Thomas v. Western Car Co

• Decision Date: 24 April 1893
• Docket Number: No. 196,196
• Citation: 149 U.S. 95,37 L.Ed. 663,13 S.Ct. 824
• Parties: THOMAS et al. v. WESTERN CAR CO
• Court: U.S. Supreme Court

149 U.S. 95

13 S.Ct. 824

37 L.Ed. 663

THOMAS et al.

v WESTERN CAR CO.

No. 196.

April 24, 1893.

This case arose on the intervening petition of the Western Car Company in the suit of Veeder G. Thomas and others against the Peoria & Rock Island Railway Company for the foreclosure of a mortgage. The petition was granted in part, and denied in part, (36 Fed. Rep. 808,) and the complainants appeal. Affirmed in part, and reversed in part.

Statement by Mr. Justice SHIRAS:

This is an appeal from the decree of the circuit court of the United States for the northern district of Illinois, in a proceeding to foreclose a mortgage executed by the Peoria & Rock Island Railway Company to secure its first mortgage bonds to the amount of $1,500,000.

The original bill was filed in October, 1874 by Veeder G. Thomas, Daniel R. Thomas, and Thomas B. Simpson, citizens of the state of New Jersey, as holders of certain mortgage bonds, and on behalf of all of the holders of such bonds. Among others, it made the trustee in the mortgage given to secure the bonds, and William R. Hamilton, Benjamin E. Smith, and William Dennison, defendants, and, beside setting forth the default in the covenants of the mortgage, charged, among other things, that these mortgage bonds were issued, as it was represented, for the purpose of constructing and equipping the said railroad, and that they were placed upon the market for general sale by the firm of Turner Bros., bankers, of the city of New York, who assumed and represented themselves to be the financial agents for the railway company, and, as such agents, represented by pamphlets, statements, and otherwise that the road of the said railway company was a completed road, built by subscriptions to its capital stock; that the capital stock, amounting to $2,000,000, had all been paid in; that the said road was open, and being operated successfully; and, finally, that the said bonds were offered for sale by the said company for the purpose of placing upon the road the equipment necessary for the business offered, and to construct cars, engines, depots, and machine houses, such as were required by the business of the company.

The bill charges that the complainants purchased, and became the holders of, their bonds in reliance upon these representations, and that the entire issue of bonds were sold by Turner Bros. under like representations; that these representations were in fact false and fraudulent; and that the officers of the railway company and the defendants Smith, Dennison, and Hamilton directed and authorized them to be made, knowing them to be false. It is charged that in June, 1870, while Hamilton was president of the railway company, a contract was made with Smith and his associated for the construction of the railroad, and that Dennison was one of the associates of Smith in this contract; that, by the terms of the contract, Smith and his associates agreed to iron, depot, and moderately equip with rolling stock the railway, and the railway company was to deliver to him, for himself and associates $1,250,000 of the capital stock of the company, and the entire $1,500,000 of the first mortgage bonds; that the $1,250,000 of the capital stock was, immediately upon the making of the contract, issued and delivered to Smith for himself and his associates, being a large majority of all of the capital stock of the company, and that Smith and Dennison and their associates thereby obtained absolute control of the management of the railway company, and caused such officers and directors to be elected as were friendly to their schemes and in their control; that the road was insufficiently constructed and insufficiently equipped on the part of Smith and his associates; that, desicing to sell the bonds, and having control of the management of the company, Smith and his associates fraudulently caused the bonds to be offered for sale through Turner Bros. as the financial agents of the railway company, and as for its benefit, upon the said representations, and that in fact the bonds were not put upon the market and sold for the benefit of the railway company, and it was not intended or expected to use the proceeds thereof for the purpose of placing the necessary equipment upon the road, as was represented, but, on the contrary, the entire proceeds of the bonds were received by and divided among Smith and his associates; and that the railway company has never had any other or greater equipment of rolling stock than that furnished by Smith under his construction contract before the sale of the bonds.

The bill charges, further, that in 1871, owning and controlling the capital stock of the railway company, Smith and his associates caused Smith, Dennison, and Hamilton, and others in their interest, to be elected directors, Hamilton to be elected president, and Smith to be elected vice president, of the railway company, and that as such they continued to control the affairs of the railway company down to the time of the filing of the bill.

Among other charges of fraud in the bill it is charged that Smith, Dennison, and others of the directors of the railway company had caused the railway company to hire cars from the Western Car Company at an exorbitant rate, and that these contracts for the use of cars were made and continued by reason of the control of Smith and his associates over the affairs of the railway company.

The bill sought a foreclosure of the mortgage, and prayed for the appointment of a receiver.

On the 23d of January, 1875, an order was entered appointing John R. Hilliard receiver of the Peoria & Rock Island Railway Company and its property, and on the 1st of February, 1875, Hilliard, as receiver, went into possession and into the operation of the said railway. Hilliard remained in control and operated the railroad until after its sale, in 1877, and until possession was delivered by him, under the order of court, to the purchasers, who had become organized as the Rock Island & Peoria Railroad Company, and who have ever since operated this railroad.

A decree of foreclosure was rendered on the 11th day of January, 1877. It directed a sale to be made by the master in chancery of the franchises and property of the railway company. It contained directions as to the application of the proceeds of the sale, ordering, among other things, that, after payment of specific sums provided for, the balance should be paid to the clerk of the court, who should apply the same, under the direction of the court, first, to the payment of all remaining claims of intervening creditors, as they should be allowed by the court, and next to the payment of the bonds and coupons secured by the mortgage which should be outstanding and unpaid. It authorized the master to receive from the purchaser or purchasers, after payment of the sum of $100,000 of the amount of his bid, for the balance of the sum bid, in lieu of cash, outstanding and unpaid bonds and coupons at such percentage as the court should direct on the approval of the sale; and it authorized the purchaser or purchasers of the property and franchises of the railway company to reorganize under and by virtue of the provisions of the charter of the said railway company, and to be invested with all the rights, franchises, privileges, and powers of the said railway company.

On September 17, 1877, an order was entered approving the master's report of sale, and ordering that the sale made to Ransom R. Cable for $550,000 be confirmed. The purchaser, Cable, was directed by this order to deposit all such bonds and coupons as he should desire to pay in on account of the purchase with the clerk of the court. The court also ordered that all petitioners for allowance of intervening claims complete their proofs of such claims by the 1st of October, 1877.

On the 14th of December, 1877, an order was entered by the court approving the report of the master, showing the execution of a deed by him of the property under the foreclosure decree to the Rock Island & Peoria Railway Company, in pursuance of an order entered on the 11th of December, 1877, and approving the deed, a copy of which is set forth in the order. This order also approved penal bonds in the sum of $100,000 each, payable to the clerk of the court, for the use of whosoever should become interested, one of such bonds being expressly conditioned for the payment to the Western Car Company of any amount which should be found due to it, reciting the intervention of that company, and the claims asserted by it against the proceeds of the sale of the property of the railway company.

The original intervening petition of the Western Car Company in this cause was filed on the 11th of December, 1876. It asserted that at the time of the appointment of the receiver the railway company was indebted to the car company in the sum of $35,106.49, and interest thereon, for car rentals under contracts made between the railway company and the car company. It also claimed the sum of $1,500 under the terms of these car contracts for the value of two box cars destroyed by the railway company, and not replaced. It claimed that the furnishing of cars to the railway company under these contracts was in the nature of supplies furnished to it, by means whereof the company had been enabled to transact its business, and prayed that the receiver might be ordered to pay his indebtedness to the petitioner out of any moneys in his hands, or income received from the business of the railway company.

To this original petition were attached statements of account as exhibits, showing the amount claimed by the car company against the railway company prior to the appointment of the receiver, and also copies of two contracts between the car company and the railway company,—one bearing date March 5, 1872, for the leasing of 70 box cars and 20 stock cars; the other bearing date October 1, 1873, for the leasing of 150 box cars.

To this original petition,...