| Pa. | Jun 2, 1874
delivered the opinion of the court, July 2d 1874.
The first subject for consideration is the fund in court. What does it represent? The mortgage under which the sale was made, embraced the entire railroad and all its land, property, franchises, sidings, workshops, stations, depots, machinery, rolling stock, and every thing of a tangible nature, then owned or to be thereafter acquired, together with all the corporate rights, privileges, franchises, easements and liberties, then existing or thereafter to be acquired. Thus not only the entire property, real and personal of the corporation, but even its capacity to make other property by its railroad and franchises, passed to the purchasers. By the terms of the Act of 8th April 1861, 1 Brightly 290 pi., 49, these purchasers became “ vested with all the right, title, interest, property, possession, claim, and demand in law and equity of, in and to such railroad, with its appertenances, and with all the rights, powers, immunities, privileges and franchises of the corporation.”
The fund in court, therefore, represents all that was tangible or valuable, belonging to the corporation, leaving it a denuded trunk, possessed of those powers only essential to the settlement of its
' It is to this fund, the jurisdiction of this court has attached, and hence the necessity of a full and entire distribution of. the fund among all the creditors entitled to it. Jurisdiction having attached, equity comprehends within its grasp all incidental matters necessary to enable it to make a full and final distribution, and, therefore, to terminate litigation, while it affords a perfect remedy : Souder’s Appeal, 7 P. F. Smith 502. Hence, in Kelly’s Appeal, 4 Harris 59, in a question of distribution, involving partnership property and individual creditors, Judge Bell said: “ The objection that the court or auditor had no power to state an account between the partners, is met by the answer, that the distribution of the proceeds of sheriff’s sales is to be determined according to law and equity, and it cannot be questioned that in such a case a chancellor from necessity would direct an account to be taken.” See also Overholt’s Appeal, 2 Jones 222. The doctrine is precisely the same in regard to distribution among creditors and others, in the Orphans’ Court. “ The power,” says Lewis, C. J., “ to decide all questions necessary to a proper distribution of the fund, follows the power of distribution, and vests in the Orphans’ Court as a necessary incident to the jurisdiction:” Bull’s Appeal, 12 Harris 288; Kittera’s Estate, 5 Id. 416. He states this further proposition. “ The right of each (claimant) to be heard in support of his claim, and in opposition to every claimant who interferes with it, is necessarily involved in the right to demand payment out of the fund.” See also Dundas’ Appeal, 23 P. F. Smith 474. It was, therefore, a grave error, on part of the master, instead of distributing the entire fund among the several claimants according to their rights, to award to the counsel of the Farmers’ National Bank of Reading, the Reading Savings Bank, and Bushong & Brother, the sum of $109,771.24, representing ninety-seven second mortgage bonds, and their overdue coupons, and a like error to award to the Kensington National Bank $73,536.57, representing sixty-five second mortgage bonds, and their overdue coupons. He should have awarded to the several parties named, the actual amount of their real debt, with interest to the day of sale, and the excess should have been distributed among the other creditors according to their rights. The effect of léaving this excess in the hands of these creditors, who held the bonds as mere cellaterals, was to ignore both the jurisdiction and the duty of the court, to make distribution of the entire fund in its hands according to law and equity. The error of the master was, in assuming that Richmond L. Jones would be entitled to this excess which would pass into his hands from these creditors, who had received the bonds through him, as collateral for the company’s debts. But the right of Mr. Jones to participate in the fund against other
This brings us to consider the claim of Mr. Ahl to eighty thousand dollars for purchase-money, and his right to receive the same out of the fund in court which was produced by a sale under the second mortgage of $200,000. The battle before the master appears to have been fought over the question of the delivery of eighty bonds, from No. 1 to No. 80 inclusive, set apart by the railroad company for Mr. Ahl, and sent to Kennedy & Stewart, attorneys of the company, for delivery. These bonds were not delivered to Ahl, and were recalled by the company. On this ground the master thought that Mr. Ahl was not entitled to participate in the fund. But he misconceived Mr. Ahl’s claim. It did not rest on a sale and delivery of so many bonds, but on his prior right to so much money as these securities represented. It is because in equity he was by the terms of his antecedeut contract, the owner of so much of the mortgage which was raised under the terms of that contract to secure payment to him. of the remaining $80,000 purchase-money. He was therefore entitled to a place in the distribution of the fund produced by that mortgage unless a higher equity in third parties has supervened. A short statement will exhibit the nature and the equity of his claim. He was the vendor to the company of the property from which the fund has been produced. By the terms of his first agreement of sale, December 7th 1869, his deed to the railroad company was held in escrow in the hands of a third person as a security for their compliance with the terms of sale. The company found it necessary for their purpose to have the title absolutely in themselves, and came to a new arrangement with Mr. Ahl, on the 4th of June 1870, whereby he released his title to them and they agreed to pay him $50,000 in cash, instead of the judgment of $50,000 in the first agreement, and to deliver him $50,000 in first mortgage bonds and $80,000 in second mortgage bonds, in lieu of the $130,000 of stock and of $130,000 of bonds in the first agreement.
By the terms of the agreement of the 4th of June, the company were bound, within sixty days, to execute a second mortgage, not to exceed in amount $200,000, and to deliver to Ahl eighty one thousand dollar bonds, secured by his mortgage. This mortgage was not a thing in esse for which the parties were bargaining, but it was to be created as the means of securing the sum of the unpaid purchase-money. The agreement of the 4th of June 1870, was, therefore, to the extent of the $80,000 of purchase-money, a deed to lead the use of the mortgage and not a mere agreement, for a purchase. As soon as the mortgage was executed, Ahl’s right attached to it in equity by virtue of the prior agreement to lead its use, as to so much of it. The money represented by this por
Hence the resolutions of the company of the 26th of December 1870 and 27th May 1871, under which the master finds that the bonds went into the hands of R. L. Jones, were ineffectual to transfer title to him, unless he had been a bond, fide purchaser for value, without notice of the rights of Mr. Ahl. But unfortunately for Mr. Jones, on the question of notice, there is not a shadow of doubt. He was himself the party, as attorney in fact, for the company who made the agreement of the 4th of June 1870, and signed it as such attorney. He knew precisely what the rights of Mr. Ahl were. ° W. H. Kemble’s testimony also brings home notice to him, and in addition wé have the significant fact that the treasurer recalled the bonds from Kennedy & .Stewart, by letter of the 15th of August 1871, and on the 23d of the same month they were handed over to Jones, and the further fact, that Jones was the, factotum of the company. These bonds are next found in the possession of the Farmers’ Bank of Reading, the Reading Savings Bank, and Bushong & Brother, placed there by R. L. Jones, as collaterals for the security of overdue debts against the company, and Jones and others. In the present state of the law, it must be conceded that railroad bonds, such as these, pass by delivery, and are protected in the hands of boná fide holders for value without notice, in the same manner as negotiable paper. Whether these Reading parties are such boná fide holders for value, is not altogether clear. The master thought there was a new consideration,
The decree of the court of Nisi Prius is reversed, and it is ordered that the case be referred to another master, with leave to take further testimony, if required by the parties — the testimony on all sides to be closed by the 1st day of November next, and report to be made on or before the first Monday of January 1875. The master to report the facts and make a new distribution of the whole fund, according to the principles set forth in the foregoing opinion; and Greorge Junkin, Esq., is hereby appointed examiner and master for the purpose.
And it is further ordered, that the master inquire into and report the facts in relation to the two judgments in the name of Amos L. Boyer, for use, aggregating $65,789.64; that is to say, whether the money advanced by the assignees of Boyer was by way of loan
Mr. Junkin sat on the 4th of August 1874, and subsequently. A number of stockholders were represented at the various meetings ; there were laid before the master judgments against the company for land damages, viz.: Abraham Keefer, December 18th 1872, for $1500; David Teeter, April 18th 1878, for $1200; Jacob Friese, November 3d 1873, for $1712.75; also judgments, W. & A. Burgess, January 25th 1873, for $6000 on a note; James Giles, April 26th 1873, for $606.89 on an acceptance; and several other claims which were on simple contract.
Besides the facts found by the former master, it further appeared by the report of Mr. Junkin as follows:—
At a meeting of the stockholders, March 4th 1869, after the election of the first board of directors, a general resolution was passed giving the directors authority to do everything that the company were authorized to do. Jones did not become an officer because he was to have the contract for building the road, nor Ahl, because he was to sell his land to the company. The contract with Jones to build the road was made without any survey having been made; Jones did not expect to do it, but to sublet it, which he afterwards did.
On the 12th of March, John Evans, the confidential clerk and man of business of Ahl, subscribed for ten shares and was elected a director.
The president and the four directors were not expected to pay for their stock, nor did they ever pay for it; they were elected to represent Jones and Ahl, and carry out their plans. The president and two directors, who resided in Reading and held forty shares of the stock, gave their checks for $4000, the amount of their subscriptions; these checks were afterwards returned to them, and the amount charged as expenses incident to organization. About March 16th, no definite arrangement having then been made for the purchase of the land, public meetings were held at Mercersburg and elsewhere in the vicinity of the route of the road, for the purpose of inducing .subscriptions. Jones spoke at these meetings, and, without asking the people to subscribe, his statements were such as to induce them, to believe that he and those acting with him were able to construct the road. Subscriptions to the stock exceeding $125,000 were procured by Ahl and his asso
On the. 26th of April 1869, Ahl made a deed to Jones for one-half the land on which the company was to be organized, Jones giving him a bond for $50,000, which was to be paid as Jones should receive it from the company under his foregoing contract, and also $10,000 of the stock. Jones insisted on this conveyance as a guaranty 'that the enterprise would be carried on, to satisfy those who were to assist him in money matters. Afterwards the supplement changing the name of the company was passed, and Jones set the engineers to work to prepare for building the road;, these and other expenses Jones paid, the company having no funds, as the subscriptions by outside parties were upon the condition that the road should be constructed to Mercersburg.
Up to the middle of August 1869, Jones and Ahl acted together in harmony; then Ahl by letter complained to Jones of the slow progress of-the work, Jones’s reply showed that the delay was for want of money, and that the understanding was that the $50,000 cash payment for the land was to be made from outside subscriptions for stock. On 24th August the directors resolved to call in the stock subscriptions. Up to this time there had been no absolute agreement as to the conveyance of the land ; other land had been articled for and leases to Jones and Ahl procured. Under the agreement of December 7th 1869, referred to in the first master’s report, the company was not to issue in the aggregate more than $855,000 in bonds, and none of them were to have a claim or lien paramount to the 130 bonds to be issued to Ahl; at the same time Jones gave to Ahl a written agreement that the company should not enter the deed of December 7th 1869 held by Evans in escrow, for record until after two weeks’ notice to Ahl, and six tracts of the land were to be reconveyed to Ahl; the deed to Jones of April 26th 1869 for half the land was handed-back to Jones, the furnace contract abandoned, and the bond of Jones for $50,000 was cancelled. On December 14th 1869 the company executed an ordinary judgment-bond to Ahl for $130,000, payable with seven per cent, interest on the 14th of December 1877, and reconveyed to Ahl the six tracts; this left in the company about 3690 acres. On the 24th of December 1869 the directors instructed the treasurer to pay R. L. Jones $10,000, “in repayment of money advanced by him from time to time to the company, and for his expenses incurred in the company’s service.”
On the 20th of January 1870 Ahl’s deed was delivered absolutely to the company, and the $130,000 bond, the stock, and the deed for the six tracts, delivered to Ahl. He entered judgment
About February 19th 1870, the St. Charles Iron Company was incorporated; there were seven corporators; stock to the amount of $100,000 was subscribed, but none was ever paid for. Most of the corporators were in some way connected with the Southern Pennsylvania Company. R. L. Jones was the president. George Rice, one of the directors, was one of the sub-contractors of Jones for the building of the Southern Pennsylvánia road. The “ improvements” contemplated by the company were building a railroad from the road of the Southern Pennsylvania Company through their land to their ore-banks, and the various apparatus to prepare the ore for market. George Rice was to make these improvements for $75,000. .He was to pay for them, the other stockholders to be credited on their stock for this amount, Rice to get $25,000 of stock for nothing; and to be reimbursed for his outlay by being permitted to mine a certain quantity of ore. No money was ever paid into the treasury; no contract was made by Rice with the St. Charles Company,'but the arrangement was by an “understanding” between him and the officers of the Southern Pennsylvania Company. On the 19th of November 1870, the two .companies made a contract by which the St. Charles Company was to mine and prepare for the market, iron-ore not exceeding 20,000 tons per month, and deliver it on the Southern Pennsylvania Company’s road, for which that company were to pay them $1.50 per ton; the St. Charles to have the right also to mine for their own furnaces at fifty cents per ton. Rice commenced the improvements in the winter of 1871-1872. On the 5th of January 1871, Jones sold twenty-five of his seventy-five second mortgage bonds to George Rice, and on the 14th of March 1871, the remaining fifty bonds were issued to Jones.
At a meeting of the directors of ■ the Southern Pennsylvania Company, January 28th 1871, one item of the treasurer’s report was:—
“ $1000 second mortgage bonds for D. Y. Ahl, nowin the hands of Kennedy & Stewart, $80,000.”
The treasurer’s report was accepted and approved.
When McCarty and Jones, on the 1st of April 1871, went to take possession of the furnace property, Ahl refused to surrender it, saying that he had not been paid for the property and he intended to hold it. Jones replied that he had been paid, the bonds
A certiorari to the justice’s proceedings was issued. One of the exceptions to the proceedings, was that the relation of landlord and tenant did not exist. The certiorari was still undisposed of. McCarty and Jones were afterwards convicted in the Quarter Sessions of forcible entry.
The work on the railroad continued to progress; the bonds and stock were issued by Jones on his contract; passed away by him to others; the coupons became due; engineering expenses were to be met, and money to be raised for these matters. “Jones was in fact the company; the directors from the first had been put there by him and Ahl, and all the details of the business and the acts of the company had been prepared by him, and ratified by the directors as and when he requested it.”
When Jones was seeking for money to pay the matters just mentioned, he applied to the Farmers’ Bank of Reading, which was one of the state treasurer’s depositories. The ofiicers of the bank said they were not in funds to accommodate him, but would if they had funds. Jones then requested the state treasurer to deposit funds there; he did so. It was afterwards agreed with the treasurer that he, the treasurer, should have some of the corporation bonds ; by his direction 100,000 of the second mortgage bonds were, issued to C. L. Magee for him, “ as commission on sundry temporary loans.” These bonds are those claimed by the Allegheny Bank.
On the 27th of May 187.1, the president was authorized to execute an instrument “for securing the payment to C. T. Yerkes Jr., of a certain sum of money, being the amount of certain bonds which said company have agreed to purchase from said Yerkes on July 22d 1871, and also a warrant of attorney for confession of judgment in his favor in case of non-payment by the company.” This was but a mode of covering usury for the loan of money. The loan had been made'by Yerkes to Jones on notes, with company second mortgage bonds as collateral. Yerkes afterwmrds borrowed money from the Kensington Bank and gave the notes and bonds as part of the collateral security for the loan. Yerkes could not state the rate of discount which he charged Jones, but it “ was more likely over than under one per cent a month.”
Jones, on March 11th 1871, obtained on his note for $30,000 to his own order a discount from the People’s Bank of Philadelphia. The proceeds were used by him for the company. As this note approached maturity, June 12th 1871, the bank discounted the
Isaac Althouse discounted the company’s note, dated October 16th 1871, for $15,120, payable in four months, to the order of Jones, endorsed by him, McCarty and J. G. Jones, and guarantied by Bushong & Brother. Bushong & Brother took up this note on their guaranty, and continued-to hold it. Jones had his own note for $15,000, dated October 5th 1871, with McCarty’s endorsement, discounted at the Farmers’ Bank of Reading. A company’s note, dated October 17th 1871, endorsed by him, for $5000, and a similar one for $2667.07, were .discounted by the Reading Savings Bank. Jones’s own note for $5333.33, dated October 31st 1871, was discounted by Bushong & Brother; it was secured by his judgment bond for the same amount to Baer, their counsel, who at once assigned it to them. The proceeds of these notes were $40,002.40, and were applied to take up the note in the People’s Bank, Jones had his own note of September 17th 1871, for $15,000, discounted by the Farmers’ Bank of Reading, and applied the proceeds to use of the company. To secure these parties McCarty and Jones executed two judgment bonds to H. H. Muhlenburg, as trustee for them; one was for $35,197.77 and the other for $52,850; judgments were not entered on these bonds.
In relation to the return of the $80,000 of second mortgage bonds, and the bonds held by Keim, Mr. Junkin found substantially as the first master.
Jones borrowed from Yerkes, as before stated, on two notes drawn by McCarty and J. Glancy Jones, endorsed by him, and amounting together to $33,881.53; as collateral security he deposited sixty-five of the company’s second mortgage bonds. Yerkes passed these notes and bonds to the Kensington Bank as security for a loan made by that bank to him. In thus receiving the bonds the bank had “no knowledge of any kind affecting the integrity of these bonds.” When the notes matured, October 26th and 27th 1871, they were renewed by the bank taking the company’s notes for $25,000 and $8000; these notes were renewed by notes falling due about Jannary 1st 1872, the same collaterals remaining with the bank; $881.53, the difference between these notes and the original notes, and also the discounts on renewals, were paid by Jones. All the money received by him from Yerkes was used in payment of the company’s debts.
To meet maturing coupons of the company, Jones procured' Bushong & Brother to discount his note for $22,600; the coupons
On the 24th of February 1872, the directors authorized the treasurer to advance money to the St. Charles Company as the president might direct.
About January 22d 1872, the notes of September and October 1871 not having been paid, negotiations were had between the Reading hanks, Bushong & Brother, the Kensington Bank, their ■respective counsel, and the endorsers of the notes. The makers and endorsers wanted time. Jones then had the eighty bonds which had been set aside for Ahl, and seventeen of the two hundred which remained undisposed of; these he proposed to hand over to the banks. Mr. Baer, who was of counsel with the Reading banks and the Bushongs, asked him for his authority to dispose of them; he then produced certified copies of the resolutions of April 22d and May 27th 1871, authorizing him to use the bonds for raising money for the' use of the company. Neither Mr. Baer nor any of those whom he represented had any knowledge of the transactions with Ahl in relation to the eighty bonds. All the parties but the Kensington Bank then entered into.an agreement by which McCarty, J. Gr. Jones and R. L. Jones, parties of second part, were to confess a judgment to H. H. Muhlenberg in trust for these creditors pro ratfi; the creditors to hold the collaterals they already had; the second mortgage bonds to be given to the trustee at seventy-five per cent, as collateral to secure the indebtedness and to deliver to any creditor who might desire bonds at seventy-five per cent, in payment of his debt; to pay to trustee twenty-five cents per ton for one-half the iron-ore mined on the company’s lands ; the creditors to have the right to sell the bonds in payment of the claims, but not for less than seventy-five per cent, during the first year; no execution nor final process of any kind to be issued for three years, unless upon a statement, which the trustee had the right to demand at the end of the year, it should be found that the security had been impaired, when on thirty days’ notice he could cancel the agreement and sell the collaterals; during the three years none of the real estate and other property of the parties of the second part should be disposed of by the company, or converted except for expenses or in discharge of liens, and then the surplus to go to the trustee, and any violation of the preceding clause to work a forfeiture of the agreement, and the creditors might proceed at once to sell the securities and collect the money due. To the agreement was appended a statement of the property •of the several parties. The Kensington Bank thought best not to join in the foregoing agreement, but the president assured the
The account of Jones in the ledger of the Southern Pennsylvania Company, showed a balance in his favor of $66,247.72. His credits included the amounts claimed by the Reading banks and Bushong Brothers. Amongst the credits were these items also : “1871, March 2d. For money advanced and expenses incurred by him to December 24th 1869, as per resolution of the directors of that date for $10,000. Of this amount $2781.56 cash advanced to the company to said date, December 24th 1869, has already been passed to his credit, leaving a balance due him for this transaction .........$7218.44
“July 22d. By bills payable for paying company’s note to H. J. Eckert, paid this day ...... $5000
“ 1872, April 24th. By contingent expenses for order received from R. L. Jones on treasurer of company, signed E. P. Boas, and dated April 24th 1871, being the full amount due Boas for commissions ......... $3000”
George Rice was unable to complete the road of the St. Charles Company; he had expended about $32,000, and contracted debts; his father, John Rice, had lent him money, but was in no way connected with the contract. In consequence negotiations were commenced between John Rice and the companies ; they resulted in an agreement, made April 23d 1872, between him and the St. Charles Company, by which he agreed to assume the contract of George Rice, to save the parties from all liabilities to George, &c., John Rice to have the right to mine 200,000 tons of iron-ore, using the machinery, &c. There was also a modification made in the contract between the two companies, and the contract of John Rice was approved; the directors of the Southern Pennsylvania Company also assented to John Rice mining “225,000 tons of iron-oi’e without payment of royalty in consideration of the obligations and covenants assumed” by him.
On the 25th of May 1872, the directors of the Southern Pennsylvania Company authorized Jones “ to sell the one hundred and twelve bonds at public or private sale and apply the proceeds to the payment of the loans made or procured to be made.”
On the 8th of June the contract with Rice was further modified so that he was to afford facilities to enable the St. Charles Com
During the summer of 1872 various unsuccessful efforts were made to extricate the Southern Pennsylvania Company from its embarrassments. Ahl then learned, if he had not before, “ that the eighty bonds were in the hands of other parties as collaterals. He expressed regret that he had not taken the bonds, and said he had been badly advised. He does not seem at any time after he had refused to accept them, to have claimed them as his. * * * It became evident that the company’s road and franchises would be sold under one or other of the mortgages.”
On the 13th of August 1872, all the contracts between the two companies, and between them and John Rice, were cancelled; and it was agreed that a judgment should be confessed by the Southern Pennsylvania Company in favor of John Rice for $125,000, payable in sixty days in full of all his claims, including his right to mine 225,000 tons of ore; his expenditures were not then ascei’tained; the railroad he was to construct was completed that fall; his actual expenditures, including those of George, were $103,711.79, to which Rice added a commission of fifteen per cent., making his whole bill $118,789.51, with interest. The $125,000 judgment was entered in the Court of Common Pleas of Franklin county August 19th 1872. The purpose of this arrangement was to give Rice a lien on the Southern Pennsylvania Company’s property before a sale should be had under the mortgage. John Rice had also become the owner of the twenty-five second mortgage bonds sold by Jones to George Rice.
At the sale of the road there were but two bids: one on behalf of the Reading hanks for $300,000, and the other for $305,000 by John Rice.
The master disallowed the claims of the Commonwealth, those for land damages, and that of the Allegheny National Bank', for reasons stated in his report.
With regard to the claims of the Reading banks, he held that the judgments given to Boyer and assigned to them were mere covers of usurious interest, and that theywere entitled to receive no more than the amounts actually lent, viz.: $25,000 each, with interest. He allowed the claim of John Rice on the twenty-five second mortgage bonds. He allowed the claim of the Kensington bank on two notes of $25,000 and $8000, respectively, with interest. He held that the bank held the sixty-five second mortgage bonds bond, fide for value, and were entitled to be paid the amount of their claim from their proceeds.
As to the claims of the Farmers’ Bank of Reading, the Reading Savings Bank and Bushong & Brother, the master held that they received the bonds bond fide, without notice of any claim which
The master found that Rice’s judgment was a valid debt.
As to Jones’s individual claim, as appeared by the books, the master reported: “A bookkeeper was employed and kept the books; Mr. Jones had no hand in them except a general oversight. The books appear in the main to have been fairly kept. They were thoroughly and exhaustively examined by a professional accountant of no mean skill, and no serious defect has been shown. * * * The master is unable to see anything in his management of the details of the company’s business to show that Mr. Jones intended to do wrong or defraud any one. He did things which a strict and proper morality condemns. * * * His account on the books of the company developed a few matters which were the subject of objection, and must be passed upon. It includes, of course, many of the loans procured by him from the various parties whose claims have been heretofore considered. These being paid, are, of course, to be stricken from his account, should it become necessary to state the account accurately. In addition to these there are other items. The directors, at a meeting heretofore mentioned, voted to him $10,000 for expenses paid by him in the organization of the company. For a portion of these, items were stated subsequently, and the same were entered upon the books in detail. After this, there is a mere lumping credit given in one sum of $7218.44. No items were given in the books, nor was he able to give the items when examined; merely saying that he had expended moneys to a large amount, and setting forth, in a general way, their character. This, the master thinks, is inexcusable. It was his duty to have kept an account and the vouchers. He has neither. This item must be stricken out.”
Referring to the payment of $5000 to H. S. Eckert for his services, the master said :—
“In the opinion of the master, the payment was wrong, and ought not to have been made or received, and must be disallowed.
As to the claim of D. Y. Ahl and R. L. Jones: “In the view the master takes of these claims, they must be considered together. The case as now presented as to both of these gentlemen, is very different from that before the former master and the court. Then it was simply that of a person selling lands to a corporation, and its agent bargaining with him, each endeavoring to make the best bargain. Now we have the whole history of the transaction from beginning to end, and it exhibits facts which may almost be said to be agreed upon; certainly they are to a very large extent indisputable.
“ Mr. Ahl and his brother owned these 5400 acres of lands, to which they desired a railroad to be built, in order to enhance their value and develop the same. They also owned others in the vicinity. * * * Prom all the evidence submitted, $100,000 is probably their full cost. In his first negotiation with Mr. Jones and others, D. Y. Ahl put the price of all the 5400 acres of land at that sum. Mr. Ahl really was the Caledonia Company. * * * He and Mr. Jones then agreed to breathe life into this charter, and to use the corporation to make individual profit out of Mr. Ahl’s lands, and a railroad to be built to it. The one was to put in the lands and the charter, and the other was to raise the money to build the road. Mr. Ahl was to get control of all the stock, or a sufficient part to govern the corporation; he was never to pay for any of the stock, and he was to sell his lands to the company at a price which he and Mr. Jones should agree upon, and Mr. Jones was to have the contract for the road at a price Mr. Jones and he should agree upon. This scheme was carried out. * * * He and Mr. Jones did not become directors, because the one was to sell the lands to the company, and the other was to have the railroad contract. Immediately, without any surveys, or estimates, or examination by any director to see if it was a wise and prudent contract for the company, before the termini of the road were known or fixed, the contract was made by the directors with Mr. Jones, that he should build the road for $625,000 in bonds and $625,000 in stock, full paid. As yet the company had no money or lands. Mr. Ahl agreed to this contract. Prom these terms Mr. Jones did not subsequently at any time vary.
“ They then set to work to get outside subscriptions to this stock by boná fide subscribers. In order to induce parties to subscribe,
“ All this, and much more, demonstrates that it was a joint speculation, and that the corporation was a mere means they used to accomplish their private ends. Their true relations to the enterprise and the company they studiously kept to themselves, and absolutely concealed from the outside public whom they were endeavoring to, and did, induce to invest their money in the company. The main features of the enterprise were agreed upon by both. The details were managed by Mr. Jones through the directors. And it may be said generally, that they were merely his instruments in carrying forward the whole subsequent movements of the company. All of its action was prepared and moulded by him. When the agreements of June 4th 1870, came to be made, he settled the terms of that contract with Mr. Ahl. Had Mr. Ahl been dealing with Mr. Jones alone, or with the company, as
“The question to be decided is, who in equity and good conscience ought to take this money ? * * * Promoters, directors or agents of a company shall not make a profit out of it in buying lands for it, or in dealing with it. * * * So far as Messrs. Ahl and Jones are concerned as against the genuine stockholders and creditors of the company, their dealings have been in fraud of them. ■ What Mr. Jones’s actual profit on his railroad contract was does not appear.”
The master then enumerated certain items of his profit, and proceeded;—
“ He also got and has $625,000 in stock. Mr. Ahl has already received $50,000 in cash and $50,000 in good gold bonds, and $120,000 in company stock. * * * Both.of them were bound to put into the treasury of this company, for their stock respectively, the sums of $120,000 and $625,000 in money or its value. Neither of them has done this. Had they each been dealing with a real corporation, or real directors of such a company, ‘ at arm’s length;’ or had they informed the other subscribers of their actual plans, instead of studiously and carefully concealing all these inside agreements and plans from them, their position would have been as clear and impregnable as that of any othér man who acted in good faith; * * *
“ In the opinion of the master, neither of these parties, in good conscience and equity, is entitled to any of the fund in court as against the creditors and other stockholders of the company. * * *
“ The fund is to he distributed to the liens in their order. The judgments to the Reading banks are first; then the lien of the second mortgage. The only parties holding bonds who are entitled to be paid are Mr. Keim, Mr. Rice, the Reading banks and Bushong & Bro., to the extent heretofore allowed. And after the bondholders comes Mr. Rice’s judgment, which is only partially paid by the balance.”
Balance, including interest on the fund, since January 27th 1873, after deducting the master’s fees and other expenses ....... $318,147.10
To Farmers’ Bank of Reading, assignee of judgment in favor of A. L. Boyer, $25,000.00
Interest and costs . . 3,834.95 $28,834.95
Same — Notes of September 1st and October 5th 1871, $15,000 each . . 30,000.00
Interest .... 1,366.23 $31,366.23
-$60,201.18
To Reading Savings Bank— assignee of judgment in favor of A. L. Boyer, 25.000. 00
Interest and costs, 3.834.95
—--$28,834.95
Same — Note, Oct. 20th 1871 2,669.07
Same — Note, Nov. 23d 1871 5.000. 00
Interest on both notes . 461.78 8,130.85
-- 36,965.80
To H. M. Keim — three second mortgage bonds 3.000. 00
Coupons and interest . 188.13
Premium on gold 366.63
-- 3,554.76
To Bushong &■ Brother — Note, August 1st 1871 22,600.00
Same — Note, Oct. 16th 1871 15;120.00
Interest on both notes . 2,304.28
- 40,024.23
To Kensington ■ Bank — Note, October 6th 1871 25.000. 00
Same — Note, Nov. 29th 1871 8.000. 00
Interest on both notes . 1,930.38
•-- 34,930.38
To John Rice — twenty-five second mortgage bonds 25.000. 00
Coupons and interest 2,347.87
Premium on gold . 3,144.98
-30,492.85
Same on account of judgment 111,977.90 147,470.75
$318,147.10
.The master reported on the exceptions that they presented no grounds upon which he should change his report.
The exceptions were argued in the Supreme Court, March 18th 1875, before Agnew, C. J., Sh'arswood, Williams, Mercur, Gordon, Paxson and Woodward, JJ.
W. S. Stenger and Blade (with whom were I>. W. Sellers and W. McLellan), for Ahl.
W. Mao Veagh and Cr. W. Biddle (with whom was O. H. Jones), for R. L. Jones.
A. I). Campbell, for Kensington Bank.
Cr. F. Baer, for the Reading banks, Bushong & Brother and H. M. Keim.
F. C. Brewster and A. K. McClure (with whom was S. Cr. Thompson), for Rice.
W. S. Stenger and J. Stewart, were for Keefer, Teeter and Fries.
The other exceptants were not represented.
delivered the opinion of the court, November 24th 1875.
This case differs essentially from the one presented by the former master’s report. We have now a full history of the organization of the company and of its affairs down to the sale by the trustee of its property and franchises. A large amount of additional testimony has been taken, from which the master has found the facts clearly, and in the main accurately. The former rulings of the court were made upon the case as presented at the time. In the examination and decision of the case now we have the benefit of the additional light thrown upon it by the report of the present master.
The fund is insufficient to pay the liens as they stood against the property on the day of the sale. Hence it is clear that no creditor, whose claim is unprotected by a lien, can share in the distribution. It is therefore useless to make further reference to claims of this class. The lien claims as found and allowed by the master are as follows:—
2. Judgment of the Reading Savings Bank for . . 25,000
3. The second mortgage under which the property was sold ........ 200,000
4. Judgment of John Rice, for .... 125,000
The liens are stated in the order of their priority. As the net fund for distribution, exclusive of interest, is $305,000, it is manifestly insufficient to pay them all in full. The judgments of the Reading banks, being first in point of time, are entitled to payment to the extent they have been allowed by the master. The reduction of these judgments to the amount actually loaned by the banks, was right, and needs no discussion. Next comes the mortgage of $200,000. This also must be fully paid to the extent that the bonds are in the hands of boná fide holders for value. After which, if there be any surplus, it must be applied to the subsequent judgment.
The principal contention is over the second mortgage bonds. It is important to understand where they are, and by whom, and for what purpose held. The entire number, two hundred, of one thousand dollars each, were issued by the company, and are now held as follows: sixty-five thereof are held by the Kensington Bank as collateral security for two loans, aggregating $33,000, made to the company ; fifty of these bonds so pledged to the Kensington Bank, belong to Richmond L. Jones, and were a portion of a batch of seventy-five of said second mortgage bonds, issued to him by the company in lieu of $50,000 of the first mortgage bonds of said company, which he was entitled to receive upon account of his contract for the construction of the road. Mr. Jones agreed to receive these second mortgage bonds, and they were formally delivered to him in satisfaction of his claim to the first mortgage bonds. His title to them is therefore complete. Subsequently, as the master finds, he pledged fifty of these bonds ($50,000), with fifteen of the second mortgage bonds ($15,000), belonging to the company with Charles T. Yerkes, Jr., in order to raise money for the company; Yerkes obtained the money from the Kensington Bank and deposited the said sixty-five bonds as collateral. The bonds so pledged are liable to the bank for the amount of money loaned thereon. After the debt due the bank is paid, Mr. Jones is entitled to so many of the said bonds as may remain, and to come in upon the fund to that extent, unless prevented by a higher equity in some one else.
The Allegheny National Bank (C. L. Magee) is, or was the the holder of ten ($10,000) of these bonds. The master finds that said bank is not a holder for value, and for satisfactory reasons reports against this claim.
But there is another serious obstacle in the w'ay of Mr. Ahl. He has no standing in a court of equity to claim anything of this company until its debts are fully paid. The stockholders have an equity which entitles them to have its assets applied to the payment of its liabilities before Mr. Ahl can be allowed to lay his hand upon a dollar of its effects. This equity of the stockholders
Upon this branch of the case the auditor has found the facts very fully. We need only to refer to a few, about which there is little dispute. This corporation was gotten up by Daniel Y. Ahl and Richmond L. Jones. Each had an object. Ahl wanted to sell his ore-lands, and Jones desired the contract to build the road. Each succeeded in his purpose. Ahl sold his lands and Jones obtained the contract. They controlled the corporation absolutely. Ahl held a large majority of the stock originally, and elected a board of directors to do the work that Mr. Jones, his co-schemer, required done. There was the form of an organization; there were a few outside stockholders scooped up by Ahl’s net; but for all practical purposes the corporation was Ahl & Jones, or Jones & Ahl, it is not material which. In considering the question whether these gentlemen are entitled to any portion of the fund, we must scrutinize closely the contract made by each with the company. While the right of a stockholder to contract with his corporation and become its creditor, is conceded as a general proposition, the right of a person controlling a corporation to contract with it, rests upon entirely different principles, if it exists at all. Where a person has the actual control of a corporation, whether such control arises from the ownership of a majority of the shares, or from his position or influence, and enters into a contract with such corporation, he is to be held to the most rigid good faith. The onus is upon him to show the fairness of the transaction, if it is called in question. It is a principle too well settled to be now successfully controverted, that the promoters, directors or agents of a company, shall not make a profit out of it in buying lands for it, or in dealing with it. This principle runs through all the fiduciary relations : Simons v. Oil company, 11 P. F. Smith 202; McElhenney’s Appeal, Id. 188; Short v. Stevenson, 13 Id. 95; The Railroad Co., v. Bowers 12 Wright 37 ; Bailey v. The Gas Co., 19 P. F. Smith 340 ; Bank v. Judah, 8 Conn. 145" court="Conn." date_filed="1830-06-15" href="https://app.midpage.ai/document/banks-v-judah-6574400?utm_source=webapp" opinion_id="6574400">8 Conn. 145; Abbott v. The Rubber Co., 33 Barb. 593; Michoud v. Girod, 4 Howard 554: Hill on Trustees 148. Tried by this crucial test what becomes of Mr. Ahl’s contract for the sale of his ore-lands ? The master finds that in his first negotiations with Jones, Ahl put his 5400 acres at $100,000, which was probably their full value. It is clear that the price originally contemplated for the lands was $50,000 in cash, $50,000 in stock and $50,000 in bonds. Yet after the company had been organized; after over $100,000 in outside subscriptions to the stock had been made, Ahl demands better terms. He had the company at a disadvantage, and he virtually .compels the agreement of December 9th 1869, by which he was to have $50,000 in money, $130,000 in bonds, and $120,000 in stock, for about
It will thus be seen that Mr. Ahl has no claim to any portion of the ninety-seven bonds. They were specifically pledged by authority of the company for certain claims of the Reading banks and Bushong & Brother. I have already said that the latter were holders for value, and that the bonds passed by delivery. The master was clearly right in awarding to these claimants the amount of their claim for which said bonds were so pledged.
The master rejected the claim of Richmond L. Jones to the remainder of the bonds held by the Kensington Bank, after the debt of said bank is satisfied. He is of opinion that the claims of Ahl and Jones rest upon similar principles. Fortunately for Mr. Jones, the facts are different. The master does not find that the contract between Mr. Jones and the company for constructing the road was a fraud upon said company. Nor that he afterwards sought to alter it, and used his position to extort different and oppressive terms. He made bis contract and adhered to it faithfully. We have no means of knowledge as to rvhat extent it was profitable. Nor was Mr. Jones a party to Ahl’s fraud in the sale of his ore lands. He resisted it as far as he could. We think the master was right in finding that Richmond L. Jones contemplated no fraud upon the company. His chief offence appears to have been the undertaking of a work entirely disproportioned to his means; This involved struggles and shifts to raise money. That some of his transactions while thus engaged were irregular, is apparent. But we fail to perceive in any of them an intent to defraud the company. His acts, w’hether good or bad, appear to
The master rejected the claim of Messrs. Bushong & Bro., upon a judgment entered against R. L. Jones for $5333.33, and also upon a note for $250. He also rejected the claim of the Reading' Savings Bank upon a note of R. L. Jones for $5806.91. These liabilities were incurred by Mr. Jones on the faith of the resolutions of April and May 1871. It is conceded they were for the benefit of the company. Are the holders of these claims entitled to the protection of the ninety-seven second mortgage bonds ? The principle is well settled, that where a surety, or a person standing in the position of a surety, for the payment of a debt, receives security for his indemnity, and to discharge such indebtedness, the principal creditor is in equity entitled to the benefit of that security, and it makes no difference that the principal creditor did not know of this at the'time, or give credit on the faith of it: Cornwell's Appeal, 7 W. & S. 305; Erb’s Appeal, 2 Penna. R. 296; Himes v. Barnitz, 8 Watts 39; Carman v. Noble, 9 Barr 366; Hancock’s Appeal, 10 Casey 155. The master concedes the truth of this general proposition, but says, substantially, that Jones’ relations to the company are such, that as surety, he is not entitled to claim, and that, therefore, these holders are not. We do not regard this position as sound. The debts upon which the claims are based, were contracted for the use of the company. The latter received the consideration. The bonds were placed in the hands of Jones to cover these among other liabilities. It is true they were not specifically pledged by Jones for these claims. But they were pledged to Jones by the company, for the purpose of procuring these loans, and therefore the holders of the claims are entitled to the benefit of the security. This right does not depend upon the equities between Jones and the company, arising out of other transactions. There is a surplus of bonds in the hands of the trustees. What disposition shall be made of them ? It is clear that Jones is not entitled to them as security for any balance the company may owe him on his individual account. They were not pledged as security for any such indebtedness to him, and if they were, the master has not found that the company is indebted to him, or that he is liable as guarantor or otherwise, for any other moneys obtained for the use of the company on the pledge or security of the bonds. The surplus bonds, therefore, whatever
To avoid the delay which must necessarily result from sending this case back to the master, I have prepared a corrected table of distribution. (Prout schedule.) It will be observed, that according to the master’s report, there is an accumulation of interest amounting to $30,900. A considerable amount of interest must have accrued since. The payments made under the first master’s report, including the trustee’s fee and payments made by the trustee since, and the master’s fee in this case, amounting in the aggregate to $17,752.90, as well as the costs of this appeal, are to be paid out of the interest. The balance of the interest will be distributed pro rata to the different claims allowed.
Decree.
This cause came on to be heard at the last January Term of this court, at the city of Philadelphia, upon exceptions to the report of George Junkin, Jr., Esq., master, and was argued by counsel, whereupon, this 24th day of November 1875, it is considered, adjudged and decreed by the court, that all of the exceptions filed to said report be dismissed, except in so far as they are sustained in this opinion ; and it is now further ordered that distribution of the principal of the fund in controversy, shall be made as follows, viz. : to the Farmers’ National Bank of Reading, the sum of $28,834.95; to the Reading Savings Bank, the sum of $28,834.95; to Henry M. Keim, the sum of $3554.76; to John Rice, on account of his bonds, the sum of $30,492.85 ; to the Farmers’ National Bank of Reading, before named, the further sum of $31,366.23 ; to the Reading Savings Bank, before named, the further sum of $14,312.83 ; to Bushong & Bro., the sum of $45,986.56; to the Kensington National Bank, the sum of $34,938.84; to Richmond L. Jones, the sum of $47,054.43; to John Rice, on account of his judgment, the balance of said principal, amounting to the sum of $39,623.60 ; that as to the interest on said fund reported by the master, as well as the interest which has accumulated since, there shall be deducted therefrom the payments made under the first master’s report, including trustee’s fee, and payments made by trustee since, as per master’s report, and master’s fee in this case, aggregating the sum of $17,752.90; and also the costs of this appeal. The residue of the interest remaining after these deductions shall be distributed, pro ratá, to the different claims allowed in this opinion
Chief Justice Agnew and Mr. Justice Woodward dissented from that part of the opinion and decree rejecting Ahl’s claim.
Mr. Justice Paxson delivered a supplemental opinion and decree, January 13th 1876.
A question has been raised in regard to the proper construction of so much of our decree of November 24th 1875 as directs distribution of the interest. We are also informed that by reason of an advance in the market value of the securities in which the fund was invested, a considerable sum has been realized by their sale over and above the cost of said securities. The entire amount of said interest, less the deductions referred to in said decree, with the amount of said increase, making together the sum of $51,753.35, has been paid into court, and awaits our further order.
It is urged, on behalf of John Rice, that as to the increase in the fund, it is to be treated as principal, and awarded to him upon his judgment; and that as to the interest, by the terms of our said decree, he is entitled to a pro ratá share thereof upon the whole amount of his judgment ($125,000). If the language of our decree will bear such a construction, it must be modified. The interest is the product of the principal. Each of the parties is entitled to interest in exact proportion to his share of the capital earning such interest. So likewise as to the increase of the fund. The rights of the parties to the principal were adjusted as of the day of sale. Since then the fund as a whole has grown or increased a certain amount or per centage. It follows that the share of each creditor entitled to participate in the distribution has grown in a corresponding ratio, and he will be entitled to said increase in the same proportion that the amount of principal awarded him bears to the entire principal of said fund.
The Kensington Bank claims that as between it and Richmond L. Jones, it is entitled to interest to the day of distribution. This may be so, but we do not think we are called upon to adjust such equity in this pi’oceeding. We leave it open for the adjustment of the parties, without prejudice to the rights of either.
And now, January 13th 1876, it is further ordered, adjudged and decreed that the fund in court, amounting to $51,753.35, less proper costs and'commissions of the prothonotary, be distributed by the prothonotary to the parties entitled to the principal fund under our decree of November 24th 1875, in the exact proportion which the amount of principal awarded to them respectively bears to the whole of said principal sum, provided that no creditor shall be paid more than his debt and interest to the day of distribution, and the excess, if any, to be applied to the judgment of John Rice.