Northern Pacific Railway Co. v. Boyd

228 U.S. 482, 33 S. Ct. 554, 57 L. Ed. 931, 1913 U.S. LEXIS 2390

• Court: Supreme Court of the United States
• Decided: April 28, 1913
• Docket: 47
• Status: Published

Opinions

Mr. Justice Lamab,

after making the foregoing statement, delivered the opinion of the court.

Boyd’s judgment against the Coeur D’Alene Railway & Navigation Company was rendered in 1896 in an action begun in 1887 in a court of the Territory of Idaho. After he had established his title to the judgment and revived it in 1906 for $71,278 there was nothing: on which an execution could be levied because, in tue meantime, all of the property of the Coeur D’Alene had been sold under foreclosure. He thereupon brought .this suit, claiming that the Northern Pacific R. R. Co. was liable in equity as for a diversion of $465,000 of bonds, belonging to the Coeur D’Alene but used by the Northern Pacific in payment of 5,100 shares of stock bought from Corbin in 1888.

At that time the Coeur D’Alene was solvent, owning and operating at. a profit a narrow gauge railroad, 33 miles in length, constructed at a cost of about $12,000 a mile and paid for mainly out of the proceeds of $360,000 of first mortgage bonds. The original capital stock of $500,000, increased to $1,000,000, had been issued, but the subscriptions were unpaid. A majority of this stock was controlled by Corbin, the president.

On August 1, 1888, he, in his individual capacity, entered into a written contract with the Northern Pacific, in which he undertook to have the Coeur D’Alene issue $825,000 of bonds, $360,000 of which were to be retained to retire those then outstanding. He also agreed to cause the Coeur D’Alene to lease its property for 999 years to the Northern Pacific, which, in turn,, was to guarantee the payment of the principal and interest of the bonds. The contract further recited that in consideration of the execution of the lease and guaranty Corbin wpuld transfer to the Northern Pacific 5,100 fully paid and non-assessable shares of the capital stock of the Coeur D’Alene. The agreement was promptly carried into effect. A resolution was passed by the directors of the Coeur D’Alene authorizing the issue of $825,000 of bonds for properly constructing, completing and equipping the road; the 999-year lease was made and Corbin transferred his stock. Shortly after-wards the Trust Company, named in the mortgage, issued to Corbin, president; or order, $465,000 of the new bonds. They were not used for completing or equipping the road, paying the debts or other corporate purpose, and although the Northern Pacific .was the then holder of a majority of the stock and in charge of the business and litigation of the Cceur D’Alene, no steps were taken to trace or recover them. Corbin testified that he was paid for the stock, in cash, about the .par value of the bonds; that he had never received them, or if so, that they only passed through his hands “with an agreement that somebody was to take them off of our hands and pay us the money.”

1. The buyer would naturally have been the person to make arrangement for the payment. But the Railway insists that the payment was not made in cash but that, as recited in the written contract, the stock was transferred by Corbin in consideration of the Northern Pacific guaranteeing the bonds and entering into the lease. But even if Corbin, sold his 5,100 shares'for a consideration nominally moving to the Coeur D’Alene, that would not change the character of the transaction if, in fact, Corbin made the transfer with the further understanding that he was to have the proceeds of the guaranteed bonds. In that event the purchaser would be as much liable for the diversion of the $465,000 as the seller. Chicago, M. & St. P. Ry. v. Third Nat. Bank, 134 U. S. 276. The terms of the contract; Corbin’s control of the Coeur D’Alene; the failure to produce or account for the absence of the agent who represented the Northern Pacific Railroad in the purchase, together with Corbin’s testimony that the stock was paid for out of the cash proceeds of the bonds, support the concurrent findings of-the two courts that the Northern Pacific combined with him to divert $465,000 of the assets of the Coeur D’Alene. And even if, as claimed, liability for a diversion of trust funds was dependent upon the insolvency of the Coeur D’Alene, that insolvency was brought about in the very act of carrying the illegal contract into effect; for thereby the Coeur D’Alene was encumbered with a mortgage for twice its value, and the lease for 999 years, with rental payable only from net profits, left nothing out of which debts could be made by levy and sale. 134 U. S. 277.

2. Being liable for this diversion of $465,000, the Northern Pacific Railroad remained so liable until the funds were restored to the true owner. Chicago, M. & St. P. Ry. v. Third Nat. Bank, 134 U. S. 277. The obligation was not lessened by set-offs, nor discharged in whole, because the Northern Pacific spent $500,000 of its own. money in broadening the gauge, extending the line, equipping the road, or for other purposes which may have been thought by it advantageous To the Cceur D’Alene. Such disbursement was not a restoration of what had been taken, but an expenditure' by the Northern Pacific, for its own benefit, in improving a road which it practically owned by virtue of the 999-year lease.

3. Although this diversion of $465,000 of bonds in 1888 made the Northern Pacific liable, in equity, for the payment of Boyd’s judgment for $71,278, recovered in 1896 and revived in 1906, yet his right was apparently not en-. forcible because, in 1896, all of the property of the Northern Pacific Railroad had been sold under foreclosure to the newly created Northern Pacific Railway Company. He' thereupon brought this suit against the mortgagor and purchaser, seeking to subject the property bought to the payment of this liability. He claimed that the foreclosure sale was void because made in pursuance of an illegal plan of reorganization, between bondholders and stockholders of the Railroad, in which, though no provision was made for the payment of unsecured creditors, the stockholders retained their' interest by receiving an equal number of shares in the new Railway. There was no question as to parties and no demurrer to the bill. The Railway answered and on the trial of the merits offered evidence tending to support its contention that the decree was regular in form, free from fraud and that the property brought a fair price at public outcry. Both court's found against this contention and entered a decree making Boyd’s claim a lien upon the property of the Railroad in the hands of the Railway, but subject to the mortgages placed thereon at the time of the reorganization.

The appellants attack the ruling from various standpoints based 'upon many facts in the voluminous record. But, having been summarized in the statement, they will not be discussed in detail, inasmuch as the case, though presenting various aspects, is controlled by a single proposition. For although Boyd was not a party to the foreclosure, and was not made such by the publication notifying creditors to prove their claims, yet the original and supplemental decrees were free from any moral or actual fraud and were, in form and nature, sufficient to have passed a title good against him, unless the contract of reorganization, reserving a stock interest in the new company for the old shareholders, left the property still subject to the claims of non-assenting creditors of the Northern Pacific Railroad.

4. Corporations, insolvent or financially embarrassed, often find it necessary to scale their debts and readjust stock issues with an agreement to conduct the same business with the same property under a reorganization. This may be done in pursuance of a private contract between bondholders and stockholders. And though the corporate property is thereby transferred to a new company, having the same shareholders, the transaction would be binding between the parties. But, of course, such a transfer by stockholders from themselves to themselves cannot defeat the claim of a non-assenting creditor. As against him the sale is void in equity, regardless-of the motive with which it was made. For if such contract reorganization was consummated in good faith and in ignorance of the existence of the creditor, yet when he appeared and established his debt the subordinate interest of the old stockholders would still be subject to his claim in the hands of the reorganized company. Cf. San Francisco & N. P. R. R. v. Bee, 48 California, 398; Grenell v. Detroit Gas Co., 112 Michigan, 70. There is no difference in principle if the contract of reorganization, instead of being effectuated by private sale, is consummated by a master’s deed under a consent decree.

5. It is argued that this is true only when there is fraud in the decree, — the appellants insisting that in all other cases a judicial sale operates to pass a title which, cuts off all claims of unsecured creditors against the property. They rely on Wenger v. Chicago &c. R. R., 114 Fed. Rep. 34; Farmers’ Loan & Trust Co. v. Louisville &c. Ry. Co., 103 Fed. Rep. 110; Pennsylvania Transportation Co.’s Appeal, 101 Pa. St. 576; Kurtz v. R. R., 187 Pa. St. 59; Paton v. P. R. R., 85 Fed. Rep. 838; Shoemaker v. Katz, 74 Wisconsin, 374; Bame v. Drew, 4 Denio, 287; Ferguson v. Ann Arbor R. R., 17 App. Div. 336; McArdell v. Olcott, 104 App. Div. 263; S. C., 189 N. Y. 368, 384; Candee v. Lord, 2 N. Y. 269. Some of these cases hold directly, and others inferentially, that, in the absence of fraud, as here, a judicial sale is binding upon non-assenting creditors even .though the decree was entered and the sale was made in pursuance of a contract, to which the stockholders were parties, and by which they were to ^retain a stock interest in the purchasing company. This makes the creditor’s legal right against the shareholders’ interest depend upon the motive with which they act and the method by which they carry out the scheme. If they do so by means of. a private contract, though in ignorance of the existence of the creditor, the property remains hable for his debts. If they do so by means of a judicial sale under a consent decree and in like ignorance or disregard of his existence, the result is said to be different, although the shareholders should, reserve exactly the same interest and- deprive the creditor of exactly the same right.

Such and similar possibilities at one time caused doubts to be expressed, as to whether a court could permit a foreclosure sale which left any interest to the stockholders. But it is now settled that such reorganizations are not necessarily illegal, and, as proceedings to subject the property must usually be in a court where those who ask equity must do equity, such reorganizations may even have an effect more extensive than those made without judicial sale, and bind creditors who do not accept fair terms offered. The enormous value of corporate property often .makes it impossible for one, or a score, or a hundred bondholders to purchase, and equally so for stockholders' to protect their interests. A combination is necessary to secure a bidder and to prevent a sacrifice. Cooperation being essential, there is no reason why the stockholders should not unite with the bondholders to buy in the property.

That was done in the present case. And while the agreemeht contained no provision as to the payment of unsecured creditors, yet the Railway Company purchased unsecured claims aggregating $14,000,000. Whether they were acquired because of their value, to avoid litigation, or in recognition of the fact that such claims were-superior to the rights of stockholders, does not appear, nor is it material. For, if purposely or unintentionally a single creditor was not paid, or provided for in the reorganization, he could assert his superior rights against the subordinate interests of the old stockholders in the property transferred to the new company. They were in the position of insolvent debtors who could not reserve an interest as against creditors. Their original contribution to the capital stock was subject to the payment of debts. The property was a trust fund charged primarily with the payment of corporate liabilities. Any device,. whether by private contract or judicial sale under consent decree, whereby stockholders, were preferred before the creditor was invalid. . Being bound for the debts, the purchase of their property, by their new company) for their benefit, put the stockholders in the position of. a mortgagor buying at his own sale. If they did so in good faith and in ignorance of Boyd’s claim, they were none the less bound to recognize his superior' right in the property, when years later his contingent claim was liquidated and established. That such a sale would be void, even in the absence of fraud.in the decree, appears from the reasoning in Louisville Trust Co. v. Louis ville Ry., 174 U. S. 674, 683, 684, where “assuming that foreclosure proceedings may be carried on to some extent at least in the interests and for the benefit of both mortgagee and mortgagor (that is, bondholder and stockholder) ” the court said that “no such proceedings can be rightfully carried to consummation which recognize and preserve.; any interest in the stockholders.without also recognizing and preserving the interests, not merely of the mortgagee, but of every creditor of the corporation. . . . Any arrangement of the parties by which the subordinate rights and interests of the stockholders are attempted to be secured at the expense of the prior rights of either class of creditors, comes within judicial denunciation.”

6. The Railway seeks to distinguish that case from this, insisting that even if the stockholders’ participation the reorganization would have invalidated the proceeding, such result does not follow here because the court having charge of the foreclosure passed on this very question before the sale in 1896 and dismissed the Bill of Paton, an unsecured creditor, when he made exactly the same attack upon the reorganization as that by Boyd in this bill. That court then held that as the property was insufficient to pay the mortgage debts of $157,000,000, there was nothing which cquld come to the unsecured creditors, and they, therefore, had no ground to complain if the bondholders were willing to give new shares to the old stockholders. No appeal was taken from that decision — possibly because the Patón -claim was purchased by the Railway. But inasmuch as Boyd was not a. party to the record that décree was not binding upon him as res adjudicóla, and the qpinion not being controlling authority, cannot be followed in view of the principles declared in Chicago, R. I. & P. R. R. v. Howard, 7 Wall. 392; Louisville Trust Co. v. Louisville R. R., 174 U. S. 674.

In saying that there was nothing for unsecured creditors the argument assumes the very fact which the law com templated was to be tested by adversary proceeding in which it would have been to the .interest of the stockholders to interpose every valid defense. If, after a trial, a sale was ordered, they were still interested in making the property bring its value, so as to leave a surplus for themselves as ultimate owners. Even after sale they could have opposed its confirmation if the bids had been chilled, or other reason existed to prevent its approval. In the present case all these tests and safeguards were withdrawn. The. stockholders, who, in lawfully protecting themselves, would, necessarily have protected unsecured creditors, abandoned the defense that the foreclosure suit had been prematurely brought. The law, of . course, did not require them to make or insist upon that defense if it was not meritorious, nor does it condemn the decree solely because, it was entered by consent. But the shareholders were not merely quiescent. They, though in effect defendants, became parties to a contract. with the- creditors, who were in effect complainants, by which, in consideration of stock in the new company, they 'transferred their shares in the Railroad to the Railway. The latter then owning the bonds of the complainant and controlling the stock in the defendant, became the representative of both parties, in interest. In such a situation there was nothing to litigate, and so the demurrer to the bill was withdrawn. An answer was immediately filed admitting all the allegations of the bill. On the same day, “no one opposing,” a decree of foreclosure- and sale was entered. Two months later the property was sold to the agreed purchaser at the upset price named in the decree. In a few days and by consent that sale was confirmed. As between the parties and the public generally, the sale was valid. As against creditors, it was a mere form. Though the Northern Pacific Railroad was divested of the legal title, the old stockholders .were still owners of the same railroad, encumbered by the same debts. The circumlocution did not better their title against Boyd as a non-assenting creditor. They had changed the name but not the relation. The property in the hands .of the former owners, under a new charter, was as.much subject to any existing liability as that óf a defendant who buys his own property at a tax sale.-

The invalidity of the sale flowed from the character of the reorganization agreement regardless of the value of the property, for in cases like this, the question must be decided according to a fixed principle, not leaving the rights of the creditors to depend upon the balancing of evidence as to whether, on the day of sale the property was insufficient to pay prior encumbrances. The facts in the present case illustrate the necessity of adhering to the rule. The railroad cost $241,000,000. The lien debts were $157,000,000. The road sold for $61,000,000 and the purchaser at once issued $190,000,000 of bonds and $155,000,000 of stock on property which, a month before, had been bought for $61,000,000.

It is insisted, however, that not only .the bid at public outcry, but the specific, finding in the Patón case, established that the property was worth less than the encumbrances of $157,000,000, and hence that Boyd is no worse off than if the sale had been made without the reorganization agreement. In the last analysis, this means that he cannot complain if worthless stock in the new company was given for worthless stock in the old. Such contention, if true in fact, would come perilously near proving that the new shares had been issued without -the payment of any part of the implied stock subscriptions except the. $10 and $15 assessments. But there was an entirely different estimate of the value of the road when the reorganization contract was made. For that agreement contained the distinct recital that the property to be purchased was agreed to be “of the full value of $345,000,000, payable in fully paid non-assessable stock and the prior lien and general lien bonds to be executed and delivered as hereinafter provided. ’ ’

The fact that at the sale, where there was no competition, the property was bid in at $61,000,000 does not disprove the truth of that recital, and the shareholders cannot now be heard to claim that this material statement was untrue and that as a fact there was no-equity out of which unsecured creditors could have been paid, although there was a value which authorized- the issuance of $Í44,000,000 fully paid stock. If the value of the road justified the issuance of stock in exchange for old shares, the creditors were entitled to the benefit of .that value, whether it was present or prospective, for dividends or only for purposes of control. In either event it was a right of property out of which the creditors were entitled to be paid before the stockholders could retain it for any purpose whatever.

7. This conclusion does not, as claimed, require the impossible and make it necessary to pay an unsecured creditor in cash as a condition of stockholders retaining an interest in the reorganized company. His interest can be' preserved by the issuance, on equitable terms, of income bonds or preferred stock. If he declines a fair offer he is left to protect himself as any other creditor of a judgment debtor, and, having refused to come into a just reorganization, could not thereafter be heard in a eourt of equity to attack it. If, however, no. such tender was made and kept good he retains the right to subject the interest of the old stockholders in the property to the payment of his debt. If their interest is valueless, he gets nothing. If it be valuable, he merely subjects that which the law had originally and continuously made liable for the payment of corporate liabilities.

8. Lastly, it is said that Boyd was estopped from attacking, in 1906, a reorganization completed in 1896, and, ordinarily, such a lapse, of limé would prevent any creditor from asserting a claim like that here made. For along-with the policy to encourage reorganizations, goes that of requiring prompt action by those who claim that their rights have been injuriously affected. The fact that improvements are put upon the property — that the stock and bonds of the new company almost immediately became the subject of transactions with third persons — call for special application of the rule of diligence. But the doctrine of estoppel by laches is not one which can be measured out in days and months, as though it were a statute of limitations. For what might be inexcusable delay in one cáse would not be inconsistent with diligence in another, and unless the non-action of the complainant operated to damage the’ defendant or to induce it to change its position, there is no necessary estoppel arising from the mere lapse of time. Townsend v. Vanderworker, 160 U. S. 171, 186.

In this case the defendants and their stockholders have not been injured by Boyd’s failure to sue. His delay was not the result of inexcusable' neglect, but in spite of diligent effort to put himself in the position of a judgment creditor of the Cceur D’Alene so as to be able to proceed in equity to collect his debt. He accomplished this result. only' after protracted litigation, beginning in 1887 and ■continuing through the present appeal (1913). The inore important chapters of the different cases, with lawsuits within lawsuits, are reported in 5 Idaho, 528;, 6 Idaho, 97; 6 Idaho, 638; 85 Fed. Rep. 838; 93 Fed. Rep. 280; 174 U. S. 801; 170 Fed. Rep. 779; 177 Fed. Rep. 804. They involve a series of independent transactions, in different courts, between Spaulding and the Cœur D’Alene Company; Boyd and Spaulding; Boyd and the Cœur D’Alene Company; the Northern Pacific, Railroad and the. Cœur D’Alene, and finally the foreclosure of the Northern Pacific Railroad and its purchase by the Northern Pacific Railway.

When. Spaulding recovered against the Cœur D’Alene it required, years for Boyd to establish his title to the judgment. To prevent it from becoming dormant it was necessary promptly to institute proceedings against the Cœur D’Alene in the nature of scire facias to revive the judgment. There is no reason suggested by this record why it should have done so, unless it was to avoid the enforcement oí this very claim, but the Northern Pacific Railway, by.its counsel, defended that revivor suit against the Cœur D’Alene, and when, in 1906, it terminated in favor of Boyd, he at once filed this bill alleging that the Railroad was liable for the debts of the Cœur D’Alene and the Railway liable for the debts of the Railroad.

The delay in beginning the present suit — the last of a remarkable series of legal proceedings — was excusable if not absolutely unavoidable. Boyd claims that he had no notice of the fact that the stockholders were to retain an interest in the new company and that, in part, the delay to begin proceedings was occasioned by the Railway Company itself, since it, as the purchaser of the Cœur D’Alene property, resisted his attempt to revivé the judgment. Boyd’s- silence,, in 1896, did not mislead the stockholders, nor did his non-action induce them to become parties to the reorganization plan. They have not in any,way changed their position by reason of anything he did or failed to. do, and the .mere lapse of time ..under the peculiar and extraordinary circumstances of this case did not estop' him, when he revived the judgment, from promptly proceeding to subject the shareholders’ interest in property which in- equity was liable for the payment of his debt. The decree of the Circuit Court of Appeals is

Affirmed.