Kent v. Lake Superior Ship Canal, Railway Iron Co

• Decision Date: 14 March 1892
• Parties: KENT v. LAKE SUPERIOR SHIP CANAL, RAILWAY & IRON CO. et al
• Court: U.S. Supreme Court

144 U.S. 75

12 S.Ct. 650

36 L.Ed. 352

KENT v. LAKE SUPERIOR SHIP CANAL, RAILWAY & IRON CO. et al.

March 14, 1892.

STATEMENT BY MR. CHIEF JUSTICE FULLER.

This was a bill in equity brought in the supreme court in and for the county of Kings, N. Y., February 7, 1884, by Andrew Kent, as executor and trustee of the last will and testament of Jonathan T. Wells, deceased, against the Lake Superior Ship Canal, Railway & Iron Company; Theodore M. Davis; Theodore M. Davis, as receiver of the Ocean National Bank of New York; J. Boorman Johnston, Isaac H. Knox, and Gordon Norrie, being the surviving partners of the firm of J. Boorman Johnston & Co.; Frederick Ayer, sole surviving partner of the firm of J. C. Ayer & Co.; Frederick F. Ayer, Josephine Ayer, and Benjamin Dean, administrators with the will annexed of the estate of James C. Ayer, deceased; and Thomas N. McCarter; and subsequently removed into the circuit court of the United States for the eastern district of New York.

The bill alleged that July 6, 1864, the Portage Lake & Lake Superior Ship Canal Company was organized as a corporation under the laws of Michigan for the purpose of constructing a ship canal to connect the waters of Portage lake and Lake Superior; that by an act of congress approved March 3, 1865, 200,000 acres of public land were granted to the state of Michigan 'to aid in building a harbor and ship canal at Portage lake, keweenaw Point, Lake Superior,' subject to the condition, among others, that they should revert to the United States in case the said canal and harbor should not be completed in two years from the passage of the act; that by an act entitled 'A bill to accept a grant of land by act of congress to aid in the construction of the ship canal at the head of Portage lake with Lake Superior, and to provide for the construction of the same,' passed March 16, 1865, by the legislature of Michigan, tne grant was accepted and conferred upon said Portage Lake & Lake Superior Ship Canal Company, subject to the condition 'that none of said lands shall be sold or otherwise disposed of, except for the purposes of hypothecation, until said canal shall be completed as therein provided;' and that July 1, 1865, the company executed a deed of trust conveying to C. C. Douglas and his successors its canal and franchises and the 200,000 acres of land to secure the payment of 1,000 bonds, of $500 each, john L. Sutherland being thereafter substituted as trustee.

The bill further averred that by act of congress approved July 3, 1866, a second 200,000 acres of land were granted to the state of Michigan for the above purposes, and it was provided by the act that this second grant should inure to the use and benefit of the company in accordance with the act of the Michigan legislature of March 16, 1865; that July 1, 1868, the company executed a deed of trust of the second land grant, together with the equity in the canal and other property already conveyed to Douglas in trust, to Martin and Davis, to whom Lucien Birdseye subsequently succeeded as trustee, to secure 1,000 other bonds, of $500 each; and that Jonathan T. Wells purchased 80 of these last-named bonds, and paid cash therefor, which money was applied by the company in the construction of the harbor and canal. It was further alleged that July 1, 1870, the company made its third deed of trust, conveying its canal and the two land grants to Charles L. Frost, to secure 1,250 bonds, of $1,000 each, 250 of which were paid, redeemed, and canceled by the company by bonds of a subsequent issue, known as the 'Union Trust bonds;' that Thomas N. McCarter succeeded Frost as trustee, July 1, 1872; and that Wells become the holder and owner of 40 of the bonds secured by this third trust-deed. The bill continued that on or about April 29, 1871, the name of company was changed to 'The Lake Superior Ship Canal, Railway & Iron Company,' which on May 1, 1871, became seised and possessed by purchase of the entrance canal, by way of Portage river, into Portage lake, with the franchises appertaining thereto, and also acquired title to 200,000 acres of land or thereabouts, situated in the state of Michigan, and known as the 'Wagon Road Lands;' that May 1, 1871, the company executed a deed of trust to the Union Trust Company of New York as trustee, conveying the canal, with all rights and franchises thereunto appertaining, and the 600,000 acres of land, to secure the payment of bonds which the company proposed to issue to the number of 3,500, at $1,000 each, of which there were after wards issued and negotiated 1,300, and no more.

It was further averred that between 1865 and 1872 the company hypothecated certain of the bonds issued under the first three deeds of trust, and during the years 1871 and 1872 hypothecated certain of the bonds issued under the fourth deed of trust, and only a small proportion of the bonds of each issue was ever sold outright by the company; that in November, 1871, and on January 18, 1872, the company defaulted in the payment of the interest then due upon these bonds; and that at that time large amounts of them were held by the Ocean National Bank, Johnston & Co., and Ayer & Co., as collateral to certain loans, which plaintiff charges were of doubtful legality, made by the parties to the canal company at different times before the default, and it was claimed by the company that the bonds pledged as security for the loans were issued unlawfully, and in violation of the law of Michigan.

That in December, 1871, the Ocean National Bank failed, and T. M. Davis was appointed its receiver; and among the assets of the bank were bonds under all the aforesaid deeds of trust, but most of them were under the McCarter and Union Trust Company deeds; and that some of the bonds in the possession of the bank were owned by it, but by far the larger part were held as collateral.

That prior to the default the company had selected with care and at much expense the lands it was entitled to, and they were regarded as of great prospective value, and those selected under the act of congress of July 3, 1866, were especially valuable.

That early in 1872, Davis, receiver, Johnston & Co. and Ayer & Co. retained an attorney at Detroit to protect their interests as creditors and bondholders of the company, and to act for and represent them in prospective legal proceedings in the United States courts for the eastern district of Michigan for the foreclosure of the deeds of trust, who was afterwards retained and employed by Sutherland, Birdseye, and McCarter, and the Union Trust Company, trustees, as their solicitor, to foreclose the several trust-deeds, which employment was by Davis, receiver Johnston & Co., and Ayer & Co., and upon their retainer and in their in terest, without reference to the interests of the other bondholders; and it was agreed between them and the trustees that the foreclosure suits were to be prosecuted under their direction and for their special benefit; and to this end they indemnified the trustees against all loss and damage by reason of anything which Davis, Johnston, and Ayer might do in the premises.

That on or about May 25, 1872, a bill was filed in the circuit court of the United States for the eastern district of Michigan, in the name of Sutherland, trustee, by said solicitor, to foreclose the trust-deed of July 1, 1865, and the company, Birdseye, Frost, and the Union Trust Company, as trustees, were made parties defendant. As Birdseye was a citizen of New York, it was alleged that Sutherland, who was also a citizen of New York, was a citizen of New Jersey; that on or about June 13, 1872, one Knox was appointed receiver, and it was admitted by Birdseye's solicitors that Sutherland was a citizen and resident of New Jersey, though plaintiff charges that the admission extended only to the order appointing the receiver, and that the circuit court was afterwards shown by the pleadings and proofs to have no jurisdiction therein, and had none in fact; that on June 17, 1872, an order was made empowering the receiver to execute an instrument to F. D. Tappan, as trustee, to secure certificates of indebtedness authorized to be issued for the purpose of completing the construction of the canal, and certificates were issued to the amount of about $640,000, which were purchased by Johnston & Co. and Ayer & Co., $500,000 of the issue being sold at the rate of 75 cents on the dollar, and the remainder at the rate of 60 cents on the dollar, though 25 per cent. discount was the limitation prescribed; and that all this was in the interest of Davis, Johnston, and Ayer.

The bill further averred that on August 27, 1872, the company was adjudicated a bankrupt by the Michigan district court, and Jerome and Beaman were appointed assignees, who on January 3, 1873, by supplemental bill, were made parties to the Sutherland suit, as was McCarter, trustee. It was further stated that on July 3, 1872, a bill was filed in the circuit court in the name of McCarter, trustee, by the same solicitor, to foreclose the trust-deed of July 1, 1870, and the company and the Union Trust Company were made parties defendant, as were the assignees, January 13, 1873.

The bill also alleged that on July 5, 1872, a bill was filed in the circuit court in the name of Birdseye, trustee, by the same solicitor, to foreclose the trust-deed of July 1, 1868, and the company, McCarter, trustee, and the Union Trust Company were made parties defendant. This bill set up the appointment of Knox as receiver, his taking possession of the property, to the amount of $500,000, and tot he amount of $500,000, and that the certificates were made, by order of court, a paramount lien upon the canal and all the property of the company; and prayed that the certificates might first be ratably paid from the proceeds of the sales of the lands acquired by the Sutherland and Birdseye deeds of trust; and plaintiff charged that this recognition of the certificates...