The complaint, filed in WAKE Court, set forth that:
1. By an act ratified Dec. 20th 1866, the Company defendant was authorized to issue bonds not to exceed $4,000,000, for the *Page 558 security of whose holders it might execute a mortgage, conveying its franchise, etc., which should be a first mortgage, — a previous loan in favor of the State to be postponed, and made a second mortgage;
2. By an ordinance of the Convention of 1868, passed Feb. 5th 1868, upon a surrender of $1,500,000 of the above bonds, the State would endorse $1,000,000 of the remainder thereof: provided that $500,000 in other bonds of such remainder should be deposited with the Treasurer of the State, as collateral security for it on account of such endorsement; and if the Company should fail to pay either the principal or interest of said endorsed bonds, so that the State should become liable for, and should pay the same, then the State should become the owner of said $500,000, but if the Company should (721) pay both principal and interest, they should be the property of the Company;
3. Under the above provisions the Company issued $2,000,000 in bonds (besides the $500,000) and executed the mortgage as aforesaid, and obtained the endorsement of the State for $1,000,000 of the $2,000,000 issued and secured as above:
4. The $500,000 were also deposited as required, for an indemnity, etc.;
5. Of the bonds endorsed by the State, $50,000 has come to the hands of the plaintiff as purchaser, for value, etc.;
6. By an act ratified March 12th 1870, the Treasurer is directed to re-deliver to the said Company the above $500,000, (in exchange for a like amount of certain State bonds) to be by it applied to the construction and completion of the road; and the Company is about to demand, and the Treasurer to deliver, them accordingly;
7. The plaintiff is advised that as holder of the said $50,000, it is interested in the security held by the State by having the $500,000 in hand as an indemnity; and is also interested that the fund secured by the mortgage shall not be increased by placing the $500,000 in market; and, therefore, that the act of March 12th 1870, is, as regards it, unconstitutional and void;
8. That the estate conveyed in the mortgage is insufficient to secure the debt provided for; that the Company is insolvent; and that the power which the plaintiff has over the fund held by the State in trust, as above, is superior to that of enforcing payment from the State itself, and that this advantage is one of which he cannot be deprived by adverse legislation;
9. The judgment demanded, was that the Treasurer should be enjoined from delivering the $500,000, or any part thereof; (722) and that the Company and its agents, etc., should be injoined from receiving the same. *Page 559
Upon application to his Honor, Judge Henry, at Chambers, in Raleigh, on the 17th of March 1870, he granted a restraining order until the motion should be decided, and a further order, that the defendants should show cause before Chief Justice Pearson, at Chambers, in Yadkin County, upon the 7th day of April, why the injunction should not be continued until judgment, etc.
There was a miscarriage in regard to the appearance upon the 7th of April, and thereupon, his Honor the Chief Justice postponed the hearing until the 27th day of April, at which time the motion was argued before him at length, by counsel upon both sides.
His Honor made the following order:
It is thereupon considered by me, that the motion be refused, and that the defendants recover the costs of the motion.
The plaintiff having asked to be allowed to appeal, his Honor added:
The plaintiff is entitled to an appeal. The injunction in this case is not ancillary to some primary equity, as a provisional remedy, but is itself the primary right demanded, viz: an injunction, in the first instance, until the hearing, and then, to have it made perpetual; and it rests on the right to be protected from irreparable injury. Consequently, an order refusing the injunction puts an end to the case. The effect of the appeal is, to vacate the order refusing the injunction; and the order of restraint made by his Honor, Judge Henry, remains in force until the motion for an injunction is disposed of by the Supreme Court;
This being an appeal from a ruling at Chambers, does not fall under the regular course of the docket, but will be called on the second day of the next term. (723)
The plaintiff appealed. 1. Any fund given by a principal debtor, (here, the Company,) to his surety, (here, the State,) in order to indemnify the latter against the risk incurred by the relation between them, enures to the benefit of the creditor, (here, the Bank); and no consent by the two former parties to abolish the indemnity, can prevail if the third party disagree. An act of Assembly allowing such new arrangement, against the will of the creditor, impairs the obligation of the contract. The State took the $500,000, charged with a trust to the Bank, and a trust is a contract, within the meaning of the Constitution of the United States: Wiswall v. Potts,58 N.C. 184; Blalock v. Peck, 56 N.C. 323, Burge, Surety, 324;Wright v. Baseley, 11 Ves. 12, 21; Keys v. Brugh, 2 Paige 311; Mousev. Harrison, 1 Abr. Eq. *Page 560 Cas. 93; Moses v. Murgatroyd, 1 Jon. C. 119; Nelson v. Bright, 1 John. 205, 2 John. C. 418.
2. This is especially true here, where the plaintiff can, by suit,enforce his rights against the fund, although he cannot against the surety:Curran v. Arkansas, 15 How. 305; Briscoe v. Bank of Kentucky, 11 Pet. 311; See Hunter v. U.S., 5 Pet. 173; Bank of U.S., v. U.S., 2 How. 711, 2 Story, Const., secs. 1391, 1392; Woodruff v. Trapnall, 10 How. 190;Hawthorne v. Calef, 2 Wall. 10, Cooley, Const. Lim. 277; Town of Pawlett v.Clark, 9 Cranch 292; Terrett v. Taylor, Id. 43; Montpelier v. EastMontpelier, 29 Vt. 12, 1 Kent. Comm. 463; Hoffman v. The City of Quincy, 4 Wall. 535; Dodge v. Woodsey, 18 How. 331.
3. Even if the State cannot be enjoined, its agents may, as, here, the Treasurer: Osborne v. U.S. Bank, 9 Wheat. 738; (724) Curran v. Arkansas, and Dodge v. Woolsey, supra.
4. A State may become a trustee. The English authorities, where they are to the contrary, go upon the view, that the sovereign can act in his sovereign capacity only. In the United States, it is accepted that the sovereign may put off his sovereignty, i.e. as member of a corporation, or as a trader. The rule seems to be, that if a State choose to appear in the guise of a trader, it must submit to be bound by the beneficent rules, (uberrima fides,) of the mercantile law. It cannot, in its sovereign capacity, by the mouths of its Judges, lay down a rule for its citizens, which, in its quasi private capacity, when trading itself, it will not be bound by to the full. If it be a surety, as here, it takes upon itself all the qualities and incidents of the relation. Its example is to tally with its precepts. See 1 Green. Cruise, 385, 431, and n.; Kildare v.Eustace, 1 Vern. 412; Penn v. Lord, Baltimore, 1 Ves. Sr. 444, Saund. U. and T. 349; Pinson v. Ivey, 1 Yerg. 296. 1. The plaintiff states that the trust set up by it is only "indirect," and not express: As the State is not bound by Statutes which do not act upon it expressly, so also, it is not by transactions: Bac. Abr., Prerog. 5; Charles River Bridge v. Warren Budge, 11 Pet. 552; U.S. v. Arredondo, 6 Pet. 738; State v. Garland, 29 N.C. 48; McRee v. Wil. Ral. R. R.,47 N.C. 186; State v. Manuel, 20 N.C. 33, 2 Sto. Eq. sec. 1195.
2. The doctrines which affect ordinary persons who fill certain relations of business, etc., have no place in regard to the State, or sovereign, when holding such relations: Bac. Prerog. 1; Taylor v. *Page 561 Shuford, 11 N.C. 133; Candler v. Lunsford, 20 N.C. 408; Wallace v.Maxwell, 32 N.C. 112.
3. The State cannot be a trustee: Cook v. Fountain, 3 Swanst. 585. (725)
4. If the State be decreed a trustee, it has, of course, the privileges of a trustee; one of which is that of making prudent investments of the trust funds, at his discretion; as, here, by an investment for the completion of the road, and the consequent enhancement of all its property. Lewin, Trusts, 413; Massey v. Bonner, 1 Jac. and Walk. 241. A question is made in this case as to the right of a plaintiff to appeal from a decision of a Judge, or of a Justice of this Court, sitting at Chambers, refusing an injunction. We think the right is clearly given by section 299, C.C.P., and we can see no inconvenience in its exercise.
2. As to the principal question:
The plaintiff contends that by virtue of the contract between the State and the Company, contained in the ordinance of 1868, the State became a trustee of the property conveyed to it under that ordinance, to wit: of the road and of the half million of the bonds of the company, not only for the indemnity of the State as the endorser for the company of a million of its bonds, but also for the benefit of all the holders of such bonds; and that consequently it cannot, in good faith, do any act calculated to impair the security. The general principle is admitted. And although there was no direct contract between the State and the plaintiff, (except, of course, the endorsement,) it is conceded that any equities arising to the plaintiff as a creditor, out of the contract between the State and the company, are as much entitled to protection as would be any rights directly created by a contract between the plaintiff and the State. In the view which we take of this case, it is not necessary to consider whether equitable obligations assumed by a State as a trustee, can be enforced indirectly through the process of an injunction (726) against the State Treasurer; we avoid the expression of any opinion on that point, but for the sake of the argument we assume that they may. The only remaining question is, whether the act sought to be enjoined is in violation of any contract implied between the State and the plaintiff, or of any equity arising on behalf of the plaintiff out of the contract between the State and the defendants, contained in the ordinance of 1868. If it is not, although the plaintiff may be damaged by the threatened act, he cannot, in a legal sense, be injured. The act sought to be enjoined is the delivery to the company of the half million of its bonds which *Page 562 were deposited with the State under the ordinance of 1868, to be negotiated for its benefit.
Two ways are suggested in which the plaintiff will be damaged by this act:
I. It is said that the fund provided for the security of his debt will be diminished, by withdrawing from it this half million of bonds: and, for example, it is said that if the road shall be sold under the mortgage, and bring less than two millions, the plaintiff and other like creditors, through the State as their trustee, would be entitled, in the distribution of the proceeds, to a share, in the proportion of a million and a half to the million of the notes not endorsed by the State.
This view regards the half million of bonds as property, as a real value, which it seems clear to us, as long as they remain unnegotiated and in the hands of the State, they are not. For this half million of bonds the State has given no consideration; they do not represent a debt to the State, actual or contingent; they do not been delivered to the State as bonds; they are simply in the nature of the penalty of a bond, which does not increase the real obligation. The only debt to the State, (we may speak of it as a debt, although it is in fact only a liability,) is, for the million of bonds (727) endorsed by it; and the company by procuring the holders of those bonds to release the State, would be immediately entitled to receive the half million of its bonds. To such a distribution of the assets of the company as that suggested in the event supposed, the holders of the million of bonds not endorsed by the State, but secured in the mortgage equally with those so endorsed, might reasonably object: it would be inequitable for the State to prove for an amount exceeding its liabilities; in a common risk, equality is equity. It may here be asked if this be the true construction of the contract, what purpose was intended to be answered by the deposit of this half million of bonds. The question is pertinent, and an answer will be attempted in the course of this discussion.
II. It is said that the plaintiff will be damaged by the negotiation of the half million of bonds, in that the debt secured by the mortgage will be increased, and hence, in the event supposed, of the insolvency of the company, the pro rata share of the plaintiff will be diminished. The suggestion is opposed to the former one, which considers the mortgage debt to be two millions and a half, whereas this properly regards it as being, until the negotiations of these bonds, only two millions. It is admitted that the negotiation of these bonds may be a damage to the plaintiff in the way suggested; and if the whole debt contemplated by the mortgage, both prospective and existing, was only two millions, we are prepared to *Page 563 concede that the increase would be inequitable and injurious. The equities claimed by the plaintiff can arise only out of this construction of the ordinance. But it seems to us clear, on the face of the ordinance, that the intention in depositing these bonds, was, that they might be negotiated in some contingency. No other reasonable purpose can be suggested, and this is our answer to the inquiry above, which was deferred. Unless they were to be negotiated, their existence could answer no useful purpose whatever; in the (728) hands of the State they were without vitality. The plaintiff therefore, although he might be damaged by such negotiation, could not be injured, as it is consistent with the contract which he knew of and assented to, when he purchased his bonds.
The plaintiff, however, says that although it was agreed that the State might negotiate these bonds, yet it can only do so in the event of a default of the company in the payment of interest, and the proceeds of the sale must be applied exclusively to pay the interest of the bonds endorsedby the State. We think this the most serious question in the case. But upon consideration of the whole contract between the State and the company, we are led to the conclusion that it was not the intention to tie up the power of the State over these bonds so narrowly, but that a discretion was left to it to use them in any way not injurious to the creditors secured by the mortgage.
In the first place, it is not said expressly, or, as far as we can see, by a reasonable implication, that the proceeds of the half million of bonds is to be appropriated in the way claimed. They are deposited with the State as a collateral security for its endorsement, "and if the company shall fail to pay either interest or principal of said endorsed bonds, so that the State shall become liable for the same, then the State shall become the owner of the said five hundred thousand dollars of bonds:" but if the company shall pay the bonds endorsed by the State, the half million of bonds shall be the property of the company. It does not appeal that the State has yet paid any thing for the company, nor is it material that it should appear. It is not easy to see what precise rights the Convention supposed would arise from the deposit of these bonds. It could not be that in the event of the insolvency of the company and a failure of its assets, the State was to prove as a creditor for half a (729) million more than was owing to it, or than it was bound for. The injustice of this to other creditors in the event supposed is so obvious, that we cannot attribute such a purpose to the Convention. But, in any event the half million were to be the property either of the State or of the company; they were regarded as a part of the debt secured by the mortgage, and this they could not be so long *Page 564 as they remained in the hands either of the State or of the company; they had no existence as a debt until they were negotiated, and the expectation plainly was that they should be negotiated, under circumstances not clearly described, and probably not clearly foreseen.
Secondly, the holders of the million of bonds secured by the mortgage, but not endorsed by the State, might truly allege that to sell the half million of bonds and apply the proceeds to pay the interest of the endorsed bonds, would be disadvantageous to them, as enlarging the principal of the mortgage debt for the exclusive benefit of the holders of the endorsed bonds. We are not prepared to say that this application of the half million of bonds would be inequitable, because it probably was one of the modes in which it was contemplated in the ordinance that they might be used: but we think it was not the only one, and that the State and the company might agree to any other application not expressly or impliedly forbidden by the ordinance. The act of 1870 gives the bonds to the company, to be negotiated by them, and the proceeds to be expended in the construction of the road. This application does not impair, but may increase the security of the mortgage creditors; it is neither expressly, nor, so far as we can see, by any probable implication, forbidden by the ordinance of 1868, but we think was contemplated, as possible, by that ordinance. We do not see that the plaintiff is damaged — much less injured — by this (730) application. We think, therefore, the injunction was properly refused; the restraining order is also dissolved.
The defendant will recover costs.