U.S. Supreme Court
Railroad Company v. Howard, 74 U.S. 7 Wall. 392 392 (1868)
Railroad Company v. Howard
74 U.S. (7 Wall.) 392
1. Under the laws of Iowa, a railroad company, having power to issue its own bonds in order to make its road, may guaranty the bonds of cities and counties which have been lawfully issued, and are used as the means of accomplishing the same end.
2. A sale under foreclosure of mortgage of an insolvent railroad company, expedited and made advantageous by an arrangement between the mortgagees and the stockholders, under which arrangement the mortgagees, according to their order, got more or less of their debt (100 to 30 percent), and the stockholders of the company the residue of the proceeds -- a fraction (16 percent) of the par of their stock -- held fraudulent as against general creditors not secured by the mortgage, and this although the road was mortgaged far above its value, and on a sale in open market did not bring near enough to pay even the mortgage debts, so chanrobles.com-red
that in fact, if there had been an ordinary foreclosure, and one independent of all arrangement between the mortgagees and the stockholders, the whole proceeds of sale would have belonged to the mortgagees.
3. A sale by a railroad corporation not authorized in its corporate capacity to make it may be yet validly carried into effect by the consent of all parties interested in the subject matter of it.
4. Stockholders in a corporation need not be individually made parties in a creditor's suit where their interest is fully represented both by the railroad company and by a committee chosen and appointed by them.
5. Contracts are not necessarily negotiable because by their terms they entire to the benefit of the hearer. Hence a receipt by which a person acknowledges that he has received from another named so many shares of stock in a specified corporation, entitling the bearer to so many dollars in certain bonds to be issued, is not free, in the hands of a transferee, from equities which would have affected it in the hands of the original recipient.
6. The fact that a creditor has a remedy at law against a principal debtor does not prevent him, after the issue in vain of execution against such principal, from proceeding in equity against a guarantor.
The Mississippi & Missouri Railroad Company -- a company in Iowa, and by the laws of that state, having power to issue its bonds to carry into effect the purposes for which it was created -- was encumbered by five several mortgages, given to secure bonds which it had executed, amounting, with arrears of interest, to $7,000,000; a sum greatly beyond what the road was worth. The interest was largely in arrears, and the company was insolvent. The Chicago & Rock Island Railroad Company -- another company -- made overtures for the purchase of the former road, offering to give for it $5,500,000, a sum more than it was worth, though, as just said, much less than what it owed. But the offer was contingent upon getting a title at once. The directors of the insolvent road had power, under its charter, to sell it on payment of its debts, and with the assent of two-thirds of its stockholders; but the only mode to make a satisfactory title which now seemed possible, was by a foreclosure under one of the mortgages; a matter which it was supposed, apparently, that it might be in the power of the stockholders, chanrobles.com-red
by the interposition of difficulties, to delay. Under these circumstances, a meeting of the holders of the stock and of the various classes of mortgage bonds of the company was called, to determine what should be done with the road. And it was resolved, at this meeting, to sell the road for the $5,500,000 offered, provided that the purchase money be distributed among the bondholders and stockholders of the company, according to a plan or "scale" specified, by which the different classes of bondholders were to be paid certain specified amounts, varying from 100 to 30 percent of the amount of their bonds, and the stockholders were to receive 16 percent of the par value of their stock, amounting to $552.400. A committee was appointed to arrange the details of the sale, and the mode of payment with the purchasing company; and the committee was instructed
"to make an arrangement with some trust company to receive the bonds and stock of the parties assenting and issue certificates therefor, setting forth what the holder thereof is entitled to receive."
In pursuance of these resolutions, a written contract was made between the Mississippi & Missouri Railroad Company and the purchasing company, which in its caption was stated to be made "in pursuance of resolutions passed by the meeting of the bondholders and stockholders" of the former company, by which it was agreed,
1. That the Mississippi & Missouri Company "will take the proper steps, with all possible dispatch, to cause the mortgages upon its line of road," &c.,
"to be foreclosed, and its entire property, real and personal, sold, so that the purchaser shall be able to transfer a perfect and unencumbered title to such incorporated company as the Chicago & Rock Island Railroad Company may designate to become the purchaser and owner thereof."
2. That the Chicago & Rock Island Company shall cause a company to be incorporated under the general law of Iowa, which shall purchase the said property for $5,500,000, and the Mississippi & Missouri Company agree that the purchaser, at the foreclosure sale, shall sell to such company so to be incorporated, "for the sum and upon the terms herein stated and set forth." chanrobles.com-red
The committee appointed at the meeting, to carry into effect the sale of the road, made arrangements as instructed by the resolution appointing them with the Union Trust Company of New York, to act as their agent to receive from the holders of bonds and stock, assenting to the plan agreed on, their bonds and stock certificates, and to give receipts to them therefor. A written agreement was subscribed by the committee, and by each party so depositing bonds or stock, entitled,
"Agreement made between A. B., and other subscribing holders of the stock and bonds of the Mississippi & Missouri Railroad Company of the first part, and G. W. S., J. E. &c. (the committee), of the second part."
By this instrument (after reciting the action of the meeting, and the agreement of sale between the two railroad companies, "in furtherance of" the resolutions of the meeting, and that the committee to effectuate this clearance and sale were about to foreclose the various mortgages, in order subsequently to convey a clear title to the purchaser or purchasers thereof), the subscribing bond and stock holders ratified and confirmed the authority given to the committee by the meeting, and consented to the foreclosure of mortgages, and sale of the Mississippi & Missouri Road thereunder, and to surrender their bonds and stock certificates, on signing the agreement, to the Union Trust Company as agent of the committee, to be used in carrying out the sale and foreclosure.
The committee agreed to use all diligence in foreclosing; to convey the road, after foreclosure, "as more fully set forth in the agreement between the two companies for $5,500,000, and to distribute the same among the holders of stock and bonds according to the following scale, viz." (specifying the amounts to be paid on the different classes of bonds, and the 16 percent to the stockholders, as agreed on at the meeting), the amounts to be paid in the form in which the proceeds of sale were received, and to be either money or bonds secured as provided in agreement of sale between the railroad companies.
The trust company issued certificates to the depositors of stock, acknowledging the receipt of their old certificates chanrobles.com-red
of stock, and declaring them to be held subject to the agreement made by the depositors and other holders of the stock and bonds of the company, with the committee, and that the receipt now issued entitled "the bearer" to so many dollars in the new bonds to be issued, and interest thereon at the rate of 7 percent per annum, from December 1, 1865, less the excess, if any, of the cost of foreclosure, sale, and other expenses of the committee &c.; over and above $32,164, unappropriated balance of $5,500,000, derived from the sale of said road, and any and all the rights of the said depositor, under and by virtue of the agreement aforesaid.
On the back of the receipt was printed the scheme of distribution, specifying the proportion to be paid on each class of bonds and on the stock.
The holders of the stock and bonds (with unimportant exceptions) became parties to this agreement by depositing their stock and bonds with the trust company, signing the agreement, and taking their receipts as above.
The foreclosure was effected thus: Some holders of bonds, secured by the last mortgage, being dissatisfied with the above plan, caused a suit to foreclose that mortgage to be commenced in the Circuit Court for Iowa, in the name of the trustees of the mortgage, early in 1866. The Chicago & Rock Island Railroad Company subsequently purchased the bonds of these parties, and obtained the control of the suit, which was then turned over to the committee. Under their direction, cross-bills to foreclose the other mortgages were filed, and a final decree of foreclosure of all the mortgages and for a sale of the road was had. A sale under this decree took place soon after, and the road was bid off by a new corporation, which had been organized under the Iowa law, for $2,200,000, which sale was afterwards confirmed, and a deed made in pursuance of it. The new company after the sale was consolidated with the Chicago & Rock Island Company, the consolidated company assuming the name of "The Chicago, Rock Island and Pacific Railroad Company." The $5,500,000 of bonds, agreed to be given for the property of the Mississippi & Missouri Company, were distributed as chanrobles.com-red
agreed on, except that portion thereof which was to have been divided among the stockholders. In regard to that, new claimants now appeared. These were, Howard, Weber, and numerous other persons, who had obtained judgments against the Mississippi & Missouri Railroad Company, on certain bonds of the Cities of Davenport, Muscatine &c., guaranteed by the railroad company, but making no part of the bonds already mentioned, as executed by the Mississippi & Missouri Company, nor secured in any way by the mortgages foreclosed, nor provided for in the transactions above set forth. These creditors, on whose judgments executions had been issued and returned nulla bona, now filed a bill in the court below, to obtain satisfaction of their claims out of the fund of 16 percent allotted to the stockholders; making the committee who negotiated matters, all three railroads, and the City of Davenport (against which also they had obtained judgment) defendants. Answers were filed by the members of the committee, and by the Chicago, Rock Island & Pacific Railroad Company. The decree made in the case declared the complainants entitled to the fund, as creditors of the Mississippi & Missouri Railroad Company, directed its payment by the Chicago, Rock Island & Pacific Railroad Company to a receiver, its conversion by him into money, and distribution pro rata among the different creditors; providing also for subrogating the defendants to the rights and remedies of the plaintiffs, against the municipalities issuing the bonds, so far as they were paid out of the fund in controversy. From this decree the committee, and the Chicago, Rock Island & Pacific Railroad Company appealed; and this appeal constituted the present case: the principal question being, whether the court below, in allowing the creditors unprotected by mortgage to take away the 16 percent which had been allowed to the stockholders, had decreed rightly. The Mississippi & Missouri Railroad Company did not appeal. chanrobles.com-red