Louisville, N. A. & C. R. Co. v. Ohio Val Improvement & Contract Co.

• Decision Date: 23 May 1893
• Citation: 57 F. 42
• Court: United States Circuit Court, District of Kentucky
• Parties: LOUISVILLE, N. A. & C. RY. CO. v. OHIO VAL. IMPROVEMENT & CONTRACT CO. et al.

57 F. 42

LOUISVILLE, N. A. & C. RY. CO. v. OHIO VAL. IMPROVEMENT & CONTRACT CO. et al.

United States Circuit Court, D. Kentucky.

May 23, 1893

Henry Crawford and Helm & Bruce, for complainant.

St John Boyle and Muir, Heyman & Muir, for defendants.

LURTON Circuit Judge.

The questions now for consideration arise upon the demurrers filed by certain defendants to the supplemental bill filed by the original complainant. For a proper understanding of these questions, it is necessary to state the substance of the original bill, as well as of the supplemental bill. The original bill alleged that the defendant the Richmond Nicholasville, Ervine & Beattyville Railway Company hereafter styled the Beattyville Railway Company, had contracted with the Ohio Valley Improvement & Contract Company for the construction and equipment of its line of railway, situated in the state of Kentucky; that the construction company, as a consideration, was to receive the first mortgage bonds of the railway company, to the extent of $25,000 per mile, deliverable as the work progressed, and also a controlling interest in its shares of stock. The bill then charged that the complainant railway company had entered into a contract with the defendant construction company, by which, in consideration of a transfer to it of a majority of the entire stock of the Kentucky Railway Company, that it (the complainant railway company) would guaranty the payment of the principal and interest of the railway bonds to be received by the construction company. The bill further alleged that this contract had been so far executed that the guaranty of the railway company had been indorsed upon 1,185 of the Beattyville Railway Company's bonds, which had been delivered to the construction company. This indorsement upon these bonds was in these words:

'For value received, the Louisville, New Albany and Chicago Railway Company hereby guaranties to the holder of the within bond the payment by the obligor therein, of the principal and interest thereof, in accordance with the tenor thereof.'

It also charged that the bonds thus guarantied had been delivered to the construction company, and that a large portion of them were still held by the construction company; that others had been delivered to certain persons who had subscribed therefor, and who were named as defendants to the bill; that others, still, were in the hands of the Louisville Trust Company, to be delivered to subscribers when paid for. The bill alleged such a state of facts as to make the guaranty upon such bonds illegal and fraudulent, and the contract for the guaranty of further bonds to be received by the construction company likewise illegal.

Upon the filing of the bill the usual injunction was granted, enjoining all of the named defendants from transferring, incumbering, selling, or removing from within the jurisdiction of the court, any of the bonds thus illegally and fraudulently guarantied; and such steps were thereafter had, under the original bill and answer, as resulted in a decree canceling the guaranty upon all bonds then in the possession or control of the construction company. Since that decree, complainant company has filed a supplemental bill, alleging, among other things, that the work of construction of the Beattyville Railway has been abandoned; that it is insolvent, and in the hands of a receiver appointed by this court, under a bill filed by the holders of its mortgage bonds; and that complainant has lately learned that certain persons, who are made defendants to this supplemental bill, claim to be the owners and holder of Beattyville Railway bonds, many of them guarantied by complainant company, and which have not been heretofore canceled. The supplemental bill prays that these holders of said guarantied bonds be made defendants, and that they be required to bring their bonds into court, and submit to a cancellation of the guaranty thereon.

Certain of these defendants have appeared and demurred upon the ground that this court has no jurisdiction of the matters complained of; no case appearing on the face of the bill, entitling the complainant, in a court of equity, to any relief against them.

Neither the bill nor the supplemental bill contain any specific allegation as to the circumstances under which the demurring defendants became holders of bonds. It does not affirmatively appear whether they are, or are not, holders for value and without notice. But it seems to me that where a bill alleges a state of facts showing that negotiable securities have been issued illegally and fraudulently, and have come into the possession of the defendant, that it devolves upon the defendant, in view of such fraud and illegality, to show that he is a purchaser for value. 'Where fraud or illegality in the inception of negotiable paper is shown, the indorsee, before he can recover, must prove that he is a holder for value. The mere possession of the paper, under such circumstances, is not enough.' Story, Prom. Notes, § 196; Smith v. Sac Co., 11 Wall. 139. 'It is an elementary rule that, if fraud or illegality in the inception of a negotiable paper is shown, the indorsee, before he can recover, must prove that he is a holder for value. The mere possession of the paper, under such circumstances, is not enough.' Stewart v. Lansing, 104 U.S. 505. For the purpose of this demurrer, the defendants must be treated as standing, with respect to these guarantied bonds, in no better situation than the construction company.

Defendants next insist that a court of equity could not entertain jurisdiction of a suit to set aside any illegal contract where there is an adequate and sufficient defense at law. Cancellation is one of those purely equitable remedies exercised exclusively by courts of equity. The jurisdiction has always existed, but will not generally be exercised if the legal remedy, whether defensive or affirmative, is certain, complete, and adequate. There is a strong line of authority, from courts of the highest respectability, supporting the view that equity has jurisdiction to decree cancellation of a deed, bond, note, or other obligation, whether the instrument is or is not void at law, or whether it be void for matter appearing on its face, or aliunde. Hamilton v. Cummings, 1 Johns. Ch. 521, and cases cited, English and American; Jones v. Perry, 10 Yerg. 59; ...