U.S. Supreme Court
Lloyd v. Preston, 146 U.S. 630 (1892)
Lloyd v. Preston
Argued November 29-30, 1892
Decided December 19, 1892
146 U.S. 630
In 1881, H., a citizen of Ohio, through P., M. and others of Chicago, speculated in grain in the markets of the latter city, lost money, and settled with his Chicago creditors by agreeing to convert a narrow gauge railroad in Ohio, which he owned, into a standard gauge, and to extend the same to places named in the agreement, and to organize a new company to take the property thus altered and extended, and to cause the new company to issue bonds which the creditors were to take in satisfaction of their respective debts. The company was organized; the stock and bonds were issued and delivered to H., except a small amount of stock which was issued to sundry persons to enable them to become directors, and H. passed over the property to the company. The value of the property so conveyed was very much less than the face value of the stock and bonds so issued for it. No money payments of subscription to the stock were made by H. to the company. The railway company soon became insolvent, and in 1855, after recovery of judgments against it for amounts due and payable on its bonds, P., M. and the other creditors filed a bill in equity to compel H. to pay his subscriptions in cash. A part of the stock of H. having been passed over to L., the bill set forth that that transfer had been made for the benefit of H., and sought to make H. liable in like manner for that stock. H. answered to
the bill. Afterwards he became insolvent, and made an assignment of his estate for the benefit of his creditors. The assignee then appeared, and set up that the only consideration for the original debts of P., M. and others was an illegal gambling transaction, by betting upon future chanroblesvirtualawlibrary
values of wheat; that the claims which formed the sole consideration for the transfer of the bonds was a pretended balance of said winnings, and that the judgments were founded on the bonds so transferred and on no other consideration. There were other pleadings which need not be detailed. The allegations respecting the character of the grain transactions were, on motion, stricken out by the court below.
(1) That the organization was grossly fraudulent from first to last, without a single honest incident or redeeming feature;
(2) That P., M. and the other Chicago creditors had not only no knowledge or complicity in the company's illegal organization, but that they understood that the stockholders were to be subject to the liability imposed by the law of Ohio, namely, full payment in money or its equivalent, and, in addition, 100 percent.
(3) That the evidence, if taken to be true, did not establish a gambling transaction between E. and P., M, and the other creditors;
(4) That therefore the defendant was not injured by the action of the court in striking out allegations regarding these transactions, and in afterwards passing upon them.
(5) That the same measure of liability applied to the stock of H. standing in L.'s name which applied to that standing in his own name.
(6) That as the attention of the court below was not called to the question of the allowance of interest, this Court would not disturb the decree in that respect.
On October 12, 1881, Edward L. Harper was the owner of what was then known as the Columbus, Washington & Cincinnati Railroad, a narrow gauge road extending from Allentown to New Burlington in the State of Ohio. Prior to that time, Harper had been engaged in the purchase and sale of grain in the City of Chicago, Illinois, through J. W. Preston & Co., W. E. McHenry, Preston & McHenry, and H. Eckert & Co., agents for W. E. McHenry and Preston & McHenry, and on account of such grain transactions the said persons made claims against Harper, which he disputed. By way of settlement and compromise of these claims, Harper entered into an agreement October 12, 1881, with the said Preston & McHenry, and their agents, which agreement, after naming the parties thereto, and setting out Harper's ownership of the said railroad, proceeds as follows:
"First. That the said Harper shall cause the gauge of said road to be changed to the standard gauge, and shall extend the same from its present terminus at Allentown, Ohio, on the
Dayton and Southwestern Railroad, to the Town of Jeffersonville, on the Southern Ohio Railroad, and make the connection with the last-named road; also shall extend it from its present western terminus at New Burlington to the present line of the Little Miami Railroad at or near the Town of Corwin, and make connection therewith."
"Second. And the said Harper agrees to make said gauge and said extensions and connections with said roads within four months from the date of this contract."
"Third. And the said Harper further agrees within the same period of four months to cause to be organized under the laws of Ohio a railway company, to be named the Cincinnati, Columbus and Hocking Valley Railway Company, and to convey or cause to be conveyed and transferred to said company said railroad and extensions, and all the privileges, appurtenances, and plant thereunto belonging, an unencumbered title therefor, except the mortgage bonds herein provided for."
"Fourth. And the said Harper further agrees to cause said company to issue its coupon bonds of one hundred, five hundred, and one thousand dollars each, payable in four years, with interest at six percent per annum, payable semiannually, which shall be secured by a first mortgage upon the said railroad and its extensions and the real and personal property and franchises of said company then owned or thereafter acquired by it, said first mortgage bonds not to exceed in the aggregate an amount equal to the rate of twenty thousand dollars per mile of the length of said road and extensions, and said Harper likewise agrees to cause said company to issue income bonds of one hundred, five hundred, and one thousand dollars each, payable in forty years, properly secured, which shall not exceed in the aggregate twenty thousand dollars per mile, interest and principal of said bonds to be made payable in New York city."
"Fifth. And the said Harper further agrees to deliver to the said other parties hereto, in payment of their respective claims, said first mortgage bonds at the par value thereof, as follows: "
"To the said J. W. Preston & Co., seventy-five thousand five hundred and thirty-four dollars."
"To the said W. E. McHenry, twelve hundred and fifty dollars."
"To the said Preston & McHenry, one hundred and thirty-seven thousand and six hundred and twenty-two dollars."
"To the said H. Eckert & Co., agents for W. E. McHenry and Preston & McHenry, five hundred dollars, and likewise to deliver as a bonus at the par value thereof fifty percentum of the above amount respectively in said income bonds."
"Said deliveries to be made within four months from the date hereof at the Third National Bank of Cincinnati."
"And the said Howard Eckert & Co., J. W. Preston & Co., W. E. McHenry, and Preston & McHenry, each for himself and themselves, agree to accept said first mortgage and income bonds in full payment of the indebtedness of said Harper to each of them respectively."
On November 7, 1881, a corpor