Gilfillan v. Union Canal Company of Pennsylvania

• Decision Date: 26 November 1883
• Citation: 3 S.Ct. 304,27 L.Ed. 977,109 U.S. 401
• Parties: GILFILLAN v. UNION CANAL COMPANY OF PENNSYLVANIA
• Court: U.S. Supreme Court

109 U.S. 401

3 S.Ct. 304

27 L.Ed. 977

GILFILLAN v. UNION CANAL COMPANY OF PENNSYLVANIA.

November 26, 1883.

J. Duval Rodney, for plaintiff in error.

Thomas Hart, Jr., for defendant in error.

WAITE, C. J.

The Union Canal Company of Pennsylvania, a corporation of the state of Pennsylvania, issued, in 1853, a series of bonds for the payment of money, amounting in the aggregate to $2,500,000, with coupons for semi-annual interest attached. These bonds and coupons were secured by a mortgage to trustees on the property of the company. Prior to 1862 the company became pecuniarily embarrassed, and a plan was devised by parties in interest for the settlement of its affairs and liabilities, by which the entire indebtedness, whether secured or unsecured, was to be converted into a funded debt, secured by mortgage, on which interest was to be paid only 'out of and from the clear net income and profits of the business of the corporation,' but the right of voting at elections and meetings of the corporation was to be given to bondholders as well as stockholders. On the tenth of April, 1862, the legislature of Pennsylvania passed a statute, the purpose of which was to give authority for such an agreement between the company and its creditors. The statute provided in express terms that the agreement, if entered into, should only be binding on such of the holders of the bonds of 1853 'as shall signify their assent in writing thereto; and in case any such bondholder shall fail to file with the president of such corporation his or her refusal, in writing, to concur in the said agreement within three months from the date thereof, such bondholder shall be taken to have assented to the same.' Ample provision was made for notice to the bondholders to appear and express in writing their assents or dissents, and for the preservation of all the original rights of such as dissented.

Pursuant to this legislative authority, the contemplated agreement was entered into between the corporation, with the assent of its stockholders and the creditors. The notice required by the statute was given, and bondholders to the amount of only $85,000 out of the $2,500,000 filed in writing their refusal to concur. All the rest either assented in writing or failed to signify their dissent. At the time the agreement was made, Gilfillan, the plaintiff in error, owned $4,200 of the bonds of 1853, and the coupons thereon from November 1, 1857. He had actual notice of the agreement and the proceedings for its execution, but he neither signified his assent thereto in writing nor filed with the president of the company his refusal to concur. Between the time of making the agreement and the commencement of this suit there was not 'any clear net income and profits of the business' of the company. This suit was brought against the company by Gilfillan on his coupons running from November 1, 1857, to May 1, 1877, inclusive. At the trial a case was stated which presented for determination the single question whether the agreement of settlement barred the action. The supreme court of the state decided that it did, and gave judgment accordingly. To reverse that judgment this writ of error was brought.

The precise point we have to decide is whether the statute which made the failure of a bondholder to signify his refusal to concur in the agreement of settlement within the specified time equivalent to an express assent in writing, impaired the obligation of his bond Mortgages of the kind of that executed by this company are of a peculiar character, and each bondholder under then enters by fair implication into certain contract relations with his associates. Such bondholders are not, like stockholders in a corporation, necessarily bound, in the absence of fraud or undue influence, by the will of the majority, when expressed in the way provided by law, but they occupy, to some extent, an analogous position towards each other. The mortgage, with the issue and distribution of bonds under it, creates a trust, of which the selected mortgagee, or his duly-constituted successor, is the trustee, and the bondholders primarily, and the stock holders ultimately, the beneficiaries. It not unfrequently happens that compromises and adjustments of conflicting interests become necessary in the course of the administration of such trusts. As in the present case, a very large majority of the bondholders sometimes think it is for their own interests as well as of that of their associates to surrender a part of their rights and accept others instead, and they prepare and submit for execution an agreement, the object of which is to carry their plan into effect. No majority, however large, can compel a minority, small though it be, to enter into such the agreement against their will; and, under the constitution of the United States, it is probable that no statute of a state, passed after the bonds were issued, subjecting the minority to the provisions of the agreement without their consent, would be valid. But it seems to us a proper exercise of legislative power to require a minority...