Gilman, Sons & Co. v. New Orleans & Selma Railroad

72 Ala. 566 | Ala. | 1882

BRIO KELL, C. J.

1. The original bill was filed by a judgment-creditor of the “Selma and,New Orleans Railroad Company and Immigration Association,” who had exhausted his remedies at law; and its main purpose was to remove, as an obstacle in the way of obtaining satisfaction of his judgment, a mortgage, or deed of trust upon the property of the company, given to secure bonds it had issued. The appellants, as holders of a number of these bonds, were made parties defendant; and they appeared and answered, affirming the validity of the bonds, and of the mortgage given as security for the payment; and also asserting that, as "bona fide holders of the bonds, they were entitled to be subrogated to the paramount lien of the State as indorser, recognized in the mortgage. The dismissal of the original bill, if erroneous, can not in any event operate prejudi-cially to the appellants, and of it they can not be heard, to complain. It is only matters which are of in jury to the parties appealing, that will be noticed on error.

2-3. In the absence of statutory provisions, a cross-bill and an answer are essentially separate and distinct pleadings; and it is irregular to join and blend them, — as irregular as it would be to join and blend an amended and supplemental bill. Generally, a cross-bill is a mere mode of defense; and if all its purposes can be be obtained by answer, the bill will not be entertained. There are some defenses which, however, can not be made by answer; and often, in aid of' the defense, a discovery from the plaintiff in the original bill is necessary. And as a general rule, by answer the defendant can pray only to be dismissed ; if he is entitled to relief touching the matter of the suit, he can obtain it, in the pending suit, only by cross-bill.—Cullum v. Erwin, 4 Ala. 452; Goodwin v. McGehee, 15 Ala. 232. Frequently, co-defendants hare, as between themselves, opposite and clashing interests touching the matter of suit; without an adjustment of which, a complete decree, quieting the litigation, can not be rendered. In such case, either defendant may file a cross-bill; or the court may order it to be filed, bringing before the court the whole matter of litigation, and enabling it by one decree to settle the rights and interests of all parties,—Cullum v. Erwin, supra; Story’s Eq. Pl. § 392; 2 Dan. Ch. Pr. 1548.

It is a cross-bill of this latter character which was incorporated in the answer of the appellants originally; a bill not seeking any discovery from the complainant in the original suit, or any relief against him, but seeking relief only as against the railroad company, and the other holders of its bonds, and the establishment and enforcement of the prior right of the appellants to the payment of the bonds held by them. According to the rules of pleading and practice prevailing in courts of equity, unchanged by statute, there can be no doubt that the appellants were without right to make an answer serve the purposes of a cross-bill. The court and the parties could have silently disregarded so much of the answer as purported to be a cross-bill; the failure of any party defendant to appear and plead to it, would not have authorized a decree pro confesso against him ; or, on motion or exception, it would have been stricken out as impertinent; and the appellants, whatever may have been their right to file a cross-bill, or however necessary such a bill may have been for their protection, would have been in court in no other condition than as respondents who had only answered.

The statute provides, that a defendant may obtain relief against the complainant, for any cause connected with, or growing out of the subject-matter of the bill, by alleging in his answer, and as a pari; thereof, the facts upon which such relief is prayed, and that the complainant shall answer the same. The matter thus put in issue “must be considered in the nature of a cross-bill, and be heard at the same time as the original bill.” Code of 1876, 3801-04. It is apparent the statute refers to but one of the several kinds of cross-bill, — that in which relief is sought only against the complainant in the original bill; and has no reference or application to the other distinct and different kind of cross-bill, in which no relief is sought against him, to which he is a party rather for the sake of conforming the pleadings to the cause to which they belong, and affecting him by any order which may be rendered, staying, if necessary, a hearing on the original bill until the cross-bill is ripe for hearing with it; and in which relief is sought only against co-defendants. After demurrer upon this ground, to so much of the answer as purported to be a cross-bill, the appellants amended, by striking out the answer, and filing it as a separate pleading. But, before the amendment, the co-defendants, Morton, Bliss and others, had tiled a cross-bill bringing the whole matter of litigation before the court, and under -which the appellants could obtain full relief. In this condition of the cause, the cross-bill of appellants was properly dismissed. A cross-bill is not entertained, when in the original suit the party tiling it can obtain the full relief to which he is entitled. It is unnecessary, adds to the costs, and tends to confusion; and without the restriction, cross-bills would be multiplied at the mere election of defendants.—Weed v. Small, 3 Band. Ch. 273; Braman v. Wilkerson, 3 Barb. (S. C.) 151; Bogle v. Bogle, 3 Allen, 158.

4. The more important question the case involves is, whether the appellants are entitled to subrogation to the statutory lien of the State, as indorser of the bonds of the railroad company. In the consideration of this question, we do not find it necessary to pass upon the numerous exceptions to evidence -which were sustained by the City Court. The material facts upon which the right depends, if it exists, are shown satisfactorily by the pleadings, and by evidence to which no exception was taken. These facts are, that the company had contracted with DuPuy for the construction of its road, and, while he-was engaged in the construction of the first twenty miles, issued to him its bonds, three hundred and twenty in number, each for the payment of one thousand dollars, payable to the holder thereof, at the agency of the corporation in the city of New York, bearing interest at the rate of eight per-cent., payable semi-annually ; the bond reciting on its face, that it was one of a series limited to sixteen thousand dollars per mile of equipped and completed railroad in the State of Alabama; and further, that it was “ secured by a mortgage, bearing even date herewith, of the railroad, with its equipments, and appurtenances, and franchises of said corporation which relate thereto, issued under the provisions of an act ■of the General Assembly of Alabama, entitled ‘ An act to furnish the aid and credit of the State of Alabama, for the purpose of expediting the construction of railroads,’ approved February 21st, 1S70; all secured by a first lien, provided for in said act, on the railroad of said company and its equipments, and all other property relating thereto, including the franchises of the company, with power of sale in case of default, and by indorsement by the State of Alabama, made under authority and in pursuance of the act of the General Assembly aforesaid.” Having completed and equipped the first twenty miles of road, the bonds were returned- to the company, that the indorsement thereof by tbe State should be obtained; and the preliminary proofs required by the statute having been made, the Governor, in the name of the State, indorsed them. The bonds were then re-delivered to DuPuy, who applied them to pay the debt the company had incurred with him for the construction and equipment of the first twenty miles of the road; and he passed them to David Crawford, to whom he had become indebted for money borrowed, and to Morton, Bliss & Co., to whom he had become indebted for railroad iron, while engaged in such construction, they having notice of the application DuPuy had made and was making of the bonds. Fifty-eight of these bonds Crawford subsequently transferred to the appellants, under circumstances, and upon a consideration which will be hereafter noticed.

The real relation of the State was that of an accommodation indorser of the bonds of the company. For the indorsement there was no consideration of value moving to the State, and its only purpose was giving credit and currency to the circulation of the bonds. In the words of the title of the statute which authorized the indorsement, the purpose was, “ to furnish the aid and credit of the State to expedite the construction of railroads.” Until twenty continuous miles of road had been completed and equipped, the indorsement of bonds by the State was unauthorized ; and the completion and equipment must have been from resources of the company, distinct and independent of such as were or could be derived from a negotiation of the bonds indorsed by the State. The plain purpose of the statute was, that the indorsed bonds should be aqjplied to no other uses or purposes, than to the further construction and equipment of the road. The indorsement was of no force — as a contract, it had no legal inception — until the bonds were by the company negotiated. The bonds teferring to the statute under which they were indorsed, every person dealing in them was put on inquiry, and at his own peril was bound to take notice of its requirements, of the relation of the State as indorser, and of the uses or purposes for which the company could legally and properly transfer them.—Jones on R. R. Securities, sections 226, 297, 27; N. O., M. & C. R. R. Co. v. Dunn, 51 Ala. 128; McLure v. Township of Oxford, 94 U. S. 429.

5. The application of the bonds by DuPuy to pay the debt the company had contracted with him for the completion and equipment of the first twenty miles of the road, was in direct contravention of the statute — was a. diversion of the bonds from the uses and purposes to Much they were by the statute appropriated, and to which the company, by the very act of procuring and accepting the indorsement, agreed they should be solely and exclusively appropriated. Whether the company assented to the application, or whether they re-delivered the bonds to DuPny, upon his promise to continue the construction and -equipment of the road, and to use the bonds to raise money for that purpose, is not material. With full knowledge of the only uses and purposes to which they could be appropriated, he applied them to the payment of the existing debt of the company, in contravention of the statute, and in .violation of the agreement of the company under which the credit of the State was loaned; and thereafter he abandoned his contract to construct further the roach Whoever takes accommodation paper, with knowledge that the terms and conditions upon which the accommodation was given are being violated; whoever participates in the diversion of the paper to other objects or uses than such as were intended when the paper was made, unless fraud is imputed, must be understood to relieve the party giving the .accommodation from all liability, whatever liability the party with whom he deals may incur. — 2 Parsons Notes and Bills, 27 ; 1 Dan. Neg. Tnst. 594.

It was tlie interest of the State that the further construction ■of the road should be continued — to expedite the construction the bonds were indorsed. There was no general lending of its. credit by the State, but a loan upon terms and conditions; and a diversion of the bonds from the uses to which it was designed they should be applied, and their application to uses prohibited by the statute, would be a fraud, if the parties intended to assert its liability. As between DuPuy and the State, the in-dorsement had no binding force; as a contract, it had not legal inception. Crawford, and Morton, Bliss & Co., acquiring the bonds from DuPuy, with knowledge that he had applied them in payment of a pre-existing debt of the company, in violation •of the statute, and in violation of the terms and conditions upon which the indorsement of the State was made, chose to receive them with all the infirmities to 'which they were subject in Du-Puy’s hands — they were substituted to his place, acquiring only his rights.

6. The bonds were negotiable instruments; the purpose of making or issuing, as well as of indorsing them, was, that they .should be employed in raising money by sale, or otherwise, in the usual course of business; that they should be employed for all the purposes for which bank-notes could be employed. The principles of the law-merchant, founded upon considerations of public policy and the necessities of commerce, “so well and so long established, that it is laid up among the fundamentals of the law, and neither reasons nor authorities are now necessary to be brought forward in its support,” affirms the right and the title of a bona fide holder, for value, of negotiable paper, acquired before maturity, whatever may be the defenses or equities existing as against antecedent parties.—Swift v. Tyson, 16 Peters, 1; Goodman v. Simonds, 20 How. 343; Murray v. Lardner, 2 Wall. 110. The State, though there had been an appropriation of the bonds to uses which were excluded by the terms and conditions upon which its indorsement was lent to the railroad company, and as to the State the bonds can be said properly to have been put in circulation fraudulently, would become liable to a Iona fide holder, taking them without knowledge of the misappropriation, or of the fraud.—Jones on Railroad Securities, section 284: State, ex rel. Plock v Cobb, 64 Ala. 127.

7. Whether the appellants stand in this relation — whether they acquired the bonds for value, without knowledge of the infirmity of the indorsement of the State, and of the title of Crawford, is amaterial point of contention. The question must be considered and determined, as it worrld be if the State were a party, and the immediate object of the suit was the enforcement of the indorsement. The fact being shown that there had been an appropriation of the bonds to uses which were excluded by the terms and conditions of the indorsement; and as to the State, if the purpose was not to relieve and release it from liability, the bonds were put in circulation fraudulently; upon the holder, pursuing the State, the law' casts the burden of proving that he acquired them for value, in good faith, and in the usual course of business.—Wallace v. Br. Bank Mobile, 1 Ala. 565; Thompson v. Armstrong, 7 Ala 256; Ross v. Drinkard, 35 Ala. 434. The right of the antecedent holder to assert the liability of the State is destroyed, or, rather, is shown never to have existed ; and the right of subsequent holders, resting only on a title derived from him, which has not some other foundation,, can not rise superior to it. A higher and better right, resting upon its own foundation, is shown, when it appears that in good-faith, upon a consideration of value, in the ordinary or usual course of business, the bonds were acquired.

8. If the appellants are holders for value, there can be no-question the bonds were taken according to the customs and usages of mercantile transactions. The sale or exchange of such securities for shares of stock in railroad corporations, or for the shares of the stock of companies organized either as joint-stock companies, or as corporations, for the construction of railroads by contract, is, doubtless, an ordinary commercial transaction. The controversy seems to be directed specially to the sufficiency of the consideration with which the appellants parted,and whether there were no circumstances attending the transaction which ought to have excited inquiry into the nature of Crawford’s title, and the manner in which he had obtained the bonds. The facts are, thaton 17th October, 1870, appellants sold to Crawdord shares of stock in the Des Moines Yalley Construction Company, of the nominal value of three hundred thousand dollars; Crawford agreeing to deliver, within about sixty days, the bonds of the Selma and New Orleans Railroad Company, &e., guaranteed by the State of Alabama, bearing eight per-cent, interest, for fifty-eight thousand dollars, the interest to begin on the first day of January, 1871. The stock was greatly depreciated, not having probably a marketable value exceeding ten cents to the dollar of its nominal value. Of the company, Crawford was treasurer, and a large stockholder. The bonds were not indorsed by the State until 14th July, 1871, and were not delivered to the appellants until the 22d of that month. Tt is apparent the bonds were estimated by the parties as of their face value; for delay having occurred in their delivery, the interest during the period of delay they would have borne, Crawford paid to the appellants in money. Not long afterwards, the Des Moines stock became valueless in consequence of the failure of the company. There is not in the transaction any fact indicating that the parties regarded the bonds of doubtful, or of uncertain valne, however they may have regarded the stock with which they were purchased.

It is only a purchaser or holder for value, not a mere volunteer, the law protects against equities and defeuses to which negotiable paper would be subject in the hands of antecedent holders. The books employ various expressions; sometimes it is said full value must have been parted with; sometimes/air and reasonable value; but most often, perhaps, the single word value is employed. The principle is analogous, in many respects, to that which prevails in .courts of equity for the protection of bona fide purchasers against equities affecting the legal estate, of which they have not notice. — 2 Lead. Eq. Cases, 103. Generally, it is agreed, that it is not necessary to constitute a bona fide purchaser of the legal estate, or a bona fide holder of negotiable paper, that he should have parted with money, or money’s worth. ' If he parts with, or cedes an existing right, or if he forbears, or suspends legal remedies, there is, in the legal sense of the term, a valuable consideration.- — 1 Amer. Lead. Cases, 226; 2 Lead. Eq. Cases, 103. In considering this question, it is said in Goodman v. Simonds, 20 How. 371: “ The better opinion seems to be, in respect to parol contracts, as a general rule, that there is but one measure of the sufficiency of a consideration ; and, consequently, whatever would have given validity to the bill as between the original parties, is sufficient to uphold a transfer,” &c. There would be much of difficulty and uncertainty in the application of any other principle. It can not be supposed, that only the party giving in money the full face-value of negotiable paper, or its equivalent in property, is a bona fide holder for value. Whenever, from any cause — depression of the money market, or depression in the affairs of the State, or of corporations' — there was depreciation in the value of such securities as were the subject of this transaction, such a rule would stop their circulation, and divest them of the legal incidents of negotiability. If it be said, there must be a fair and reasonable consideration, the inquiry at once arises, what is to be deemed such a consideration; an inquiry it would be as difficult to determine, as it would be to determine the inadequacy of consideration which would justify the rescission of a contract. The safer doctrine, it seems to us, is, that when the holder, as in the present case, parts with value, no question of usury being involved, the amount of the consideration is material in no other respect than as it may bear upon the inquiry, whether he had notice, actual or constructive, of the infirmity of the paper, or of the title to it.—Gould v. Segee, 5 Duer, 260; Phelan v. Moss, 67 Penn. St. 59.

There is no reason for supposing that Crawford purchased the stock with a view to its immediate conversion into money at its market value. The relation he sustained to the company would rather indicate that he regarded it as of greater value. But it is not necessary to speculate upon the reasons which may have induced him into the transaction; there can be no doubt, if he had given for the stock his own negotiable paper of the precise amount of the bonds, that it would have been supported by a sufficient consideration. The -appellants parted with the stock, and he acquired it, in the usual course of business; and the relation of the appellants is that of holders of the bonds for value.

9. The appellants, having acquired the bonds for value, in the usual course of business, can not be affected by the fraud and illegality of DuPuy’s appropriation, and Crawford’s acquisition of them, unless notice of it can be traced to them. The presumption is of a want of notice; for, “though possible, it is not likely, that notice of the original fraud or illegality would be communicated to subsequent holders.” It is not incumbent upon them to prove the absence of notice; but it is incumbent on the party assailing the presumption, and questioning their title, to prove it.—Ryles on Bills (6th Amer. Ed.), 194; Carpenter v. Longan, 16 Wall. 271. There is no evidenccof direct notice. The evidence of Tucker, as to the interviews he had with one or more of the appellants, at the instance of Crawford, is too vague and indefinite to justify the inference that he communicated the fact that Crawford had, or would acquire the bonds from DuPuy, in violation of the terms and conditions upon which the indorsement of the State was loaned, thereby relieving the State from liability. It was for bonds guaranteed by the State, the appellants contracted, and Crawford promised to deliver. The guaranty or indorsement of the State became worthless to them, if, at the time of the contract, they were informed of DuPuy’s misappropriation; and it was idle for them to contract for bonds of that description. ' And it is scarcely possible that Crawford] who brought about the interview for the purpose of inducing the appellants into the transaction, would have invited a disclosure of the infirmity of his title as against the State. All that can be said of Tucker’s evidence is, that at Crawford’s instance he communicated to one or more of the appellants the number of miles of road the railroad company had constructed, and that the bonds were the first-mortgage bonds of the company. If any other particular facts were communicated, he does not disclose them.

In reference to the facts which it is supposed ought to have put the appellants upon inquiry as to the manner of Crawford’s acquisition of the bonds, it is enough to say, that the largest significance claimed for them is. that they might have aroused suspicion as to his title. Tt is not, under the prevailing principles of the commercial law, enough to defeat the title of the holder of negotiable paper, to show that lie acquired it under ■circumstances which would, in the mind of a prudent man, have excited suspicion as to the title of the party from whom he derived it.—Goodman v. Simonds, supra; Murray v. Lardner, supra; Phelan v. Moss, supra. It is apparent from the contract, that it was expected Crawford would thereafter acquire the bonds; hence, a future day is appointed for the delivery; and the fact is apparent that he did not obtain them, bearing the indorsement of the State, until a short time before their delivery. These facts may have excited the belief, that when he made the contract with the appellants, he had some arrangement by which he would obtain the bonds. But, would they probably divert and direct inquiry to the nature of that arrangement? Would they excite the suspicion ■of the most prudent, dealing in negotiable securities, that he intended acquiring them, or had acquired them, fraudulently, ■or illegally? We can not think the facts are sufficient to cast a shade on the transaction, so far as the appellants are concerned. It is only bad faith which will defeat their right to enforce the bonds against all parties to them.

10. The remaining question has been heretofore considered and decided by this court. The statute gave the State, for its protection and indemnity, a lien upon the property of the railroad company, having precedence and priority over all other liens, by way of mortgage or otherwise. The holders of the bonds of the company, indorsed by the State, to whom the ■State is liable upon its indorsement, upon default in the payment of the bonds, are entitled to be subrogated to the lien of the State. The subrogation is just and equitable, and is essential to render effectual the purposes of the statute in the creation of the lien — the protection and indemnity of the State. Colt v. Barnes, 64 Ala. 108; Forrest v. Luddington, 68 Ala. 1. The equity is worked out through and from the liability of the State; and if the liability does not exist, the equity does not arise.—Bankhead v. Owen, 60 Ala. 457; Houston v. Br. Bank Huntsville, 25 Ala. 250; Grigsby v. Hair, Ib. 327. And of consequence, it can not be claimed by a party who, in his transactions with the railroad company, has relieved the State from liability, though he may be entitled to enforce the subordinate mortgage the company may have executed.

Note by REPORTER. — On application for rehearing, by the counsel for Morton, Bliss et al., the judgment rendered in this case, as indicated above, was set aside, and judgment rendered as follows: “It is considered that the decree of said City Court be reversed and annulled, and the cause be remanded to said City Court for further proceedings; and that the appellees pay the costs of this appeal, both in this court, and in said City Court ”

There would be the difficulties attending the subrogation, suggested in the arguments of counsel, and pointed out by Mr. Justice Bradley, in Branch v. Macon & Brunswick R. R. Co., 2 Woods, C. C. 385, if the State was pursuing the remedies given to it specially, and had possession of the property of the company. If a court were then to intervene — to intercept the remedies of the State, and to interrupt its possession — as it could intervene only at the instance of a party to whom the State was liable, or a party having a superior equity, there would be embarrassments arising from the incapacity of the State to be sued, and from other considerations, which this case does not involve. The constitution forbids the making of the State a party to suits in law or equity. It would be a harsh construction of the constitution, leading to the most inequitable consequences, that circumscribed the jurisdiction of the courts to determine controversies between individuals claiming rights, or asserting defenses, which must be traced to, or derived from the State. The incapacity of the State to be sued, as a general rule, is a sufficient reason for dispensing with its presence as a party.—Davis v. Gray, 16 Wall. 220; Arlington case, 3 Hughes (C. C.) 1; Hagan v. Walker, 14 How. 29.

The result is, that the City Court erred, in not decreeing the appellants were entitled to subrogation to the lien of the State, and, of consequence, to precedence and priority over the other holders of the bonds of the railroad company, who are entitled only to the security of the mortgage. The decree in this respect will be here reversed, reformed and corrected; otherwise affirmed, and remanded to the City Court for execution.