MR. JUSTICE LAMAR delivered the opinion of the court.
This is a suit in equity, originally brought in the Circuit Court of the United States for the Western District of Michigan by Ashbel Green and William Bond, trustees, against the Chicago, Saginaw and Canada Railroad Company, a corporation organized under the laws of the State of Michigan, to foreclose a mortgage given by that company on all its property and effects of whatsoever description to the plaintiffs, to secure the payment of 5500 of its bonds of $1000 each, payable to said trustees or bearer.
The suit was commenced on the 16th of November, 1876. A receiver was at once appointed. The company made no defence, but numerous parties, holders of the bonds thus secured, and others with claims of various kinds against the company, with leave of the court, intervened in the case, and were allowed to prove their respective claims. The controversy resolved itself into a contest for priority among the respective claimants in the distribution of the proceeds of the sale of the mortgaged property thereafter to be made.
On the 30th of June, 1882, a decree was rendered that the bill was well filed, and that the complainants were entitled to
Benjamin Richardson's claim is in this class. It was for 600 bonds claimed as collateral security for the amount of money advanced by him for the construction of the road, and for 1105 other bonds which he alleged he had redeemed from certain bankers in London; and, in another form, was for 3574 bonds which he had purchased at an execution sale in New York City that was had to satisfy a judgment he had obtained against the railroad company in the Court of Common Pleas for the city and county of New York for the amount of his debt with interest. The decree allowed Richardson's claim as respects 200 of the 600 bonds, but rejected it as to the other bonds claimed by him.
Subsequently, that decree was amended by the decree of October 8, 1883, so as to correct certain mistakes in the calculation of interest upon the bonds. The effect of this latter decree was to reduce Richardson's share of the proceeds by
Four separate appeals were taken from the decree of May 3, 1883, and an appeal was also taken by Richardson and his assignee, Henry Day, from the amended decree of October 8, 1883. At the last term of the court all the appeals were dismissed except that of Richardson and Day from the decree of October 8, 1883. Richardson v. Green, 130 U.S. 104. Before the decision at the last term of the court was rendered Richardson died, and his legal representatives are now prosecuting the appeal. As a decision upon the questions presented by this appeal affects the distribution decreed by the court below of $137,154.94 among the other claimants, it becomes necessary to examine the facts and to give consideration to the equities which relate to the claims of all those parties.
The Chicago, Saginaw and Canada Railroad Company was organized about the 4th of December, 1872, under an act of the Michigan legislature approved April 18, 1871, with a capital stock of $4,200,000, divided into 4200 shares, for the purpose of building a railroad from St. Clair, in the eastern part of the State, to Grand Haven, on Lake Michigan, a distance of about 210 miles.
The original incorporators each subscribed for 210 shares of this capital stock, five per cent of which was paid in. This was all the stock ever subscribed, and all the money paid in on any stock. Nine of those corporators were elected directors, all but three of whom resigned in 1873, transferring their stock, it is supposed, to those three. The stock subscribed and the money paid on it may, for all practical purposes, be considered as having afterwards disappeared from the organization.
For the purpose of raising funds to build the road and equip it the corporation executed a mortgage and issued 5500 seven per cent bonds of $1000 each, due in 30 years, with interest payable semi-annually, and placed them in the hands of its executive committee to be put upon the market. Before selling any of its bonds, however, the corporation borrowed considerable
These loans were negotiated with the following persons: (1) With a syndicate of four persons in Philadelphia, designated in the record as the "Philadelphia parties," who advanced money to the company on the terms above stated until the amount aggregated, according to the report of the master, $143,629.62. The number of bonds pledged to the syndicate, as collateral security for this loan, was 462. The Philadelphia parties claimed before the court below to be entitled to prove all the bonds held by them to the full amount of principal and accrued interest, and to a share in the proceeds of the fund derived from the sale of the mortgaged property to the extent of their loans and the interest thereon. The decree of the court allowed their claim, to the extent of 287.26 bonds only, that number being twice the amount of the principal advanced. The second party from whom the company obtained a loan was the appellant Richardson, upon terms hereinafter stated. The third party was George G. Sickles of New York, who loaned the company $100,000 upon a pledge of 250 of the bonds, as collateral, and also a bonus of $100,000 full paid stock. Afterwards his son, Daniel E. Sickles, bought 163 of the bonds for the consideration that he would assume and pay the debt due his father, which he afterwards did. The bonds held by the elder Sickles were then returned to the company. Daniel E. Sickles claimed that, as an innocent purchaser, he was entitled to priority over the other collateral bondholders, who were the directors, officers and promoters of the company. His demand for priority was disallowed by the court; and the only part of his claim that was allowed was, that as innocent purchaser of the 163 bonds he might prove them to the full amount of his principal and interest.
After the negotiation for the three loans above named, Thomas M. Nelson contracted with the company to ballast and iron the first twenty miles of the road from the town of
The claim of the Wrought Iron Bridge Company was based upon a contract with the railroad company, under which it built an iron bridge across the Saginaw River, which was sold by the receiver for the sum of $20,000. This claimant was allowed a share in the proceeds of the sale on the basis of the 66 bonds of which it had become the actual owner.
The claim of Stevens was based upon a bona fide loan made to the company by him. By the decree of the court below he was allowed a share in the funds to the extent of 32 bonds.
Any modification of the decree of the court below favorable to the contention of the appellants herein will correspondingly reduce the allowances made to the above-mentioned claimants.
The loan of $100,000 by Richardson to the railroad company, on which he obtained the first 200 bonds, as collateral, was made by him on the 31st of March, 1875, under a contract with the company, in which he agreed to lend the corporation that amount upon certain terms, which, among others, were, (1) that the company should deliver to him 200 mortgage
In the contest for priority among the claimants before the master the judgment creditors of the corporation claimed that they entered into the contracts with the company whereon they obtained their judgments relying upon its resources, which they were led to think were ample by reason of the amount of the outstanding paid up stock in the hands of such responsible stockholders and owners as Richardson and the Philadelphia parties; and it was contended that those stockholders should not be allowed to share in the proceeds arising from the sale of the mortgaged property on the basis of the bonds held by them, as collateral, unless they should first pay to the company the full amount of the shares of stock of which they had held themselves out to the world as the owners. The master concurred in this view, but, because there was no proof of the actual value of the stock, he declined to make any deduction from the amount due to Richardson, but limited his claim to the 200 bonds. The appellants received the amount which the decree allowed, but appealed to this court from that decree, contending that they were entitled to a
To determine the merits of the contention of the appellants, a somewhat minute statement of the circumstances which led the board of directors to vote to Richardson those 400 additional bonds becomes necessary. The 1250 shares of paid up stock for which he paid nothing made him the largest stockholder in the company. He and the Philadelphia parties held all the outstanding stock with the exception of a few shares, and the entire and absolute control of the corporation was thus in their hands. Richardson soon controlled a majority of the board, and dominated its proceedings. He was at once made a director, according to the contract. He became chairman of its executive committee and its managing director. The lease of the first 20 miles of the road was made to him, and that part was turned over to his possession. He had John A. Elwell, his coadjutor and representative, elected a director, who became, successively, secretary, auditor and a member of the executive committee of the board. He afterwards caused Ambrose, Hamm and Cooper to be put upon the board of directors, to each of whom he assigned small portions of his stock to enable them to vote in furtherance of his schemes and interests; and the 1250 shares of paid up stock were in due time issued to him.
At a meeting of the board of directors, held on the 5th of July, 1875, although he had advanced nothing beyond his original loan already secured, he demanded 100 additional bonds, representing $100,000, as collateral, and the board, yielding to his exactions, unanimously adopted a resolution directing the secretary and treasurer to deposit with him that number of bonds for such purpose. Within one month afterwards, to wit, August 5, 1875, Richardson was unanimously elected treasurer of the company, to fill the vacancy caused by the resignation of E.P. Ferry, which he had tendered, to take effect when his accounts should be adjusted by the executive committee, and when the personal obligations he had made should be settled, or he be relieved therefrom. The board of directors also voted to Richardson 300 additional first mortgage
"Resolved, That the president and secretary be, and they are hereby, authorized to execute a contract for the purpose of grading, tying and bridging the company's located road from its western terminus to Lakeview."
Elwell testifies that Richardson stated to the board that if they would, by resolution, authorize him to receive 300 additional bonds of the company of $1000 each, he would make
On the 11th of October, 1875, Richardson was appointed managing director, irrevocable, and chairman of the executive
"Received of Edward P. Ferry, treasurer of the Chicago, Saginaw & Canada Railroad Co., twenty-two hundred and eighty-nine (2289) of the first-mortgage bonds of the company, numbered as detailed by the memorandum above, dated New York, Aug. 20, '75, and signed by O.W. Child & M.J. Baney, placed in my custody as chairman of the executive committee of said R.R. Co., in accordance with the resolution of the board of directors passed Oct. 11, '75, for custody, disposal, or sale.
"Endorsed: Benjamin Richardson. Receipt — 2289 bonds. Oct. 12, 1875."
The list thus receipted for by Richardson as chairman of the executive committee, included the 400 bonds numbered from 3201 to 3600, inclusive, which he previously, as before stated, had separated from the original number, and claimed had been pledged to him as collateral security. It is safe to say, too, we think, that no one interested in the affairs of the company, except Elwell and Richardson, knew, at that time, that Richardson was holding those 400 bonds in any other capacity than as treasurer of the company. Elwell testified that at the meeting of October 11, 1875, none of the other parties knew that Richardson had those bonds.
W.J. Kelley testified that, at a meeting of the board of directors on that day, the understanding of the board derived from Richardson's statement was, that he had in his possession only the original 200 bonds as collateral. Secured in the possession of the company's bonds, Richardson refused to comply with the conditions on which Ferry had resigned. On the 16th of August, 1875, Elwell enclosed in a letter to Richardson two renewal notes to be substituted for those on which Ferry had been endorser, saying: "Mr. Ferry demands that, before he resigns his office of treasurer and turns everything over to you, you shall endorse the renewal notes personally,
At the meeting of July 8, 1876, the board, in anticipation of the foreclosure of the mortgage then determined on, passed resolutions auditing the entire account of Richardson against the company, and declared the sum of $185,584.18 to be due to him from it. Another resolution, unanimously adopted, ratified and approved the bonds issued to him for that aggregate sum. A third resolution was adopted directing the secretary to execute and deliver to him the notes of the company at seven per cent, payable at such times as could be agreed on with Richardson, and that there should be embodied in the note an authority to the holder, in default of payment, to sell such
In view of all the facts and circumstances presented by this record we are unable to see any such superior equity arising out of the transactions of Richardson with this company as entitles him to a priority over the other creditors in the distribution of the fund in question; or anything in his mode of getting possession of the 400 bonds which gives him a better claim to them than that of the other creditors. While we may not be prepared to concur with the master in some of the reasons
Richardson's relation to the subject matter of this controversy was threefold: (1) That of a creditor of an insolvent corporation claiming for his debt priority of payment over those of all other creditors, out of the fund arising from a foreclosure sale of the mortgaged property; (2) that of a director and officer of that corporation at the time his debt against it was created; and (3) that of the largest shareholder of its capital stock. Undoubtedly his relation as a director and officer, or as a stockholder of the company, does not preclude him from entering into contracts with it, making loans to it and taking its bonds as collateral security; but courts of equity regard such personal transactions of a party in either of these positions not, perhaps, with distrust, but with a large measure of watchful care; and unless satisfied by the proof that the transaction was entered into in good faith, with a view to the benefit of the company as well as of its creditors, and not solely with a view to his own benefit, they refuse to lend their aid to its enforcement. In Twin Lick Oil Co. v. Marbury, 91 U.S. 587, 588, Mr. Justice Miller, delivering the opinion of the court, said: "That a director of a joint-stock corporation occupies one of those fiduciary relations where his dealings with the subject matter of his trust or agency, and with the beneficiary or party whose interest is confided to his care, is viewed with jealousy by the courts, and may be set aside on slight grounds, is a doctrine founded on the soundest morality, and which has received the clearest recognition in this court and in others."
In relation to the rights and liabilities of a stockholder, this court said in Sawyer v. Hoag, 17 Wall. 610, 620, Mr. Justice Miller also delivering the opinion of the court: "We think it now well established that the capital stock of a corporation, especially its unpaid subscriptions, is a trust fund for the benefit of the general creditors of the corporation." Proceeding to show that this trust cannot be defeated by a simulated payment of the stock subscription, nor by any device short of
In the case last cited the stockholder nominally paid the stock subscription, but the money was immediately taken back as a loan, and it was claimed by him as a valid payment. The transaction was characterized by the court as a "fraud upon the public who were expected to deal with them."
In Graham v. Railroad Co., 102 U.S. 148, 161, this court said, Mr. Justice Bradley delivering the opinion: "When a corporation becomes insolvent, it is so far civilly dead, that its property may be administered as a trust-fund for the benefit of its stockholders and creditors. A court of equity, at the instance of the proper parties, will then make those funds trust-funds, which, in other circumstances, are as much the absolute property of the corporation as any man's property is his."
In the more recent case of Wabash, St. Louis & Pacific Railway Co. v. Ham, 114 U.S. 587, 594, it was said by this court, speaking through Mr. Justice Gray: "The property of a corporation is doubtless a trust fund for the payment of its debts, in the sense that when the corporation is lawfully dissolved and all its business wound up, or when it is insolvent, all its creditors are entitled in equity to have their debts paid out of the corporate property before any distribution thereof among the stockholders. It is also true, in the case of a corporation, as in that of a natural person, that any conveyance of property of the debtor, without authority of law, and in fraud of existing creditors, is void as against them."
Can the transactions between Richardson and the insolvent
We have seen that all the acts of Richardson as director, stockholder, chairman of the executive committee and treasurer, all of which offices he held at one time, had their origin in this bonus stock. After having exercised all the privileges and powers of a stockholder in the corporation, it cannot be seriously contended that he is to be held exempt from the liabilities which would attach to a bona fide shareholder who has taken shares purporting to be paid up, but which in truth are not paid up. The case of Scovill v. Thayer, 105 U.S. 143, 153, 154, bears a close analogy to this. Mr. Justice Woods delivering the opinion of the court in that case said: "The stock held by the defendant was evidenced by certificates of full-paid shares. It is conceded to have been the contract between him and the company that he should never be called upon to pay any further assessments upon it... . But the doctrine of this court is, that such a contract, though binding on the company, is a fraud in law on its creditors, which they can set aside; that when their rights intervene and their claims are to be satisfied, the stockholders can be
The principle underlying all of the decisions which we have cited upon this point is, that the capital stock of a corporation, when it becomes insolvent, is in law assets of the corporation, to be appropriated to the payment of its debts; and that creditors have the right to assume that the stock issued by the corporation and held by its stockholders as paid up stock had been paid up, or, if unpaid, that a court of equity, at the instance of the proper parties, could require it to be paid up. In the case now before us, the bonds claimed by the appellants were voted to Richardson by his associate directors, every one of whom owed his election to the holders of this bonus stock alone. The total amount of the advances made by him, for which these bonds are collateral, is very little larger than one-half of the amount of the stock which he had as paid up stock. If the stock given to him and the Philadelphia parties had been really paid up stock, there would have been no insolvency on the part of this corporation.
Irrespective of the question whether he can be made liable for the face amount of this stock, or for its proved value, the facts we have detailed certainly do not entitle his claim to outrank that of any bona fide creditor, whether secured or unsecured, in the matter of distribution.
The master found that the 400 bonds had never been delivered by the company to Richardson in his individual capacity, in pledge as collateral security for the moneys advanced. It
Counsel for the appellants in their brief put not a little stress upon the fact that Richardson's claim is based upon the
It is hardly necessary to say much with respect to the claim of Richardson to the 1105 bonds alleged by him to have been redeemed as aforesaid. Upon this question the master says:
"The case is briefly this: The board of directors sent one of their number as financial agent to Europe with authority to negotiate a sale of bonds. While there, to defray expenses, he borrowed a sum of money from a Mr. Stevens and pledged to him 50 of the bonds as collateral security; these, together with the 1105 bonds, this agent and Stevens deposited with the Consolidated Bank of London, with agreement that the bonds should not be delivered to any one without the joint order or consent of the agent and Stevens. The agent was withdrawn from Europe; the indebtedness due Stevens was allowed to go to protest, and the directors were fearful Stevens would not only sell the bonds pledged, but would also sell the 1105, and the purchaser obtain title to the whole, and thus render nearly valueless the securities held by the directors. To prevent this calamity Richardson advanced the money, charged it to the company, and received its notes therefor. He then attempted to do what he was fearful might have been done in London, namely, levy upon and sell the 1105 bonds, and himself become the purchaser at a nominal sum, and thus gain an unconscionable advantage over other bondholders. It is a general rule that fraud or any gross misconduct on the part of the salvors in connection with the property saved will work a forfeiture of the salvage, and the evidence in this case with reference to the means employed to obtain a levy on the bonds in question and the sale thereof fully justifies us in the conclusion which I have reached that no allowance ought to be made to Richardson by way of `equitable salvage' for the
We fully agree with what is said by the master, and do not deem it essential to add anything further on that point.
As regards the decree of October 8, 1883, we think it sufficient to say that the corrections made by it, as regards the calculations of interest on the bonds, in the original decree were correct and proper, and were warranted by the law. The original decree had allowed interest on some of the bonds owned and held as collateral security from the date of their issue. The amendatory decree simply allowed such interest to be calculated from the date when the bonds were actually delivered to the owners and holders of them. Such correction was eminently legal and just.
The decree of the court below is affirmed.