U.S. Supreme Court
Guardian Trust & Deposit Co., 200 U.S. 57 (1906)
Guardian Trust and Deposit Company
Argued November 28, 1905
Decided January 2, 1906
200 U.S. 57
Section 1255 of the Code of North Carolina of 1883 provides that mortgages of corporations shall not exempt the property mortgaged from execution for judgments obtained in the state courts against the corporation for torts and certain other causes. A corporation constructed a plant for supplying a city with water, having received exclusive authority there for from the city. It executed two mortgages, under the foreclosure of the second of which its plant was sold, subject to the first mortgage, to a new corporation, which then executed a further mortgage. Subsequently, judgments were rendered in actions brought by property owners against the new corporation for damages caused, as charged in the complaints and recited in the judgments, by its negligence. On foreclosure of the outstanding mortgages, the holders of these judgments were given priority over the mortgagees notwithstanding the contention of the latter that the property owners had no contractual relations with, or right to maintain these actions against, the water company, that the judgments were not conclusive, the mortgagees not being parties thereto, and that only the equity acquired by the new company was subject to any judgment lien. In affirming the decision, held that: chanroblesvirtualawlibrary
Under the statute, the mortgagees agreed to accept the judgments as conclusive of the amounts due. And the record, showing that negligence was alleged in the complaints and adjudged by the state court, discloses judgments in actions of tort.
One may by contract acquire an opportunity for acts and conduct in which parties other than those with whom he contracts are interested and for negligence in which he is liable to such other parties.
While a citizen may have no individual claim against a company contracting to supply water to a city for its failure to do anything under the contract, he may have a claim against it, after it has entered upon a contract and is engaged in supplying the city with water, for damages resulting from negligence, and in such a case, the action is not for breach of contract, but for a tort.
Section 1255 is not a penal statute, but remedial, and should be liberally construed to give effect to the intent of the legislature to make the property of corporations security against its torts, and imposes upon the plant of a corporation responsibility for torts which cannot be avoided by a conveyance to a new corporation.
Section 1255 of the Code of North Carolina of 1883 reads:
"Mortgages of incorporate companies upon their property or earnings, whether in bonds or otherwise, hereafter issued, shall not have power to exempt the property or earning of such incorporations from execution for the satisfaction of any judgment obtained in courts of the state against such incorporation for labor performed [nor for material furnished such incorporation], nor for torts committed by such incorporation, its agents or employees, whereby any person is killed or any person or property injured, any clause or clauses in such mortgage to the contrary notwithstanding."
This was subsequently amended by leaving out the matter enclosed in brackets.
In 1887, a corporation was organized under the laws of North Carolina, which, soon after secured the passage of an ordinance by the City of Greensboro giving to it the exclusive right to the use of the streets, sidewalks, and public grounds for the purpose of constructing, operating, and maintaining a complete system of waterworks. A later ordinance provided that
"said water company shall be responsible for all damage sustained by the city, or any individual or individuals,
for any injury sustained from the negligence of the said company, either in the construction or operation of their plant."
The corporation constructed the waterworks and also executed a mortgage or deed of trust conveying its entire property and plant to secure the payment of fifty thousand dollars of bonds. A subsequent mortgage or deed of trust was foreclosed, and the title to the property passed to a new corporation, subject to the lien of the first mortgage. After its purchase, the new corporation executed a further mortgage or deed of trust. Subsequently two fires occurred, destroying property belonging to the respondents. Actions were commenced in the Superior Court of Guilford County by the owners of the property destroyed against the new corporation, and judgments recovered, the judgment entries each reciting that the recovery was "for the injury and damage done him by the negligence of the defendant." 128 N.C. 375. Proceedings having been commenced in the circuit court of the United States to foreclose the existing mortgages, a decree was entered and a sale made. Thereupon the judgment creditors intervened, insisting that, in the distribution of the proceeds, they were entitled to priority over the mortgage liens by virtue of the statute above referred to. The circuit court decided in their favor. 115 F.1d 4. Its judgment was taken on appeal to the court of appeals, from which court the case was brought here on certiorari. chanroblesvirtualawlibrary