NORTHERN PACIFIC RAILWAY COMPANY v. BOYD
No. 47
SUPREME COURT OF THE UNITED STATES
Argued November 11, 12, 1912. Decided April 28, 1913.
228 U.S. 482
APPEAL FROM THE CIRCUIT COURT OF APPEALS FOR THE NINTH CIRCUIT.
A corporation acquiring stock control of a railroad company and leasing it becomes liable to account to the leased company for the amount of bonds in the treasury of the leased company diverted by it; that liability can be enforced by a creditor of the leased company who is unable to collect his judgment on account of the insolvency of the leased company which has resulted from the lease itself. Chicago Railway v. Chicago Bank, 134 U. S. 277.
A lessor railroad company which has once become liable for diversion of bonds from the treasury of a lessee company remains so until the bonds are restored; nor is the obligation lessened by disbursements made on account of the roadbed of the leased company.
Improvements of a roadbed leased for 999 years from another company are expenditures for the benefit of the lessee and not the lessor; they cannot be regarded as an offset to a debt owed by the lessee to the lessor. Chicago Railway v. Chicago Bank, 134 U. S. 277.
Contracts for reorganization made between bondholders and stockholders of corporations, insolvent or financially embarrassed, involving the transfer of the corporate property to a new corporation, while proper and binding as between the parties, cаnnot, even where made in good faith, defeat the claim of non-assenting creditors; nor is there any difference whether the reorganization be made by contract or at private sale or consummated by a master‘s deed under a consent decree.
Even in the absence of fraud, any device, whether by private contract or under judicial sale, whereby stockholders are preferred to creditors, is invalid. Louisville Trust Co. v. Louisville Railway, 174 U. S. 683.
The decree in a proceeding brought by one of a class to permit that class to participate in a reorganization is not res judicata as against another of the same class who was not a party thereto and had no notice of the proceeding.
Rights of creditors of corporations undergoing reorganization do not
The property of a corporation, in the hands of the former owners under a new charter, is as much subject to existing liabilities as that of a defendant who buys his own property at a tax sale.
The fact that property of great value belonging to an insolvent corporation is bid in by the reorganization committee at the upset price fixеd by the court at a judicial sale, cannot be used as evidence to disprove the recital as to its actual and far greater value when subsequently transferred by the reorganization committee to the new corporation.
A creditor of a corporation undergoing reorganization cannot prevent stockholders from retaining an interest in the reorganized corporation; if he is given a fair opportunity to protect his interests and refuses to avail of it he may be cut off by the decree.
Laches is not to be measured as statutory limitations are. There is no necessary estoppel from mere lapse of time where complainant‘s non-action is excusable and has not damaged defendant or caused him to change his position. Townsend v. Vanderwerker, 160 U. S. 186.
In this case the delay in bringing the suit was excusable if not unavoidable; and, as complainant‘s silence did not mislead the stockholders and his inaction did not induce any of them to become parties to the reorganization, laches cannot be imputed to him.
177 Fed. Rep. 804, affirmed.
THE Circuit Court of Appeals for the Ninth Circuit affirmed a decree subjecting the property of the Northern Pacific Railway Company to the payment of a judgment for $71,278 which Joseph H. Boyd had revived against the Cœur D‘Alene Railway and Navigation Company. The record on this appeal is very lengthy and the transactions so overlap that any chronological statement would necessarily be confusing. It will conduce to clearness to refer first to those between the Cœur D‘Alene and the Northern Pacific Railroad and then set out as succinctly as possible the facts connected with the foreclosure of the Northern Pacific Railroad and its purchase by the Northern Pacific Railway.
In 1886 the Cœur D‘Alene Railroad and Navigation
The Cœur D‘Alene Railway and Navigation Company in 1886 built a narrow gauge railroad 33 miles in length. D. C. Corbin was president and controlled 5,100 shares, which constituted a majority of the stock, which had been increased to $1,000,000, and all of which was unpaid.
Corbin secured the adoption of resolutions authorizing the lease and the issuance of the bonds. On September 18, 1888, 5,100 shares of stock were transferred to the Railroad, which entered into possession as lessee October 1, 1888, taking charge of all the matters relating to the Cœur D‘Alene, including its litigation, although Corbin and the other officers did not immediately resign.
The resolution provided for the immediate issuance of $825,000 of bonds, $360,000 of which were to be retained to redeem the outstanding bonds for that amount. The agreement was silent as to what should be done with the remaining $465,000 of bonds, and the parties are at issue as to what use was, in fact, made of them. The Railway insists that the records show that they were delivered by the mortgage trustee on October 29 and 30, 1888, upon the order of Corbin, president, part to him and part to another person. Boyd, however, contends that these bonds, $465,000, or their proceeds were used to pay Corbin for the 5,100 shares of stock sold by him to the Northern Pacific Railroad, while the latter insists that the consideration for the transfer was, as stated in the contract, the railroad‘s guaranteeing the principal and intеrest of
The evidence on this branch of the case is meager. On behalf of the defendant the records showed that on October 29 and 30, 1888, the bonds were turned over on the order of Corbin, president of the Cœur D‘Alene Company. Corbin, who was an old man at the time of taking the testimony in 1907, stated that he received none of the bonds but so much cash; that neither he nor his associates received any benefit from the mortgage, “though I presume it was probably used to pay us. I know we got our money. . . . I do not think we received any bonds, unless possibly we might have received bonds with an agreement with somebody to take them off our hands and pay us the money, because I never had any bonds. . . . If they ever came into my hands at all, they just passed through my hands.”
A witness for the Northern Pacific, who had been its Auditor in 1888, had no personal knowledge of the transaction, but testified that there was nothing on the books of the Northern Pacific which showed that it had ever received the $465,000 of bonds or that it had ever paid anything for this stock. He did not think that the 33 miles of railroad cost $825,000, and supposed that the $465,000 of bonds went to Corbin and his associates. “His rights and so on were worth something.”
In December, 1889, the Railroad obtained, through Corbin, the remaining 4,900 shares of stock in the Cœur D‘Alene, paying therefor $250,000. It changed the road from a narrow to a broad gauge at a cost of $150,000 and extended the line 16 1/2 miles at a cost of $750,000, and, as provided in the mortgage, issued $413,000 of additional bonds, being at the rate of $25,000 per mile. The cost of this extension, change in grade, and other betterments amounted to $910,000, or about $500,000 more than the
The first 21 months after the lease the Cœur D‘Alene‘s net earnings amounted to $176,000, and, as the lease provided that net earnings should be paid as rental, a dividend of 6 per cent. was declared. Thereafter the earnings rapidly decreased and ultimately the books showed a loss. But the Northern Pacific Railroad, in accordance with the terms of the lease, paid the interest on the bonds until it was itself put in the hands of a Receiver in 1893. He failed to pay the interest in 1895, and proceedings were instituted to foreclose the mortgages on the Cœur D‘Alene Company. The property was sold under foreclosure in January, 1899, for $220,000 to the newly organized Northern Pacific Railway Company.
This left nothing for payment of Boyd‘s debt, and he insists that the lease and the diversion of the funds in purchase of Corbin‘s stock made the Railroad responsible for the debts of the Cœur D‘Alene, including his judgment. He further claims that the Railway became liable for the payment of the same debt by virtue of new and independent proceedings now to be stated, under which the Northern Pacific Railway in 1896 acquired the property of the Northern Pacific Railroad.
On August 15, 1893, Winston and others filed in the United States Court for the Eastern District of Wisconsin a creditors’ bill against the Northern Pacific Railroad alleging that it was insolvent, its mortgage bonds amounting to about $140,000,000 and its floating debts to $11,000,000, and praying for the appointment of a receiver to preserve the property as an entirety and to prevent it from being dismembered by separate sales under attachments and other liens. The company owned or controlled 54 subsidiary companies, and main and branch lines 4,700 miles in length. It also owned or was entitled to receive about 40,000,000 acres under land grants. There
Shortly after the filing of the creditors’ bill a suit was brought in the same court by the trustees to foreclose thеse latter mortgages. The cases were consolidated and the receivership continued under the consolidated causes. The Railroad demurred. As the road ran through several States, there were many questions of conflicting jurisdiction which were not settled until January 31, 1896, so that except for administrative orders, no steps were taken in the litigation proper.
The representatives of the stockholders intended to resist the foreclosure, and while recognizing the superior claim of the bonds, advised that “if properly protected, stockholders can secure equitable terms in any reorganization.” There were also representatives of the bondholders, and ultimately the two interests agreed upon a plan, the terms of which were stated by the Reorganization Committee which, March 16, 1896, issued a circular to “the holders of bonds and stocks issued or guaranteed by the Northern Pacific Railroad.” This circular outlined a plan under which all of the stocks and bonds of the Railroad were to be transferred to a new company (the present Northern Pacific Railway Company) which was to purchase the property of the Railroad, issue new bonds, part of which were to be sold to raise money with which to discharge Receivers’ Certificates, purchase needed equipment and make necessary betterments. The balance was to be issued in exchange for the bonds of the old company.
The plan also contemplated the issuance of preferred and common stock, part to be used in paying debts of the subsidiary companies, for which the Northern Pacific
The records showing the cost of the original construction were not accessible, and in some particulars, the costs of the main and subsidiary lines appear to have been combined. But there is testimony tending to show that the cost of the railroad property, subject to the mortgage, was about $241,000,000. What was the value of the 40,000,000 acrеs of land is not stated. For several years prior to the receivership the road‘s net earnings had varied between $10,000,000 and, $4,449,000. Its fixed charges amounted to $11,000,000—showing an annual deficit of about $5,000,000. The bonds, unpaid interest and Receivers’ Certificates aggregated at date of sale $157,000,000. The unsecured debts proved before the master amounted to about $15,200,000. The reorganization contemplated an issue of new bonds for $190,000,000 at lower rates of interest, $75,000,000 of preferred stock, $80,000,000 of common stock—a total in bonds and stock of $345,000,000.
The reorganization agreement contained a statement that the property intended to be purchased was mutually agreed to be of the value of $345,000,000, payable in the stocks and bonds as above described.
The plan of reorganization was accepted, and on April 27, 1896, the decree of foreclosure was entered and the property ordered to be sold, on a date later fixed for July 25, 1896.
On July 22, 1896, Paton and others, holding contingent and unsecured claims for $5,500,000 against the Northern Pacific R. R., filed a Bill, in the same court that had jurisdiction of the Creditors’ Bill and Foreclosure suit, charging that the sale was the result of a conspiracy between bondholders and stockholders to exclude general creditors, and to award to stockholders in the old company rights in the new which were valuable and could not be legally reserved for the stockholders until first offered to and declined by the general creditors. It prayed that the decree of foreclosure should be opened; that the court would formulate a just and fair plan for distribution, and that the sale be enjoined. This was later modified so as to permit the sale to proceed, but asking an injunction to prevent the distribution of the proceeds and securities. The court held that the company was insolvent; that the assets were insufficient to pay the mortgage debts; that practical operation had demonstrated that the net earnings would not pay the fixed charges; that there was no equity in the property out of which unsecured creditors could be paid and no reason existed why the stockholders could not go into a reorganization plan whereby they would become stockholders in the new company, if it should become the purchaser. The prayer for injunction was denied. No appeal was taken.
On July 25 the railroad property was sold at public outcry to the newly organized Railway Company at a price representing $61,500,000, or $86,000,000 less than the secured debts. On July 27 the sale was reported to the
In addition to the property covered by the mortgage, the Northern Pacific Railroad owned large quantities of land which were not encumbered, and in May, 1896, the Farmers’ Loan and Trust Company filed its Supplemental Bill describing this unmortgaged property and alleging that various intervening creditors had obtained judgments against the Railroad Company, some of which had been assigned to the trust compаny. It prayed that these lands of the Railroad should be sold and the proceeds applied to the satisfaction of the unsecured claims. On the same day that this Supplemental Bill was filed, the Railroad Company and other parties to the consolidated causes answered, the court adjudged that the complainant was entitled to the decree asked for, and appointed a Receiver of the property.
It was not, however, until April 27, 1899, that the sale was ordered. The property was thereupon sold to the Northern Pacific Railway for $1,623,000. The parties stipulated that the sale should be confirmed and on the same day in September, 1899, this was done.
Out of the proceeds of this unmortgaged land a dividend of $108,000 was paid on the Cœur D‘Alene bonds held by the Northern Pacific Railway. The Northern Pacific Railway had a claim against the old Railroad of $86,000,000 for deficiency between the bid at foreclosure sale and
But during these years the litigation between Spaulding and the Cœur D‘Alene to recover judgment for work done; between Boyd and Spaulding over the title to the judgment, and between Boyd and the Cœur D‘Alene to revive the judgment had been in progress and did not terminate until 1905, when the judgment was revived. When the appeal was dismissed Boyd brought this bill in equity against the Northern Pacific Railroad Company and the Northern Pacific Railway Company, insisting that the Railroad was liable for this debt of the Cœur D‘Alene and that the Railway was in turn liable for this debt of the Railroad. There was no demurrer, but both answered and much evidence was taken. A decree in favor of Boyd and against the Railway was made a lien on the property purchased, subject, however, to the mortgages placed thereon. The decree was affirmed by the Circuit Court of Appeals (170 Fed. Rep. 779; 177 Fed. Rep. 804), and both defendants appealed. In this court a brief was filed by an amicus curiae, insisting that the complainants’ remedy was against stockholders of the Northern Pacific Railroad and not against the Railway Company or its property.
Mr. Francis Lynde Stetson and Mr. Charles Donnelly, with whom Mr. Charles W. Bunn was on the brief, for appellant:
The complainant never has been a creditor of the Northern Pacific Railroad Company, nor as against that company, has he ever possessed any rights either in law or in equity.
There never was any misappropriation of assets of the Cœur D‘Alene Company by the Northern Pacific Railroad Company, but even if so, the misappropriation by one man
The Railroad Company never contracted to pay the debt on which the judgment is based.
The contention that the Cœur D‘Alene stock was not paid up, and that the Railroad Company by the purchase of that stock in 1888 became liable to the extent of the unpaid stock subscription cannot be sustained.
The common-law rule is, that creditors of a corporation, who deal with it in reliance upon its representation that its authorized capital is fully paid, may if the stock has been issued in fraud of creditors without being fully paid, collect their debts to the extent of unpaid subscriptions from the original subscribers to the stock or from transferees with notice. Cook on Corporations, §§ 42, 49; Morawetz on Corporations, §§ 821, 823; Clark & Marshall on Corporations, §§ 791 et seq.
The Railroad Company cannot be held answerable as stockholder for the debts of the Cœur D‘Alene Company because no reliance was ever placed on the stock subscriptions. Complainant has not proved that the stock wаs not paid up. He has only alleged it.
As to the contention that the Railroad Company fraudulently diverted the earnings of the Cœur D‘Alene property, complainant has made no attempt anywhere to support that charge and it may be treated as abandoned.
Even if complainant were entitled to judgment against the Railroad Company, his rights would end there. He is not entitled to collect his judgment out of the property which in 1896 passed to the Railway Company, because the judicial proceedings, by which that property passed,
The transaction was as free from “fraud in law” as confessedly it was free from fraud in fact. Only by the plan adopted, or by one substantially similar, could this hopelessly insolvent property have been placed upon a sound financial basis. The reorganization of insolvent railroad properties would be an impossibility if honеst, reasonable plans such as this were to be condemned, and in fact this court never has condemned them.
This branch of the defense rests on two principles, applicable in the absence of actual fraud: where nothing is taken from the general creditors, they have no valid ground of complaint; in advance of foreclosure a mortgagee may lawfully agree to sell to the mortgagor, or to anyone connected in interest with the mortgagor, a share in the property purchased, provided such sale be for a fair price and in good faith.
The mortgagee in good faith, may lawfully agree to sell to the mortgagor. Wicker v. Hoppock, 6 Wall. 94, 98; Bame v. Drew, 4 Denio, 287; Shoemaker v. Katz, 74 Wisconsin, 374; Central Trust Co. v. U. S. Rolling Stock Co., 56 Fed Rep. 5, 7. And see opinion in the Paton Case, 85 Fed. Rep. 838; The Monon Case, 174 U. S. 674; Wenger v. Railway Co., 114 Fed. Rep. 34; Dickerman v. Northern Trust Co., 176 U. S. 181, 189; Pennsylvania Transp. Co.‘s Appeal, 101 Pa. St. 576; Kurtz v. Phil. & R. R. R. Co., 187 Pa. St. 59. See also McArdell v. Olcott, 104 App. Div, 283; aff‘d 189 N. Y. 368, 393.
The points of distinction are independent of the decision against the complainant‘s contention pronounced in the Paton Case.
Treating the question broadly, it is to be remembered that between 1892 and 1900, a large number of the railroad companies of the United States, by their necessities, were forced to submit to foreclosure. They have been succeeded by a system of vigorous, solvent, prosperous and useful corporations. The change, оbviously to the public advantage, was the result of reorganizations so-called, of which almost all were based upon plans similar to that involved in the present case. The principle of such plans was that financial necessities of the physical properties could be met only by sufficient and prompt provision of additional cash capital for the new corporation; and that for prompt and sufficient cash provision the most available source was and would be those who already were acquainted with the physical property and would have faith in its future possibilities. Manifestly these were, and must continue to be, those who had been interested in the old company, either as bondholders or stockholders, and not necessarily or probably those who were its general creditors.
Prior to the decree in the present suit, no court has held to be fraudulent the reorganization of an insolvent corporation under a plan which permitted interests in the new company to be acquired by stockholders of the old company only upon making substantial money payments.
There is, now, presented for review by this court, a conclusion of law never before reached by any court upon like facts. The importance of the issue to the holders of
Even though the court should be of opinion that in this reorganization there was such participation by stockholders as should have invalidated the proceedings in the consolidated suit, still the court having charge of those proceedings adjudged otherwise; and that judgment, sustained after consideration of the specific objections here relied on, and decreeing the Railway Company to be entitled to the property, is binding on all the world, including the complainant.
The identical objections raised by complainants, based upon this identical plan of reorganization, and urged against these identical foreclosures of the mortgages on the property of the Northern Pacific Railroad Company, were made and were urged by eminent counsel to the court which for nearly three years had been administering the property; that court decided them to be unsound; and having so decided them to be unsound, it proceeded with the foreclosure and sale of the property and it rendered decrees and orders upon which we now rely. Paton v. Nor. Pac. R. R. Co., 85 Fed. Rep. 838.
One who objects seasonably to the validity of a foreclosure sale upon the ground that the price paid was inadequate, must accompany his objection with an offer of some responsible person to pay more. Jones on Mortgages, § 1641; Jones on Corporate Bonds and Mortgages, § 662. It applies as well in railroad foreclosure sales as in other foreclosure sales. Turner v. Indianapolis &c. Ry. Co., 8 Biss. 380; S. C., Fed. Cas. No. 14259. Had complainant appeared in the court at Milwaukee and protested against the confirmation of this sale on the ground that the price paid was inadequate, the court would not have listened to his objections unless accompanied by an offer to pay more. A fortiori the court will not listen to them now unless there is some showing that a higher price
This very question as to the fraudulent character of the reorganization had been passed on by the court before it rendered the decrees of foreclosure and sale; its decision in the Paton Case, whether or not a bar, must be regarded by every other court. Fauntleroy v. Lum, 210 U. S: 230, 237; 2 Freeman on Judgments, § 486.
Boyd was a party to the Paton proceeding in the only possible way in which he could have been one except by his own direct intervention, for not until after judgment was rendered in the foreclosure suits was he a judgment creditor even of the Cœur D‘Alene Company; and not until later did he even assert himself to be a creditor of the Northern Pacific Railroad Company. 1 Daniel‘s Chanc. Pl. & Pr. 280, 5th. Amer. ed.; Story Eq. Pl., §§ 156, 351.
The doctrine of lis pendens is an ancient one. It was laid down by Lord Bacon in one of his ordinances. Murray v. Ballau, 1 Johns. Ch. 577. See also Tilton v. Cofield, 93 U. S. 163; Ex parte Railroad Co., 95 U. S. 221; Stout v. Lye, 103 U. S. 66; Hollins v. Brierfield Coal Co., 150 U. S. 371; Herring v. Railway Co., 105 N. Y. 340; Bronson v. Railroad Co., 2 Black, 524.
Complainant has been guilty of such laches as deprives him of any right now to call upon a court of equity to enforce a claim matured in 1886 and now more than quadrupled by interest charges.
This case fairly illustrates the gross injustice of permitting a suitor to assert a liability against a defendant many years after the event, when the imputation rests upon conjecture and when the lapse of time has impaired recollection of the transactions and obscured the details. Under such circumstances it has been consistently held by courts of equity, and by none more forcibly than by this
Such rule of diligence will rigidly be enforced in equity against a bondholder who fails promptly to prosecute a claim to share in the proceeds of a corporate reorganization from which he has been excluded, even though otherwise he would be entitled to relief. Alsop v. Riker, 155 U. S. 448, 459; Felix. v. Patrick, 145 U. S. 317; 329.
As to the applicability of laches when the property is of a speculative character, see Starkweather v. Jenner, 216 U. S. 524; Rothschild v. Memphis & Co. R. Co., 113 Fed. Rep. 476; Leavenworth v. Chicago Ry. Co., 134 U. S. 688, 709; Graham v. Boston, H. & E. R. R. Co., 118 U. S. 161.
Mr. George Turner and Mr. R. L. Edmiston, for appellee.
Mr. Samuel W. Moore, by leave of the court, filed a brief as amicus curiae.
MR. JUSTICE LAMAR, after making the foregoing statement, delivered the opinion of the court.
Boyd‘s judgment against the Cœur 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 the meantime, all of the property of the Cœur 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 Cœur 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 Cœur 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 Cœur D‘Alene issue $825,000 of bonds, $360,000 of which were to be retained to retire those then outstanding. He also agreеd to cause the Cœur 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 bonds. The contract further recited that in consideration of the execution of the lease and guaranty Corbin would transfer to the Northern Pacific 5,100 fully paid and non-assessable shares of the capital stock of the Cœur D‘Alene. The agreement was promptly carried into effect. A resolution was passed by the directors of the Cœur 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 afterwards 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 Cœur 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 wаs 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 enforcible 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 courts 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 from 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 cannot 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 еstablished 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 that 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 agreement contained no provisiоn 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 position 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-ville Ry., 174 U. S. 674, 683, 684, where “assuming that foreclosure proceedings may be carried on to some extent at least in the interests and for the benefit of both mortgagee and mortgagor (that is, bondholder and stockholder)” the court said that “no such proceedings can be rightfully carried to consummation which recognize and preserve any interest in the stockholders without also recognizing and preserving the interests, not merely of the mortgagee, but of every creditor of the corporation. . . . Any arrangement of the parties by which the subordinate rights and interests of the stockholders are attempted to be secured at the expense of the prior rights of either class of creditors, comes within judicial denunciation.”
6. The Railway seeks to distinguish that case from this, insisting that even if the stockholders’ participation in 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 before the sale in 1896 and dismissed the Bill of Paton, an unsecured creditor, when he mаde 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 could 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 Paton claim was purchased by the Railway. But inasmuch as Boyd was not a party to the record that decree was not binding upon him as res adjudicata, and the opinion not being controlling authority, cannot be followed in view of the principles declared in Chicago, R. I. & P. R. R. v. Howard, 7 Wall. 392; Louisville Trust Co. v. Louisville R. R., 174 U. S. 674.
In saying that there was nothing for unsecured creditors the argument assumes the very fact which the law con-
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 according 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 Paton cаse, established that the property was worth less than the encumbrances of $157,000,000, and hence that Boyd is no 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 vаlue which authorized the issuance of $144,000,000 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 left 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 court 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 continuоusly 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 time would prevent any creditor
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 sрite of diligent effort to put himself in the position of a judgment creditor of the Cœur 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 appeal (1913). The more important chapters of the different cases, with lawsuits within lawsuits, are reported in 5 Idaho, 528; 6 Idaho, 97; 6 Idaho, 638; 85 Fed. Rep. 838; 93 Fed. Rep. 280; 174 U. S. 801; 170 Fed. Rep. 779; 177 Fed. Rep. 804. They involve a series of independent transactions, in different courts, between Spaulding and the Cœur D‘Alene Company; Boyd and Spaulding; Boyd and the Cœur D‘Alene Company; the Northern Pacific Railroad and the Cœur D‘Alene, and finally the foreclosure of the Northern Pacific Railroad and its purchase by the Northern Pacific Railway.
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 proceedings was occasioned by the Railway Company itself, since it, as the purchaser of the Cœur D‘Alene property, resisted his attempt to revive 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 any thing 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 decree of the Circuit Court of Appeals is
Affirmed.
LURTON, J., WHITE, Ch. J., HOLMES, J., VAN DEVANTER, J., dis‘nt‘g.
Dissenting opinion by MR. JUSTICE LURTON, in which concur THE CHIEF JUSTICE, MR. JUSTICE HOLMES and MR. JUSTICE VAN DEVANTER.
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 common 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 I agree that every plan of reorganization which in any way includes stockholders of the reorganized company is for that reason alone to be regarded as an illegal withholding from creditors of corporate property which should go to the payment of corporate debts. That corporate property must 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 reorganization agreement and is not affected by actual consequences to creditors.
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 yеars, and asserts the right 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., 174 U. S. 674, 683, “railroad mortgages, or trust deeds, are ordinarily so large in amount that on foreclosure thereof only the mortgagees, or their representatives, can be considered as probable purchasers.” Hence it was that the upset priсe must be fixed at such a sum as was reasonably within the range of any bidding which the property might be started at by the only probable bidders. The case last cited goes to the very verge of the law, but in that case the denunciation of such a plan of reorganization goes no farther than to condemn any arrangement by which the subordinate rights of stockholders are saved at the expense of creditors. That was not done here. The sale price was about eighty million dollars less than the lien claims entitled to be paid before creditors of the class to which Boyd belongs. Many of his class were actual parties to the consolidated cause in which the reorganiza-
“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.
Although his bonds had not then matured, he could have taken steps to prevent any transfer of the property that would impair his equitable rights in it or instituted proper judicial proceedings, of which all would be required to take notice, to have his interest in the property adjudicated. He allowed the trust to be wound up, and postponed any appeal to a court of equity based upon an illegal breach of trust by the trustees, until six out of the seven original trustees had died.”
In Foster v. Mansfield &c. Rd., 146 U. S. 88, 99, 100, it was said:
“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 sale invalid as against him. The case is without merit, and the bill should have been dismissed.
THE CHIEF JUSTICE, MR. JUSTICE HOLMES and MR. JUSTICE VAN DEVANTER concur in this dissent.