U.S. Supreme Court
Drury v. Cross, 74 U.S. 7 Wall. 299 299 (1868)
Drury v. Cross
74 U.S. (7 Wall.) 299
1. A sale, far below value, of a railroad, with its franchises, rolling stock &c. under a decree of foreclosure, set aside as fraudulent against creditors, the sale having been made under a scheme between the directors of the road and the purchasers by which the directors escaped liability on endorsements which they had made for the railroad company. And the purchasers held to be trustees to the creditors complainant for the full value of the property purchased, less a sum which the purchasers had actually paid for a large lien claim, presented as for its apparent amount but which they had bought at a large discount. Interest on the balance, from the day of purchase to the day of final decree in the suit, to be added.
2. But because the full value of the property sold was not shown with sufficient certainty, the case was sent back for ascertainment of it by a master.
The case was this:
Bailey & Co., of Liverpool, England, held notes against the Milwaukee & Superior Milwaukee & Superior Railroad Company, endorsed by four of its directors, for about $21,000 (the price of iron furnished to lay the road), and as collateral security for payment, $42,000 in mortgage bonds of the road. Two hundred and eighty thousand dollars in similar bonds, but which had never been issued, were sealed up and deposited with M. K. Jesup & Co., not to be issued until the debt to Bailey & Co. was paid and twenty-seven miles of the road were built. The company was managed by a board of seven directors, of whom four made a quorum. chanroblesvirtualawlibrary
The company, having made about five miles of the road, became thoroughly insolvent and abandoned their enterprise. Bailey & Co., being unpaid and not being willing to trust to and proceed on their mortgage, brought actions against the four directors on their endorsement. These, desirous to throw the debt on the company, where it belonged, procured, at their own expense and risk, a suit to be commenced to foreclose the mortgage so that they could make their debt out of the collaterals in their hands. In this suit, certain bonds issued to the City of Milwaukee, and the $42,000 of bonds held by Bailey & Co., were spoken of, but no mention was made of the $280,000 of bonds deposited with Jesup & Co., and no relief asked in relation to them. On the 19th of March, 1859, the bill was taken as confessed, decree rendered, and the case referred to the master to compute and report the amount that was due.
Prior to the decree, in consequence of negotiations between the directors and Cross, Luddington & Scott (Cross & Co), an arrangement was made by which these persons were to purchase the claim of Bailey and protect the directors from their endorsement. The directors, on their part, were to aid Cross & Co. to acquire the entire property of the road.
In furtherance of this plan, the $280,000 of bonds in the hands of Jesup & Co. were delivered, by resolution of the board of directors, to Bailey & Co. as additional security for their claim. Bailey & Co. did not ask for further security, and refused, at first, to receive these bonds, and in fact did not receive them until they had sold their claim, with their collaterals, to Cross & Co. This was after the decree in the foreclosure suit. Cross & Co. having thus got possession of $322,000 in bonds, transferred by Bailey & Co., as collaterals, in order, as they said, to become the absolute owners of them, sold them, with consent of the railroad corporation, at the Exchange in Milwaukee, on five days' notice; bought them for a small sum of money; produced them before the master, who allowed them as a lien on the road, and the final decree in the foreclosure suit was rendered upon the said $322,000 bonds, and no others. chanroblesvirtualawlibrary
The sum paid by Cross & Co. to Bailey & Co. for all the judgments obtained was $13,380.20.
Under the decree of foreclosure, the entire railroad, its franchises, rolling stock (two locomotives and tenders, with ten platform cars) and fixtures were sold in August, 1859, to Cross & Co., for $20,100. The iron tracks, which were now torn up, some evidence showed had been sold for $22,500. The locomotives (little used) had cost $18,000; the cars about $5,000. The company, it was said, had paid between $15,000 and $20,000 for their right of way. There were also railroad chairs, spikes, ties, some fences &c., the value not being exactly shown.
In this state of things, Drury & Page, having obtained judgment for $21,634 against the railroad company for locomotives sold to it, filed a bill in chancery in the court below against the company, Cross and his co-purchasers, alleging that the sale was fraudulent and seeking to reach the franchises and property of the company sold to Cross & Co. under the decree of foreclosure. The court below dismissed the bill as to Cross and his co-purchasers, and from this decree of dismissal the present appeal came. chanroblesvirtualawlibrary