Wood v. Guarantee Trust Safe Deposit Co

• Decision Date: 19 November 1888
• Citation: 9 S.Ct. 131,128 U.S. 416,32 L.Ed. 472
• Parties: WOOD et al. v. GUARANTEE TRUST & SAFE DEPOSIT CO
• Court: U.S. Supreme Court

128 U.S. 416

9 S.Ct. 131

32 L.Ed. 472

WOOD et al. v. GUARANTEE TRUST & SAFE DEPOSIT CO.

November 19, 1888.

[Statement of Case from pages 417-418 intentionally omitted] Monroe L. Millard, for appellants.

[Argument of Counsel from pages 418-420 intentionally omitted] James L. High, for appellee.

Mr. Justice LAMAR, after stating the facts as above, delivered the opinion of the court.

In this appeal the first claim advanced is that since the 117 coupons, parcel of the lot in controversy, were paid by Starr with the funds that he had raised for the express purpose of defraying the expense of constructing the water-works, it was his primary duty so to use the money; and that his failure so to do amounted to a diversion, which will entitle the appellants to a priority, under the doctrine of Fosdick v Schall, 99 U. S. 235. The argument is unsound. There are several answers to it: First. It overlooks the vital distinction between a debt for construction and one for operating expenses. The doctrine of Fosdick v. Schall is applicable wholly to the latter class of liabilities. In the case of Cowdrey v. Railroad Co., 93 U. S. 352, it was settled that the doctrine does not apply where it is a question of original construction. Secondly. It overlooks the important fact that the doctrine only applies where there is a diversion of the income of a 'going concern' from the purpose to which that income is equitably primarily devoted, viz., the payment of the operating expenses of the concern. In other words, the income must be first devoted to the expenses of producing the income. In this case it is not pretended that the money used in paying the 117 coupons in question was income of the water-works company. Thirdly. The doctrine of Fosdick v. Schall has never yet been applied in any case except that of a railroad. The case lays great emphasis on the consideration that a railroad is a peculiar property, of a public nature, and discharging a great public work. There is a broad distinction between such a case and that of a purely private concern. We do not undertake to decide the question here, but only point it out. There is other ample ground upon which to decide this question.

It is further insisted, in reference to the 117 coupons, that appellants are entitled to recover on them in their own right, as owners, and independently of the doctrine of Fosdick v. Schall. These coupons matured July 1, 1881. Appellants came into possession of them in October, 1882,—15 months after they were dishonored. If any defense existed against them in Starr's hands, the same defense is available now against Starr's assignee. It is claimed by the appellee that before the appellants acquired them they had been in fact paid. This is denied; and the case of Ketchum v. Duncan, 96 U. S. 659, is relied on to support the denial. The facts and the reasoning of the court in that case are as follows. 'Duncan, Sherman & Co., who furnished the money which the former owners received for the coupons, did not intend to pay them in any such sense as to relieve the railroad company from its obligation. By advancing the money, and directing its payment to the holders of the coupons, they intended to take the place of those holders, and to become the owners of the evidences of the company's debt; or, in other words, they intended to obtain for themselves the rights of purchasers. They did not advance the money either to or for the company. Certainly, they did not intend to extinguish the coupons. Of this the evidence is very full. The firm had made advances to the company to pay the coupons due in November, 1873, as well as interest due in January and March, 1874, amounting to a very large sum. These advances had not been repaid when the May coupons fell due. Those coupons the company was then utterly unable to take up. In near prospect of this inability, William B. Duncan, the head of the firm, on the 28th of April, 1874, telegraphed from New York to the company at Mobile that his firm would purchase for their own account sterling coupons, payable in London. The firm also telegraphed to the Bank of Mobile and to the Union Bank of London to purchase the coupons there presented for them, charging their account with the cost, and transmitting the coupons uneanceled. The railroad company acceded to the proposition made them, and the Bank of Mobile and the Union Bank did also. Similar arrangements were made respecting the November coupons, except that Duncan, Sherman & Co. arranged with the Credit Foncier to make the purchase in London. Both these banks were agents of the firm in the transactions. They were not agents of the railroad company. They had no funds of the company in hand. In taking up the coupons they acted for Duncan, Sherman & Co., charged the cost to their account, transmitted to them the coupons taken up without cancellation, and were repaid by them. In view of these facts, it is manifest that, whatever may have been the nature of the transaction by which the coupons passed from the hands of the former holders into the possession of Duncan, Sherman & Co., it was not intended by the firm to be a payment or extinguishment of the company's liability. Neither they, nor the company,...