Lead Opinion
after making the foregoing statement, delivered the opinion of the court.
Boyd’s judgment against the Coeur D’Alene Railway & Navigation Company was rendered in 1896 in an action begun in 1887 in a court of the Territory of Idaho. After he had established his title to the judgment and revived it in 1906 for $71,278 there was nothing: on which an execution could be levied because, in tue meantime, all of the property of the Coeur D’Alene had been sold under foreclosure. He thereupon brought .this suit, claiming that the Northern Pacific R. R. Co. was liable in equity as for a diversion of $465,000 of bonds, belonging to the Coeur D’Alene but used by the Northern Pacific in payment of 5,100 shares of stock bought from Corbin in 1888.
At that time the Coeur D’Alene was solvent, owning
On August 1, 1888, he, in his individual capacity, entered into a written contract with the Northern Pacific, in which he undertook to have the Coeur D’Alene issue $825,000 of bonds, $360,000 of which were to be retained to retire those then outstanding. He also agreed to cause the Coeur D’Alene to lease its property for 999 years to the Northern Pacific, which, in turn,, was to guarantee the payment of the principal and interest of the bоnds. The contract further recited that in consideration of the execution of the lease and guaranty Corbin wpuld transfer to the Northern Pacific 5,100 fully paid and non-assessable shares of the capital stock of the Coeur D’Alene. The agreement was promptly carried into effect. A resolution was passed by the directors of the Coeur D’Alene authorizing the issue of $825,000 of bonds for properly constructing, completing and equipping the road; the 999-year lease was made and Corbin transferred his stock. Shortly after-wards the Trust Company, named in the mortgage, issued to Corbin, president; or order, $465,000 of the new bonds. They were not used for completing or equipping the road, paying the debts or other corporate purpose, and although the Northern Pacific .was the then holder of a majority of the stock and in charge of the business and litigation of the Cceur D’Alene, no steps were taken to trace or recover them. Corbin testified that he was paid for the stock, in cash, about the .par value of the bonds; that he had never received them, or if so, that they only passed through his hands “with an agreement that somebody was to take them off of our hands and pay us the money.”
2. Being liable for this diversion of $465,000, the Northern Pacific Railroad remained so liable until the funds were restored to the true owner. Chicago, M. & St. P. Ry. v. Third Nat. Bank, 134 U. S. 277. The obligation was not lessened by set-offs, nor discharged in whole, because the Northern Pacific spent $500,000 of its own.
3. Although this diversion of $465,000 of bonds in 1888 made the Northern Pacific liable, in equity, for the payment of Boyd’s judgment for $71,278, recovered in 1896 and revived in 1906, yet his right was apparently not en-. forcible because, in 1896, all of the property of the Northern Pacific Railroad had been sold under foreclosure to the newly created Northern Pacific Railway Company. He' thereupon brought this suit against the mortgagor and purchaser, seeking to subject the property bought to the payment of this liability. He claimed that the foreclosure sale was void because made in pursuance of an illegal plan of reorganization, between bondholders and stockholders of the Railroad, in which, though no provision was made for the payment of unsecured creditors, the stockholders retained their' interest by receiving an equal number of shares in the new Railway. There was no question as to parties and no demurrer to the bill. The Railway answered and on the trial of the merits offered evidence tending to support its contention that the decree was regular in form, free from fraud and that the property brought a fair price at public outcry. Both court's found against this contention and entered a decree making Boyd’s claim a lien upon the property of the Railroad in the hands of the Railway, but subject to the mortgages placed thereon at the time of the reorganization.
The appellants attack the ruling frоm various standpoints based 'upon many facts in the voluminous record. But, having been summarized in the statement, they will not be discussed in detail, inasmuch as the case, though
4. Corporations, insolvent or financially embarrassed, often find it necessary to scale their debts and readjust stock issues with an agreement to conduct the same business with the same property under a reorganization. This may be done in pursuance of a private contract between bondholders and stockholders. And though the corporate property is thereby transferred to a new company, having the same shareholders, the transaction would be binding between the parties. But, of course, such a transfer by stockholders from themselves to themselves cannоt defeat the claim of a non-assenting creditor. As against him the sale is void in equity, regardless-of the motive with which it was made. For if such contract reorganization was consummated in good faith and in ignorance of the existence of the creditor, yet when he appeared and established his debt the subordinate interest of the old stockholders would still be subject to his claim in the hands of the reorganized company. Cf. San Francisco & N. P. R. R. v. Bee, 48 California, 398; Grenell v. Detroit Gas Co., 112 Michigan, 70. There is no difference in principle if the contract of reorganization, instead of being effectuated by private sale, is consummated by a master’s deed under a consent decree.
5. It is argued that this is true only when there is fraud in the decree, — the appellants insisting that in all other
Such and similar possibilities at one time caused doubts to be expressed, as to whether a court could permit a foreclosure sale which left any interest to the stockholders. But it is now settled thаt such reorganizations are not necessarily illegal, and, as proceedings to subject the property must usually be in a court where those who ask equity must do equity, such reorganizations may even have an effect more extensive than those made without judicial sale, and bind creditors who do not accept fair
That was done in the present case. And while the agreemeht contained no provision as to the payment of unsecured creditors, yet the Railway Company purchased unsecured claims aggregating $14,000,000. Whether they were acquired because of their value, to avoid litigation, or in recognition of the fact that such claims were-superior to the rights of stockholders, does not appear, nor is it material. For, if purposely or unintentionally a single creditor was not paid, or provided for in the reorganization, he could assert his superior rights against the subordinate interests of the old stockholders in the property transferred to the new company. They were in the position of insolvent debtors who could not reserve an interest as against creditors. Their original contribution to the capital stock was subject to the payment of debts. The property was a trust fund charged primarily with the payment of corporate liabilities. Any device,. whether by private contract or judicial sale under consent decree, whereby stockholders, were preferred before the creditor was invalid. . Being bound for the debts, the purchase of their property, by their new company) for their benefit, put the stockholders in the pоsition of. a mortgagor buying at his own sale. If they did so in good faith and in ignorance of Boyd’s claim, they were none the less bound to recognize his superior' right in the property, when years later his contingent claim was liquidated and established. That such a sale would be void, even in the absence of fraud.in the decree, appears from the reasoning in Louisville Trust Co. v. Louis
6. The Railway seeks to distinguish that case from this, insisting that even if the stockholders’ participation the reorganization would have invalidated the proceeding, such result does not follow here because the court having charge of the foreclosure passed on this very question bеfore the sale in 1896 and dismissed the Bill of Paton, an unsecured creditor, when he made exactly the same attack upon the reorganization as that by Boyd in this bill. That court then held that as the property was insufficient to pay the mortgage debts of $157,000,000, there was nothing which cquld come to the unsecured creditors, and they, therefore, had no ground to complain if the bondholders were willing to give new shares to the old stockholders. No appeal was taken from that decision — possibly because the Patón -claim was purchased by the Railway. But inasmuch as Boyd was not a. party to the record that décree was not binding upon him as res adjudicóla, and the qpinion not being controlling authority, cannot be followed in view of the principles declared in Chicago, R. I. & P. R. R. v. Howard,
In saying that there was nothing for unsecured creditors the argument assumes the very fact which the law com
The invalidity of the sale flowed from the character of the reorganization agreement regardless of the value of the property, for in cases like this, the question must be decided аccording to a fixed principle, not leaving the rights of the creditors to depend upon the balancing of evidence as to whether, on the day of sale the property was insufficient to pay prior encumbrances. The facts in the present case illustrate the necessity of adhering to the rule. The railroad cost $241,000,000. The lien debts were $157,000,000. The road sold for $61,000,000 and the purchaser at once issued $190,000,000 of bonds and $155,000,000 of stock on property which, a month before, had been bought for $61,000,000.
It is insisted, however, that not only .the bid at public outcry, but the specific, finding in the Patón case, established that the property was worth less than the encumbrances of $157,000,000, and hence that Boyd is nо worse off than if the sale had been made without the reorganization agreement. In the last analysis, this means that he cannot complain if worthless stock in the new company was given for worthless stock in the old. Such contention, if true in fact, would come perilously near proving that the new shares had been issued without -the payment of any part of the implied stock subscriptions except the. $10 and $15 assessments. But there was an entirely different estimate of the value of the road when the reorganization contract was made. For that agreement contained the distinct recital that the property to be purchased was agreed to be “of the full value of $345,000,000, payable in fully paid non-assessable stock and the prior
The fact that at the sale, where there was no competition, the property was bid in at $61,000,000 does not disprove the truth of that recital, and the shareholders cannot now be heard to claim that this material statement was untrue and that as a fact there was no-equity out of which unsecured creditors could have been paid, although there was a value which authorized- the issuance of $Í44,000,000 fully paid stock. If the value of the road justified the issuance of stock in exchange for old shares, the creditors were entitled to the benefit of .that value, whether it was present or prospective, for dividends or only for purposes of control. In either event it was a right of property out of which the creditors were entitled to be paid before the stockholders could retain it for any purpose whatever.
7. This conclusion does not, as claimed, require the impossible and make it necessary to pay an unsecured creditor in cash as a condition of stockholders retaining an interest in the reorganized company. His interest can be' preserved by the issuance, on equitable terms, of income bonds or preferred stock. If he declines a fair offer he is lеft to protect himself as any other creditor of a judgment debtor, and, having refused to come into a just reorganization, could not thereafter be heard in a eourt of equity to attack it. If, however, no. such tender was made and kept good he retains the right to subject the interest of the old stockholders in the property to the payment of his debt. If their interest is valueless, he gets nothing. If it be valuable, he merely subjects that which the law had originally and continuously made liable for the payment of corporate liabilities.
8. Lastly, it is said that Boyd was estopped from attacking, in 1906, a reorganization completed in 1896, and, ordinarily, such a lapse, of limé would prevent any сreditor
In this case the defendants and their stockholders have not been injured by Boyd’s failure to sue. His delay was not the result of inexcusable' neglect, but in spite of diligent effort to put himself in the position of a judgment creditor of the Cceur D’Alene so as to be able to proceed in equity to collect his debt. He accomplished this result. only' after protracted litigation, beginning in 1887 and ■continuing through the present appeаl (1913). The inore important chapters of the different cases, with lawsuits within lawsuits, are reported in
The delay in beginning the present suit — the last of a remarkable series of legal proceedings — was excusable if not absolutely unavoidable. Boyd claims that he had no notice of the fact that the stockholders were to retain an interest in the new company and that, in part, the delay to begin рroceedings was occasioned by the Railway Company itself, since it, as the purchaser of the Cœur D’Alene property, resisted his attempt to revivé the judgment. Boyd’s- silence,, in 1896, did not mislead the stockholders, nor did his non-action induce them to become parties to the reorganization plan. They have not in any,way changed their position by reason of anything he did or failed to. do, and the .mere lapse of time ..under the peculiar and extraordinary circumstances of this case did not estop' him, when he revived the judgment, from promptly proceeding to subject the shareholders’ interest in property which in- equity was liable for the payment of his debt. The decreе of the Circuit Court of Appeals is
Affirmed.
Dissenting Opinion
in which concur
I find myself unable to agree with the opinion of the court. The consequences which may result from the decision to the numerous reorganizations of railroad companies which occurred about the time of this reorganization or since, are, to my mind, alarming. Arrangements and agreements in advance of judicial sales between creditors interested for the commop benefit are the usual incidents of foreclosures, and if fairly and openly entered into and approved by the court are not subject to criticism.
Nor do X agree that every plan of reorganization which in any way includes stockholders of the reorganized company is for tlyat reason alone to be regarded as an illegal withholding from creditors of corporate property which should go to thé payment, of corporate debts. That corporate property inust be applied to corporate debts before shareholders can participate, is plain. But I think every case should stand upon its own facts, and the remedy be shaped to do justice and equity in the particular case, and not tried out by any hard and fast rule such as indicated when this court says that the invalidity of a judicial sale must turn upon the character of the reorgаnization: agreement and is not affected by actual. consequences to creditors. ' y
Here is a single creditor who comes forward many years after a judicial sale under a general creditors bill and a mortgage foreclosure bill which had been pending several years, and asserts the fight to ignore the judicial sale and the title resulting and asks to'have the property of the old company subjected to his non-lien claim, not because of any actual fraud in the sale, nor because he can show that he has in any way suffered a loss by reason of the plan of reorganization under which the sale was conducted, but
It is true that Boyd was not a party to that- suit. But it was a bill, filed after the decree and before the sale, attacking the reorganization plan upon the precise grounds here advanced, and is highly persuasive as to the good faith of the plan and the fairness of the subscription price.
The upset price of sixty-one million dollars was fixed by the court, — probably as large as could be expected at the sale. As observed by this court in Louisville Trust Co. v. Louisville &c. Ry.,
“The record discloses no element of fraud or concealment upon the part of the trustees or of any of them. What they did was done openly and was known or might have been known by the exercise of the slightest diligence upon the part of every one interested in the, property of. the old corporation. The plaintiff unquestionably knew, or could easily have ascertained, before the trustees bought the property at the foreclosure sale, — at any rate, before they transferred it to the new corporation, — that their purchase would be, and was, exclusively for the-benefit of certificate holders interested in the trust.
In Foster v. Mansfield &c. Rd.,
“If a person be ignorant of his interest in a certain transaction, no negligence is imputable to him for failing to inform himself, of his rights; but if he is aware of his interest, and knows that proceedings are pending the result of which may be prejudicial to such interests, he is bound to look into such proceedings so far as to see that no action is taken to his detriment.”
Boyd had actual knowledge. If he had sought to intervene, I have no doubt he would have been permitted to do so. He chose to do nothing, and now asks a court of equity, after the purchaser has been for more than a decade in undisturbed possession and ownership, to declare the judicial «ale invalid as against him. The case is without merit, and the bill should have been dismissed.