Gould v. Little Rock, M.R. & T. Ry. Co.

• Decision Date: 28 October 1892
• Docket Number: 951.
• Citation: 52 F. 680
• Parties: GOULD v. LITTLE ROCK, M.R. & T. RY. CO. et al.
• Court: U.S. District Court — Eastern District of Arkansas

52 F. 680

GOULD v. LITTLE ROCK, M.R. & T. RY. CO. et al.

No. 951.

United States Circuit Court, E.D. Arkansas.

October 28, 1892

Statement by CALDWELL, Circuit Judge:

On the 25th day of April, 1884, the Little Rock, Mississippi River &amp Texas Railway Company, an Arkansas corporation, in pursuance of a resolution of its stockholders, and also of its board of directors, executed by its secretary, to Henry Wood, as trustee, a deed of trust in the nature of a mortgage on certain lands belonging to the company to secure the payment to Atkins, Winchester, Dexter, and Redfield the sum of about $425,000. The money the deed of trust was given to secure was, from time to time, advanced by Atkins, Winchester Dexter, and Redfield to the company for the construction and improvement of the railroad and the purchase of the necessary equipments, and to pay pressing debts, and was needed and used for these purposes. At the time the money was advanced and the deed of trust executed, Atkins was president of the company, and Dexter and Winchester were stockholders and directors in the company, and Redfield was a stockholder and a director part of the time, but was not a director when the deed was executed. They were all large holders of the stock and bonds of the company, and in control of the road and its affairs. There is nothing in the record to show what number of persons constituted the board of directors. The statute of the state regulating the organization of railroad companies provides that the board shall consist of not less than 5 nor more than 13, and counsel for interveners state in their brief that there were 8 directors. At the time the money was advanced the company owned its line of road and the rolling stock used in operating the same, and other property, but there were mortgages on this property, to secure bonds issued by the company, equal to or exceeding its value. The credit of the company was not good. It had no means of raising money to meet pressing demands and make necessary improvements except by selling its mortgage bonds at a ruinous sacrifice. In this condition of affairs, the parties named loaned or advanced the money mentioned in the deed of trust to the company from time to time, as its necessities demanded borrowing money themselves for this purpose. The company could not have obtained the money from any other source, and those who advanced it were impelled to do so to protect and preserve the large interests they already had in the property. As collateral security for the money advanced, the company pledged its first mortgage bonds to the amount in par value of $206,500, and 3,430 shares of the capital stock of the company. It was known this security was inadequate at the time it was taken, but it was all the company had to offer; and afterwards, when the state made a grant of lands to the company, the deed of trust in suit was executed thereon as additional security for these loans or advances. At the date of the execution of the deed of trust the floating debt of the company was inconsiderable, and the company continued to be a going concern, and to own its road, until it was sold in 1887, under a decree foreclosing the mortgage given to secure its first mortgage bonds.

Some time before this sale of the road, the mortgagees mentioned in the deed, for the consideration of $400,000, paid in cash, assigned and transferred the debt due them from the company and the deed of trust to secure the same, as well as the collateral securities which they held, to the present plaintiff. The purchase price of the road at the foreclosure sale was such that the holders of the first mortgage bonds received 56.52 cents on the dollar for the bonds, and the plaintiff received this percentage, amounting in the aggregate to $167,864.40 on the first mortgage bonds which he held as collateral security for the debt secured by the deed of trust in suit, and this is all that has ever been paid thereon. The second mortgage bonds and stock were rendered worthless by the foreclosure of the first mortgage. This bill was filed by the plaintiff against the company and the trustee named in the deed, to foreclose the same. The company and the trustee appeared, and confessed the bill. Upon her own motion, Sallie Leverett, as administratrix of the estate of J. M. Leverett, deceased, was made a defendant, and thereupon filed an answer and cross bill, alleging that on the 28th day of March, 1885, she recovered a judgment against the defendant company for $3,500 in the circuit court of Desha county, Ark., upon which executions were issued and levied upon the lands mentioned in plaintiff's deed of trust. She avers, among other things, that the deed is void, because, at the time of its execution, Atkins was president, and Winchester, Dexter, and Redfield, directors, of the company, and the principal holders of its stock and bonds, and the company insolvent. There was a replication to the answer, and an answer to the cross bill, which denied all its allegations.

The deed of trust was void, because made to secure debts due to the directors of the company when it was insolvent, and cited Lippincott v. Carriage Co., 25 F. 577, 586; Howe, Brown & Co. v. Sanford Fork & Tool Co., 44 F. 231; White, Potter & Paige Manuf'g Co. v. Henry B. Pettes Importing Co., 30 F. 864; Adams v. Milling Co., 35 F. 433; Haywood v. Lumber Co., 64 Wis. 639, 26 N.W. 184; Rouse v. Bank, 46 Ohio St. 493, 22 N.E. 293; Consolidated Tank Line Co. v. Kansas City Varnish Co., 45 F. 7; Gibson v. Furniture Co., (Ala.) 11 South.Rep. 365.

Dodge & Johnson, for plaintiff.

Sol F. Clark, Dan W. Jones, Thomas B. Martin, and Ratcliffe & Fletcher, for defendant Leverett, contended that--

CALDWELL Circuit Judge, (after stating the facts.)

1. It is the law of Arkansas, established by the decision of its supreme court 50 years ago, that a corporation of that state is failing circumstances may make preferences among its creditors by assigning all or a part of its property to preferred creditors, or to trustees for their benefit. Its right to prefer one or more of its bona fide creditors to the exclusion of others, in the absence of a statute prohibiting it, is as unrestricted and absolute as is the common-law right of an individual debtor to make preferences among his creditors. Ex Parte Conway, 4 Ark. 302, 348, 354; Ringo v. Biscoe, 13 Ark. 563. The established rule in that state is in harmony with the general, though not quite uniform, current of authorities in this country on the question. 2 Mor.Corp. § 802; Allis v. Jones, 45 F. 148; Covert v. Rogers, 38 Mich. 363; Coats v. Donnell, 94 U.S. 168; Dana v. Bank, 5 Watts & S. 223; Warner v. Mower, 11 Vt. 390; Whitwell v. Warner, 20 Vt. 426; Stratton v. Allen, 16 N.J.Eq. 229; Wilkinson v. Bauerle, 41 N.J.Eq. 635, 7 Atl.Rep. 514; Duncomb v. Railroad Co., 84 N.Y. 190, 88 N.Y. 1; Harts v. Brown, 77 Ill. 226; Reichwald v. Hotel Co., 106 Ill. 439; Buell v. Buchingham, 16 Iowa, 284, (opinion by Judge DILLON;) Hallam v. Hotel Co., 56 Iowa, 178, 9 N.W. 111; Garrett v. Plow Co., 70 Iowa, 697, 29 N.W. 395; Smith v. Skeary, 47 Conn. 47; Bank v. Whittle, 78 Va. 737; Ashhurst's Appeal, 60 Pa.St. 314; Sargent v. Webster, 13 Metc. (Mass.) 497.

In some states, by statute, the property of an insolvent corporation must be devoted to the payment pro rata of all its creditors, and, after the insolvency of the corporation is known, the directors cannot divert its property from such use by giving preferences to some of its creditors; but where there is no such statute the great weight of authority is that the property of an insolvent corporation may be sold and used by its directors in the payment of some of its creditors to the exclusion of others. Its insolvency does not affect its right to make preferences any more than the right of an individual debtor to make preferences is affected by his insolvency. The cases which hold the contrary doctrine are bottomed on the erroneous theory that the insolvency of a corporation, in effect, dissolves it, and makes the directors mere trustees to distribute its assets ratably among its creditors. It is undoubtedly true that the property of a corporation is, in one sense, a trust fund for the payment of its debts; but this rule means no more than that the property of a corporation cannot be distributed among its stockholders, or applied to any purpose foreign to the legitimate business of the corporation, until its debts are paid. The rule, so far as it relates to the payment of debts, is satisfied whenever the property of a corporation is applied to the payment of any of its bona fide debts. The rule, as has been often pointed out, does not prevent a corporation, whether solvent or insolvent, from making preferences among its creditors, and exercising in good faith absolute dominion over its property in the conduct of its legitimate corporate business, so long as its right to do so is not restrained by statute or by judicial proceedings.

In Fogg v. Blair, 133 U.S. 534, 541, 10 S.Ct. 338, Mr. Justice FIELD, in delivering the opinion of the court, calls attention to the fact that the property of a corporation is not a trust fund for creditors in any other sense than we have stated. He says:

'We do not question the general doctrine invoked by the appellant, that the property of a railroad company is a trust fund for the payment of it's debts, but do not perceive any place for its application here. That doctrine only means that the property must first be appropriated to the payment of the debts of the company before any portion of it can be distributed to the stockholders. It does not mean that the property is so affected by the indebtedness of the company that it cannot be sold, transferred, or mortgaged to bona fide

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