonds, Vail, the trustee, on the 17th day of March, 1872, sold and conveyed these properties, rights, privileges, and franchises for $15,000 in cash, subject to all prior and superior liens, to one Stillman Witt, who purchased in behalf of the holders of bonds secured by the deed of March 1, 1871. Subsequently, March 29, 1873, Witt executed a deed declaring the respective interests of the parties whom he represented, and conveying to each his proportionate share of the property and interests so purchased. On the 17th of November, 1873, the grantees in the latter deed conveyed the same property, rights, and franchises to the Memphis and Little Rock Railway Company, a corporation then recently organized under the laws of Arkansas by the parties to whom Witt conveyed, subject, however, to the condition that that company should execute its bonds for $2,600,000, secured by first mortgage to the New York Guaranty and Indemnity Company, that amount, according to the estimate of the parties, being less than the principal and interest chanroblesvirtualawlibrary
due on the $1,300,000 mortgage of May 1, 1860, and other indebtedness theretofore incurred in the construction and equipment of the road. In conformity with that condition, the railway company executed, December 1, 1873, a mortgage securing its bonds for $2,600,000. That mortgage provided, among other things, that
"In case of any sale, judicial or otherwise, of the premises embraced in this mortgage, and the holders of a majority in interest of the then outstanding bonds secured by this mortgage shall, in writing, request the said trustee, or its successor or successors, or his or their survivor or survivors, so to do it, they or he is authorized to purchase the premises embraced herein for the use and benefit of the holders of the then outstanding bonds and coupons secured by this mortgage. And that, having so purchased said premises, the right and title thereto shall vest in said trustee or trustees, and no bondholder shall have any claim to the premises, or to the proceeds thereof except for his pro rata share of the proceeds of said premises as represented in a new company or corporation to be formed by a majority in interest of said bondholders for the use and benefit of the holders of the bonds secured hereby. And whenever the holders of a majority of said bonds shall have organized a new company or corporation for the use and benefit of all the holders of the bonds secured by this mortgage, the said trustee or its successor or successors or his or their survivor or survivors shall reconvey the premises so purchased by it, him, or them to said new company or corporation."
The New York Guaranty and Indemnity Company was succeeded in the trust by Pierson, Dow, and Matthews. The railway company having made default in meeting the interest on its bonds, and the principal, under the terms of the deed of trust, becoming thereby due, the trustees instituted a suit for foreclosure. Pending that suit, Tate and others, trustees in the mortgage of May 1, 1860, were made co-plaintiffs. The bill was amended and the prayer for relief so enlarged as to include a foreclosure of the latter mortgage. Both mortgages were foreclosed by final decree of November 1, 1876, the amount found to be due on that of May 1, 1860, being $1,088,348.80, chanroblesvirtualawlibrary
with interest at the rate of six percent per annum, and the amount due on that of December 1, 1873, being $3,016,000. The decree provided, among other things,
"That if said trustees shall be so requested, and shall bid for said property, they shall pay into court a sufficient sum to pay the costs of sale and this suit, including counsel fees, allowances to trustees, to the commissioner for sale, and master of this court. And for the residue, their bid, to the amount due and ordered to be paid by this decree, shall be accepted by said commissioner and he shall forthwith execute a deed conveying the purchased property to said trustees for and upon the trusts expressed in said second mortgage; that is to say, upon trust that they will convey the same to such new company or corporation as may be organized by the holders of a majority in interest of said bonds, upon demand thereof."
At the sale under that decree, Pierson, Dow, and Matthews, as trustees in the deed of December 1, 1873, purchased the property for the holders of bonds secured by that instrument, and a deed was made to them, on April 28, 1877, in trust for such holders
"and upon the further trust that they will convey the same and all thereof to such company or corporation as may be formed by the holders of a majority of such bonds at such time, and upon such terms and conditions, as a majority of the holders of such bonds may require."
On the day last mentioned, the majority in value of such bondholders entered into articles of association reorganizing the Memphis and Little Rock Railroad Company and fixing its capital stock at $1,300,000. The parties engaged in the reorganization being holders of the bonds secured by the deed of December 1, 1873, and beneficiaries under the deed of April 28, 1877, took the entire stock to themselves, without paying therefor in money. The articles, after declaring that each and every share of the above-named stock was fully paid stock and acknowledging on behalf of the company that $100 had been paid upon each share by the holder thereof, provided
"That we hereby require the said trustees, William S. Pierson, Watson Matthews, and R. K. Dow, to convey all and
singular the property, charter, franchises, rights, privileges, and immunities so conveyed to them by such commissioner to the Memphis and Little Rock Railroad Company, as reorganized, upon the following terms and conditions, to-wit:"
"1. That said railroad company, as reorganized, shall issue its two hundred and fifty bonds, payable to bearer at the office of the Central Trust Company of New York, in the City of New York, each for one thousand dollars, maturing in five equal installments, on the first days of May in the years 1879, 1880, 1881, 1882, and 1883, bearing interest from date at the rate of ten percent per annum, payable semiannually at the same place, with coupons for said interest annexed, and shall secure the payment of the principle and interest thereof by a mortgage of all and singular the said property, charter, franchises, rights, privileges, and immunities, of which mortgage said Pierson, Matthews, Matthews, and Dow shall be trustees, and shall deliver the same to the said Pierson, Matthews, and Dow, to be by them sold, and the proceeds applied to the payment of the liens upon the said property reserved by the decree of the said court directing the sale thereof, and to the payment of moneys borrowed by them to make the cash payment required by said decree."
"2. That said Memphis and Little Rock Railroad Company as reorganized shall execute and deliver to said Pierson, Matthews, and Dow its two thousand five hundred and seventy-five other bonds, each for the sum of one thousand dollars, and its one hundred other bonds, each for two hundred and fifty dollars, payable at the same place thirty years after date, bearing interest from the first day July, 1878, and until the first day of July, 1882 at the rate of four percent per annum, and after the last-named date at eight percent per annum, payable at the same place, with coupons for such interest attached, and shall make provision for a sinking fund for redemption of such bonds, and shall secure payment of said bonds, interest, and sinking fund by a mortgage of all of said property, charter, franchises, rights, privileges, and immunities, of which mortgage said Pierson, Matthews, and Dow shall be trustees, such last-named bonds to be by said Pierson,
Matthews, and Dow equally distributed among the holders of the bonds secured by the mortgage of the Memphis and Little Rock Railway Company, of date December 1, 1873."
These terms were formally accepted by the stockholders, and on April 30, 1877, the trustees conveyed to the reorganized company the property, rights, and interests so purchased, subject to the terms, conditions, and trusts prescribed in its said articles of association.
Pursuant to the conditions upon which it received title, the appellant, on May 1, 1877, issued its bonds, amounting to $250,000, and, to secure their payment conveyed the same property, rights, and interests to Pierson, Dow, and Matthews as trustees. The proceeds of these bonds were applied in payment of the expenses of foreclosure and reorganization. In further compliance with these terms, the appellant issued its bonds for $2,600,000 for distribution among the holders of bonds secured by the mortgage of December 1, 1873, and to secure their payment executed the before-mentioned mortgage or deed of trust of May 2, 1877. The recitals in the deed disclose all the foregoing circumstances connected with the organization of the appellant corporation, and with its acquisition of these properties. chanroblesvirtualawlibrary