Coe v. East & W.R. Co. of Alabama

• Decision Date: 12 January 1892
• Citation: 52 F. 531
• Court: U.S. District Court — Northern District of Alabama
• Parties: COE v. EAST & W.R. CO. OF ALABAMA et al. GRANT et al. v. SAME, (SCHLEY, Intervener.)

52 F. 531

COE v. EAST & W.R. CO. OF ALABAMA et al.

GRANT et al. v. SAME, (SCHLEY, Intervener.)

United States Circuit Court, N.D. Alabama, Southern Division.

January 12, 1892

R. L Fowler, for complainant.

John H Inzer, for East & W. R. Co.

Calhoun King & Spaulding, for Grant Bros.

Wager Swayne and A. Prentice, for Browning Bros.

F. S Smith, for Kelly & Byrne.

Webb & Tillman, for intervener and defendant Schley.

PARDEE Circuit Judge.

The American Loan & Trust Company, in June, 1888, filed its bill to foreclose the consolidated first mortgage of the East & West Railroad Company of Alabama, for the equal benefit of the holders of all or any of its bonds. The bill alleged that the railroad company had disposed of 1,750 of said bonds to bona fide holders for value, and that all of said 1,750 bonds were valid. The bill also disclosed the fact that the mortgaged premises were in the hands of a receiver appointed by this court. It prayed foreclosure and sale of the property for the payment of the said bonds, and that the mortgaged property be placed in the hands of the receiver to be appointed under the foreclosure bill, which was subsequently done, one receiver of this court surrendering possession to another.

On the 26th of July an order was granted allowing Grant Bros. to file an auxiliary bill in behalf of themselves and all other bondholders similarly situated, which bill set up the fact that 966 of the 1,750 bonds were invalid and illegal, and were taken by the defendants W. C. Browning, Edward F. Browning, John Hull Browning, and Amos G. West from the railroad company without consideration, and were a fictitious debt, and that Eugene Kelly and John Byrne had acquired an interest in said bonds with full knowledge of all these facts. It also alleged that the bonds held by Grant Bros. and other holders for value had been acquired for a valuable consideration, without notice of any defect, and that they had been induced to buy the same by a series of misstatements and misrepresentations as to the condition of said road, the payment of its interest, and its fiscal condition, made by Edward F. Browning, J. Hull Browning, and A. G. West, or Grovesteen & Pell, a firm of brokers acting in conjunction with said last-named parties. The bill does not seek to prevent the foreclosure of the mortgage, but prays that the 966 bonds should be adjudged illegal, fictitious, fraudulent, and void, and not entitled to participate in the proceeds of the mortgaged premises; and that the foreclosure prayed for in the original bill of the American Loan & Trust Company should be for the equal benefit only of the said consolidated first mortgage bonds adjudged to be valid by the decree to be rendered in the Grant Bros. case.

Each of the individual defendants has filed an answer denying generally and specifically all the allegations of Grant Bros.' bill of complaint, so far as said averments impeach, in any particular, the bona fides of said defendants, respectively.

Subsequent to making up the issues, the American Loan & Trust Company having failed in business, and gone into the possession of a receiver, due proceedings were had by which the American Loan & Trust Company was removed as trustee under the first consolidated mortgage of the East & West Railroad of Alabama, and George S. Coe, Esq., substituted as trustee and complainant herein.

To the main bill, defendant railroad company and James W. Schley have filed answers. The intervention of Schley is also at issue.

Auxiliary Bill of Grant Bros. The complainants in the auxiliary bill have standing in this cause only as bona fide owners and holders of bonds issued under the mortgage granted in 1887 by the East & West Railroad Company of Alabama, in which mortgage all bonds are styled 'First Consolidated Mortgage Bonds.' The resolutions of the stockholders of the East & West Railroad Company of Alabama, which authorized the issuance of the first consolidated mortgage bonds, and which was assented to by each and every stockholder, recite that--

'The bonds were to be issued for the purpose of providing funds for the extension and completion of the road of the company, to widen its gauge, and to take up and retire the present outstanding first mortgage bonds and debenture bonds, and retiring them, and canceling said first and debenture mortgage, ' etc.

At the time those resolutions were passed, there was outstanding indebtedness of the East & West Railroad Company of Alabama, and to a large amount represented by bonds secured by a first mortgage of the railway property, and by debenture bonds secured by a second mortgage of the railway property.

The holders of the first consolidated bonds are charged with notice of the prior bonds and mortgages, and of the terms upon which their own bonds were issued. Caylus v. Railroad Co., 10 Hun, 295; Bronson v. Railroad Co., 2 Wall. 287-311. This being the case, it is very doubtful whether complainants can impeach the indebtedness which existed prior to the issuance of their bonds, and upon which their bonds are based. At the time the first consolidated bonds were authorized and issued, every interest consented,--every bondholder, every stockholder, and the board of directors, and, so far as the record shows, every creditor; and the transaction was the consolidation of two series of bonds secured by mortgages of different dates into an equal number of bonds running a longer time, and bearing the same rate of interest, secured by one mortgage on practically the same property. Any and all the defects of consideration, and all equities existing to the prejudice of the prior bonds, were waived and extinguished, and it was competent for the railroad company to make such waiver. See Bronson v. Railroad Co., supra. Even if the railroad company had been wronged or cheated, it would seem that subsequent creditors and subsequent purchasers have no right to question the transaction as long as the railroad company acquiesces, and no intention to defraud subsequent creditors is shown. See Graham v. Railroad Co., 102 U.S. 148. And the same case denies, in respect to such matters, that a corporation stands on any different footing from an individual debtor.

The issues made up by the pleadings challenge, and inquiry has been largely made into, the transactions in pursuance of which the railroad company in 1882, 1883, 1884, and 1885 put out the first mortgage bonds for purchase and construction of its railroad, and in 1886 issued its debenture bonds, and sold the same to pay its floating debt. The real basis of the first mortgage bonds and of the debentures are two transactions in 1882,-- the purchase of the Cherokee Railroad from the Cherokee Iron Works, and the construction contract with Michael Duff assigned to and assumed by the Southern Railroad Construction Company. The complainants claim that the Brownings and West had an interest in the Southern Railroad Construction Company, and that they were its agents or managers, and that practically it was a mere figurehead to represent the Brownings' interest. The evidence shows it to have been, and to still be, for that matter, a duly incorporated company under the laws of the state of New Jersey.

If all the complainants' claim in that behalf be admitted, still the contract with the Southern Railroad Construction Company was binding upon the railroad company, as the same was fully and duly authorized at a meeting of stockholders held at the time the negotiations were pending, with full notice of all terms and details, and the same has been ratified from time to time by the stockholders and different boards of directors up to, if not since, the institution of this suit. And in this case the company in its answer still insists that it was a valid, binding contract. The various agreements in the record in relation to construction are to be considered as one contract, put in the form of a subscription to stock by Michael Duff,-- an agreement with him to pay for construction, both stock and bonds, and the assignment to, and the assumption by, the Southern Railroad Construction Company, all in good faith and under the advice of counsel.

If it be conceded that the Brownings and West, who were directors of and controlling the East & West Railroad Company of Alabama, were also interested in and controlling the Southern Railroad Construction Company, and, as claimed, were the parties who actually advanced the means to build and construct the road, received the bonds and stock issued under the contract in payment therefor, and that the complainants, acquiring an interest years after, have been injured by the transaction, and can, in this proceeding, inquire into and attack the same, the question still is whether, under all the circumstances, the transaction was not valid. Certainly, if the contract inured to the benefit of the railroad company, and was the best available method for securing the construction of the road, and there was no palpable overvaluation of the work performed and moneys advanced, nor undervaluation of the stocks and bonds received in payment, and it resulted in no injury to any person in interest at the time, it should not be set aside on technicalities, but only in case of palpable intended violation of law. The case of Van Cott v. Van Brunt, 82 N.Y. 535, is directly in point:

'The right of the officers of a railroad corporation to enter into an agreement to build its road, and pay for the construction of the same in stocks and bonds, cannot be seriously questioned, and contracts of this description are frequently made for such a purpose. In Angell & Ames on Corporations, (section 590a), it is laid down: 'An agreement is often made by railroads to pay the persons building them a

...