34 F. 162 | U.S. Circuit Court for the District of Southern New York | 1888
Although the pleadings and proofs in this case present a formidable record, the real controversy is a comparatively narrow one when limited, as it must bo upon the bill of complaint and by the controlling facts, to its real proportions. The complainants sue on behalf of themselves and of all other persons similarly situated. They are the members of several banking firms, aliens and citizens of France, who, together with other persons not named in the bill, wore acting in concert in March, 1873, as a syndicate to market $6,250,000 bonds of the New York, Boston & Montreal Railway Company, then offered to the public for subscription in London, and who became purchasers by subscription of two-thirds of the bonds. The bonds were part of an issue of $12,-250,000 first mortgage bonds created by the railway company pursuant to a consolidation agreement by which several constituent companies were united and merged together as a new corporation under the laws of the state of New York. That agreement, among other things, provided for the creation by the new company of first and second mortgage bonds,
The argument has taken a wide range, and it has been contended for the complainants — (1) That the trustees and the other original defendants were parties to a scheme of deceit and fraud b3r which unprofitable railroad properties were to be merged together and mortgaged, the mortgage securities marketed, and the proceeds captured by the promoters; that the complainants were induced by deceit and fraud to purchase the bonds, and thus to supply the proceeds which were to be appropriated, and -were kept, as plunder by the promoters; and that they are entitled to resort to a court of equity, charge the defendants as trustees ex maleficio, and follow the proceeds. (2) That the complainants were induced to purchase the bonds, relying upon the truth of certain false and fraudulent representations contained in the prospectus issued in behalf of the consolidated corporation when the bonds were offered for sale upon the ‘London market; that the defendants knew this when the proceeds came to their hands respectively; and, that, having received the proceeds under such circumstances, the defendants are trustees ex maleficio even though they -were innocent and honest otherwise in their participation in the transactions complained of. And (3) that the proceeds of the bonds were a trust fund in the hands of the trustees, impressed, both by express contract and constructively, with the equitable rights of the complainants to have them applied for specified purposes; that the trustees have disré-
The theory of a contract trust rests on the propositions — (!) That the complainants wore entitled to avail themselves of 1he Irusls created by the consolidation agreement; that this agroemeni was the charter of the company, and could not he materially changed without legislative sanction; thaf the trustees and the recipients of the fund arising from tho proceeds of the bonds were bound to know that any disposition of the fund contrary to the provisions of that agreement was unauthorized; that the disbursement trust agreement, so far as it permitted a different disposition, was consequently invalid; and that it was the duty of the trustees to return the proceeds to the complainants unless they were willing and able to conform to tlie directions of tho consolidated agreement. (2) That the prospectus, upon the faith of which the complainants bought the bonds, contained an express promise that the proceeds should be applied by the trustees in a specified manner, to-wit, should be held and applied by them for completing the construction of railroad property, while the remaining first and second mortgage bonds should not in tho mean time be offered for sale, but should bo held by them for the extinction of all outstanding bonds and stock of the constituent companies; and that, if tho trustees were not parties to this promise, so that it is not to bo treated as a promise by them, nevertheless they knew of it when they received the proceeds, — knew that the railroad company had pledged itself accordingly, and were bound either to repudiate it and return the moneys or apply them conformably to the promise.
11 will bo found that If the bill of complaint asserts more than two distinct causes of action or grounds of recovery against the defendants, there are but two which the evidence justifies in any view that can reasonably be taken of it. Tho complainants allege in substance in (heir bill that they loaned to the railway company the amount of money advanced upon their subscription for tho company's bonds; that they subscribed for the bonds upon the faith of a prospectus issued to induce tho subscription; that tho prospectus contained various representations concerning (he character and value of the mortgaged property, and tho condition and circumstances of the enterprise in which their money was to be used; that lliev knew nothing in respect to these matters but what they learned from the prospectus, except that various of the persons who were named in it as connected with tho enterprise were regarded as men of wealth and high standing; that many of tho material representations contained in the prospectus wore false and fraudulent, put forth to stimulate a subscription on the part of persons like tho complainants, ignorant of the natural features and surroundings of tho said railway enterprise; that in consequence they were deluded and beguiled into subscribing for the bonds, and the disposal of the bonds to them under the circumstances involved a gross fraud and imposition upon them on the part of the railway company, its officers and agents, and oil tho part of tho said trustees; and that the complainants and other takers of the bonds similarly sitn-
Plainly, the averments of the bill present two principal grounds of complaint against the defendants as the basis of the relief sought: First, that the money of the complainants was obtained by deceit, of which the prospectus was the vehicle, whereby complainants are entitled to rescind their subscriptions and reclaim the money of the defendants who received it and participated in the deceit, or were cognizant of the deceit when the money came to their hands; second, that the prospectus contained a promise, in the nature of a trust to the effect stated, whereby the complainants are entitled to reclaim their money of the trustees who received it and applied it, disregarding the promise, and of the other defendants who received it with knowledge of the facts. There are allegations in the bill which may have been designed to charge that the trustees, as well as Duncan, Park, and Brown, were parties to a scheme of deceit and fraud, by which unprofitable railroad properties were to he merged together and mortgaged, the mortgage bonds marketed, and the proceeds captured by the promoters; and that the complainants were drawn into this scheme and induced to purchase the bonds, and thus supply the plunder which was to be and was appropriated by the promoters. Certainly, a considerable part of the argument for the complainants at the bar has proceeded upon the theory of such a cause of action, and that the complainants are entitled upon that theory to reclaim their money in a court of equity. But if any such charge was originally contemplated by the bill, the evidence to support it is not found in the record. Nothing in this controversy is better established by the proofs than that all the defendants, who were among the promoters of the consolidation scheme, wore convinced that their enterprise offered excellent prospects of success as a practical and legitimate undertaking, and believed -when the mortgage was created that the bonds subsequently bought by the complainants wore a good speculative investment, and would ultimately prove a safe and profitable one for the purchasers.
A narrative of the transactions preceding the issuing of the prospectus and the sale of the bonds is necessary.
The consolidation scheme originated in 1871; and negotiations ensued in which Messrs. Park, Duncan, and others, represented the Harlem Extension Railroad Company, Gen. Schultz (as agent for James Brown) and George H. Brown represented the Dutchess & Columbia Railroad Company, and Messrs. McKinney and Hoyt represented the Now York & Boston Railroad Company; and a provisional agreement for a consolidation "was reached in the spring of 1872. The scheme contemplated thp merger of these three railway companies with two other railway companies. viz., the Putnam & Dutchess Railroad Company and the Pine Plains & Albany Railroad Company, which latter companies were to be organized to construct and bring into the proposed consolidated lino intervening lines of railway. The Harlem Extension Railroad Company had been created in 1870 by the consolidation of the Bennington & Rutland Railroad Company with the Lebanon Springs Railroad Company, and upon
The Dutchess & Columbia Railroad Company was organized in 1866, and at the time of the negotiations had cost, with its equipments, about $2,600,000. Its road extended from Fishkill Landing, on the Hudson river, to Millerton Station, on the Harlem Railway, near the Connecticut line, a distance of about 59 miles. Nearly $1,500,000 had been paid in on its capital stock. Its first mortgage bonds ($1,500,000) had been sold at from 80 to 85 per cent, of par. It had a second mortgage for $600,000, a third for $125,000, and a fourth for $275,000. At one time it had been leased by the Boston, Hartford & Erie Railroad Company for an annual rental of $200,000, but this companj’- had defaulted in payment of rent, and, upon the termination of the lease, in March, 1870, the railroad was without equipment, and without means. James Brown was a large stockholder and creditor of this company, his interest approximating the sum of $1,000,000. The president of this company was his son, the defendant George H. Brown, and the defendant John Crosby Brown was the trustee of the several issues of mortgage bonds. George H. Brown held $52,000 of its stock, and $6,000 of its first mortgage bonds, and John Crosby Brown held $5,000 of the stock and $74,-000 of its first mortgage bonds. After the termination of the lease to the Boston, Hartford & Erie Railroad Company, the railroad was without equipment, and without means to meet the interest on its mortgage debt; and thereupon James Brown purchased rolling stock and leased it to the company, and made advances to assist the company in carrying on its operations. At the time of the negotiation it was not earning operating expenses.
The New York & Boston Railroad Company was organized in 1869 to build a line of railroad from the Harlem river, near New York city, to
The two completed railways had experienced the usual vicissitudes of young enterprises, and at the time were unprofitable, but there is no reason to suppose that their owners regarded them as likely to bo permanently so; the uncompleted one, tlie New York & Boston Railway, bad been projected by intelligent and enterprising men, who believed in its ability to maintain itself when completed. It occurred to those interested in the three disconnected railways that by building the necessary link lines to unite them together, and merging all under one management, the three concerns could be utilized as members of an extensive system, and a trunk railway line be formed extending from Rut-land, in the state of Vermont, to Yew York city, having connections at the termini and at intervening points upon the line with other railroads, then built and in operation, or projected; and that the now company would be able to command a much larger traffic locally than had inured to the disconnected roads, a traffic that would develop and increase with the increase of facilities and the growth of the communities along the route, and would also command a valuable independent traffic from its connections with other railroads. This was certainly not an unreasonable expectation in view of the results of many previous instances of railway consolidations, and in view of the-physical and geographical conditions of the particular enterprise. They proposed to construct a railway which should be not only a north and south lino, terminating at Rutland in the north, and on tide water at the Ilarlem river near New York city on the south, and he an avenue of traffic reaching into Northern Vermont and Lower Canada, but one which by its connections with railways running east and west would derive a considerable business from the commerce between the eastern and western states. As the scheme took life and form it grow in dimensions, and the horizon of the promoters became enlarged, so as to include alliances and combinations with other important railway corporations to strengthen and fructify tiro new railway. Negotiations were commenced with the Erie Railway Company and with the Central Vermont Railway Company looking to such an alliance. A charter for an underground railway company in New York city was secured; and the construction of various branch roads to serve as tributaries to the main line was included in the program of the projectors. Baring tlie latter part of 1871 and the early part of 1872 the scheme gradually assumed a practical and defined form, and a bat is
The reduction of the amount per mile of the proposed first mortgage necessitated a readjustment between the promoters of tbe basis upon which the constituent properties should be provided for, the indebtedness of the company be satisfied, and the proposed enterprise bo carried through. While negotiations to this end were going on between the promoters and the various parties in interest, negotiations were also commenced with the officers of the Erie Railway Company touching an alliance and the co-operation of that company in obtaining the necessary fi
“ That the said party of the first part [the Erie Company] agrees that it will aid and assist the said parties of the second part [the five companies] to negotiate the said first mortgage bonds to be issued by such proposed consolidated company to the extent above recited, upon condition that the proceeds of sucli bonds shall in the first place be used only for the purpose of completing said main line from High Bridge to Rutland, and to put the said line in complete working order, and for paying such claims as may now exist, and which it is necessary should be paid, in accordance with the terms of sucli proposed consolidation, as the same are expressed in the agreement already made relating thereto; and said parties of the second part agree that all proceeds of sucli consolidated bonds, when the same are realized, shall be so used and disposed of to the extent aforesaid.”
The contract then defined the terms of the traffic arrangements which were thereafter to exist between the Erie Railway Company and the consolidated company, and closed with a covenant by the parties of the second part that the contract should be fully confirmed and duly executed by the consolidated company as soon as organized, and a covenant by both parties that the duration of the contract should be for the term of 50 years.
About this time it became necessary for the promoters to assist the New York & Boston Railroad 'Company to raise money so that il might consummate on its part the projmsed scheme of consolidation. Application was made to Bischoffsheim & Goldschmidt in this behalf, and they consented to advance about $400,000 for that purpose. As a condition of that advance an agreement was entered into between the five constituent companies and Bischoffsheim & Goldschmidt, bearing date October 31, 1872, reciting the proposed consolidation of the five constituent companies, and their purpose to create and issue mortgage bonds at the rate of $35,000 per mile upon the consolidated main line, to be negotiated by Bischoffsheim & Goldschmidt, and providing that the companies should proceed without delay to complete the proposed consolidation, and create and issue the proposed'bonds, and place the same in the hands of Bischoffsheim & Goldschmidt for sale upon commission, and that Bischoffsheim & Goldschmidt should bring out, introduce, and undertake the sale of the consolidated bonds, on terms therein specified as to commission and brokerage, and should have an option to purchase the bonds at 90 per cent., less commission and brokerage. Concurrently with the execution of this contract, a written agreement in the form of a letter to Bischoffsheim & Goldschmidt was signed by five of the promoters personally, which, among other things, contained a promise that
The promoters being now ready to proceed in perfecting the modified scheme of consolidation, such proceedings were taken that the Dutchess & Columbia Railroad Company, the Putnam & Dutchess Railroad Company, and the New York & Boston Railroad Company consolidated together by the name of the New York Boston & Northern Railroad Company; and the J farlem Extension Railroad Company and the Pine Plains & Albany Railroad Company consolidated together under the name of tiro Harlem Extension Railroad Company; and shortly afterwards, and on or about December 19, 1872, the two companies consolidated as the New York, Boston & Montreal Railway Company. The agreements for consolidation were ratified by the stockholders of the several constituent companies, as required by law. The consolidation agreement which thus created the new corporation was executed under authority derived from chapter 917 of the laws of New York of 1869. This statute allows directors of companies proposing to consolidate to enter into a joint agreement uuderlhe corporate seal of each company, prescribing the terms and conditions of the consolidation and the mode of carrying the same into effect; and requires the agreement, after the same is ratified by the stockholders of the respective companies, to be filed in the office of the secretary of state. The statute does not impose any restriction upon the contracting corporations in respect to the terms of the agreement to consolidate, except that the capital stock shall not exceed the sum of the capital stock of tlio constituent companies, and that no bonds or other evidences of debt shall be issued as a consideration for consolidation. The statute also preserves unimpaired the rights and means of all creditors of the constituent corporations, and provides that all the debts and liabilities of those corporations, except mortgages, shall attach to the new corporation, and be enforced against it. The consolidation agreement provided, among other things, that the railway company should execute and deliver to Jesse Seligman, William Waits Sherman, and John Crosby Brown, as trustees, a mortgage of all its property then existing or thereafter to be acquired (except certain equipments) to secure its bonds to the amount oí $12,250,000, to be known as its consolidated first mortgage, and a second mortgage to the trustees to secure additional bonds to the amount of $12,750,000, to be known as its consolidated second mortgage; and that the said first and second mortgage bonds, when issued, should bo delivered to throe persons as “disbursement trustees” to bo nominated and chosen by the railway company upon specified trusts. Those trusts were contained in the seventh article of the agreement, anti were (1) to arrange for the sale of tiro first mortgage bonds when issued, by negotiating in advance of the issue, and publishing a prospectus in respect to the proposed issue conformably to the rules of any stock exchange, and to sign the same for the company; (2) to receive payments on account of the purchase money of the first mortgage bonds; (3) to invest the proceeds upon interest during such times as they should not be required for the purposes of the trust, and apply the interest to the gen
The provisions of the fourth and fifth trust are more fully set forth as follows: The fourth trust provides for the extinction of the debts of the several companies forming directly or indirectly the consolidated company, and to that end declares that the disbursement trustees shall set apart, hold, and dispose of specified amounts of first and second mortgage bonds, and apply the proceeds to purchase the following debts of the original companies at not exceeding 45 per cent, in cash, and the balance of 55 per cent, in second mortgage bonds: (1) $1,729,000 first mortgage bonds and $1,838,000 second mortgage bonds to the payment or discharge of the Dutchess & Columbia mortgage debt, and the Dutch-ess & Columbia unsecured debt, and anjr surplus to the mortgage trustees; (2) $1,552,000 first mortgage bonds and $1,650,000 of second mortgage bonds to the payment or discharge of the New York & Boston mortgage debt, and any surplus to the treasurer of the consolidated company; (3) $2,903,000 of first mortgage bonds and $3,087,000 of second mortgage bonds to the payment and discharge of the Harlem Extension •mortgage debt, and the Harlem Extension unsecured debt, and the balance to the vendors of the Lebanon Springs Railroad Company and the Harlem Extension Railroad Company. The fifth trust declares that the trustees shall sell and dispose of specified amounts of first mortgage bonds, and apply the proceeds as follows, viz.: (1) $1,500,000 to the purchase of rolling stock and equipment; (2) $230,000 for a payment due under the Bennington & Glastonberry Railroad Company lease; (3) $172,000 for a payment due under the Clove Branch Railroad Company lease; (4) $897,000 to complete the Putnam & Dutchess Railroad; (5) $1,287,000 to complete the Pine Plains & Albany Railroad; (6) $805,-000 to complete the New York & Boston Railroad; (7) $1,000,000 to the payment of interest on the consolidated first mortgage bond; and (8) the balance to the treasurer of the consolidated Railway Company. George H. Browm was selected as president of the company, and Park and Duncan were selected as two of its directors. John Crosby Brown, Jesse Seligman, and W. Watts Sherman were selected as trustees under the mortgage. Other directors were chosen who represented the several constituent interests. It is to be noticed that by the agreement of consolidation disbursement trustees were to be selected by the consolidated company, and at some time previous to the issuing of its mortgage bonds were to negotiate and issue the bonds, and that in order that the bonds should be applied to the payment of the outstanding indebtedness of the constituent companies,"as well as to construction and equipment, the entire issue was to be divided into specific amounts applicable to the several objects. Shortly after this agreement was executed, the new company found itself in need of funds, and applied through its president to
The use directed constitutes the trusts of the agreement. The applications directed were as follows: (1) $1,729,000 first mortgage bonds and $1,838,000 second mortgage bonds to the payment of the mortgage and unsecured debt of the .Dutchess & Columbia Railroad Company, at rates not exceeding 45 per cent, of the amount in cash, and the balance in second mortgage bonds at par; (2) $1,552,000 first mortgage bonds and §1,650,000 second mortgage bonds to the payment of the .New York
It will be seen that the disbursement trust agreement was intended to relieve the disbursement trustees of the duty of issuing and negotiating the sale of the mortgage bonds. The recital that an arrangement for the negotiation of the bonds had been made by the company after the consolidation agreement was executed was inaccurate, because the arrangement referred to was the agreement made between the five constituent companies and Bischoifsheim & Goldschmidt of the date of October 31, 1872, already mentioned. There was no occasion for tire provision which-had been incorporated in the consolidation agreement imposing this duty upon the disbursement trustees; and doubtless the insertion of a clause-to that effect was an oversight, and resulted from copying the language-of the provisional consolidation agreement in that respect, which had been prepared in the spring of 1872 for the approval of the constituent, companies. The modification of the consolidation agreement introduced by the disbursement trust agreement had been considered and determined upon some little time previous to the execution of the latter instrument. In order to expedite the placing of the first mortgage bonds, the company, before the disbursement trust agreement was executed, and on February 6th, sent Mr. Sherman abroad with a power of attorney authorizing him to dispose of the bonds. This instrument gave him plenary discretion, and authorized him to substitute agents with like powers; but it was undoubtedly intended to permit him to make the formal agreement with Bischoffsheim & Goldschmidt) in the name of the new company, which had in effect been made in its behalf by the five constituent, companies in October previously. Mr. Sherman carried with him duly authenticated copies of y.ie agreement of consolidation of the first consolidated mortgage of the disbursement trust agreement then unsigned, and of other documents which it is not necessary to mention. February 12th the solicitors for the consolidated company sentby mail to McHenry in London duplicate copies of the same papers accompanied by the noc-
The facts thus summarized, with others of secondary importance, not adverted to, in the history of the consolidation scheme to the time the bonds were offered for sale, supply the dalaior inferences which are quite inconsistent with the existence of any such fraudulent conspiracy on the part of the promoters as has been asserted. It appears that by the scheme, as matured, the owners of the Dutchess & Columbia Railroad were to got only about $865,000 cash for property upon which about $2,600,000 bail been actually expended for construction; the owners of the Harlem Extension Railroad were to get only about $1,106,000 for property upon which about $4,000,000 had been actually expended for construction; and the owners of the New York Boston Railroad were to got only about $700,000 for property upon which about $2,000,000 had actually-been expended for construction. Those cash payments were very considerably less than the then value of the properties. These properties represented a considerable investment beyond the actual cost of construction by those who had contributed the moans to the several companies to build and operate their roads. As an equivalent for these properties, and fertile moneys invested in them by stockholders, bondholders, and creditors, the parties in interest, — mainly the promoters of the consolidation, — were to have, besides the cash payments mentioned, 55 per cent, of the outlay in second mortgage bonds; to which extent, of course, their reimbursement was contingent upon the ability of the company to provide for the interest and ultimately the principal of the first mortgage bonds. It is also manifest that the enterprise had commended itseli to men of experience and prominence in railway undertakings, who were on the spot, and familiar, not only with the general features, but largely with the details of the scheme, and had no interest as promoters, but were consulting their own interests as the owners of adjacent ra.il-
The salient facts and considerations thus referred to are sufficient to refute the charge of such a conspiracy on the part of the defendants. But it is proper to refer to other evidence in their exculpation. The report of Mr. Barnes, an engineer, and an authority of undoubted qualifications, experience, and reputation upon railway projects, made in the spring of 1872, has been produced. This report was not procured to influence the public, but was procured by John Crosby Brown for his own information, and at his own expense, in order to satisfy himself that the enterprise was one with which he could properly connect his name. Mr. Barnes made a careful personal investigation of the existing conditions and the prospective merits of the undertaking. His report embodies in detail a full summary of them; and his opinion was that the enterprise was a judicious one, and that the proposed consolidated railway would be adequate security for a larger mortgage than the first mortgage, which was subsequently created. The complainants have compelled the production by the defendants of the private letters passing between various members of the Brown family, and the private letters passing between the various members of the Seligman family, during the period from the inception of the scheme to the time the bonds were sold in London and subsequently, and put them in evidence, to reveal the secret history of the transactions in suit. These letters demonstrate the confidence of John
It has seemed necessary to consider the charge of conspiracy made against the defendants, irrespective of the question whether the bill of complaint contains any such charge, because thousands of pages of the printed record are occupied by evidence of no pertinency to the controversy, except as bearing upon such a charge. If the charge is unfounded, the defendants are entitled to the benefit of a vindication. The conclusion reached is not only that the charge is unfounded, but also that it is without a shadow of justification. The promoters did not assume to bo philanthropists, but they were not tricksters. They wore well-known men of business, who concerted the consolidation scheme in order to make money for themselves. They were anxious to convert their investments in railways that were not productive at the time into investments that would be productive in the future; they convinced themselves that their enterprise had the elements of legitimate success; they were willing to stake a very considerable part of their investments upon the chances of its success; they expected to have to treat with men of experience, sagacity, and acuteness when they should apply for the necessary pecuniary means to float their enterprise and put it on its feet; and, finally, they sought for the moans required of men who not only had- as good an opportunity to judge of the merits as they themselves, but whose judgment was probably better, because more disinterested than their own. It would be strange if among the many actors in promoting the consolidation, some of whom are not defendants in this suit, there were not those who were unscrupulous, and cared little about the outcome so long as it was profitable to themselves. It would he strange if among the concomitants and incidents of such a scheme there were not things done, and other things left undone, which savor of recklessness, and bring reproach upon their authors, and measurably upon all associated with them. These things, however, fall far short of intentional fraud, and are common, if not inevitable, in the history of large projects of a speculative character like this one, in which the diversity of motives and interests is as various as are the temperaments and characters of those who participate.
Before considering the case with respect to the prospectus, and the
It remains to consider the case so far as it proceeds upon the theory that the defendants are responsible for the moneys claimed because they were obtained by the inducement of a prospectus which contained fraudulent misrepresentations of material facts, and also a promise amounting to an equitable obligation to apply the complainant’s moneys in a way different from that observed. The officers of the railway company took a very subordinate part in formulating or issuing the prospectus. It was their understanding, and also that of all the promoters, that a prospectus was to be issued and published incident to the sale of the bonds. Such a document was necessary if the bonds were to be listed with the stock exchange. The consolidation agreement contemplated that the trustees would undertake the office of negotiating the bonds and issuing of the prospectus upon which the bonds were to be offered to the public, but before they consented to act as trustees the negotiation of the bonds had been committed to Bischoffsheim & Goldschmidt by those who controlled the affairs of the company; and by the terms of the disbursement trust agreement the trustees were to receive the proceeds for distribution among the objects and to the beneficiaries of the trust, and were relieved of the duty of negotiating the bonds. As lias been stated, the agreement between Bischoffsheim & Goldschmidt of October 81, 1872, by which they became contractors for negotiating the bonds of'the company, was an agreement between them and the constituent companies afterwards composing the consolidated company; and, by force of the statute authorizing the consolidation, this agreement became obligatory upon the consolidated company as soon as it came into being. This agreement was supplemented by the authority given to Bischoffsheim & Goldschmidt by the consolidated company upon the advance made by them February 6, 1873; and when Sherman went to London with the power of attorney, his mission, so far as it related to the negotiation of the bonds, was merely to conclude formally with Bischoffsheim & Gold-schmidt a contract in behalf of the consolidated company embodying the terms of the previous agreement. Mr. McHenry was the modiary selected by the officers of the company to conclude the formal contract with Bischoffsheim & Goldschmidt; and pursuant to the previous understanding between the officers of the company and McHenry, Sherman substituted McHenry as agent for the company, with full' powers to contract for the negotiation of the bonds, and thereupon 'McHenry executed the contract with Bischoffsheim & Goldschmidt of fhe date of March 14, 1873. Prior to the execution of this contract, McHenry and Bischoffsheim & Goldschmidt had been engaged in the preparation of the prospectus, and Bischoffsheim & Goldschmidt had applied to the complainants inviting them to assist in marketing the bonds. So far as appears, Sherman took no part in any of the acts of the promoters. He
It was supposed at this time by the officers of the railway company that McHenry had interested himself for the company because of the alliance which existed between it and the Erie Railroad Company, and because the Erie Railroad Company was anxious to promote the new enterprise and bring it to a completion; but in fact McHenry wlas acting witii Bischoffsheim & Goldschmidt, and was a partner with them in the profits which they were to derive by commissions and otherwise by negotiating the bonds. When the agents for the promoters, who visited London in the summer of 1872 to solicit financial assistance, returned to this country, they left with Mr. Sharp, the solicitor of Bischoffsheim & Gold-schmidt, who was also the solicitor of the Erie Railway Company in London, the printed report which they had prepared, as well as all the other instruments and papers relating to the several companies and the proposed scheme of the consolidation; and they also left with Bischoff-sheim & Goldschmidt a statement embodying all the conditions and details of the enterprise, which statement had been delivered by them to Bischoffsheim & Goldschmidt as the basis for negotiations. McHenry resorted to these materials for the preparation of the prospectus, and on February 1, 1873, had prepared one, a proof copy of which was on that day mailed by him to the president of the consolidated company. This was received by Brown, the president, February 14th. With a view to its preparation, McHenry had cabled Brown, on January 27th, to send a statement of the intended appropriation of the first mortgage bonds “that we may state authoritatively that proceeds of said issue will complete works.” Brown cabled him in reply, stating that $6,000,000first mortgage bonds and $6,500,000 second mortgage were to be appropriated to redeem old mortgage indebtedness, $3,400,000 (first mortgage bonds) to complete new -works, $1,500,000 for equipment, and $1,000,000 to meet future interest, “all in trust for these specific purposes,” and also that with the $3,000,000 second mortgage bonds and $3,000,000 of unissued stock the company would have ample means to complete the whole line according to their programme; that 200 miles of lines were then in operation; that 56 more were ready for iron, and would be in operation by June; and that 50 more would be during the year. The proof prospectus forwarded by McHenry to Brown, February 1st,'was prepared by McHenry in part from the information derived from this cable. It purported to offer for public subscription “$4,900,000, part of $12,-250,000 first mortgage bonds.” It recited the formation of the railway company by the consolidation of the several constituent companies, and gave the names of the officers, directors, and mortgage trustees. It also contained the following statements:
“By the purchase and consolidation of the several lines mentioned, and by works in progress, these railways will form one main line connecting Hew York with Boston and Montreal. The entire line, including branches, will*183 be 350 miles in length, of which 200 miles are now in operation, 50 more will be completed and in working order by June next, and the whole will be completed during the present year. The route extends from the city of New York through the populous and fertile counties of Westchester, Putnam, Dutchess, Columbia, and Rensselaer, in the state of New York, the counties of Rutland, Anderson, Franklin, and Chittenden, in the state of Vermont, and the manufacturing county of Berkshire, in Massachusetts. Throughout the length of the lino the local passenger and freight business promises to be very large, while in the vicinity of New York city it will only be limited to the capacity of the railway. The Erie Railway Company, considering that the control of this railway and its connections is'of the first importance towards securing a direct entrance into the city of New York, with access to Boston, and the chief manufacturing towns of the New England states and to tiie British Provinces, have entered into working arrangements with the New York, Boston & Montreal Railway Company for a term of fifty years, and, without any closer connection at present, the lines will practically be worked as one administration. * * * The holders of the first mortgage bonds of the several lines included in the consolidation have agreed to accept 45 percent, first mortgage bonds of the present issue, and 55 per cent, of the second mortgage bonds. Messrs. Bisehoffsheim & Goldschmidt are authorized to offer for public subscription @4,900,000 of the'abovebonds of the New York, Boston & Montreal Railway Company to complete the construction and equipment of the railways of the said*company, the balance of $12,250,000 being reserved for the conversion of the divisional mortgage bonds issued by the several companies now constituting the New York, Boston & Montreal Railway.”
Upon receiving this copy of the proposed prospectus, the president of the company had a consultation with Mr. Barlow, who was at that timo the counsel of the Erie Railway Company and also the counsel at New York of Bisehoffsheim & Goldschmidt, and as a result of the conference they both joined in a cable, sent February 14th, to McHenry, directing him to correct the prospectus so as to offer $6,250,000 for subscription, and also directing him to arrange for the sale of the remaining $6,000,000. The purpose of this dispatch is shown by a letter written the next day by Brown to McHenry, in which he uses this language:
“There is one point upon which I desire to touch that is very important to us. You do not fairly understand, I think, that we have contracts with the bondholders oil the different roads to surrender their bonds and take in exchange, not first mortgage bonds, but 45 cents in cash and 55 per cent, in second mortgage bonds at par. Under the plan of prospectus sent us, if we rightly understand it, you propose to negotiate and sell on the London market only that portion of the bonds that is not to be used for conversion, and, if we judge rightly, leave us to settle with the old mortgage bondholders in first mortgage bonds, which, not being in accordance with our contract with them, would necessitate an advance on our part of the 45 per cent, cash necessary to carry out our agreement,s with them. This, as you are aware, we are not in position to do, and therefore we have already supposed that we should receive through Messrs. Bisehoffsheim & Goldschmidt the proceeds of the whole @12,250,000; which proceeds, being placed in the hands of the disbursement trustees, would be held by them for the retiring under the contract of tlie old bonds. It will have a very damaging effect upon our credit here unless this contract, arranged with so much care and placed in the hands of such trustees as William Watts Sherman, John Crosby Brown, and Jesse Seligman, can be carried out by us. We may entirely misunderstand the terms of the prospectus, and by it may be intended that as soon as the $6,000,000 has been actually con*184 verted, or, in other words, as soon as the trustees hold in their hands the old mortgages to cover the $6,000,000, or any part thereof, that then these bonds become available on the London stock exchange, and can be sold like the first issue through Messrs. Bischoifsheim & Goldschmidt under the contract.”
A further explanation is found in a letter of the same date written by Barlow’ to McHenry as follows:
“The $6,000,000 (remainder first mortgage bonds) are reserved for exchange under consolidation agreement for existing prior mortgages on the whole line, but I assume that your prospectus is so worded that if the market will take the whole issue these surplus bonds, after cancellation of old bonds, can be sold. This is what the parties desire.”
McHenry answered the cable of'Brown and Barlow as follows:
“Disposal of your bonds absolutely certain, but I must be allowed to manage in my own time and fashion. Do not make engagements for expenditures until all is ready. ”
February 13th, McHenry mailed to the president of the company another copy of the proposed prospectus, and this was received by him February 26th. This prospectus purported to offer $6,250,000, part of $12,250,000 first mortgage bonds for public subscription, and contained this statement:
“The balance, $6,000,000, will be used for the extinction by conversion or payment of the divisional first mortgage bonds issued by the several companies now consolidated.”
It also contained a statement of the estimated revenue of the railway from various specified sources. Otherwise it was a substantial duplicate of the first proof prospectus. In the mean time McHenry and Bisolioff-eheim & Goldschmidt were engaged in perfecting plans to bring out the loan. March 10th McHenry telegraphed to President Brown as follows:
“Prospectus will be issued Thursday. I engage the $6,000,000 firsts will be reserved until line opened in order to secure syndicate guarantee, but when first issue placed advances can be arranged on second half.”
Brown immediately cabled to McHenry, (March 10, 1873:)
“Must not engage reserve without advances on the $6,000,000 at 87¿ currency net to us. Must have 45 cash on old securities to fulfill engagements and complete road. For this purpose need proceeds of whole issue.”
McHenry cabled in reply, (March 11th:)
“I have placed $5,000,000 with syndicate to guarantee success. Can manage only $6,250,000, and shall manage $6,000,000 as circumstances permit.”
What McHenry meant by this dispatch is more fully explained in his letter of the date of March 14th, to Brown. He said:
“In order to make an absolute success of this first issue and a consequent good market for further issue, I have arranged with the Paris syndicate and given them a large percentage for the guarantee of the subscription. I have arranged with Bisclioffsheim & Goldschmidt to place at your disposal $1,000-000 monthly, say on the 6th of each month, until the loan is exhausted, particulars of which will be settled by cable. In the prospectus you will see that we have been compelled to insert a clause postponing the public subscription of the second issue until the main line is finished to Rutland. If it is neccs-*185 sary for you to have money before the second issue, there is nothing in the prospectus to prevent a private subscription similar to that now practically made for the first issue.”
This was the last copy of the proposed prospectus ever seen by any of the officers of the company or any of the defendants until some time after the sale of tho bonds by Bisehoifsheim & Goldschmidt.
The prospectus which was finally adopted, known as tho “final prospectus,1’was prepared by McHenry shortly before March 14th, was issued on that day by Bisehoffsheiin & Goldschmidt, and a copy was sent by them to the Banquo Franco-Egyptienne which was received by the latter at Paris March 15th. It seems to have been the thirteenth or fourteenth revision of tho various prospectuses prepared by McHenry and Bischofi’-sheim & Goldschmidt between the last of January and March 14th. This document, after giving the names of the officers and directors of the company, offered the bonds for public subscription in the following language:
“Issue of @6,250,000, part of $12,250,000, first mortgage bonds (the remaining $6,000,000 being reserved for extinction of existing mortgages, will not be offered for subscription until the main line from New York city to Rutland is opened for public traffic) of the New York, Boston & Montreal Railway Company.”
It contained this further statement:
“The proceeds of the present issue of $6,250,000 first mortgage bonds will be held by the trustees (Messrs. John Crosby Brown, IV. Watts Sherman, and Jesse Seligman) for completing the construction and for the general purposes of the consolidated undertaking. ” * * * The documents conneded with the company may be seen at the office of II. P. Sharp, Nsq., 92 Cresham House, Old Broad Street.”
It repeated in substance tho statements recited in tho two proposed prospectuses sent by McHenry to Brown concerning the general nature and conditions of the enterprise, and its relations with the Erie Railway Company; hut it amplified in somewhat florid language the paragraphs which depicted the future prospects and plans of tho company. It was largely devoted to representations intended to show the advantages which might bo expected to inure to the Erie Railway Company by reason of the alliance between that company and the consolidated company, and boars evidence upon its face that those who prepared it and put it in circulation designed to influence the market for Erie securities abroad by' advertising these advantages in glowing terms. There was also prepared by McHenry, and put into circulation in some instances by Bisclioffshoim & Goldschmidt, a printed statement intended to supplement the advertisement of the enterprise contained in tho prospectus. This also was largely devoted to showing the benefits expected to accrue to tho Erie Railway Company from its relations with the consolidated railway. Most of the statements in this paper like those in the prospectus are promissory; and the only material ones not found in the prospectus are that “the corporation will own the lines from the Battery in New York to Rut-land,” and “the promoters propose to complete a first-class line with low grades and easy curves, in order to transport goods at a rate that shall defy competition.” Copies of a map which had been prepared by some
At this time the complainants had organized themselves as a syndicate under the management of the Banque Franco-Egyptienne which had been formed to deal in loans brought out in London by Bischoffsheim & Goldschmidt for the Erie company and its affiliated concerns. The firm had a house in London and in Paris. Henry L. Bischoffsheim was the manager of the London house, and his father, Louis R. Bischoffsheim, was the head of the Paris house. The firm in each city was composed of the same persons, except that Mr. Tallón, who was a member of the Paris firm, was not a member of the London firm. Louis R. Bischoff-sheim was the president of the Banque Franco-Egyptienne, and the Paris firm of Bischoffsheim & Goldschmidt were members of the syndicate. The London firm, as contractors for placing loans brought out by them in London, had been assisted by the Paris firm and the Banque Franco-Egyptienne in floating the loans. In such operations it is customary to create and maintain a market for the securities until they are ultimately absorbed by the public at prices which are sufficiently remunerative to the contractors and their coadjutors. The bank had formed a syndicate consisting of the same members when the London firm had recently marketed large issues of bonds for the Erie Railway Company and the Atlantic & Great Western Railway Company, and the syndicate had assisted in floating these loans, not as partners with the contractors, but as guarantors and subscribers for the loan upon commissions and options. The Paris firm of Bischoffsheim & Goldschmidt and the other members of the syndicate were jointly interested in the profits of these transactions, and in the subsequent dealings of the syndicate in the bonds; and the relations between the syndicate and the London firm were such as to imply a mutual co-operation in manipulating the market for the profit of all concerned until the securities might be finally disposed of to the public. Shortly prior to the making of the contract between the railway company and Bischoffsheim & Goldschmidt of London, by which the latter became contractors for bringing out the loan, Henry L. Bischoffsheim went to Paris to obtain the co-operation of the syndicate. A letter of the date of March 4th, written to him after his return home by Mr. May, manager of the bank, shows the state of the negotiations at that time. It is as follows:
“Our appetite is certainly still in existence, and your proposition is not of the nature to make it disappear, but before giving our decision in the name of the syndicate it is necessary for us to know all the conditions of the business. It is probable that your letter of to-day will give us these details, and we will send you our reply as quickly as possible.”
“Tlio very complete information which you give us on the subject of the Slew York, West Shore & Chicago Railroad Company is conclusive. It is a matter to be left altogether aside. ”
In the mean time negotiations wore taking place between Louis R. Bischoflsheim, representing the syndicate, and Henry L. Bischoflsheim of London by correspondence which has not been produced. It would seem that by March 9th the information desired of “all the conditions of the business” had been obtained by Mr. May,' or by Louis R. Bisch-offsheim, and laid before the members of the syndicate. On March 9th Mr. May wrote to Henry L. Bischoflsheim as follows:
“We had a committee meeting this morning to discuss Montreal (Row York, Boston & Montreal Railway Company) business, and the following are the propositions which your father made to us: (1) To guaranty the whole issue in consideration of one-half per cent.-commission; (2) power for the participants of the syndicate of guaranty personally to subscribe after the close of the subscription and after knowledge of the result, to the whole extent of their share in the syndicate of guaranty, with power for you to reduce their subscription not exceeding one-third; (3) payment by you totheBanque Franco-Egyptienne of a commission of one-fourth per cent, on the subscription by the participants, that is on a,minimum of two-thirds of the subscription. This matter is accepted in principle, but as your father will inform you, we should prefer to have three-fourths per cent, for the guaranty of the commission instead of one-half. As soon as you inform your father by telegraph that all the above conditions are accepted, the matter may be considered as settled, and you will please confirm the same to us by letter.”
Before this letter was written, a copy of a proposed prospectus, the eighth revision, had been forwarded to the bank by Bischoflsheim & Gold-schmidt, and been received. March 10th the negotiations between the syndicate and the London firm were formally concluded on the part of the latter, and a letter embodying the contract was mailed on that day by the latter to the bank. In substance, the arrangement was that the syndicate were to guaranty that the $0,250,000 bonds about to bo offered to the public by Bischoflsheim & Goldschmidt should be “placed,” and any amount not placed should be taken by the syndicate; and in consideration thereof the syndicate was to have a commission of one-half per cent, upon the amount, and an option of taking not less than two-thirds of the issue after the result of the public subscription should be known. It was stipulated that Bischoflsheim & Goldschmidt should not change the terms of the prospectus as to the price oí the bonds and the dates of payment upon subscriptions, and it was further understood
It appears that the course of business pursued by the contractors in the negotiation of such loans is to notify the public by advertisement, and by the circulation of the prospectus, when subscriptions may be made. These are generally made upon forms of application sent by the contractors, accompanying the prospectus, to bankers. The application list remains open for several days, and then the contractors proceed to make allotments to the applicants. If the applications are in excess of the loan offered, the affair is a success, and the contractors exercise their own pleasure in selecting the applicants and making allotments, or, as was contemplated in the present instance, decline to make allotments to the general public, and allot the loan, more or less of it, to themselves or their friends. The members of the syndicate were not formally notified that they had been included as participants in the guaranty, or in the subscription, until some time after the arrangement had, in the words of Mr. May, been “settled in principle;” indeed, some of them were not informed that anything of the kind was on foot until some days after the subscription had been actually made. The bank, after consulting with some of the members, assumed the responsibility of representing the rest, and on the 11th of March ratified the agreement embodied in the letter of Bischoffsheim & Goldschmidt of March 10th. Thereafter the bank addressed circulars to the members of the syndicate, announcing that they were respectively included as participants, and allotting them respectively specified interests in the commission and the option. The complainants acquired the bonds in suit by becoming participants in this option. The Paris firm of Bischoffsheim & Goldschmidt, as a participant, became a subscriber for nearly $1,500,000 of the bonds. As the prospectus underwent revision by McHenry and Bischoffsheim and Goldschmidt, copies of the revision were forwarded by them to the bank for inspection. As has been stated, a copy of the final prospectus reached the bank March 15th. March 18th Bischoffsheim & Goldschmidt telegraphed the bank as follows:
“ Whole public subscription above $9,000,000 and below $10,000,000; telegraph instructions for to-morrow.”
It is apparent that before this telegram ivas sent they had kept the bank advised of the extent of the public demand for the bonds and of the applications received. On the 17th of March they were notified that the syndicate had concluded to exorcise its option of subscription; and by a letter of the date of March 17th they notified the bank as follows:
“ In accordance with your instructions, we have subscribed on your account $4,166,000 first mortgage bonds of the Hew York, Boston & Montreal Ilail-way, and we debit you with $41,660 in your account.”
By the terms of the agreement with the syndicate Bischoffsheim á Goldschmidt were entitled, if the syndicate exercised its option for subscription, to reduce the subscription to one for two-thirds of §6,250,000. They did so, and allotted only'- the two-thirds, doubtless in order that the public might have the other third. The syndicate which, as origin
“ We have the honor to inform you that we have sold to a new syndicate, formed for the purchase of bonds of American railroads, the @4,160,000 Yew York, Boston & Montreal first mortgage bonds subscribed by our syndicate at the time of the issue. As the syndicate is by this event dissolved, tiie participants are released from the payments mentioned in our letter of the 12th of March, 1873, and not yet made. Your interest in the syndicate being £-, we place at your disposal at the office of .Messrs. Bisehoffsheim & Goldschmidt in London £~-, forming your proportionate part of the sum above mentioned.”
On the same day the bank sent a circular letter to the participants as follows:
“ We have the honor to confirm to you that you are included for a participation of £-, in a syndicate formed with a capital of £3,200,000 to purchase and sell mortgage bonds of railways of the United States of America. This syndicaf e will exist until the 31st day of December, 1873. The syndicate lias already secured the purchase of @633,000 Atlantic & Great Western first mortgage bonds at 80; @1,16(5,000 New York, Boston & Montreal first mortgage bonds at 82; @4,145,000 Brie Company convertible gold bonds at 82; total £1,702,660. You will therefore kindly pay to the credit of the Banque If raneo- Jigyptienno, at the office of Messrs. Bisehoffsheim & Goldschmidt in London, 10 per cent. on your participation, viz., £- — -, for your proportional part in the cail made by the syndicate. ”
The syndicate did not, however, dissolve December 31st. The following extracts from a circular letter sent by the bank to the participants, of the date of December 31st, explain why the syndicate was not dissolved.
“ The'duration of the syndicate of which you have vested the managemontin ns being limited to the 31st of this month, we desire to explain to you the course it seems to us desirable to pursue at this moment in our joint interest. The crisis which prevails in America, and which took place so soon after the formation of our syndicate, has led to a certain depreciation in ail railroad securities, and has restricted their sales. Although the securities held by the syndicate have been relatively speaking less injured by the crisis, we have" not thought of selling them at prices which seemed to us below their real value. Ho far as concerns the Brie convertible gold bonds, and the small balance of Atlantic & Groat Western first mortgage, we think that it is necessary to return to each the portion represented by his participation. The market for these two securities is sufficiently settled and their value is high enough to prevent this division of securities from leading to any inconvenience. Go far as concerns the bonds of the Yew York, Boston & .Montreal Railway, wo are convinced that it is extremely important to remain united for some time still, as a joint course of action will alone allow us to carry on negotiations to the advantage of the participants. We will therefore send you, as soon as the accounts of the syndicate are settled, your share of Atlantic & Great Western and of Erie bonds as likewise the cash balance which may be due to you. You will thus remain a participant in the syndicate of @4,106,000 Yew York, Boston & Montreal bonds. ”
“ After consideration, we tbink that it is against the interest of the syndicate to send en bloc to New York so large an amount of coupons *' * * to be cashed at the office of the New York, Boston & Montreal Company, * * * thus revealing to that company the small quantity of its bonds which are in the hands of the public. ”
The syndicate accepted and acted upon the suggestion. About the same time the bank and the syndicate acquired information of certain “special advantages” which the London firm had received in the negotiation of the bonds for the railway company. To quote the testimony of Mr. May, “they acquired this knowledge at the same time that they learned that in the other enterprises as to which they Had dealings with this firm it'had taken special advantages, concerning which it had not informed them. It was a consequence of these discoveries, that the bank and syndicate, desiring to enforce their claim against the house of Bisch-offsheim & Goldschmidt, of London, and the estate of Mr. Louis R. Bischoffsheim, entered into an arrangement in February, 1874, whereby the bank and the syndicate obtained satisfaction of their claims.” This arrangement was an agreement, of the date of February 19, 1874, to which all the members of the syndicate were parties upon one side, and Bischoffsheim & Goldschmidt of London,, and the heirs of Louis R. Bischoffsheim of Paris, were parties upon the other side. By. its terms the syndicate was continued until August 1,1876, and Bischoffsheim & Gold-schmidt agreed to pay the interest upon the bonds at their own risk during the continuance of the syndicate, and also to account to the syndicate for all losses upon the bonds at the selling price of 70 cents on the dollar. They also agreed to bear jointly with the heirs of Louis R. Bischoffsheim one-half of any further loss to the syndicate arising by a fall in the price of the bonds below 70 cents per dollar. Under this arrangement the syndicate has received over $1,000,000.
So far as the statements of the prospectus require consideration as misrepresentations which were intended to induce persons to buy the bonds, they may be divided into three classes — those relating to existing facts, those which are merely matters of opinion, and those of the character of promissory representations. If the complainants are entitled to resort to a court of equity to obtain a recission of their purchase of the bonds, and to reclaim the money they were induced to advance, because of misrepresentations in the prospectus, they must rely upon misrepresentations concerning material facts, and not as to mere matters of opinion, and which relate to existing facts, or be predicated of what was untrue at the time, and not of matters of future conduct or expectation. Misrepresentation by prospectus, except as between promoters and share
“Everyone knows that it is intended to usher a, company into existence. Ho one is surprised to find that a future tense must be given to words in the past or present tense. * * * This ought always to be borne in mind when a construction is to be put upon the language of a prospectus.”
Almost all the statements in the prospectus, except those concerning the legal organization of the company, the amount of its bonds and stock, and the names of its officers and directors, are expressions of what is proposed to be done, and relate to the future plans of the promoters of the expected results of the enterprise. The only other statements which arc not of this character, or arc not more expressions of opinion, are found in the paragraph whieh states that of the system “200 miles are now in operation, 56 miles more will bo in working order by June, and the whole is intended to be completed during the present, year,”and the paragraph which, after reciting the advantages which the Erie Railroad Company will derive from the enterprise, refers to the “working arrangements” entered into between the two companies for the “term of fifty years.” The only statement in these two paragraphs which was untrue was tiro one in reference to the number of miles of railway tiren in operation. in fact iess than 190 miles were then in operation instead of 200. This misrepresentation doubtless originated in the cable message of Brown to McHenry of January 27th, and being accepted as true by McHenry, was incorporated by him into the prospectus, it was a statement made by Brown upon insufficient and erroneous data, put forth carelessly by tlie impulsive and over sanguine author without any deliberate purpose to deceive, in the belief that it was substantially true. The description of the proposed railway as one “extending from New York city to Rutland” and as one which would afford the Erie Railway, by junction at Fishkill,” a direct entrance into the city of Now York, was likely to convey a wrong conception of the location of the Now York terminus of the railway, but was literally correct. The railway, as located at the time, terminated on tide water at the Harlem river, the northerly boundary of New York city, whence practical access to tlio business portion of the city was only by water communication. This fact had boon explicitly pointed out by the promoters to Bischoíísheim & Goldschmidt in the communication addressed to them in the summer of 1872, and in the “report” circulated by the agents in London at that timo, and distinctly appears in the mortgage itself. Inasmuch as tlie plans of the promoters included a connection of the railway with the heart of the city by the underground railway, for which they owned a charter, or by arrangements with some other rapid transit system, and the description is to bo interpreted as speaking of the future, the language was not mendacious. The vice of the prospectus is found in the highiy colored and exaggerated estimates of the probable sources of revenue of tlie railway. These were so artfully blended with arguments based upon the revenues
The promissory statements of the prospectus, except those which refer to the extent of line expected to be completed in the following June, and the time when the whole line and branches were to be completed, relate wholly to the application to be made of the proceeds of the bonds then offered to the public, and the purpose of the officers of the railway company to apply the bonds not then offered, together with other bonds and capital stock of the company, for the extinction of pre-existing indebtedness. The statements respecting the application of the proceeds of the bonds are to be ascribed in part to the defiant refusal of McHenry and Bischoffsheim & Goldschmidt to accede to the plans and wishes of the officers of the company, and in part to the understanding of the latter that the terms of the prospectus would not bo such as to cripple the company in carrying out the engagements contained in the disbursement trust agreement. The officers of the company were so far committed to Mc-Henry and Bischoffsheim & Goldschmidt in the negotiation of the bonds that they could not then recede without such a delay and rehabilitation of their plans for obtaining the necessary finances to carry out the scheme of consolidation as would propably have been fatal to it. McHenry and Bischoffsheim & Goldschmidt understood this perfectly well. They also knew that the company required the proceeds of the whole issue of first
Many of the complainants have testified as witnesses in the cause. They state in substance that they relied upon each and all the representations of the prospectus in making subscription for the bonds. It is common experience, now that parties are competent witnesses, that such testimony is always forthcoming. It is not improbable that some of the witnesses honestly think that they did rely upon these representations, and are convinced that they purchased the bonds confiding in their truth. But each witness states positively that he had no information at the time that there were underlying mortgages on the property of the railway company, and if he had been aware of that fact he would not have become a subscriber. Yet this fact was distinctly stated in the final prospectus, and in the whole series of previous revisions, and appeared conspicuously in two places in the document. It was natural that the complainants
The question remains whether the prospectus contained a promise tor a specific application of the proceeds of the bonds offered for sale which impressed an equity upon the proceeds in favor of the complainants, and entitled them upon a misapplication to call the defendants to an account. This question may bo disposed of briefly. Those who read the prospectus could fairly gather from its several statements the understanding that the railway company proposed to use the proceeds of the bonds then offered to complete the construction of the railway, and for such other general purposes of the undertaking as might be necessary, but not for the extinction of underlying mortgages. The statements about the reservation of the remaining $6,000,000 of the issue for the extinction of the outstanding existing mortgages and stock of the constituent compar
Not only was there no fiduciary relation in the present case which authorized the complainants to regard the trustees under the disbursement trust agreement as their trustees, bailees, or agents, but the complainants were not justified in relying upon any promise contained in the prospectus as a contract by the officers of the railway company to appropriate the money in a way not authorized by the disbursement trust agreement. They were bound to take notice of the limitations upon the power of the company to make any disposition of the proceeds of the bonds inconsistent with the provisions of the consolidation agreement which was the charter of the company. Whenever a corporation goes for business it carries its charter, and all persons dealing with it must take notice of the powers and limitations thereby imposed upon its agents. Railway Co. v. Gebhard, 109 U. S. 537, 3 Sup. Ct. Rep. 363; Ernest v. Nicholls, 6 H. L. Cas. 418. An inspection of that instrument would not have informed them of the existence of the disbursement trust agreement, but it would have informed them that the proceeds of the bonds were required to be appropriated to specific objects, and that this was a fundamental feature of the consolidated scheme. That instrument,was sufficient to put them upon inquiry, and knowledge must be imputed to them of all the facts which a sufficient inquiry would have disclosed. The prospectus itself pointed out a proper source of inquiry to all who wished to become acquainted with the documents creating the company and creating the trust which the trustees were to administer, and inquiry at that source would have led them to the disbursement trust agreement, and informed them that the promise of the company, contained in the prospectus, was one which it was beyond the power of the company to make or fulfill. Consequently if the complainants loaned their money to the railway company relying upon that promise, they did so at their own peril. Certainly they cannot follow it into the hands of those who never consented to receive it upon such terms, but received it because they were entitled to it as trustees of a different trust.
