Pierce v. Somerset Ry

• Citation: 171 U.S. 641,19 S.Ct. 64,43 L.Ed. 316
• Decision Date: 31 October 1898
• Docket Number: No. 12,12
• Parties: PIERCE et al. v. SOMERSET RY
• Court: United States Supreme Court

171 U.S. 641

19 S.Ct. 64

43 L.Ed. 316

PIERCE et al.

v SOMERSET RY.

No. 12.

October 31, 1898.

D. D. Stewart and H. B. Cleaves, for plaintiffs in error.

E. F. Webb and J. H. Drummond, for defendant in error.

Mr. Justice PECKHAM delivered the opinion of the court.

This is a writ of error directed to the supreme judicial court of the state of Maine for the purpose of reviewing a judgment of that court in favor of the defendant in error, who was plaintiff below. 88 Me. 86-100, 33 Atl. 772. The facts necessary to an understanding of the case are as follows:

The Somerset Railroad Company was organized in 1871, pursuant to an act of the legislature of the state of Maine, for the purpose of building and operating a railroad between Oakland, in the county of Kennebec, and Solon, in the county of Somerset, in that state. In order to obtain the money to build its road, the company, on the 1st day of July, 1871, executed a mortgage to three trustees, covering its railroad and franchises and all its real estate and personal property then possessed by it or to be thereafter acquired. By the terms of the mortgage the trustees were to hold in trust for the holders of the bonds of the railroad company, to be issued by it, payable as therein mentioned. The company thereupon issued and sold its bonds, secured by the mortgage, to the amount of $450,000, with proper coupons for interest attached, payable semiannually on the 1st days of January and July in each year, at the rate of 7 per cent., the principal of the bonds becoming due on the 1st of July, 1891. The proceeds of the sale of these bonds were applied to the building, equipping, and operating of the road from Oakland to North Anson, a station between Oakland and the proposed terminus of the road at Solon. In 1876 the road had been completed as far as the village of Anson, 25 miles from Oakland, and it was opened and its cars commenced running in that year between those points. The company continued to so operate its road until September, 1883. It had, however, become insolvent some time prior to April 1, 1883, and at that time its coupons for interest on the bonds secured by the above-mentioned mortgage had been unpaid for more* than three years. At the time when this mortgage was given, corporations could be formed by the holders of bonds secured by a railroad mortgage in the manner provided for by the statute. Rev. St. 1871, c. 51. In 1878, seven years after the execution of the mortgage, the provision for the formation of corporations by the holders of bonds was extended so as to include the case of railroad corporations where the principal of the bonds should have remained overdue for the space of three years, and by an act of March 6, 1883, the provision was still further extended so as to apply to the case in which no interest had been paid thereon for more than three years.

By virtue of the provisions of the Revised Statutes of 1871, as amended and extended by the statutes of 1878 and 1883 (both statutes, as will be seen, being subsequent to the execution of the mortgage), the holders of bonds of the Somerset Railroad Company, following the method provided by those statutes, and on the 15th day of August, 1883, formed a new corporation under the name of the Somerset Railway. The capital stock of this new corporation was $736,648.76, made up of the principal of $450,000 of the unpaid outstanding bonds and $286,648.76 of interest thereon up to the 15th of August, 1883. This was in accordance with the provisions of the statute that the new company should issue the capital stock to the holders of the bonds, secured by the mortgage, in the proportion of one share of stock for each $100 worth of bonds and interest. On the 1st of September, 1883, the Somerset Railway took possession of the railroad from Oakland to Anson (which was as far as it had then been completed), and of all the other property embraced in the mortgage, and it has ever since held and operated the same. Its capital stock was divided into shares of $100 each to the amount of the bonds and overdue coupons as the law provided. The stockholders of the old company had previously, and on the 13th of July, 1883, at their annual meeting, voted that the bondholders should organize a new corporation under the statutes of the state, and take possession of the railroad, and at the same meeting voted to surrender possession of the road to the new corporation, the Somerset Railway.

The holders of a very large majority of these bonds, including some held by the parties in whose interest the plaintiffs in error now act, participated in the formation of this corporation, but the holders of all the bonds did not so participate, a majority being sufficient under the statute for the regular formation of the corporation. Bonds largely exceeding a majority of those which were issued under the mortgage were surrendered to the Somerset Railway, and are now held by it, and the stock issued therefor, the amount being at the time the suit herein was instituted $339,400, and the amount of bonds not surrendered was $110,600, not counting overdue coupons.

From the time the new company took possession of the railroad it has continued to operate it as far as it was then completed, and it has also extended the same some 16 miles, and as extended it has continued to operate it.

To obtain the funds necessary for the completion of the 16 miles of extension, the new company, under what is claimed to be due authority of law, issued its bonds on the 1st day of July, 1887, to the amount of $225,000, payable in 20 years from their date, and to secure payment of the same mortgaged its entire railroad from Oakland to Bingham, 41 miles. These bonds were sold by the company, and the proceeds applied towards the completion of the road. The mortgage given by the Somerset Railroad Company in 1871 included the roadbed from Oakland to the terminus of the road in Solon. The mortgage given by the new company in 1887 embraced the railroad so far as it had been constructed by the old company, as well as the 16 miles constructed by the new company after it took possession of the road. The giving of this mortgage in 1887 was a matter of public notoriety, well known to the trustees of the original mortgage, and no objection was made in behalf of any one. On the contrary, the trustees stood by, and saw this mortgage of 1887 given, and the bonds sold to innocent parties, and the money expended in extending the railroad 16 miles, and it was not until more than five years afterwards, when the road had been built and completed and was in operation to Bingham, that the trustees took action.

In December, 1892, the trustees in the mortgage of 1871 commenced two actions at law, one in each of two counties in which the railroad was situated, in which actions the president of the new corporation, its superintendent, treasurer, accountant, and various station agents and conductors, were made parties defendant, because they were in possession of the road, and the plaintiffs (trustees) claimed to recover from the defendants, as disseisors, the possession of the railroad, and from the defendants, as individuals, the sum of $180,000 as mesne profits.

The ground upon which the trustees based their action was that the new company was never legally organized; that by the terms of the mortgage the trustees alone could take proceedings to foreclose the mortgage; and that the acts of the legislature passed subsequently to the execution of the mortgage, and under which the new company was formed, could and did...