Thomas v. Brownville, Ft Ky Pac Co

• Decision Date: 10 December 1883
• Citation: 109 U.S. 522,27 L.Ed. 1018,3 S.Ct. 315
• Parties: THOMAS, Trustee, v. BROWNVILLE, FT. KY. & PAC. R. CO. and others. 1
• Court: U.S. Supreme Court

109 U.S. 522

3 S.Ct. 315

27 L.Ed. 1018

THOMAS, Trustee, v. BROWNVILLE, FT. KY. & PAC. R. CO. and others.¹

December 10, 1883.

Wm. M. Ramsey, for appellant.

J. H. Broady, for appellee.

MILLER, J.

This is an appeal from a decree of the circuit court for the district of Nebraska dismissing appellant's bill for a foreclosure of a railroad mortgage. The mortgage was made by the Brownville, Fort Kearney & Pacific Railroad Company to secure the payment of bonds issued by said company to certain persons who had contracted to build its road, and to whom 610 of said bonds of $1,000 each had been delivered. There was a default in the payment of these bonds. After they were executed and delivered the Brownville & Fort Kearney Railroad Company became consolidated under the laws of Nebraska with the Midland Pacific Railroad Company, under the new name of the Nebraska Railway Company. In the bill of foreclosure both these companies—that is, the Brownville Company and the Nebraska Company are made defendants, and an answer confessing plaintiff's right to relief being filed, the court rendered a decree of foreclosure, and apparently a sale was had. But at this stage of the proceedings certain parties interested as stockholders of the original Brownville & Fort Kearney Company were permitted to make themselves defendants, and the first decree was vacated. These parties set up by way of answer and cross-bill that the contract for the construction of the road, on account of which the bonds were issued, was fraudulent and void, and so were the bonds issued under it, and they resisted the foreclosure of the mortgage on that account.

The fraud charged in this answer and cross-bill is founded on two allegations: First. It is alleged that two of the board of directors who took part in making the construction contract were interested with the other parties in the contract. Second. That the other contractors besides these two made an agreement, at the same time that the construction contract was made, with 12 of the shareholders of the railroad company, that they would relieve them, as subscribers to the stock of said company, from the payment of any further assessments upon the stock which they had subscribed for, by paying out said stock and having same assigned to them; in all, not to exceed $16,500 of the $41,000 of individual subscriptions to said company. The names of the persons thus relieved by the construction company included all the directors of the railroad company at the time the contract for construction was made. As the stock was worthless, and these parties were liable to be called on to pay up this $16,500, the effect upon the directors in making a construction contract with the men who relieved them of their liability, two of them being also parties in the construction contract, is readily seen. These allegations are proved beyond question, and the circuit court held the contract void, and the bonds issued in fulfillment of it also void, and dismissed the bill. We concur with the circuit judge that no such contract as this can be enforced in a court of equity where it is resisted and its immorality is brought to light. But as this court said in the case of Twin Lick Oil Co. v. Marbury, 91 U. S. 587, such contracts are not absolutely void, but are voidable at the election of the parties affected by the fraud. It may often occur that, notwithstanding the vice of the transaction,—namely, the directors or trustees, or a majority of them, being interested in opposition to the interest of those whom they represent, and in reality parties to both sides of the contract,—that it may be one which those whose confidence is abused may prefer to ratify or submit to. It is therefore at the option of these latter to avoid it, and, until some act of theirs indicates such a purpose, it is not a nullity.

In the present case the stockholders of the corporation, whose officers accepted those benefits at the hands of the parties, with whom they were, in the name of the corporation, making a contract for over a million of dollars, do denounce and repudiate that contract. The conduct of these directors is utterly indefensible. The case of Wardell v. Union Pac. R. Co. 103 U. S. 651, is in precise analogy to this. See, also, same case in 4 Dill. 330. The original contract being such that the contractors can maintain no suit on it, the bonds which they received are affected with the same vice, and cannot be enforced unless they are...