70 F. 346 | 9th Cir. | 1895
On the 15th day of March, 1895, the United States filed a bill in equity in the circuit court of the United States for the northern district of California to establish a claim for $15,237,000 against the estate of Leland Stanford, deceased. The bill alleges, in substance, that the Central Pacific Railroad Company of California was organized on the,28th day of June, 1861, under and by virtue of an act of the legislature of the state of California approved May 20, 1861; that the Western Pacific Railroad Company was a corporation existing under the laws of California, organized under the same act; that under the Pacific railroad acts of congress of July 1, 1862, July 2,1864, and other subsequent acts, the said two California corporations made and entered into a contract with the United States, whereby they became indebted to the United States, on account of the bonds of the United States loaned to the said corporations under and by virtue of the terms of said acts, the sum whereof at the maturity of the bonds will amount to about $78,-000,000, including principal and interest; that after said contracts were entered into, and said bonds were loaned to the two corporations named, they were consolidated and amalgamated into what is known as the Central Pacific Railroad Company; that the said company is now insolvent, and, after deducting all credits to which it and the estate of Leland Stanford are or hereafter may become entitled, the Central Pacific Railroad Company will still be indebted to the United States in the sum of more than $60,000,000, for which the United States have no security, and that the whole of said debt will be lost, unless the same can be collected from the stockholders of said corporation, under the provisions of the constitution and the laws of the state of California; that Leland Stanford was a stockholder in the Central Pacific Railroad Company of California from the date of its organization and during all the times at which the United States loaned and delivered the said bonds to that corporation, and that on and after the 8th day of June, 1867, he was a stockholder in the Western Pacific Railroad Company, and was and remained a stockholder in the said amalgamated corporation from the date of such consolidation until his death, and that as such stockholder he was, at the time of his death, liable for his proportion of the debt so due and owing to the United States, and that his estate is now liable therefor; that the United States have paid ail the interest which has accrued on said bonds, and will continue to do so until the maturity of the last thereof; that on the 16th day of January, 1895, $2,362,000 principal of said bonds matured and became payable, and on that day the same were paid by the United States. The defendant demurred to the bill for want of equity. The circuit court sustained the demurrer, and thereafter entered a decree dismissing the bill. 69 Fed. 25. From the decree so entered this appeal is taken.
“Sec. 31. Corporations may he formed under general laws, hut shall not he creauid by special act, except for municipal purposes. All general laws and special acts passed pursuant to tills section may he altered, from time to time, or repealed.
“Sec. 32. Dues from corporations shall ho secured by such individual liability of the corporators, and other means, as may he prescribed by law.”
“Sec. 30. Each stockholder of a corporation or joint stock association shall he individually and personally liable for his proportion of all its debts and liabilities.”
The first act of congress creating the contract relations under which the present suit is brought is entitled “An act to aid in the construction of a railroad and telegraph line from the Missouri river to the Pacific Ocean, and to secure to the government the use of tin; same for postal, military, and other purposes,” enacted July 1, 1862 (12 Stat. 489). It begins by creating a body corporate under the name of the Union Pacific Railroad Company, consisting of 158 citizens,, named, taken from nearly all the states then loyal to the Union, together with five commissioners to be named by the secretary of the interior, and empowers the company to lay out and maintain a continuous railroad and telegraph line from a point on the 100th meridian of longitude west from Greenwich, between the south margin of the valley of the Republican river and the north margin of the valley of the Platte river, in the territory of Nebraska, to the western boundary of Nevada territory. The point of departure fixed at the 100th meridian of longitude was about 200 miles west of the Missouri river. But the same act made provision for the construction of branch roads and telegraph lines from several points on the Missouri river', to connect with the main line of the Union Pacific Railroad Company at the 100 th meridian of longitude. These points on the Missouri river were either mentioned in the act or subsequently designated as Sioux City and Council Bluffs in Iowa, Atchi-son and Leavenworth in Kansas, and Kansas City in Missouri. Tire Union Pacific Company was also authorized, by sectiou 14 of the act., to build a line of road and telegraph from the western boundary of the state of Iowa (a point subsequently designated as Council Bluffs), upon the most direct and practicable route, to the 100th meridian oí longitude, so as to connect with the main line at that point. This section of road and telegraph was intended as a direct connection with any railroad that might thereafter be constructed through the state of Iowa, with a terminus at Council Bluffs. None was then completed, but a railroad was in progress of construction through the state from the eastern border to the Missouri river. It was, also provided in section 14 of the act that whenever there should be a
“The Central Pacific: Railroad Company of California, a corporation existing nnder the laws of the state of California, are lierohy authorized to construct a railroad and telegraph line from the Pacific const, at or near San Francisco, or tile navigable waters of the Sacramento river, to the eastern boundary of California, upon the same terms and conditions, in all respects, as are contained in this act for the construction of said railroad and telegraph line first mentioned, and to meet and connect witli the first mentioned railroad and telegraph line on the eastern boundary of California. Each of said companies shall file their acceptance oí the conditions of this act in the department of the interior within six months after ihe passage of this act.”
“That any other railroad company now incorporated, or hereafter to be incorporated, shall have the right to connect their road with the road and branches provided for by this aet, at such places and upon such just and equitable terms as the president of the United States may prescribe.”
“That at; any time after the passage of this act all of the railroad companies named heroin, and assenting hereto, or any two or more of them, are authorized to form themselves into one consolidated company; notice of such consolidation, in writing, shall he filed in the department of the interior, and such consolidated company shall thereafter proceed to construct said railroad and branches and telegraph line upon the terms and conditions provided in this act.”
The seventeenth section provides, in substance, that in case any of the companies so named shall fail to comply with the terms of the act by not completing said road and telegraph and brandies within a reasonable time, or by.not keeping the same in repair, congress may pass an act to insure the speedy completion thereof, or put the same in repair, and may direct the income thereof to be thereafter devoted to the use of the United States, to repay all expenditures caused by such default or neglect; and that, in case said roads are not completed so as to form a continuous line of railroad from the Missouri river to tlie navigable waters of the Sacramento river, in California, by July 1, 1876, the whole of said railroads, together with all their furniture, fixtures, rolling stock, etc., shall he forfeited to and be taken possession of by the United States; and the United Slates reserves unto itself the possession of 25 per centum of the bonds granted to aid said roads along certain parts of said roads, and 15 per centum of bonds upon other portions thereof, until the road should be completed as required by the act. In the eighteenth section it was enacted that “congress may, at any time, having due regard for the rights of said companies named herein, add to, alter, amend, or repeal this act.”
On July 2, 1864, congress amended the act of 1862. 13 Stat. 356. It conferred upon the corporations named in that act the power of eminent domain, and prescribed the method of its exercise, doubled the grant of lands to aid the constniction of the road, repealed the requirement that a portion of the bonds should be reserved as security for the completion of the road, and provided that the aided companies might each issue their own first mortgage bonds on their respective railroad and telegraph lines, to an amount not exceeding the amount of the bonds of the United States, and that the lien of the United States bonds should be subordinate to that of the bonds so issued by the companies. It; defined with great particularity and detail the method of consolidation of the corporations. It provided, substantially, that any two or more of the companies authorized to participate in the benefits of the acts were empowered at any time to unite and consolidate, upon such terms and conditions and in such manner as they might agree upon, not incompatible with the act, or the laws of the state or states in which the roads of such companies might be, and to assume and adopt such corporate name and style as they might agree upon, with capital stock not to exceed the actual cost of the roads so consolidated; and that, upon filing a copy of such consolidation in the department of the interior, such organization would “succeed to, possess, and be entitled to receive from the United States, all and singular the grants, benefits, immunities,
The Central Pacific Railroad Company of California filed its acceptance of the terms of the first act upon January 1, 1863. On the 8th day of October it increased its capital stock to $20,000,000, and on July 15, 1868, increased the same to $100,000,000. The bonds of the United States were issued, payable 30 years from date of issue, and were received by the companies at various dates from January 6, 1865, to December 31, 1869. The Western Pacific Railroad Company of California was incorporated under the laws of that state on the 11th day of December, 1862, for the purpose of building a railroad and telegraph line from the city of San José to the city of Sacramento. It is alleged in the bill that this road “was intended to be, and in fact was, a part of the road which congress authorized and desired should be constructed from the Missouri river to the Pacific Ocean under the act of July 1,1862, and the acts amendatory thereof.” By an assignment from the Central Pacific Railroad Company of California to the Western Pacific Railroad Company, made October 31,1864, the Western Pacific Railroad Company was author-
Upon these1 statutes, so constituting the contract relation between the United States and the Central Pacific Railroad Company, the question arises whether or not it was the intention of the United States to hold the stockholders of that corporation individually liable1 tor the default of the railroad company in case of its failure to pay its debt to the United States whem due, and wlmther or not the1 provisions of thetse statutes, and the course of dealing of the United States with the evaporations therein mentioned, weere sue;h as to justify the1 stoekholefors of the Cemtral Pacifie; Railroad Cemipany in believing, at the time they became stockholders in said company, or in either of flee eeompanies subsequently consolidated therein, aiid at the time1 the1 debt to the government was incurreel, that they were as free1 from individual liability for sue:h debt as were the stockholders of the Union Pacific Railroad Company, or the stockholders of fhe other corporations which were aided in like manner. Upon the one hand, it is urged that, while the Union Pacific Railroad Company received its corporate franchises from the United States, and was therefore to some extent under the control of the government, which-was its sovereign, the Cemtral Pacific Railroad Company received none of its corporate1 privileges or immunities freern the United States, but te>ok its life and ai tributes from the state of California, and that the1 rights and privileges which it acquired from the government
In order to understand the relation of the United Státes to the corporations that entered into this agreement in the year 1862, it is necessary to refer to the condition of the country, the situation of the territory to be affected by the improvement, and the purposes that the United States had in view in fostering the enterprises contemplated in the act. Those purposes have heretofore been adverted to and considered by the supreme court in cases of litigation between the bond-aided corporations and the United States, and it will be sufficient for the purposes of this opinion to quote from the expressions of the views of that court. Said Mr. Justice Davis, in U. S. v. Union Pac. R. Co., 91 U. S. 79, 81, 89:
“The bonds in question were issued in pursuance of a scheme to aid in the construction of a great national highway. ⅜ * * The war of the Rebellion was in progress; aDd, owing to complications with England, the country had become alarmed for the safety of our Pacific possessions. The loss of them was feared in case those complications should result in an open rupture; but, even if this fear were groundless, it was quite apparent that we were unable to furnish that degree of protection to the people occupying them which every government owes to its citizens. It is true, the threatened danger was happily averted; but wisdom pointed out the necessity of making suitable provision for the future. This could be done in no better way than by the construction of a railroad across the continent. * ⅞ ⅜ But the primary object of the government Was to advance its own interests, and it endeavored to engage individual co-operation as a means to am end, — the securing a road which could be used for its own purposes. The obligations, therefore, which were imposed on the company incorporated to build it, must depend on the true meaning of the enactment itself, viewed in the light of contemporaneous history. * ⅜ * Of necessity, there were risks to be taken in aiding with money or bonds an enterprise unparalleled'in the history of any free people, the completion of which, if practicable at all, would require, as was supposed, twelve years. But these risks were common to both parties. Congress was obliged to assume its .share, and advance the bonds, or abandon the enterprise; for clearly the grant of lands, however valuable after the road was finished, could not be available as a resource for building it. If the road were a success, in addition to the benefits it would confer on the United States the corporation would be in a situation to repay the advances for interest, and the principal when due. If, on the contrary, it proved to be a failure, sub*357 jecting- Hie private persons wlio invested their capital in it to a total loss, there would he left Ihe entire property of ihe corporation, of which immediate possession could he taken by the government on a declaration of forfeiture.”
In U. S. v. Union Pac. R. Co., 98 U. S. 614, Mr. Justice Miller said:
“JSut in iis anxiety to secure tlie rapid prosecution of the work — an end more important to it than to any one else, and still more important to the people, whom it represented — it postponed this lien to another mortgage, that, the means might he raised to complete the road.”
In the Sinking Fund Cases, 99 U. S. 723, Mr. Chief Justice Waite said:
“Great undertakings like this, whose future is at tlie time uncertain, requiring, as they do, large amounts of money to carry them on, seem to make It necessary that extraordinary inducements should he held out to capitalists to enter upon them, since a failure is almost sure to involve those who make the venture in iinaneial ruin.”
Aside from the scope of the internal improvements which were contemplated, and the emergency which impelled their inception, there is much in the language of the acts to indicate that in treating; with the Central Pacific, an well as the other railroad companies mentioned in tlie contracts, the United States was pursuing a general sell erne of internal improvement, and in so doing was dealing with all the aided companies upon terms of liberality and equality. R:o discrimina lion is made in favor of either the corporation created by act of congress or the corporations existing under the laws of the states which were the beneficiaries of the act. la incorporating the Union Pacific Railroad Company, congress was silent upon the subject of the individual liability of its stockholders. Those stockholders, therefore, cannot be individually held for the payment of the debts of that corporation, since the individual liability of stockholders is a creation of statute law, and must affirmatively appear by the provisions of the law coni rolling the corporation when the debt was incurred. The other corporations mentioned in the act, with the exception of those of the slate of California, were organized under the laws of states which impose upon the stockholders of railroad corporations no individual liability for corporate debts. Since ⅛⅛ United Slates had the same national benefits in view in creating the one company and in endowing all the companies with the same grant» and franchises, it must be presumed that there was imposed upon Hie Union Pacilie Company and its stockholders every duty and obligation then deemed necessary for the public interest.
In interpreting the language of the act which confers upon the oilier corporations so aided the benefits mentioned in the act upon the same terms and conditions that were specified in the grant to ihe Union Pacific Railroad Company, it is just to say, under the circumstances, that more was intended than that the other companies should receive the land grants, the rights of way, the bonds, and tlie other rights and privileges which were therein enumerated, upon the same terms and conditions (hat were, by express words, attached to the grant to the company first named. It is true, the grant was to the corporation, and a corporation is a creature of the law, distinct from tlie members that compose it, and the corporations aided by the
In the well-considered case of Ohio Life Ins. Co. v. Merchants’ Ins. Co., 11 Humph. 1, 17, the court had occasion to construe the charter of the Merchants’ Insurance & Trust Company of Nashville, which had been incorporated under an act of the legislature extending to it the provisions of “An act equalizing the rights and privileges of insurance companies of this state.” The act so referred to was the charter of the Knoxville Insurance Company, in which it was provided as follows:
“All rights and privileges granted by this act, which have not heretofore boon granted to any of the existing insurance companies of this state, shall be, and the same are hereby granted to them, and that any right or privilege heretofore granted to any existing insurance office in this state is hereby extended to the corporation herein created, so as to place all institutions of the same kind on the same footing.” .
The court said:
“In construing this statute it Is material to observe its obvious and evident intention to place all insurance companies on a footing of equality, and, though ‘rights and privileges’ are the words employed in the former part of the section, yet, in order to give effect to the intention, it must be understood as implying responsibilities, obligations, and duties also; otherwise insurance companies would not be, as they were intended to be, on a footing of equality. * s * We are of opinion that the Kashville company, in receiving the rights and franchises, incurred also the obligations and duties stated in the charter of the Knoxville company.”
The- court thereupon, after enumerating the list of rights so conferred upon the Knoxville company by charter, proceeded to hold that
“Tlie individual property, both real and personal, of every stockholder in tlie said institution shall he held and hound for the payment of the debts of said corporation to the full amount of his or her stock in said corporation.”
The distinct doctrine of that decision is that a law imposing individual liability upon Stockholders is a law directly ajiplying to the corporation itself, and constitutes an obligation and a restriction upon the corporation. If the stockholders of the Knoxville company, instead of being liable for corporate debts, bad been by law made exempt therefrom, the Tennessee court, upon the same reasoning, would have been compelled to hold that such individual immunity possessed by the stockholders of that company passed to the stockholders of the Nashville company by a grant of all the rights and franchises enjoyed by the other company.
In the case of Humphrey v. Pegues, 16 Wall. 244, the Northeastern Railroad Company had been incorporated under an act of the legislature which did not exempt its stock from taxation. Subsequently its charter was so amended that its corporate stock and its real estate were made exempt from taxation during its corporate existence. Thereafter the legislature conferred upon another corporation named “all the powers, rights, and privileges granted by the charter” of the first company. A suit was brought by the stockholders of the second company to restrain the collection of a tax upon their stock. It was held that the privileges so granted to the second company included the exemption of stock from taxation. The court recognized the principle that immunity of stock from taxation, although it is a privilege incapable of being enjoyed by the corporation under its corporate name or in its corporate capacity, and is available only for the protection of tlie individual stockholder, is nevertheless one of the privileges belonging to the corporation, granted to it by its charter. That principle was subsequently affirmed in Tennessee v. Whitworth, 117 U. S. 139, 6 Sup. Ct. 649, and Keokuk & W. R. Co. v. Missouri, 152 U. S. 301, 14 Sup. Ct. 592.
But there is in the act of 1862 further expression of the intention of the United States to deal equally and impartially and without discrimination with all the other parties to the contract. It is found in the permission which is therein granted to either company, in case of the default of the other, to build all of the road. It thus appears that the attitude of the United States to each company was such that it was a matter of indifference to the government: whether the Central Pacific Railroad Company or the Union Pacific Company built the road that was to be aided by the government bonds and subsidy. If, under this permission, the Union Pacific had built: the whole road, it is evident that there would have been no individual liability of its stockholders to repay the debt now due the United States, or any part thereof. The same would he true if the Kansas Pacific had built the road. Had the Central Pacific constructed the whole road, if its stockholders are individually liable for this debt,
“Pbe only material difference between the Central Pacific Conrpany and the Union Pacific lies in the fact that in the case of the Central Pacific the special franchises, as well as the land and subsidy bonds, were granted by the United States to a corporation formed and organized under the laws of California, while in that of the Union Pacific congress created the corporation to which the grants were made.” 99 U. S. 727.
In those cases the court sustained the power of congress to require the companies to provide sinking funds against the maturity of the bonded debt, not alone upon the ground that there had been reserved to the United States in the contract the right to amend, the acts, but upon the ground that the United States sustained to both companies such sovereign relation as to authorize it to impose reasonable regulations upon the management of the affairs of the corporations. In all 'its dealings with the two companies the United States has never asserted greater power of control over the Union Pacific Company than over the Central Pacific Company, notwithstanding its sovereign relation to the former. The measure of its right over both is defined in the Sinking Fund Cases. It could take from neither any of the privileges it had bestowed. It could require of neither additional security for the debt. It could impose upon neither restrictions or obligations not already imposed, but it might lawfully require each to make due preparation for the .performance of contracts already entered into.
“If we turn to the acts of congress referred to toy the court, we shall find that franchises of the most important character were conferred on tins company. Originally, the Central Pacific Railroad Company of California had only pow or to construct a railroad from Sacramento to the eastern boundary of the state.”
The court thereupon, after quoting the terms of the act, proceeded to say:
“Tims, without referring to the other franchises and privileges conferred upon this company, the fundamental franchise was given by the act of 18(52 and the subsequent acts to construct a railroad from the Pacific Ocean across the state of California and the federal territories until it should meet the Union Pacific, which it did meet at Ogden, in the territory of Utah. This important grant, though in part collateral to, was independent; of, that made to the company by the state of California, and has ever since been possessed and enjoyed. The present company has it by transfer from and consolidation of the original companies, by which its existence and capacities were constituted. Such consolida lion was authorized by the sixteenth section of Ihe act of congress of duly 1, 18(52. and the sixteenth section of the act of duly 2, 18(54, taken in connection with the second section of the act of March 3, 18(55, referred to in the findings of the court. The last-named act ratified the transfer by the Central Pacific to the Western Pacific of a portion of its road extending from Wan José to Sacramento, and conferred upon the latter company all the privileges and benefits of the several acts of congress relating thereto, and subject to all the conditions thereof. If, therefore, the Central Pacific Railroad Company is not a federal corporation, its most important franchises, Including that of constructing- a railroad from the Pacific Ocean to Ogden City, were conferred upon it by congress.”
The supreme court has repeatedly held that, where corporations are consolidated under and by virtue of an act of congress, they are to be treated as “corporations formed and organized under the act of congress.” U. S. v. Central Pac. R. Co., 99 U. S. 450; Ames v. Kansas, 111 U. S. 449, 461, 4 Sup. Ct. 437; Pacific Railroad Removal Cases, 115 U. S. 1, 14, 5 Sup. Ct. 1113. The Kansas Pacific was a corporation originally organized under the laws of Kansas, and after-wards consolidated with the Union Pacific under the laws of the United States. In this respect its relations to the laws of Kansas, were like the relations of (he consolidated Central and Western Pacific to the laws of California. In the Pacific Railroad Removal Cases (115 U. S. 1-16, 5 Sup. Ct. 1113), the supreme court, speaking of the Kansas road, said that it “must be regarded as a corporation organized under and by virtue of the laws of the United Slates”; and
But perhaps the provision of the act most clearly indicative of the invitation of congress to owners of private capital to invest the same in the stock of these corporations upon terms of equality, and upon the understanding that there should be to .all 'alike freedom from individual responsibility, is that which authorizes the consolidation of said corporations, or any two or more thereof, for the building of the whole or any portion of the road. If the Union Pacific Kailroad Company had, in pursuance of this permission, consolidated with the Central Pacific, either before or after the construction of the roads, it is obvious that the government would now have no recourse to the individual liability of any stockholder in such consolidated corporation. It would be impossible for a portion of the stockholders to stand in one attitude to the United States while the remainder stood in another. Under such consolidation, accomplished by authority of the United States, it is manifest that all members must necessarily have stood upon an equal footing; and, as some were free from individual liability, it follows that all must have been free. It is clear that the stockholders of the Union Pacific Company, by amalgamating with the Central Pacific, would not have been made subject to.the individual liability imposed upon the latter company by the laws of California; and it is equally clear that the stockholders of the Central Pacific Kailroad Company, going into such a consolidated corporation, must have stood upon an equal footing with others, at least so far as concerned the contract rights of the United States, which, by the language of the statute, had invited the two companies thus to join in one. And the act so indicates in terms. . The amendment of 1864 expressly provides that such consolidated corporation “shall succeed to, possess, and be entitled to receive from the government of the United States, all and singular the grants, benefits, immunities, guarantees, acts, and things to be done and performed, and be subject to the same terms, conditions, restrictions, and requirements which said companies respectively, at the time of such consolidation, are or may be entitled or subject to under this act, in place and substitution of said companies so consolidated respectively.”. Here is a distinct declaration of the absolute equality of the terms, conditions, restrictions, and immunities which then existed, and were possessed not alone by all the companies, but by the stockholders of all the companies, so far as concerned the United States. The act says that those grants, immunities, and conditions are, before the consolidation, one and the same thing for each of said corporations, and that after consolidation the attitude of the stockholders of the consolidated company will not be different from that of the stockhold
It is well-settled law that the creditor of a corporation may, by express contract at the time the debt is incurred, waive ids right to collect from the stockholders debts which the corporation may fail to pay. “If a person chooses to deal with a partnership or joint-stock company upon the terms that its funds, and they only, shall be available to make good Ms demands, he cannot afterwards depart from those terms, and hold the members individually liable, as if no such restriction had been agreed to. * * This right, although secured in express terms, may be waived by the creditor by express contract; and it is equally free from doubt that it may be waived by conduct on the part of the creditor, either at the time of making the contract or subsequently, indicating a clear understanding between the contracting parties that the creditor is to look only to the corporate funds, and not to the individual liability of the shareholders.” 3 Thomp. Corp. pp. 2163, 2164, § 3008; Basshor v. Forbes, 36 Md. 154; Brown v. Slate Co., 134 Mass. 590; Ohio Life Ins. Co. v. Merchants’ Ins. Co., 11 Humph. 1.
It is our judgment that the terms of the contract between the United States and the Central Pacific Railroad Company, so far as concerns the waiver of the individual liability of the stockholders of that company, fully meet the requirements of this exposition of the law. The statutes of the United States, the policy and scheme of the government in undertaking the internal improvements, the uniform course of dealing of the United States with all the corporations which entered into contract relations with them, were clearly sufficient to justify the belief of all shareholders that the right of recourse against the individual members of the companies created under the laws of California was waived by the United States; and the course of subsequent action of the United States with reference
