U.S. Supreme Court
Meddaugh v. Wilson, 151 U.S. 333 (1894)
Meddaugh v. Wilson
Argued October 10, 1893
Decided January 22, 1894
151 U.S. 333
It is a general principle of law that a trust estate must bear the expense of its administration.
Assignees in bankruptcy, although not in possession of the bankrupt's property, are nevertheless required to look out for the interests of all, and are entitled to compensation, the lack of possession being important only in determining the amount of the compensation.
A corporation in Michigan was the owner of a large and valuable real estate. Three successive mortgages on this property were created, and a large amount of corporation bonds secured by them were issued. Suits being begun for the foreclosure of these mortgages, a receiver was appointed by the court to take possession of and hold all the mortgaged property. The corporation was then adjudged to be a bankrupt. Assignees were appointed, who appeared by counsel in the foreclosure suits and contested them. The property remained with the receiver, and never passed into the possession of the assignees. Negotiations took place looking towards a sale of the property and a reorganization, which contemplated that a certain proportion of shares in the reorganization should be delivered to W. In the course of the negotiations, the amount which the assignees were entitled to receive, and the amount which should be paid to their counsel, were determined, with the assent of all parties. W. agreed to pay this sum to D. for them out of the moneys to be received by him. These negotiations fell through. New negotiations then took chanroblesvirtualawlibrary
place looking towards a different scheme for reorganization. Under these, a decree of foreclosure was obtained under which the property was sold to M. and W. No provision was made in the decree for the payment of the sums agreed to be due to the assignees and their counsel, but the court was informed that satisfactory arrangements had been made therefor. In the reorganization, a large amount of stock was allotted to W., but not so much, in proportion to the full amount, as had been allotted to him by the previous arrangement. The claims of the assignees in bankruptcy being transferred to their counsel, the latter filed their bill in equity against W. to charge him as trustee with the payment of the claims of both assignees and counsel by virtue of his holding the shares which had been allotted to him in the new company. A large amount of proof was taken, much of which is referred to by the Court in its opinion, and as the result of examination, it was held
(1) That W. had assumed the payment of the claims of the assignees in bankruptcy and of their counsel, and that these claims were a lien in equity upon the stock of the new corporation in his hands.
(2) That W., having received in the final arrangement a less amount of stock than was awarded to him when the amount of the claims in litigation was determined, those claims were subject to be scaled down proportionately.
(3) And the majority of the court further held that, under the peculiar circumstances of the case, the plaintiffs should not be allowed interest.
This was a suit brought in the Supreme Court of the District of Columbia by the appellants, seeking to charge the defendant as trustee for them of 897 shares of the capital stock of the Lake Superior Ship Canal, Railway and Iron Company. The bill was filed June 6, 1881, the answer September 13, 1881. Proofs were taken, and on April 5, 1881, a decree was entered dismissing the bill, which decree was affirmed by the general term on March 3, 1888. From that decree of affirmance an appeal was taken to this Court.
The following are the undisputed facts in the case: the Lake Superior Ship Canal, Railway and Iron Company was a corporation organized under the laws of the State of Michigan. On July 1, 1865, it issued bonds to the amount of $500,000, secured by a mortgage upon its property and franchises. Subsequently, and on July 1, 1868, it issued another series of bonds amounting to $500,000, also secured by mortgage, all of which two series of bonds were outstanding in the hands of bona fide holders at the date of the decree hereafter mentioned. chanroblesvirtualawlibrary
On the 1st day of July, 1870, it issued a third series of bonds, amounting to $1,250,000, also secured by mortgage; $250,000 of which bonds were retired, and only $1,000,000 thereof were outstanding at the time of said decree. On May 1, 1871, it executed to the Union Trust Company, as trustee, a mortgage deed to secure a further issue of bonds to the amount of $3,500,000, of which, however, only $1,300,000 were issued, and the remainder were in the custody of the Union Trust Company at the time of said decree.
Suits were brought to foreclose these several mortgages. While these suits were pending, and in August, 1872, the company mortgagor was adjudged a bankrupt in the District Court of the United States for the Eastern District of Michigan, and George Jerome and Fernando C. Beaman were appointed assignees, and the plaintiffs, Meddaugh & Driggs, their counsel. These assignees never took possession of any property, for all of it was in the hands of a receiver appointed by the circuit court in the foreclosure suits. They however, through their counsel, appeared in and contested the foreclosure suits. They also filed a bill in the nature of a cross-bill. Litigation was carried on for some years. On February 12, 1877, the several suits having been consolidated, a single decree was entered foreclosing all the mortgages. Pending the foreclosure proceedings, as appears from the terms of the decree, the receiver had, under the authority of the court, issued receiver's certificates to the amount of $625,300.
The principal creditors and security holders were J. C. Ayer and Co., J. Boorman Johnston & Co., Theodore M. Davis, as receiver of the Ocean National Bank, and James C. Ayer and George C. Richardson, jointly. Certain English capitalists entered into negotiations for the purchase of the property. Don M. Dickinson was acting for the corporation, and interesting himself to bring about a closing of the litigation and a sale of the property to these English capitalists. On September 24, 1875, the four principal creditors above named entered into a written agreement with Dickinson in which the amounts which each creditor was willing to accept were named, which provided that the parties should consent to a decree of foreclosure, chanroblesvirtualawlibrary
and an order for the sale of the mortgaged property as an entirety; that the securities should all be deposited with Messrs. S. G. and G. C. Ward, with instructions to deliver them to Dickinson on his making payment of the aggregate amounts due the creditors as provided, this payment to be in four equal parts at intervals of sixty days each -- the entire contract being conditioned upon the ability to purchase the property named, which included all the property covered by the mortgages and certain other lands and stocks at a gross price not exceeding $2,250,000. It is stated that there was on the same day another agreement entered into between Dickinson and the owners of the balance of the property for its purchase, but that agreement is not in evidence. Also on the same day, a contract was made between Dickinson ane balance of the property for its purchase, but that agreement is not in evidence. Also on the same day, a contract was made between Dickinson ane balance of the property for its purchase, but that agreement is not in evidence. Also on the same day, a contract was made between Dickinson and the defendant by which Wilson agreed to assist in perfecting the title to the property and carrying through the prior agreements, and which, contemplating that, by the use of bonds and receiver's certificates, the entire purchase might be made at a sum less than that named, $2,250,000, stipulated that whatever of surplus there might be should be paid over to Wilson. The negotiations for the purchase by the English syndicate were continued from time to time, but for reasons not disclosed, the matter was never consummated. On February 27, 1877, another agreement was prepared for execution by the creditors aforesaid and Don M. Dickinson, which, referring to the prior agreements, and also to the fact a of a decree having been entered, stipulated that the securities belonging to the creditors should be placed under the control of Albon P. Man, of New York, and the defendant, as trustees; that such trustees should attend the foreclosure sale or sales, and, to the extent of the means furnished them for that purpose, bid in the property; that, the title being vested in them, they should organize a new corporation with a capital stock of $8,000,000, to which corporation they should convey the property they had purchased; that the corporation should, besides issuing the $8,000,000 of stock, also issue bonds to the amount of $4,000,000, properly secured by deed of trust, which stock and bonds and deed of trust should be deposited with Drexel, Morgan & Co., with chanroblesvirtualawlibrary
directions to deliver all to Don M. Dickinson or such person or persons as he should designate on his or their depositing, on or before the 1st day of June, 1887, to the credit of the said trustees, the sum of $1,886,251.40, which moneys the trustees were to dispose of, first, in paying the expenses of the sale, purchase, reconveyance, and issue of certificates of stock and bonds, and the formation of the corporation; second, in the payment of any moneys that should be furnished them for the purpose of enabling them to perfect the title to said property; third, in the payment of the sums due to the creditors under the agreement of September 24, 1875, amounting to the sum of $1,296,103.41. The fourth stipulation in reference to the disposition of the money was as follows:
"Any balance remaining in the hands of said trustees shall be delivered to Nathaniel Wilson, and his receipt therefor shall be a full discharge to the said Albon P. Man of all liability therefor, and the said Nathaniel Wilson shall not be liable to account to the parties hereto, or any of them, in respect to the moneys so paid to him as aforesaid, and, upon the payment of said moneys to said Wilson, the terms and conditions of the trust hereby created shall be considered satisfied."
It was further provided that in case the sum named was not paid on or before June 1, 1877, Drexel, Morgan & Co. should redeliver to the trustees the stocks, bonds, and securities deposited with them by the trustees, and that thereupon the said trustees should transfer and deliver to Dickinson, or to such person or persons as he should direct in writing, one full tenth part of the stock and bonds, and to the creditors, in such manner as they might in writing appoint and direct, all the residue and remainder of said stock and bonds. That agreement was signed by Man and Wilson, who accepted the trust created by the instrument and agreed to perform its duties, and also by Dickinson, J. Boorman Johnston & Co., and Theodore M. Davis as receiver, but not by the Ayers. It was therefore not a fully executed agreement. It is significant, however, as expressive of the intent of the parties signing, and as showing the relations of Wilson to the transaction. But on April 9, 1877, two contracts were entered into, executed by chanroblesvirtualawlibrary
all the creditors above named, together with Albert G. Cook, also a creditor, as well as by Dickinson, Man, and Wilson, the first of which contained provisions for the disposition of the moneys in case Dickinson should make the payment to Drexel, Morgan & Co., similar to those found in the contract of February 27; the stipulation as to the payment to Wilson being in those words:
"Fourth. The balance, if any, remaining after the payments aforesaid, shall be paid to and retained by said Nathaniel Wilson, his personal representatives or assigns, discharged from this trust, and shall be held, used, and disposed of by him or them without accountability therefor to the parties aforesaid, or any of them, by reason of anything herein."
The other provided that if Dickinson should not make the payment at the time specified, the trustees should take the bonds and stock, cancel all the former, and issue to Dickinson one-tenth of the shares, and then, after a sale of a portion, should distribute the balance as follows: to the creditors, respectively, in the proportion which the sums of money they would have received, in case the English sale had been consummated, bear to $1,693,311.74, and to Wilson as follows:
"To the said Nathaniel Wilson, his personal representatives or assigns, the same proportion of said shares remaining as aforesaid which the sum of three hundred and ninety-five thousand dollars is of one million six hundred and ninety-three thousand three hundred and eleven dollars and seventy-four cents ($1,693,311.74)."
The agreement contained also this stipulation:
"And the said Wilson, in consideration of the interests secured to him by the said indenture and this agreement, doth hereby agree unto and with the said parties of the first part, and each of them, that in the event of the purchase of said property by said trustees (Man and Wilson) or the survivor of them, he will indemnify said parties of the first part, and each of them, against, and will pay, all the charges and expenses of said trustees (Man and Wilson) and their said associates, for and in and about the execution of their said trusts, all lawful charges of the trustees under the mortgages in foreclosure
whereof said property shall be sold, the taxable costs in the suits and proceedings for foreclosure of said mortgages, the charges of the master or masters in chancery, or other officers, in or for the sale of said property, all claims or demands of Alfred Russell remaining unpaid for services and expenses in said suits or proceedings, and for any portion or interest in said property, or any shares in the capital stock, of said proposed corporation."
The sale of the property was duly made on May 11, 1877. It was bid in by Man and Wilson, the corporation provided for was duly organized under the name and style of the Lake Superior Ship Canal, Railway and Iron Company, the English capitalists failed to make the purchase, and thereupon the stock was distributed to the various parties, as named in the last agreement of April 9, 1887.
At the time the decree was prepared and submitted to the court for approval and signature, the circuit judge inquired whether provision had been made for the compensation of the assignees and their counsel, and was told that satisfactory arrangements had been made therefor. The arrangements which had been made were these: Dickinson represented to Meddaugh & Driggs the negotiations which were pending with the English syndicate, and which he was sanguine would be successful, and, the fees of the assignees in bankruptcy having been fixed at $13,000, the claim for which was subsequently transferred to plaintiffs, and of their counsel at $25,000, Dickinson agreed to pay those sums out of the moneys which he should receive from the English syndicate when and if the sale was carried through, and this was the agreement which was pronounced by the plaintiffs to be satisfactory. On February 13, the day after the signing of the decree, he wrote to Meddaugh this letter:
"Detroit, Mich. February 13, 1877"
"E. W. Meddaugh, Esq., Detroit."
"Dear Sir: I attended a session of the referee's court last night, and also this morning from 9 to 12 o'clock, so that I have had no time before to write you on the ship canal matter. "
"I am so entirely confident that I can make an arrangement by which, if the English negotiation now in the hands of Avery is carried out, that I can pay out of the $2,250,000 the fees of Meddaugh & Driggs and of the assignees, that I am willing to bind myself by the following statement:"
"If the English negotiation is consummated, so that the money shall be paid through it for the property and for the discharge of the syndicate indebtedness, I will pay from it to you $38,000.00 as and for fees of Meddaugh & Driggs and of Jerome and Beaman, assignees."
"Yours, very truly,"
"Don M. Dickinson"
On March 7th, Dickinson wrote to Davis this letter:
"March 7, 1877"
"Theo. M. Davis, Esq., 20 Nassau Street, New York."
"Dear Sir: Please have the papers signed by Messrs. Man and Wilson, and forward to me at your earliest convenience. It is of importance to all of us, as Messrs. M. and D., having learned of my return from New York, are after me for their voucher."
"I wish you would telegraph me on receipt of this when you will send it, so that I can show them the telegram."
"Don M. Dickinson,"
To which Davis replied as follows:
"New York, March 10th, 1877"
"Don M. Dickinson, Esq., Detroit, Mich."
"D'r Sir: Yours of the 7th inst. came duly to hand."
"I herewith enclose Wilson's agreement, duly signed. The other agreement has been signed by Messrs. J. Boorman Johnston & Co. and myself, and will be signed by the Ayer party as soon as a guardian is appointed, its provisions having been approved by Judge Bonney."
"Said agreement has been delivered to Wm. M. Sebrey."
"Theo. M. Davis"
The only agreement signed by Wilson in which Meddaugh & Driggs' names appear is the following:
"Referring to the extension agreement of the 'Dickinson contract' this day signed, and under which Albon P. Man and myself are appointed trustees, it is provided therein that certain moneys shall be paid to me for which I shall not be held accountable by any party to said agreement, and in case of the success of what is known as the English negotiations referred in said agreement, and of the consequent payment of the money thereunder as contemplated thereby, in consideration that said Don M. Dickinson has or does agree to pay to Messrs. Meddaugh & Driggs, att'ys of Detroit, as and for cash and expenses (by them and their clients incurred and expenses) amounting to thirty-eight thousand dollars, I do agree to and with said Dickinson to pay to him, for said Meddaugh & Driggs, that sum out of said money so to be received by me as aforesaid."
"Dated February 27, 1887."