Montgomery & West Point Railroad v. Branch, Sons & Co., 59 Ala. 139

59 Ala. 139 | Ala. | 1877

Lead Opinion

MANNING, J.—

Those creditors of the Montgomery and West Point Railroad Company who were secured by mortgages of the company’s property, by those contracts acquired rights therein, of which they could not be deprived even by an act of the legislature; since any law which a State may enact, that would impair the obligation of a contract, is void under the constitution of the United States. When, therefore, in the twenty-second section of the charter of the Western Railroad Company, it was enacted, in reference to the purchase of the property of the Montgomery and West Point Railroad Company, that “ the purchases herein provided for, or the surrender of the franchises shall in no way affect the rights of the creditors of the company,” the presumption is that the clause was introduced for the benefit' chiefly of the unsecured creditors, persons to whom such a. provision might be of advantage, rather than for those whose claims were already protected by deeds creating inviolable specific liens. And that this was the understanding of the contracting parties themselves is pretty clearly indicated by a passage in the report of Mr. Pollard, president of both of the companies, when, in addressing the stockholders of one of them, in reference to and before their unioD, in regard to what the other, the Western Railroad Company, ought to do,—he speaks of “the issue by that company, after the purchase, of second mortgage bonds for such amount as may be required to fund the entire debt of both companies, not provided for, and for the repair orf the Montgomery and West-Point Railroad.”

The stipulation, also, in the resolution of the other company, by which it expressly “ assumes the payment of all the debts, obligations, and responsibilities of the Montgomery and West Point Railroad Company,” while persuasive evidence that the former understood its own charter as precluding it from becoming the absolute owner of the Montgomery and West Point Railroad Company, except upon that condition, also conclusively proves that the Western Railroad Company, and its wealthy backers, the two Georgia companies were convinced that the purchase would be a good one, on those terms.

2. It is argued, though, that the enactment declaring that the purchase of the railroad and other property of the West Point Company, and the surrender of its franchises, shall in no way affect the rights of its creditors, was intended only to preserve their rights to sue at law as they before might have done; and that thé succeeding clause, continuing that company’s separate existence, “ as to all the rights and remedies of creditors,” was intended only to enable them to bring such actions against it, by having process therein served on the President of the Western Railroad Company. The legislature did not (they say) mean to embarrass the transfer of the railroad and other property from one company to the other, by incumbering the same with liens which did not previously exist: but the Western Railroad Company acquired the property in the same plight that the Montgomery and West Point Company held it, and succeeded to the power of the latter to create a lien, by a second or third mortgage to secure bonds of a new issue, (that for $1,200,000), the holders of which would be entitled to enforce this security ag ainst and to the prejudice of the holders of the unsecured debt of the Montgomery and West Point Railroad Company. Let us examine these propositions.

No doubt, we suppose, is entertained by anybody, that the West Point road and property were acquired by the Western Railroad Company, in accordance with the intention of the legislature, when it enacted the twenty-first and twenty-second sections of the charter of the latter. The road purchased extends from Montgomery eastwardly, reaching Georgia by the main line at West Point, and, by a branch, at Columbus. A charter had previously been granted, to build a railroad from Selma westwardly, to the Mississippi State line; and the road and property of this company also, the Western Railroad Company was authorized by the same sections of its charter, to acquire; the design being to have one continuous railroad running from Georgia across the State of Alabama to the Mississippi State line in the direction of Jackson,—under the control of the Western Railroad Company and its charter,—and that the other companies when their roads were acquired should be disbanded. The charter of the Western Railroad Company provided that this corporation should be composed of the subscribers for its stock, and those whom they might at any time thereafter associate with them, their successors and assigns (Section 3); and the stockholders and the capital stock might be added to and increased from time to time, until the latter should amount to $5,000,000 (Section 8).

It was evidently contemplated that the railroads of the other companies, if purchased at all, would be obtained by an agreement on their part, to unite their roads with that of the "Western Railroad Company, and by their stockholders becoming stockholders in it. The word, sale, or sell, is not used at all in this connection, in the statute. The Western Railroad Company is authorized to “ contract for the purchase” and to “purchase” those roads, or either of them; the word purchase being used as it often is in law, in the sense of acquiring by contract or consent, from another. And after the purchase, this company (the act proceeds to say), “ may sue for and recover in its name, all debts, dues and demands from any debtor to said company whose roads may be so purchased :” which also contemplates a fusion or union of the companies and their stockholders.

In harmony with the evident intent of this enactment, the Western Railroad Company contracted for the purchase, and purchased, the railroad and other property of the Montgomery and West Point Company, by the agreement of the two, that the road, property, capital and effects of the latter should be added to those of the former, and that the stockholders of the latter should surrender their charter and become stockholders, to the same amount, in the Western Railroad Company: the transaction being, what Mr. Pollard defined it—“ really, only the consolidation of the two companies under the name and charter of the Western Railroad Company.” Thus, apart from the agreement by that company to pay “ the debts, obligations and responsibilities ” of the other, there was no consideration for the purchase so made,— except the issue of stock of the Western Company to the stockholders of the Montgomery and West Point Company; the only compensation actually made being received by them as stockholders. In other words, while they were thus paid with shares of the capital of the other company, no fund was created, or put at the disposal of the Montgomery and West Point Company, as the equivalent and substitute for the property it transferred, out of which it could be coerced to pay, or could pay one dollar to any of its creditors.

What, then, would it avail those creditors to bring actions at law against the Montgomery and West Point Railroad Company ? If writs of sequestration or execution should be issued against it, where would there be any “ goods and chattels, lands and tenements ” that could be seized by virtue thereof ? Or should writs of mandamus be sued out for any purpose in such causes,—where would a board of directors be found, or persons authorized to perform the functions of such a body, on whom these writs could be served ?

True, the act provides that the president of the Western Railroad Company “ shall be held in law, as to service of process, as the president of the other company or companies, whose roads, works and property may be purchased.” But he has no other capacity whatever in relation to the defunct Montgomery and West Point Railroad Company, and may have never had any connection with it during its existence, as a stockholder or otherwise. Nothing in fact remained of that corporation, except the name. And anything more vain and useless—than an action at law against it,—anything more absurd,—it would be difficult to conceive. We must, therefore, conclude that something more substantially beneficial to the creditors, than such suits would be, was intended by the clause of the statute professing to secure rights to them. What were the rights that might be so preserved ?

3. A private corporation chartered to transact business, is a trustee of its capital, property and effects-1—first, for the payment of its creditors, and afterwards for the benefit of its stockholders. True, while it continues in life and operation according to the design of its charter, its general creditors have no specific lien which would entitle them to sue it in a court of equity. Yet during that time, its property and effects, which the law presumes would not be dishonestly put out of reach, are liable and might be subjected to the payment of its debts by actions at law against it, if not paid voluntarily. But if leaving its debts unpaid, its capital, property and effects are distributed among its stockholders, or transferred for their benefit to third persons who are not bona fide purchasers without notice,—and still more, if the corporation be dissolved or become so disorganized that it can not be made answerable at law, then a court of equity will pursue and lay hold of such property and effects, and apply them to the payment of what it owes to its creditors. Mamma v. Potomac Co. 8 Peters 28; Dummer v. Wood, 3 Mason, 308; St. Mary’s Bank v. St. John, Powers & Co. 25 Ala. 566; Huckabee v. Smith, 53 Ala. 191. A suit having that object is the most direct, if not the only efficient means of asserting and vindicating any right of the creditors, in such a case as the present: and by holding that it is not maintainable, we should refuse to give any real effect to the saving clause in the statute, if such a clause was necessary to enable them to maintain the suit. Certainly, if by virtue of' the act, one of the contracting companies might transfer all of its ample property and effects out of which its creditors ought to be paid, to the other and weaker company, in consideration of its admitting the stockholders of the former to become shareholders of its capital and property thus augmented, and might then—by a sort of legal suicide—slip out-of existence, leaving those creditors to sue at law the surviving company, which they had never dealt with, or accepted as their debtor, their-rights would be very seriously affected thereby.

4. There is no question of innocent purchaser for value without notice^ in this case. No party-defendant can claim or does claim that character. The existence of the debts, was not only known to the Western Railroad Company, but it expressly assumed to pay them all. And such an agreement coupled with the acquisition in the same transaction,, of all of the property out of which they were payable, and, a consequent dissolution of the debtor company to which the promise was made, would itself probably create a lien on the property acquired, as well as bind the Western Railroad Company personally, for the payment of these debts. Vanmeters’ Ex’rs v. Vanmeters, 3 Grattan, p. 162.

We have no doubt, therefore, that the complainants in this cause, creditors of the Montgomery and West Point Railroad Company, have a lien for the payment of its debts to them, on the road and its appurtenances and other property that belonged to that company, superior to the lien created by the trust-deed or mortgage of September 15, 1870, executed by the Western Railroad Company.

5. There is no substance in the objection that Branch, Sons & Co. were stockholders at the time of these transactions. If there was any evidence that they participated in or approved of the transaction we have considered, it must be presumed that they did so understanding its legal effect; and by that, as we have seen, the rights of creditors were intended to be preserved.

The contention of appellants that in taking and stating the accounts ijetween the parties, and in the decree, it ought to be provided that the amount of debt of the Montgomery and West Point Railroad Company, which was paid with the bonds issued by the Western Railroad Company, should be allowed and paid out of the proceeds of the sale of its-property, before any payments should be made to complainants, is not well founded. It ignores the fact that the Western Bailroad Company expressly agreed to discharge all the debts, obligations and responsibilities of the other company—and that it was upon the condition that it should do so, that it acquired a property which, at the time, was worth much more than the debts chargeable upon it. The purchasing company can not now, nor, if it is not still the owner, can those claiming under it, because the property may have in their hands, gone down in value,—repudiate-the obligations of the contract by which it was obtained. .

We think there was no error prejudicial to appellants, in the proceedings below.

Let the decree of the chancellor be affirmed.

Stone, J., not sitting.

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Rehearing

[On application, for rehearing.]

MANNING, J.—

We have carefully considered the application for a rehearing, on the last topic discussed in the opinion in this cause,—that, namely, concerning the division of the proceeds of the sale of the Montgomery and West Point Bailroad and equipments. The principal argument upon which this contention of appellants is founded, rests on the assumption, that it was one of the terms of the contract-between the two companies, that the Western Bailroad Company should, after acquiring the property of the Montgomery and West Point Company, execute its bonds tor the $1,200,000 mentioned, and its mortgage on the entire consolidated road and its appurtenances and equipment, to-secure payment of them. We find no basis for this assumption in either the pleadings or the evidence. We infer from them both that there was no such provision in the contract. The terms proposed and accepted were clearly stated in the-resolutions of both of the contracting parties at the meetings of the stockholders of each: and no such stipulation is set forth in either of them, although the members may have individually believed that the future policy suggested, in the report o[ the president to the West Point Company,, and in the resolutions of the board of directors of the Western Company, would be wise, nothing on that subject was-introduced into the resolutions to sell and purchase, which were adopted at the respective stockholders’ meetings. And that it was not the purpose of the board of directors of the Western Company to do this, is inferrible from the recital in. its resolution to purchase, and of the terms of the purchase, that it was adopted in accordance with the resolutions of the stockholders in convention this day while subsequent resolutions of the board relating to the issue of those bonds and execution of the mortgage, do not contain any such reference to the instruction of a stockholders’ meeting. They appear to have been passed by the board of directors, in the exercise of their own powers of administration, and might have been rescinded or changed at its pleasure at any' time. No liability was thereby incurred to anybody. And if there had been, the creditors of the other company had no part or voice in those negotiations. All the ingenious argument erected on the assumption referred to, is without any foundation.

But the able counsel for appellants further insist that, if it was not a part of the contract between the two corporations, "that the Western Company should, execute the bonds and mortgage and thereby give to the holders of them rights in all that property superior to those of the unsecured creditors of the Montgomery and West Point Railroad Company,— yet these creditors knew that it was in contemplation, that such bonds and a mortgage to secure them, should be executed, and were afterwards executed; and that a large number of these creditors were paid therewith or with the money thereby raised; and that not having objected to the transaction, those who had not been paid, ought to be considered as having ratified it, and be estopped from claiming priority over the holders of these bonds.

“ Whatever trusts or liens ” (say those gentlemen) “ arose by the transaction between the two corporations in favor of the Montgomery and West Point Railroad Company, were common to all of that class, and upon what principle can it be held that a portion of this class can accept the benefit of a mortgage on the property of both corporations, while another portion of the same class, who stand by and see it done, may assert against this mortgage a superior lien to it ? We have seen that these unsecured creditors had a right to share the benefits of this mortgage. There is no allegation that Morris and Lowry, the trustees, or the parties who advanced their money on the bonds or any body else is to blame because the appellees did not, like their more fortunate •or more diligent companions, get their debts funded under the mortgage, or paid in full with the money raised upon it.”

But what right had the creditors of the Montgomery and West Point Railroad Company to ratify or refuse to ratify the mode in which the board of directors of the Western Railroad Company chose to transact the business of their own corporation ? What reason had such creditors,—in view of the opinion of Mr. Pollard that the latter company should by such an issue of mortgage-bonds, provide for “ the entire debt of both companies not provided for ”—to anticipate that they would not “ get their debts funded under the mortgage or paid in full with the money raised upon it?” And where-is there any allegation or suggestion in this cause, that they have any of them refused to be “paid in full with money raised upon ” said mortgage, or by any other means to which the Western Railroad Company might resort in performance of the duty it undertook, when it declared that it “ hereby assumes the payment of all the debts, obligations and responsibilities of said Montgomery and West Point Railroad Company ?”

We are not able to perceive any such inconsistency or injustice as counsel imagine, in holding, that those of the unsecui’ed creditors of the Montgomery and West Point Company, or of the second mortgage creditors of the same company, who released their debts against it, in exchange for the bonds of the issue of $1,200,000 of the Western Railroad Company, indorsed as they were by two wealthy Georgia companies, are not entitled to a division of the proceeds of the property which belonged to the Montgomery and West Point Company with the creditors of that company.

Those who made this exchange, ceased to be creditors of’ the latter company, and obtained securities which they preferred, and which were probably more valuable than those they parted with. It is not they who complain of being in a worse condition by that transaction, or of injustice on the-part of the appellants, who were defendants below—but appellees, the suing creditors, who complain that they have not been paid either by those indorsed bonds or otherwise.

Let the application for rehearing be overruled.

Stone, J., not sitting.