111 U.S. 505 (1884)


Supreme Court of United States.

Decided May 5th, 1884.

Attorney(s) appearing for the Case

Mr. N.H. Cowdrey and Mr. D.H. Chamberlain for appellant.

Mr. Melville C. Day and Mr. Wager Swayne for appellees.

MR. JUSTICE BLATCHFORD delivered the opinion of the court. He stated the facts in the foregoing language, and continued:

The Circuit Court, in its opinion, regarded the bill as an original bill to impeach the prior decree for fraud, and not as a bill of review upon newly discovered facts and evidence. It held the bill to be insufficient, for want of an affirmative allegation that the plaintiff was ignorant, during the pendency of the original suit, of the facts set up in the bill, much less that it was unable, after due diligence, to ascertain and plead them. The court added: "But the demurrer goes further, and raises the question whether the bill and exhibits do not show affirmatively, that the present complainant, through its stockholders, had notice of the foreclosure suit, knowledge of the defence now insisted upon against the third mortgage bonds, and ample opportunity to make that defence. It is, we think, very clear, that, in considering the question of notice, no distinction can be made between the corporation and its officers and stockholders. We cannot separate them and say the officers and stockholders knew of the fraud, but the corporation did not. If, therefore, the stockholders were advised of the foreclosure suit, and of the facts now charged as constituting fraud in the execution of the bonds and mortgages sued on therein, and had an opportunity to intervene and defend, and did not do so, the corporation is concluded by their laches. That the stockholders, as a body, were advised of the foreclosure suit, and took action looking to its defence, and that they did not rely upon the officers of the corporation, but distrusted and antagonized them, is clear from the allegations of the forty-fifth count of the bill, by which it is charged that the stockholders, in writing, requested the directors to resign, that others might be appointed in their place, who would properly attend to the duties of their office; also, that the stockholders requested said directors to employ counsel other than James Baker to defend the suit of Ketchum."

The court, in its opinion, then makes reference to various matters which, it states, appear in the record of the Ketchum case — that, at a meeting of stockholders held in March, 1876, at St. Louis, several months before the decree of foreclosure was made, a resolution was adopted requesting the directors to employ counsel to aid in the defence of the foreclosure suit; that the stockholders, or their managing committee, afterwards assented to the decree; and that the stockholders knew the facts now set up by way of defence.

The record in the Ketchum suit is not before us, on this appeal. The only allegation in the bill in regard to it is this: "Your orator prays liberty to refer to the files and records of said United States Circuit Court, in the case of George E. Ketchum v. Pacific Railroad et al., to show the collusive, irregular and fraudulent character of the legal proceedings instituted, with advice of said Baker, the counsel of your orator, to sell all its property for the enforcement of a security which your orator avers to be fraudulent and void, and for which your orator had received no valuable consideration." There is not, in the record on this appeal, any stipulation that the Ketchum record be considered as a part of the bill, nor is it identified in any way. It is no part of the transcript certified from the Circuit Court. The clerk of that court certifies that what is before us is "a true transcript of the record in case No. 1,677, of Pacific Railroad (of Missouri), plaintiff, against Missouri Pacific Railway et al., defendants, as fully as the same remain on file and of record in said case in my office." It follows, that the record in the Ketchum case was never made part of the record in this case, so far as appears from the only record which is before this court, on this appeal. In regard to the bill in the Ketchum suit, and the decree, and the master's deed, and the order approving the deed, they are made a part of the bill in this suit, and identified by the annexing of copies. But the statement in the bill that the plaintiff prays liberty to refer to the files and records of the Circuit Court in the Ketchum suit, to show such and such things, can be of no force or effect to allow either party to claim, in this court, the right to produce or refer to anything, as answering the description of such files and records, which it may assert to be such, or as being what the Circuit Court considered as before it. One of the assignments of error, on this appeal, is that the Circuit Court considered matters outside of the record, and matters not embraced in the bill. We are of opinion that this court cannot consider anything which is not contained in the bill and the exhibits which are annexed to it, and that it cannot look into anything otherwise presented as the files and records of the Ketchum suit, or of any other proceedings in any court, for the purpose of determining the questions arising on the demurrers to this bill.

The decision of the Circuit Court was placed upon the ground that the stockholders, being dissatisfied with the action of the directors and the attorney of the company in defending the foreclosure suit, were put on inquiry, and bound to do whatever it was in their power to do to protect their interests; that any individual stockholder was at liberty to apply to the court for leave to intervene and defend; that the stockholders were parties in interest, and, upon representing that fact to the court, and showing that the officers were not defending in good faith, they would, without doubt, have been allowed to defend; and that stockholders of a corporation, though not bound to intervene in a suit against the corporation, for the protection of their rights, cannot, after having notice that the officers are not faithfully defending a suit, neglect to intervene, or to take any steps in the way of endeavoring to do so, and permit a final decree to be entered, and a sale to take place, and then, after years have elapsed, be permitted to attack the validity of the proceedings.

The case, therefore, was made to turn on the question of laches. The decree was made June 6th, 1876, the sale September 6th, 1876, the report of sale September 15th, 1876, the confirmation of the sale October 7th, 1876, and the master's deed October 24th, 1876. The present plaintiff took an appeal to this court from the decree, and from the order confirming the sale, February 1st, 1877. It prosecuted that appeal in due form, and the case was heard here as soon as the court could hear it, as the bill states. It appears from the report of the case in 101 U.S. 289, that the present plaintiff contended here, that it had not consented to the decree, and sought to examine the question of the alleged fraud or unauthorized conduct of its solicitor and its officers, and also sought to defeat the jurisdiction of the Circuit Court, and to attack the propriety of the purchase by the solicitor. The conclusion of this court was, that it could not discover any error that could be corrected by appeal. But, in its opinion, it said: "The remedy for the fraud or unauthorized conduct of a solicitor, or of the officers of the corporation, in such a matter, is by an appropriate proceeding in the court where the consent was received and acted on, and in which proof may be taken and the facts ascertained." Thereupon, this bill was immediately filed.

The demurrers in this case are to the whole bill. If any part of the bill is good the demurrers fail. The charges of fraud in the bill, which are admitted by the demurrers for present purposes, are sufficient to warrant the discovery and relief based on such charges, leaving for consideration only the questions of laches and of jurisdiction.

On the admitted allegations of the bill, there was no real defence made in the Ketchum suit, and the present plaintiff was prevented from making that defence, by the unfaithful conduct of its solicitor and its directors, and the directors of the Atlantic Company. A case of that kind is one of which a court of equity will take cognizance. United States v. Throckmorton, 98 U.S. 61.

As to the question of laches, the pendency of the appeal taken in the Ketchum suit suspended the control of the Circuit Court, and of every other court, except this court, over that decree, in respect to the relief sought in this suit, of setting that decree aside and declaring it fraudulent and void, all the other relief asked being consequent on that. The appeal appearing to have been taken and prosecuted in good faith, in view of what appears in the bill herein, and in the report of the case in this court, we cannot hold, on this demurrer, that the time during which that appeal was pending can be counted against the plaintiff on the question of laches. Ensminger v. Powers, 108 U.S. 292.

As to the frauds alleged in the bill respecting the matters in the conduct of the suit, resulting in the decree, the right to relief is based on the view, that the corporation itself, the present plaintiff, speaking and acting now for its stockholders as a body, was powerless then, because it was misrepresented by unfaithful directors, who did what was done and refused to do otherwise, and through whom alone it could then speak and act. The allegations in the bill, of facts showing the existence of hostile control of the corporate affairs of the plaintiff by its directors, from before the bringing of the Ketchum suit till after the foreclosure sale, are entirely adequate as against a demurrer. Under such circumstances, mere knowledge by, or notice to, the plaintiff, or its directors or officers, or more or loss of its stockholders, is unimportant; and the plaintiff cannot be concluded by the failure of any number of its stockholders to do what unfaithful directors ought to have done, unless a case is shown of such acquiescence, assent or ratification as would make it inequitable to permit what has been done to be set aside, or unless the rights of innocent purchasers have subsequently intervened, to an extent creating an equitable bar to the granting of relief. The bill in this case does not show such a state of things. While stockholders, more or less in number, may be allowed to interpose, if they have the means or the inclination to take upon themselves the burden of such gigantic controversies as are involved in the railroad transactions of the present day, it would go far to legalize condonation of such transactions as are set forth in this bill, if mere knowledge by helpless stockholders of the fraudulent acts of their directors were to prevent the corporation itself from seeking redress, if it acts promptly when freed from the control of such directors. Fruitlessly requesting unfaithful directors to resign and to employ other counsel, so far from throwing on the stockholders the peril of losing their rights, represented by the company, if they do not personally assert them in place of the directors, operates of itself, without more, only to aggravate the wrong. At the same time, it by no means follows that parties who have become interested in the plaintiff's corporation with knowledge of the matters set forth in the bill, are entitled to the same standing, as to relief, with those who were interested in the corporation when the transactions complained of occurred.

As to the matters alleged which are extrinsic or collateral to the issues in the Ketchum suit, to what extent, greater or less, there is jurisdiction to examine them under this bill, is a question not to be decided on these demurrers to the whole bill. The bill is sufficient in regard to the other frauds alleged. But, in regard to one of those extrinsic matters, the bill states that specific property not covered by the mortgage was put into the decree without the knowledge of this plaintiff.

Upon the question of jurisdiction, there can be no doubt that the Circuit Court, as the court which made the Ketchum decree, and had jurisdiction of the Ketchum suit, as this court, in Pacific Railroad v. Ketchum, 101 U.S. 289, held it had, has jurisdiction to entertain the present suit to set aside that decree on the grounds alleged in the bill, if they shall be established as facts, and if there shall be no valid defence to the suit, although the plaintiff and some of the defendants are citizens of Missouri. The bill falls within recognized cases which have been adjudged by this court, and have been recently reviewed and reaffirmed in Krippendorf v. Hyde, 110 U.S. 276. On the question of jurisdiction the suit may be regarded as ancillary to the Ketchum suit, so that the relief asked may be granted by the court which made the decree in that suit, without regard to the citizenship of the present parties, though partaking so far of the nature of an original suit as to be subject to the rules in regard to the service of process which are laid down by Mr. Justice Miller in Pacific Railroad v. Missouri Pacific Railway Co., 1 McCrary, 647. The bill, though an original bill in the chancery sense of the word, is a continuation of the former suit, on the question of the jurisdiction of the Circuit Court. Minnesota Co. v. St. Paul Co., 2 Wall. 609, 633.

We do not see any force in the second and third grounds of demurrer, nor, at present, in the eighth. The seventh ground of demurrer alleges what is, if true, matter for exception, and so does the ninth, in part. As to the rest of the ninth, it is matter for an answer. All the demurring parties seem to be proper parties.

If, as has been strenuously argued for the defendants, there are complete defences, on the merits, to the bill, answers should have been put in and proofs taken. We can act only on what the bill brings before us, and all it alleges is admitted, for present purposes. The future proceedings in the case may show that the allegations of the bill are untrue, or may disclose perfect defences to the suit. But, as the suit now stands, the plaintiff is entitled to have the matters it alleges inquired into and adjudicated.

The decree of the Circuit Court is reversed, and the case is remanded to that court, with direction to overrule the demurrers, with costs, and to take such further proceedings in the suit as shall be proper and not inconsistent with the opinion of this court.


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