County of Morgan v. Allen

103 U.S. 498 (____)

COUNTY OF MORGAN
v.
ALLEN.

Supreme Court of United States.

The case was argued by Mr. William Brown and Mr. William M. Springer for the appellant, and by Mr. Washington H. Campbell and Mr. Henry S. Green for the appellees.

MR. JUSTICE HARLAN, after making the foregoing statement of the case, delivered the opinion of the court.

The right of the creditors of the Illinois River Railroad Company to subject to the satisfaction of their claims the bonds issued by Morgan County for its subscription to the capital stock of the company has for many years been the subject of litigation in Illinois.

The preceding statement mentions the cases in her supreme court, where the history of that litigation will be found, and summarizes the essential facts which gave rise to it. They are numerous and complicated, and our labor in ascertaining them with accuracy has been greatly increased by the confused condition of the transcript.

We will notice such of the questions of law, suggested by the assignments of error, as we deem necessary to consider or determine.

1. In Sawyer v. Hoag (17 Wall. 610), we had occasion to consider the question whether the creditors of an insolvent corporation were at liberty to assail a transaction between it and its debtor, whereby his subscription of stock was withdrawn, so far as general creditors were concerned, from the assets of the corporation. In that case we declared the doctrine to be well established, that the capital stock of a corporation, especially its unpaid subscriptions, constitutes a trust fund, for the benefit of its general creditors, and that its governing officers cannot, by agreement or other transaction with the stockholder, release him from his obligation to pay, to the prejudice of its creditors, except by fair and honest dealing, and for a valuable consideration. In the subsequent case of Sawyer v. Upton (91 U.S. 56), we had occasion to consider the same question, and there said: "The capital stock of an incorporated company is a fund set apart for the payment of its debts. It is a substitute for the personal liability which subsists in private copartnerships. When debts are incurred, a contract arises with the creditors that it shall not be withdrawn or applied otherwise than upon their demands, until such demands are satisfied. The creditors have a lien upon it in equity. If diverted, they may follow it as far as it can be traced, and subject it to the payment of their claims, except as against holders who have taken it bona fide for a valuable consideration and without notice. It is publicly pledged to those who deal with the corporation for their security. Unpaid stock is as much a part of this pledge, and as much a part of the assets of the company, as the cash which has been paid in upon it. Creditors have the same right to look to it as to anything else, and the same right to insist upon its payment as upon the payment of any other debt due the company. As regards creditors, there is no distinction between such a demand and any other assets which may form a part of the property and effects of the corporation." The same doctrines are held in Upton v. Tribilcock, 91 U.S. 45; Webster v. Upton, id. 65; Hatch v. Dana, 101 id. 205. In no court have they been more distinctly approved than in the Supreme Court of Illinois, when considering the liability of the county of Morgan to creditors of the Illinois River Railroad Company arising out of these identical bonds. Morgan County v. Thomas, 76 Ill. 120.

These principles condemn the arrangements with certain creditors of the company, through which the county, to the prejudice of other creditors, attempted to discharge its liability to the common debtor by paying less than the entire sum due from it. The suits in the State court, under cover of which these arrangements were consummated, were all commenced after the decree of foreclosure, and after the company had suspended operations and was notoriously insolvent. The county recognized the dangers which beset the original enterprise, in furtherance of which its people had voted a subscription of stock payable in bonds. Its officers believed that it would inevitably fail, and that the ends expected to be accomplished by the aid voted would not be attained. It was, for these reasons, that they sought, or acceded to, an arrangement looking to the protection of the county against liability. But it is clear that other creditors besides those with whom it combined had an interest in the disposition of the assets of the company, and that the plan, as conceived and consummated, was wholly inconsistent with the established doctrines of equity. Upon recognized principles of public policy and good faith, the debt which the county owed, by reason of its subscription and the bonds given therefor, constituted, with other property of the company, a trust fund, to which all its creditors could rightfully look for satisfaction of their claims. The county was liable for the whole of that debt, and by no device or combination, to which particular creditors were parties, could it withdraw its bonds from that fund, and thereby avoid liability to the general creditors of the company.

Had the county's liability to the company rested upon its original subscription, the present case, it must be conceded, would come within the very letter of our decisions in the cases just cited. That the subscription was paid or merged in bonds can certainly make no difference in the application of the principle upon which those cases were determined. The bonds were the evidence of the debt created by the original subscription. The company had become, as all its creditors knew, wholly unable to meet its engagements, and had practically ceased to exist. The bonds in question were part of its assets, in which all the creditors had an interest. The county, by an arrangement with some of those creditors, attempted to lessen its obligation to pay what it had stipulated to pay, and thereby defeat the rights of other creditors, who had as much claim upon the assets of the company as those with whom the county contracted. What it did is utterly indefensible under any known rules of equity.

2. But it is contended that the subscription was without authority of law, and that, consequently, the county is not liable thereon, or upon the bonds. The specific ground upon which this contention rests is that the vote of the people in 1856 conferred no legal authority to make the subscription, such vote having been taken under an order of the county court submitting, as a single proposition, the question of subscribing $50,000 to the capital stock of three separate railroad companies, one of which was the Illinois River Railroad Company; that a vote upon such a proposition, submitted in that form, was not one upon which a municipal subscription could rest. There are two sufficient answers to this suggestion. One is, that in no one of the three cases in the Supreme Court of Illinois involving this subscription was any such question distinctly raised by the county. All of them proceeded manifestly upon the undisputed ground that the county court had ample power by statute to make the subscription. We are not now disposed to inquire whether the particular mode in which the people were invited to pass upon the proposed subscription affected the substance or validity of the subscription when made; or, whether the subscription was not a waiver of any irregularity in that respect. Until this suit was brought, more than fifteen years after the subscription had been made, the county never disputed, in any direct form, the legality of the order submitting the question of subscription. Another answer to this objection is suggested by the act of Jan. 29, 1857, declaring the vote to have been legally taken, and requiring a subscription and the issuing of bonds in accordance with the vote of the people. That act, it is argued, was beyond the power of the legislature to pass, in that, in violation of section 9 of article 5 of the Constitution of 1848, as construed by the Supreme Court of Illinois, it imposed upon the people of the county a debt which they had never legally voted to incur; that the vote in 1856, upon the proposition to subscribe stock in three distinct railroad corporations, was an absolute nullity, which could not be constitutionally remedied by any act of assembly, or otherwise than by a direct vote of the electors upon a new proposition submitted in legal form. In support of these views we are referred to numerous decisions of the State court, which we had occasion heretofore to examine in other cases. We deem it unnecessary to consider the general doctrine, with all its limitations and qualifications, of the power of the legislature, by retrospective enactments, to cure defects or omissions which occurred in elections relating to municipal subscriptions. It is often difficult to determine, as matter of local constitutional law, whether the defect or omission in a particular case involves a mere irregularity in the execution of a statutory power, or is vital and jurisdictional. It is quite sufficient on this point to say that the Supreme Court of the State, in Thomas et al. v. County of Morgan (39 Ill. 496), as well as in Morgan County v. Thomas (76 id. 120), recognized the act of the 29th of January, 1857, as having legalized the vote of the county. Those cases, in connection with Thomas v. County of Morgan (59 id. 479), are adjudications under which certain creditors of the Illinois River Railroad Company have received payments of their claims out of the amount due from the county upon the bonds issued in payment of its subscription. The decrees in those cases could not have been rendered except upon the ground that the subscription was not invalid by reason of the particular mode in which the question of county aid was submitted to the electors.

3. It is further contended that the bonds were deposited with Elliott & Brown, to be delivered upon the condition, to which the railroad company assented, that they should be used only for the payment of work done in Morgan County; and, since no such work was done by that company, neither the latter nor its creditors can enforce liability upon the county.

Undoubtedly the county authorities, at the outset, expected that the bonds would be applied only upon such work, and there is no reason to suppose that the president of the company intended any application of them inconsistent with the paper which he executed and delivered to the county prior to their issue. The county court relied upon the assurances given by that officer, and made an order, at its September Term, 1857, that the bonds be delivered to the company. In conformity with that order the bonds were deposited with Elliott & Brown, the bankers of the company, and were held by them subject to its order. They in return received, for the county and by its direction, the certificate of stock. Subsequently, and after the bonds were issued and delivered to Elliott & Brown, the county voted as a stockholder in the election of directors, and for two years paid the interest on its bonds. During all that time who owned the bonds? We have already seen that the Supreme Court of the State adjudged, and, as we think, rightly, that the subscription was absolute and unconditional, and, when made, the company became entitled to the bonds, and the county to the stock. When the absolute subscription was made, the claim for its payment became, as was held by that court, a part of the assets of the company, upon which creditors could rely for the payment of their debts. While, as held by the State court, Thomas might bind himself to treat the subscription as conditional, he had no authority, simply as president of the company, "to consent that it should become conditional." The present appellees, by their purchase of its mortgage bonds (about $900,000 of them purchased in April or May, 1862, and the remainder in 1868), became creditors of the company, and nothing is disclosed by the evidence which estops them from claiming, as against the county, that the bonds given for the county's unconditional subscription constituted, from, at least, the time of their issue and delivery to Elliott & Brown, a part of the assets of the company, to which the latter's creditors could look. Upon this very point the Supreme Court of the State expressed similar views, and said that "where a party receives property from another in discharge of precedent liability, and the party delivering the property has no legal right to prescribe its future disposition or use, as in the present instance, the mere fact that when he delivers it he expects and intends that it shall be applied to a particular disposition or use, does not make such an application of it a condition precedent to the vesting of title."

4. The objection that the appellees are concluded by the decree in the State court, under which the county obtained possession of its bonds, is not well taken. They were not parties to any of those suits, but it is contended that they are nevertheless bound by the adjudication upon the claim asserted therein by Studwell, Hopkins, and Cobb, in their capacity as trustees in the mortgage deed, that they were entitled to the possession of the bonds, for delivery to the new company in completion of the original contract with the county. The Supreme Court of the State was of opinion that the mortgage deed did not, by its terms, include these bonds; that the Peoria, Pekin, and Jacksonville Railroad Company was not a reorganization of the Illinois River Railroad Company, but a new and totally independent organization; and, therefore, the new company acquired no claim to the bonds at the sale under the deed of trust. 76 Ill. But if the trustees, after obtaining the decree of foreclosure and a sale of the mortgage property for the benefit of the bondholders, were under a duty, or by virtue of their position were authorized to enforce, for the benefit of those creditors, the collection of the decree against the company for the balance of the mortgage debt, it is manifest that they did not assume, in the suit in the State court, to which they and the county were parties, to represent the bondholders. In the suit commenced by Elliott & Brown, and reported in 39 Ill., they claimed the right to hold the bonds for the benefit of the new company, and not for the bondholders, whose claims, after crediting the proceeds of the foreclosure sale, were unsatisfied to the extent of $1,061,292.56. Besides, the State court did not, in that case, decide that Morgan County was discharged altogether, and as to everybody, from responsibility upon the bonds, because of the failure of the old company to construct the road in that county. In the original decree it directed the bonds to remain in the custody of Ayres & Co. And in the case in 59 Ill. the court held that the construction of the road by the new company was a substantial compliance with the contract between the old company and the county. There was no adjudication, in the State court, against the claims of the present appellees. On the contrary, the grounds upon which the claims of Vail, Ladd, Thomas, Blair, and other creditors were adjudged by the Supreme Court of the State to be payable out of these bonds are the precise grounds upon which we sustain the claims of appellees as creditors of the old company.

5. In reference to the suit which, it is suggested, was instituted by Studwell, Hopkins, and Cobb in the Circuit Court of the United States for the Southern District of Illinois, it is sufficient to say that the present transcript contains nothing upon that subject. We are not advised, in any proper form, of the nature and object of that suit, nor who were parties to it. We cannot, therefore, say that the final decree in that case, if any was rendered, would affect the rights of parties in this litigation.

There are many other questions which counsel have discussed, but we do not regard them as material in determining the essential rights of the parties. We, therefore, refrain from any discussion of them. The decree below is in line with the adjudications of the Supreme Court of the State, and, in our judgment, is right.

While upon the bench MR. JUSTICE SWAYNE and MR. JUSTICE STRONG participated in the decision of this case. They concur in this opinion; and it is ordered that the judgment be entered as of the date when this cause was submitted to this court.

Decree affirmed.

MR. JUSTICE MILLER, MR. JUSTICE FIELD, and MR. JUSTICE BRADLEY dissented.

NOTE. — A petition was filed for rehearing.

MR. JUSTICE HARLAN delivered the opinion of the court.

We do not perceive that the petition for rehearing in behalf of the county of Morgan contains any suggestion which was not pressed upon our attention in oral argument, as well as in the printed briefs heretofore filed. All that counsel said was carefully considered by us. But there were one or two matters, not distinctly covered by our opinion, to which we may properly refer. A rehearing is asked to the end that a complete record of the suit, in the Circuit Court of the United States for the Southern District of Illinois, of Studwell, Hopkins, and Cobb, Trustees, v. Morgan County, &c., may be obtained and embodied in the transcript of the present case. If the record of that case were here, it could be of no use to the county. The decree therein is not pleaded for any purpose. Further, it is apparent, as well from the printed arguments filed in this court, for and against the county, as from the testimony of the witnesses who refer to the case in the Circuit Court, that the suit of Studwell, &c. v. Morgan County, &c., was dismissed by the complainants therein, and that there was no adjudication upon the merits. The decree of dismissal in that suit, therefore, concluded none of the parties to it, even were it conceded that the trustees had authority, in virtue of their position, to represent the present appellees in any litigation with Morgan County touching its liability to creditors of the Illinois River Railroad Company.

We did not, as counsel seem to suppose, overlook the argument based upon the subscription made by the city of Jacksonville. That subscription, as matter of law, was wholly disconnected from the subscription made by the county, and we could not regard the former as payment, in whole or in part, of the latter, without assuming to make for the parties a contract which they did not choose to make for themselves. If, as urged, that the result is unfortunate for the county, we can only say, what cannot be too often repeated, that hard cases cannot be permitted to make bad law.

Petition denied.

Allen v. County of Morgan, appeal from the same decree, was argued by the counsel who appeared in the preceding case. MR. JUSTICE HARLAN remarked, in giving the opinion of the court, that no error was perceived in the record to the substantial prejudice of the appellants. The decree below was therefore

Affirmed.

MR. JUSTICE MILLER, MR. JUSTICE FIELD, and MR. JUSTICE BRADLEY dissented.