City of Chicago v. Cameron

• Decision Date: 12 May 1887
• Citation: 120 Ill. 447,11 N.E. 899
• Parties: CITY OF CHICAGO and others v. CAMERON and another.
• Court: Illinois Supreme Court

120 Ill. 447

11 N.E. 899

CITY OF CHICAGO and others

v.CAMERON and another.

Supreme Court of Illinois.

May 12, 1887.

Appeal from appellate court, Second district.

Bill by Cameron and Cobb, appellees, against the city of Chicago and others, appellants, to quiet title by having certain railroad bonds declared ultra vires and void, and the deed of trust securing them canceled.

Geo. W. Smith and John S. Miller, for appellants.

J. L. High and E. F. Bull, (D. S. Wegg, of counsel,) for appellees.

SHELDON, J.

The La Salle & Chicago Railroad Company was incorporated in 1867 for the construction of a railroad from La Salle to Chicago. The act of incorporation authorized the company to borrow money, to issue bonds, to sell them at such price as they should bring, and to mortgage its property and franchises to secure the payment of the bonds. It provided that the affairs of the company should be managed by a board of directors. In 1872 the name of the corporation was changed to the Chicago & Great Western Railroad Company. On the first day of March, 1873, the directors of the company, by resolution, authorized the issue of bonds to the aggregate amount of eight millions of dollars, the same to be used in the construction and equipment of the line of railroad to be built. One thousand of these bonds, amounting to $1,000,000, were executed March 1, 1873, and secured by a deed of trust of the same date, conveying to the Farmers' Loan & Trust Company of New York all the property and franchises of the company. These bonds came into the hands of Emery E. Childs, the president and manager of the company. Prior to this time a corporation known as the Riverside Improvement Company, organized under an act approved March 11, 1869, for the purpose of purchasing, improving, and selling suburban property in the vicinity of Chicago, had become largely indebted for the purchase and improvement of certain lands at Riverside, in Cook county. Another corporation known as the Riverside Water & Gas Company, incorporated April 6, 1869, for the purpose of supplying water and gas to the town of Riverside, had also become largely indebted and embarrassed in its enterprise at that place. Emery E. Childs, who was the president of the Riverside Improvement Company, and vice-president and general manager of the Riverside Water & Gas Company, acquired the control of another corporation known as the Mercantile Warehouse & Loan Company, and caused its name to be changed to the Chicago & Great Western Railroad Land Company. He then caused the Riverside Improvement Company and the Riverside Water & Gas Company to convey their property to the land company, subject to a large amount of mortgage and other indebtedness. Childs then became the president and general manager of the land company. He also owned a majority of the capital stock of the Chicago & Great Western Railroad Company, and was its president and manager. Instead of using the bonds of the railroad company for the purpose of constructing its road, Childs used 750 of the bonds in payment and satisfaction of the debts of the improvement company, of the water and gas company, and of the land company. Childs also delivered 250 of the bonds to Joshua C. Saunders and other persons, without any consideration accruing to the railroad company other than what will be adverted to hereafter as claimed to be such. On the first of March, 1873, the land company executed its deed of trust, conveying certain lands at Riverside to John N. Jewett, as trustee, to secure the payment of the railroad bonds above described. The railroad bonds recite on their face that they are secured by the railroad company's trust deed, and also that the bonds are entitled to the benefits and security of a special sinking fund derived from sales of propertyat Riverside, Illinois, in the manner provided by the Jewett trust deed. Default having been made in the payment of interest on the bonds, suit was brought in the circuit court of Cook county by F. W. Peck and others, holders of the bonds, for the foreclosure of the Jewett trust deed. A decree of foreclosure was rendered, which, on being brought before this court, was modified in certain particulars. See Chicago & Great Western Land Co. v. Peck, 112 Ill. 408.

On November 27, 1884, the appellees filed their bill, setting out the above, with other facts, and alleging that on October 14, 1884, they became subscribers to the capital stock of said railroad company, with a view to carry out the purposes of said road and to obtain subscriptions. The bill also alleged that default was made in the payment of interest on said bonds, and that, by a decree of the circuit court of Cook county, the trust deed to Jewett had been foreclosed for the benefit of the holders of said bonds. It stated the names of the owners of bonds, among them appellants, so far as known, and alleged that all acquired the bonds with full notice of the matters stated, and well knew that, as against the railroad company, they were ultra vires and void; that the company, through its president, had been requested to file a bill to obtain a release of the railroad deed of trust, but had refused to do so. The bill stated that by reason of the cloud further subscriptions could not be obtained, and they were greatly damaged. The prayer was that the bonds might be decreed to be null, and that the Farmers' Loan & Trust Company should release the trust deed. Process was issued and served upon some resident defendants, among them appellants.

The answer of appellants, as well as of certain others who answered, denied that the bonds were ultra vires, claimed that appellants were bona fida holders for value, and that the question of the validity of the bonds was res adjudicata by reason of the decree of the circuit court of Cook county. The railroad company answered, and averred that none of the bonds were used in building or equipping its road, but were placed in the hands of its president, and used, without authority, in payment of debts of the Riverside companies above named; that said companies owned large tracts of land near Chicago, from which it expected to derive a large amount of business, provided said companies could be relieved from pecuniary embarrassment. It did not claim that said bonds were not lawfully issued, but submitted the question of ultra vires for determination. It admitted that it never received directly a money consideration for them; that it had been requested and refused to file a bill to procure a release of the trust deed made by it, preferring to submit said question to the decision of the court, and to remain neutral as between the stockholders and those claiming to be bondholders. The bonds show upon their face that they are secured by the two trust deeds which have been mentioned, and the Jewett trust deed makes the foreclosure of the railroad trust deed a condition precedent to a sale or foreclosure under its provisions. The Jewett trust deed recites that it was given for a debt of the railroad company. The decree entered March 4, 1885, found the facts in substance as set forth in the bill.

It is insisted by appellants that the evidence and the facts found by the decree do not sustain the decree of the circuit court that the bonds in controversy were issued without authority of law, and were null and void as against the railroad company. The decree finds that Childs, ‘without any authority, used seven hundred and fifty of said bonds, and which came into his hands as the active manager of said railroad company, in satisfaction of debts and obligations of said improvement company and said gas and water company and of said land company, and not in any way in or about the construction, equipment, or operation of the said line of railroad, and that all the persons who received said bonds from said Childs well knew that the only consideration thereforwas the indebtedness of the said several companies other than the said railroad company, and that said bonds, as against said railroad company, were ultra vires and wholly null and void, * * * and that the present holders of the bonds acquired them with full notice of the matters heretofore found, and well knowing the bonds were, as against said railroad company, ultra vires and void.’ Then follows the finding as to the remaining 250 bonds, which being somewhat different, and more strongly against the bonds, and appellant's bonds being part of the 750 bonds, we will confine ourselves to the finding as to the 750 bonds.

It is said this finding does not exclude the fact that the bonds were used for a proper corporate purpose; that, in consideration of the payment of such debts, the land company might have agreed to construct the railroad in part, or to furnish some portion of its equipment; that such a contract would have been valid, and a delivery of the bonds in pursuance thereof would have been binding upon the company. But there is nothing in the decree or in the evidence upon which to base any such supposition, and it is not, therefore, to be indulged; and, further, it would be inconsistent with the finding that the bonds were used in satisfaction of the debts, ‘and not in any way in or about the construction, equipment, or operation of the said line of railroad.’

Again, it is said the evidence before the court showed,-and that the decree does not exclude the fact,-not only that the 750 bonds were used in satisfaction of the debts of the other companies, but also that by the same transaction the land company gave to the railroad company, by the Jewett trust deed, the security of the Riverside lands for its whole authorized issue of construction bonds, to the amount of $8,000,000, and that the 750 bonds were used to extinguish prior liens on those lands in favor of the security thus obtained by the railroad company for its construction bonds; that, while such use of the bonds was not strictly ‘in any way in or about the...