Case ID: tenn_29/html/0388-01.html
Source: Caselaw Access Project
Author: {"author": "Green, J.", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

State of Tennessee vs. Central Turnpike Co.
    1. The Governor of the State of Tennessee subscribed for one half of the capital stock of th e Central Turnpike company, and issued the bonds of the State, bearing interest, in payment of the said subscription, in accordance with the provisions of the act of 1S38, ch. 107. That act establishes a bank, and declared that its capital should be five millons of dollars, and that the faith and credit of the State should be pledged for the support of the bank, to supply any deficiency in the fund specifically pledged for the establishment of such bank, and to give indemnity for all losses arising from such deficiency. The act further provides, that the bank shall pay the interest on bonds issued to internal improvement companies after the payment of specified sums to common schools and academies; and in the event there should be a deficiency in the dividends of the bank and in the dividends of the internal improvement companies to pay such interest, then the individual stockholders should be liable to pay such interest. This bill is filed to subject the individual stockholders to pay such interest, the deficiency having occurred; and it is held, 1st. The fact that the State furnished only three millions of capital does not relieve the individual stockholders from their liability to pay interest, for they must be understood to have accepted the conditions to be performed by them with reference to the- known capital of the bank at the date of the subscription. The engagement of the State to support the bank has reference alone to its creditors, as note holders and the like; and the engagement to supply the deficiency in the funds pledged has reference to the specific amount anuually appropriated to the common schools and academies.
    2. The declaration of the act that if the dividends of the bank and the contingent fund shall be insufficient to pay the interest on the bonds, the deficiency shall be made up out of any uninvested dividends from works of internal improvement, does not amount to a positive pledge to apply the dividends on works of internal improvement to the payment of interest on State bonds. The law, therefore, which requires these dividends to be paid into the treasury instead of the bank, is no violation of the contract with the stockholders, and does not discharge them.
    3. It is insisted that the act of 1842, ch. 77, appropriating two hundred thous- and dollars of the stock of the bank for the improvement of certain rivers, after its subscription of stock in the Central Turnpike company, diminished the means of the bank to pay the interest on the bonds issued to this company, was a violation of the contract with the stockholders, and discharged the defendants; and so the court holds. The State has no right to exact the payment of interest from the stockholders after a withdrawal of the means pledged for the payment of such interest.
    The Legislature in 184G passed a resolution which directed the Governor of the State to notify the several internal improvement companies in which the State was a stockolder under the act of 1838, ch. 107, that the dividends of the bank after payment of other charges, and the dividends on the stock of the State in such works, were insufficient to meet the interest on the State bonds issued to such companies, and upon the failure of any of said companies to meet its share of suc.h deficiency, to direct the attorney general to institute proceedings against one of said companies, to test the right of the State to recover such deficient sum. All of the companies refusing to pay any portion of such deficient interest, and all disputing the right of the State to recover, an agreed case was made with the Central Turnpike company, which is exhibited in the following bill and answer:
    The following is the Bill of complaint:
    The State of Tennessee, by the Attorney General, informs the Chancellor, sitting in equity at Nashville, that the legislature chartered a company, called the Columbia Central Turnpike Company, with a capital stock of three hundred thousand dollars; that of this sum one hundred and fifty thousand dollars were subscribed by-individuals, and the same amount was subscribed by the Governor on behalf the State, and the company was duly organized by the election of a board of directors, a president, and a secretary. The Attorney General states, that at different periods of time, the said company received the bonds of the State for the sum of one hundred and fifty thousand dollars in full payment of the State subscription, (bearing an interest of five per centum per annum payable semi-annually,) part in November, 1838, and part in June, 1841. The attorney general states that said company constructed said road, but that the proceeds of the State stock therein has not been sufficient to meet the interest on the bonds of the State issued to the said company. The attorney general states that the act of 1838, ch. 107, section 20, provides that the president and directors of the bank shall provide for the payment of the interest aforesaid, out of the dividends of the bank, and that in the event the dividends of the bank, after discharging the amounts chargeable upon them, shall fail to meet the interest on the bonds, that interest shall be paid out of the contingent fund, or uninvested dividends of the internal improvement stock of the State, and in the event these sources shall fail, or be insufficient, that the interest on the bonds shall be paid by the individual stockholders in proportion to the amount which the State may have issued her bonds to each company. The attorney general states that all the above sources have failed and been found insufficient to pay the interest on the bonds issued to said companies, and that after the application of all the funds aforesaid, there remains unpaid a large sum, to wit, the sum of - dollars, of the which sum ■--- dollars is chargeable .against the bonds issued to the Columbia Central Turnpike Company, and against the individual stockholders thereof. The attorney general states that said turnpike company had been duly notified according to law of the deficiency aforesaid, and of the amount chargeable against the individual stockholders of said company, and due demand thereof has been made of the same, and no payment has been made by said company, of its proportion of the deficiency aforesaid, but the same remains unpaid, and said company and its individual stockholders refuse to make payment of any part thereof. The attorney general charges that the said stockholders received the bonds of the State under the law which stipulates for their individual responsibility oír the contingencies aforesaid, and that they are bound to pay off their quota of the unpaid interest, and have not so done, to the great injury and discredit of the State.
    The attorney general states that - is the president of said corporation, and - is the secretary, and that the following persons are the stockholders: ■-, &c. &c.
    The attorney general therefore prays that said corporation be made a party defendant to this bill, and that said stockholders be made parties, and that a decree be rendered on the premises in favor of the State, against each of the stockholders for his amount of the unpaid interest chargeable against said company proportioned to his stock; and that each stockholder may declare his amount of stock, which is unknown to the State; that an account be taken, and that such other decree and relief be granted as the premises may justify.
    The following is the defendants’ answer:
    These respondents waiving the usual benefit of exception to thé bill of complaint, answering, say, It is true that the legislature did charter a company, to be called the Columbia Central Turnpike Company, for the construction of a turnpike road from Columbia to the Tennessee river; that one-half of the capital, amounting to one hundred and fifty thousand dollars, was subscribed by these respondents and paid in; the other half, amounting to one hundred and fifty thousand dollars, being subscribed by the Governor, on behalf of the State, and the amount paid for by 'the issuance to the company of one hundred and fifty bonds of one thousand each, bearing an interest of five per cent, per annum. The company was organized by the election of the proper officers, and the road built pursuant to the charter. It is also true that the dividends declared and set apart and paid over to the State as her portion of the profits, do not amount to as much as five per cent, per annum on the amount of the bonds so issued and paid to said company. It is also true that these respondents have been called upon to make up the deficiency of profits between the dividends declared and the said amount of five per cent, per annum on the bonds, and that they have refused to pay the same; and they now deny that they are bound in equity and good conscience to make up said deficiency; and will proceed to state the grounds of their refusal.
    These respondents say that they subscribed for the stock aforesaid, under the several provisions of the act of the legislature, passed on the 19th of January, 1838, entitled, “An act to establish a State Bank to raise a fund for internal improvements, and to aid in the establishment of a system of education,” and they insist that when the State, through her Governor, subscribed for the other half of said stock, a contract or agreement was thereby entered into between the State and these respondents, the terms of which agreement are contained in the said act of January 19th, 1838. They admit that one of the terms of said agreement is contained in the 20th section of said act, in the following words: “Be it enacted, that whenever the president and directors of any company incorporated for the purpose of internal improvement, shall negotiate any bonds under the provisions of this' act, it shall be their duty to notify the president and directors of the bank, of the place at which the interest on said bonds is stipulated to be paid. which shall be within the limits of the United States, and the president and directors shall provide for the payment of the interest aforesaid, out of the dividends of the bank: Provided, that if there shall be a surplus of the dividends, after setting apart the amount appropriated to common schools and academies, and after paying the interest on the bonds of the State, the same shall be held by the bank as a contingent fund, to be appropriated at any time when there may occur a deficiency in the dividends for the purposes aforesaid: And provided also, that if at any time there shall be a deficiency in the dividends to liquidate the accruing interest on the State bonds, and the contingent fund shall be insufficient for such purpose, such deficiency shall be made up out of any uninvested dividends that may have been declared on the stock owned by the State in the several works of internal improvement, and if there should still be a deficiency, the same shall be made up by the individual stockholders of the roads in which the State has subscribed for- stock, in proportion to the amount for which the State may have issued her bonds in each, the .amount so paid by the several companies to be reimbursed out of the first dividends declared in favor of the State on her stock in said companies.”
    These respondents state that in subscribing for stock, they looked for protection first to the regular dividends of the bank, next to its contingent fund, and thirdly to the dividends of the State derivable -from her stock in internal improvement companies. Before making their contract they looked to the capital of the bank for the purpose of estimating the probable dividends. They found that by the first section of the charter a bank was incorporated and, “the faith and credit of the State are hereby pledged for the support of said bank, and to supply any deficiency in the funds hereinafter specifically pledged and to give indemnity for all losses arising from such deficiency.” And in the second section they found it enacted “that the capital of said bank shall be five millions of dollars,” to be made up of the school fund, the surplus revenue, and an amount raised on the bonds of the State, sufficient to make up five millions of dollars. Respondents say that these provisions in the charter were as much parts of the contract between the State and respondents, as were the provisions in the twentieth section. They subscribed for stock under the agreement that they could be bound to make up the deficiency as stated in section twenty. Inasmuch as the State was bound and. had pledged her faith that the bank should transact business on a capital of five millions of dollars, and they now allege that the State has failed to perform her part of the agreement in this, that the capital of the bank has only been three millions of dollars, and therefore that she cannot call upon respondents to perform their part of the agreement. To show how unreasonable it is for the State to attempt to enforce this agreement, they will state that during the nine years of the operations of the bank her dividends and contingent fund have amounted annually to more than seven per cent, upon the capital. If therefore the State had provided the whole capital agreed to be furnished, it is susceptible of absolute demonstration, that the same rate of profits would have yielded a sum which, added to the State’s dividends on works of internal improvement, would have avoided any deficiency whatever. These respondents therefore insist that they cannot in equity be called upon by the complainant to perform their part of the contract. These respondents further answer that the State is precluded from enforcing the said agreement, because, on the 31st of January, 1842, she passed a law by which she took from the capital of the bank the sum of two hundred thousand dollars, and appropriated the same to the improvement of the rivers in East Tennessee and the Western District. They insist that under the contract, the faith of the complainant was pledged for the support of the bank, and to supply any deficiency in the funds specifically pledged, and therefore that the withdrawal of any portion of the capital, and its conversion to different objects, was a direct violation of the agreement, and operates to discharge and release these respondents.
    These respondents further answer, that they are released and discharged by the act of the complainant in withdrawing from the bank and appropriating to its own treasury a large portion of the funds specifically pledged to the payment of the interest on the State bonds. They allude to the act of 1844, chapter 209, which provides that after the passage of that law the State’s dividends on works of internal improvement, should be paid into the State treasury; and they allege that although a large amount in dividends from road companies has been paid, yet since the passage of the aforesaid act, the whole thereof has been appropriated by the complainant to her own treasury, instead of being applied according to the contract to the making-up of any deficiency in the bank’s dividends and contingent fund to meet the interest on bonds. They state that down to the 30th of January, 1844, when the aforesaid act was passed, the amount of the State’s dividends on works of internal improvement had reached in all to only about five thousand dollars, but that since that time they have greatly increased, and down to the present time, amount to largely over thirty thousand dollars; yet this large sum has been wholly diverted from the payment of interest on bonds to which it had been specifically pledged by the contract with respondents, and appropriated to the treasury of the State. They state further, that the first deficiency did not occur ujntil July 1st, 1845, nearly eighteen months after this withdrawal of the internal improvement dividends, although such a deficiency was anticipated by the legislature, as is shown by the act of 1844, chapter, 164, which authorized the officers of the bank to call upon the treasurer to make up any deficiency, provided there should be a surplus in the treasury over and above its ordinary current expenses. This act was passed on the 27th of January, 1844, only three days before that which withdrew the internal improvement dividends from the, means of the bank, and must have been pending before the legislature at the same time. They insist, therefore, that by the act of 1844, ch. 164, the complainant directly and clearly waived any right that may have existed under the act of 1888, chapter 107, section 20, to call on the individual stockholders, and by the act of 1844, chapter 20, the contract between complainant and these respondents was grossly violated and distinctly abandoned; and therefore, that complainant is forever precluded from setting up any claim under said contract.
    These respondents further say, that on account of the failure of the complainant to perform her agreement by providing the amount of capital stipulated to be provided, and on account of the withdrawal and conversion 
      to other objects of two hundred thousand dollars of the capital actually provided; and on account of the withholding from the bank of the internal improvement dividends, the deficiency must become permanent and amount annually to'more than fifty thousand dollars. They say that this result is fairly attributable to the course of complainant, and tends to fix upon respondents a permanent annual liability instead of an occasional or temporary liability, . as was contemplated by both parties to the contract. By the contract, it is provided that any amount paid by respondents to make up a deficiency shall be reimbursed to them out of the first dividends declared in favor of the State on her stock in internal improvement companies. From this it is manifest that the deficiency contemplated was not one that would be permanent and continuing from year to year. They therefore allege that it has become. impossible to execute the agreement; if respondents make up the deficiency in 1847, they are entitled to be reimbursed out of the State’s dividends in 1848; and yet, in 1848 they will be required to make up another deficiency; and in like manner, from year to year, the State’s internal improvement-' dividends must be applied to reimbursing the amount made up by these respondents, and year after year a balance of debt would remain against the State unsatisfied, by the appropriation of her internal improvement dividends. An attempt to carry out the contract under existing circumstances would operate as a forfeiture on the part of the State of all her internal improvement dividends, and the accumulation an-' nually of a debt to the internal improvement companies for the balances unpaid by the internal improvement dividends. They insist, therefore, that it is now impossible to execute the agreement, and that .this result has been produced by the failure on the part of the complainant to perform her portion of the original agreement.
    Having fully answered, respondents pray to be hence dismissed with their reasonable costs, &c., and if the court should decide against them, they claim the right to forfeit their stock, &'c.
    The decree of the chancellor is as follows:
    This cause came on for hearing the 16th of November, 1848, before his honor T. H. Cahal, chancellor, &c., on the bill and answer, when it appeared to the court that the complainant and defendants made a contract for the construction of a turnpike road from Columbia to the Tennessee river, each party agreeing to furnish, and in fact furnishing one half of the capital; it further appeared the complainant paid her half of the capital in the bonds of the State of Tennessee, having a long time to run and bearing an interest of five per cent, per annum, and that defendants agreed that if the sinking fund provided by the charter of the bank of Tennessee should be insufficient to pay the accruing interest on said bonds, that defendants would make up and pay said deficiency: but, in as much as it also appears that by the charter of said bank the State agreed and pledged her faith to provide a capital of five millions of dollars to be used in banking transactions, and that the State has failed to comply with her contract, the court is of the opinion and does decree that the complainant ought not to have the contract specifically executed against them.
    It is therefore ordered, adjudged and decreed that the bill of complaint be dismissed, and that the State pay the costs, &c.; from which decree the attorney general of the State prays an appeal to the next supreme court; which is granted, &c.
    
      Attorney General, for the State.
    
      Bell and Nicholson, for the defendants.
   Green, J.

delivered the opinion of the court.

This bill is brought by the State against the corporation of the Central Turnpike company, and against the private stockholders of said company, to enforce the provisions of the 20th section of the act of the 19th of January, 1838, entitled “An act to establish a bank, to raise a fund for internal improvement, and to aid in the establishment of a system of education.”

The bill states that all the sources for the payment of interest on the State bonds, provided in said act, have failed; that bonds *of the State to the amount of one hundred and fifty thousand dollars have been issued to said company; that the dividends of the road are insufficient to pay said interest; and that the said company has been notified according to law of the deficiency, and of the amount chargeable against the individual stockholders of the said company; and demand of pay» ment has been made, but said stockholders have refused to pay the same.

The bill prays for a decree for the sum so required, and for general relief.

The answer admits all the facts charged in the bill, but insists that the individual stockholders are not chargeable with the sums so demanded of them; because the State has failed to comply with the stipulations of said law on its part. First, that the capital stock of the bank has, in fact, been only three millions, whereas, in said law, the State engages that said capital stock shall be five millions of dollars. Second, because, by an act passed in 1844, ch. 209, it is provided that the State’s dividends in works of internal improvement should be paid into the Treasury, thereby lessening the contingent fund provided for in the said act of the 19th of January, 1888, for payment of interest on State bonds. And, third, because by an act passed the 31st of January, 1842, the sum of two hundred thousand dollars is directed to be paid out of the bank, for the improvement of rivers in East Tennessee, and in the Western District; thereby diminishing its capital, and consequently diminishing the fund provided for the payment of interest on the bonds of the State.

The 20th section of the act of the 19th of January, 1838, provides, that when any internal improvement company shall negotiate any bonds of the State, it shall be their duty to notify the president and directors of the bank, of the place where the interest is to be paid, and the bank shall provide out of its dividends for the payment of said interest; provided, that if there shall be a surplus of dividends, after setting apart the amount appropriated to common schools and academies, and after paying the interest on the bonds of the State, the same shall be held by the bank as a contingent fund, to be appropriated at any time when there may occur a deficiency in the dividends for the purpose aforesaid; and, provided, also, that if at any time there shall be a deficiency in the dividends to liquidate the accruing interest on the State bonds, and the contingent fund thall be insufficient for such purpose, such deficiency shall be made up out of any uninvested dividends that may have been declared on the stock owned by the State in the several works of internal improvement; and if there still should be a deficiency, the same shall be made up by the individual stockholders of the several roads in which the State has subscribed for stock, in proportion to the amount for which the State may have issued her bonds in each, tie amount so paid by the several companies to be re-inbursed out of the first dividends declared in favor of the State on her stock in said companies. In the event ih>, dividends of the bank and the profits arising from the stock of the State in internal improvements shall be insifficient to liquidate the interest on the bonds of the Stae issued for internal improvements, it shall be the duty of the Governor to notify the president and directors of suh companies in which the State has subscribed for stock three months before the interest shall become payable n the State bonds, of the probable deficit, and of the atount which will be required of each company to be pa}, in order to meet interest on the bonds of the State; >,nd upon receiving such notice from the Governor, it shallbe the duty of the president and directors of each and evfy company thus notified, forthwith to make a call on he individual stockholders for an amount equal to the su; claimed by the Governor in his notice to the said comjtnies, which sum or sums of money shall be paid at the tin, place, and manner required by the Governor; and upon úlure thereof, by any of said companies, to meet the htalment thus required, it shall be deemed and taken to bta forfeiture of the interest of the individual stockholder p stockholders thus failing to pay the instalment called hr by the Governor.”

It is statedn the bill, and admitted in the answer, that the Stahls a subscriber for one half of the stock in this road, an^nting to one hundred and fifty thousand dollars, for which its bonds have been issued, and have been negotiated by the company. The fund provided by this law is admitted to be insufficient to pay the interest on the bonds; and that the Governor has notified the president and directors that the sum of-is required from the private stockholders of this company, no part of which has been paid by any one of said stockholde’S although each of them has had notice of the amomt required of him. The consequence is, that each of thise stockholders has forfeited his stock, and the State is the entire owner of the road, unless the defendants car resist this forfeiture upon some ground assumed and ffiied on in the answer.

I. The first ground assumed by the defendáis in resistance of the decree sought by the complainant t this, that, by the second section of the law, it is dclared, “the capital of the bank shall be five millions of ¿liars,” and the first section- pledges “the faith and credi of the State for the support .of the bank, and to sup ply any deficiency in the funds thereinafter specifically ledged;” and that as the capital of the bank is only tl’ee millions of dollars, the State has failed in the peformance of its obligation, and has violated its pledges, Ind therefore has no right to claim from the defendáis the performance of the stipulations required of them» the 20th section.

We do not think the defendants have Ay right to complain that the full amount of five mill&s of dollars has not been px-ovided as the capital of th^anb.

The law, as enacted the 12th of January* 838, did not at that time constitute a contract betweeJhe State and the defendants. The time when the stoc/vvas subscribed by the defendants for the one half, and ¥ the Governor on behalf of the State for the other half of the capital stock of this road, is the period of the contract between ■ the parties in this case. At that period the bank had gone into operation, and the amount of its capital was known to the defendants. They knew what its means would be for the payment of the interest on the bonds of the State; and they must be understood as having accepted the conditions to be performed on their part in reference to the known condition of the bank.

The engagement of the faith of the State, in the first section, “to support the bank and to supply any deficiency in the funds hereinafter specifically pledged,” has no relevancy to the quHtion now before the court. The pledge of the faith of the State “to support the bank,” is an engagement to those who might become creditors of the bank, that its notes should be redeemed, and all its contracts punctually fulfilled.

The guaranty, “to supply any deficiency in the funds hereinafter specifially pledged,” was intended to apply to the common school fund, and the appropriation of a specific amount of the dividends of the bank to common schools and to academies, if there should, hereafter, be a deficiency in these funds, the treasury of the State is pledged to supply such deficiency.

2 It is insisted that, in the twentieth section of the law, it is stipulated that “if at any time there shall be a deficiency in the dividends to liquidate the accruing interest on the State bonds, and the contingent fund shall be insufficient for such purpose, such deficiency shall be made up out of any uninvested dividends that may have been declared on the stock owned by the State in the several works of internal improvement;” and that in violation of this stipulation the State has, by a subsequent law, required that the dividends on the stock of the State in works of internal improvement shall be paid into the treasury; thereby taking from the bank an important portion of the means'it should have employed in payment of the interest on the State bonds;'- and therefore the defendants ought not to be held to the performance of the contract on their part.

We do not think the language of the law contains a pledge to apply the dividends of the State in works of internal improvement to the liquidation of the interest on the State bonds. The stipulation is, that if the dividends of the bank and the contingent fund shall be insufficient, the “deficiency shall bp. made up out of any uninvested dividends” from stock in works of internal improvement. The language implies the right of the State to invest these dividends otherwise, and in any manner the Legislature might choose, and indicated to the defendants, when they took stock in this road, that they should not rely on dividends upon the stock in woiks of internal improvement as a means of indemnification against their liability to be called on to pay the interest on State bonds. The law, therefore, which requires these dividends to be paid into the treasury, is, in our opinion, no violation of the contract of the State with these stockholders.

8. It is next insisted, that, after, the turnpike company was organized by the subscription of stock on part of the defendants and of the State, the means of the bank for paying the interest on the bonds of the State were diminished by the act of the' 31st of January, 1842, which required the bank to pa.y out for the improvement of rivers in East Tennessee and the Western District, the sum of two hundred thousand dollars; and that suck diminution of the means of the bank, by the State,, renders it inequitable to enforce the contract against the defendants. And this position, we think, is properly taken, and is maintainable upon the established doctrines oí a court of equity.

By this law, the State agrees to become a partner to the amount of one half of the stock in all the roads for which acts of incorporation had been or might thereafter be granted. By thus becoming a partner with private persons in a corporation, the State sinks its sovereign character into that of a private corporator, with only the rights of other corporators, and subject to the duties and obligations imposed by the act of incorporation.

If by this act the bank is rendered less able to discharge the interest on the bonds of the State than it was by the means it had at command at the time, this corporation went into operation, it is clearly inequitable that the defendants should be compelled to pay the interest on these bonds for the State, by reason • of a necessity which the breach of its contract by the State has brought about. And, unquestionably, such is the state of the case before us. The whole amount of the profits the bank might have made on this two hundred thousand dollars, is so much abstracted by the State from the means of the bank to pay this interest; and the question is not whether the profits on that sum would have been sufficient to have relieved the stockholders in works of improvement ■from the liability imposed by the 20th section of the law;, but the question is, whether one corporator may disregard its obligations, may at pleasure diminish the fund'provided for the protection of the other corporators, and then claim the benefit of a forfeiture by its co-corporators, brought about in part at least by its own wrongful act?

We think such a claim is clearly inconsistent with the best settled principles of equity jurisprudence, and cannot be allowed.

The bill of the attorney general must, therefore, be dismissed.