New York Guaranty Indemnity Co v. Memphis Water Co

• Decision Date: 12 March 1883
• Citation: 2 S.Ct. 279,107 U.S. 205,27 L.Ed. 484
• Parties: NEW YORK GUARANTY & INDEMNITY CO. and others v. MEMPHIS WATER CO. and another
• Court: U.S. Supreme Court

107 U.S. 205

2 S.Ct. 279

27 L.Ed. 484

NEW YORK GUARANTY & INDEMNITY CO. and others v. MEMPHIS WATER CO. and another.

March 12, 1883.

W. M. Randolph, for appellants.

J. B. Heiskell, for appellees.

BRADLEY, J.

This case was commenced by a bill in equity filed by the New York Guaranty & Indemnity Company and others, holders of bonds of the Memphis Water Company, against said water company, the city of Memphis, the trustees of a mortgage given to secure said bonds, and certain others of the bondholders and persons interested. The principal object of the bill was to have declared valid a certain contract made between the city and the water company, and to compel the city to comply with its terms, in order that the moneys alleged to be due thereon from the city might be applied to the payment of the bonds held by the complainants and others, the said contract being included in the mortgage. There was also a prayer for a sale of all the property and privileges of the water company under the mortgage, and an alternative prayer that the said contract might be cancelled if the court should hold it to be void, and that then the city might be compelled to pay up a subscription it had made to the stock of the water company, or else that the stock might be cancelled. The circumstances of the case on which the bill was founded may be briefly stated as follows:

The charter of the city of Memphis, among other things, conferred upon its corporate authorities the power of supplying the city with water for all purposes. But on the twenty-eighth of February, 1870, an act was passed chartering the Memphis Water Company, and giving to it the exclusive privilege of laying down water-pipes and extending aqueducts and conductors through all or any of the streets, lanes, and alleys of the city, and of supplying to the inhabitants water by public works. Under this charter the company commenced operations for laying pipes and erecting works without the acquiescence of the city authorities. The city undertook to carry out a counter scheme, which had been under consideration for several years. A litigation ensued, which resulted in June, 1871, in a judgment of the supreme court of Tennessee, confirming the water company's exclusive right, and enjoining the city from interfering therewith, the court holding in substance that the exclusive right given to the water company suspended that of the city for the period named in the former's charter. Thereupon on the eighteenth of January, 1872, the city and the water company entered into a contract, whereby, among other things, the water company agreed to erect water-works in the city, including a certain number of street hydrants of a peculiar construction, which the city agreed to hire for the purpose of extinguishing fires, and to pay therefor a certain annual rent; and it was mutually agreed that the city should receive one-half of the company's capital stock, amounting to $100,000.

Immediately after this contract was executed the water company took measures to raise money by an issue of bonds to the amount of $600,000. For this purpose they executed a deed of trust in the nature of a mortgage to F. S. Davis, T. R. Farnsworth of Memphis, and J. L. Worth of New York, whereby they conveyed all their franchises, lands, wells, pumps, machinery, pipes, and other property then held and thereafter to be acquired, and all the income which they might thereafter 'receive, acquire, or become entitled to, including all sums of money which the party of the first part may become entitled to receive from the city of Memphis under and by virtue of a contract made and entered into between the said city of Memphis and the said party of the first part hereto, on the eighteenth day of January, A. D. 1872.' This deed was declared to be given for the purpose of securing the payment of 600 bonds of $1,000 each, payable to bearer, with interest at 7 per cent. per annum semi-annually. In case default should be made in payment of principal or interest, power was given to the trustees to take possession of the property and books of the company, and to collect all moneys due to it, including all sums due or coming due from the city of Memphis under the said contract, and to apply the same to the payment of unpaid interest on the bonds; and, if two successive installments of interest should be unpaid, the principal to become due, and, at the request of a majority in interest of the bondholders, the trustees should take possession, given notice, and sell the entire property, for cash, and apply the same to the payment of principal and interest on the bonds.

The bonds provided for by this mortgage were duly issued and disposed of, and the complainants represent themselves as holding nearly all of them; those supposed to hold the remainder being made defendants.

It is alleged and not denied that on or prior to the first of April, 1873, the water-works were completed and in operation, and the hydrants stipulated for in the contract of January, 1872, were used by the city. But, the city refusing to pay the rent therefor, a suit was brought by the water company against the city to recover the first installment of rent due. After the pleadings were filed, the writ and declaration were amended by consent, so as to be in the name of the water company, to the use of Davis, Farnsworth, and Worth, trustees of the mortgage. The cause was tried in April, 1874, and a verdict was given and judgment rendered for the plaintiffs. The supreme court of Tennessee, on a writ of error, reversed this judgment in December, 1876, and awarded a new trial, the court holding that the contract between the city and the water company was ultra vires of the city and absolutely void.

In the mean time, in May, 1875, while the writ of error was pending, at the request of the requisite number of bondholders, the trustees of the mortgage took possession of the property of the water company, and proceeded to advertise the same for sale. Thereupon one T. W. Yardley, a holder of some of the bonds, filed a bill in equity in the chancery court of Shelby county, Tennessee, alleging that the New York Guaranty & Indemnity Company had obtained the bonds held by it for an usurious and corrupt consideration, which made it inequitable for that company to hold the said bonds, or at least for the full amount thereof; and that said company was urging the trustees to make said sale, which would at that time be at a sacrifice of the property; and he prayed for an injunction to prevent the sale, and for an investigation of the true amount due, if anything, to said New York Guaranty & Indemnity Company. All the bondholders, as well as the water company itself, were made parties to the suit. A temporary injunction was granted. On the twenty-fifth of May, 1875, a decree was made, by consent of all parties, that the property should be exposed for sale by the trustees on 60 days' notice, whenever the court, in its discretion, should so order, on the demand of the requisite number of bondholders, and that the mutual rights of the parties to a distribution of the proceeds should be ascertained by the further litigation in the cause; the trustees in the mean time to keep possession of the property and account for all receipts and expenditures. An amendment to the bill was afterwards filed, which prayed an account to be taken of the amount justly due to all parties, and for a foreclosure and sale of the mortgaged premises. Answers and cross-bills were filed, nearly all the bondholders appearing to assert their respective interests. In January, 1876, the cause was removed to the circuit court of the United States, and further proceedings took place in that court. On the fifteenth of May, 1876, the trustees, at their own request, and with the assent of all parties, were by decree discharged from the custody of the water-works, and the president and secretary of the water company were placed in charge; but it was stated in the decree that the property was not thereby restored to the company itself, but to be operated in the interest of the bondholders, and at all times subject to the supervision and control of the court. In March, 1877, a few days after the filing of the bill in the present case, a decree was made dismissing Yardley's bill and the several cross-bills. An appeal was taken to this court, but was dismissed for want of prosecution. On the second of June, 1879, (after the final decree was made in the present case,) the circuit court, on the application of the New York Guaranty & Indemnity Company and others, holding a majority of the bonds, made a decree in the Yardley suit, in pursuance of the consent decrees of May 28, 1875, and May 15, 1876, ordering a sale, by a commissioner appointed for that purpose, of all the franchises, rights, privileges, and property conveyed by the deed of mortgage, and authorizing the commissioner to receive the bonds and coupons secured by the...