# Cunningham v. Mason & B. Railroad Company

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United States Supreme Court
156 U.S. 400
Cunningham v. Mason & B. Railroad Company
The Macon & Brunswick Railroad Company was chartered by the legislature of Georgia in 1856. Acts 1856, p. 181. In December, 1866, the legislature of the state authorized the governor to indorse the bonds of the road to the extent of $10,000 per mile. The act reads as follows:
'An act to extend the aid of the state to the completion of the Macon and Brunswick Railroad, and for other purposes.
'Whereas the Macon and Brunswick Railroad has been completed to the distance of fifty miles from the city of Macon, and is thoroughly equipped, and daily trains are running thereon, and seventy miles additional are graded and ready for the superstructure; and whereas its completion to Brunswick would greatly inure to the benefit of the state in developing its agricultural, commercial, and manufacturing interests; and whereas, by reason of the financial embarrassments resulting from the late war, the stockholders of said railroad are unable to supply the capital necessary to the completion of this great work:
'Section 1. Be it enacted, etc., that his excellency, the governor, be and he is hereby authorized to place the endorsement of the state on the bonds of the Macon and Brunswick Railroad Company which said company may issue, to the amount of ten thousand dollars per mile for as many miles of said road as are now completed, and the like amount per mile for every additional ten miles, as the same may be completed and placed in running order, on the following terms and conditions, to wit: Before any such endorsement shall be made the governor shall be satisfied that as much of the road as the said endorsement shall be applied for is really finished and in complete running order, and that said road is free from all liens, or mortgages, or other incumbrances, which may in any manner endanger the security of the state; and upon the further condition and express understanding that any endorsement of said bonds, when thus made, shall not only vest the title to all property of every kind which may be purchased with said bonds in the state, until all the bonds so endorsed shall be paid; but the said endorsement shall be, and is hereby understood to operate as a prior lien or mortgage on all of the property of the company, to be enforced as hereinafter provided for.
'Sec. 2. In the event of any bond or bonds endorsed by the state, as provided in the first section of this act, or the interest due thereon, shall not be paid by said railroad company at maturity, or when due, it shall be the duty of the govenor, upon information of such default by any holder of said bond or bonds, to seize and take possession of all the property of said railroad company, and apply the earnings of said road to the extinguishment of said bond, or bonds, or coupons, and shall sell the said road and its equipments, and other property belonging to said company in such manner and at such tiem as in his judgment may best subserve the interest of all concerned.' Acts 1866, p. 127.
Under this authority the governor indorsed the bonds of the company to the extent of $1,950,000. The bonds were thus entitled:
'State of Georgia.
'United States of America.
'Macon & Brunswick Railroad Company. First and Only Mortgage Bond.'
They acknowledged that the Macon & Brunswick Railroad Company was indebted to Charles J. Jenkins, as governor of Georgia, and to his successors in office, or to the bearer thereof; and also recited the statutory mortgage, which was reserved by the state in the act of 1866. In June, 1870, the president of the railroad company executed an instrument in which he stated that these bonds had been issued in conformity with the statute, and that the company was desirous of confirming the lien held by the state to secure their payment, and that, therefore, he, as president, recognized, on behalf of the company, the validity of the statutory mortgage and of the lien created thereby. To this instrument the state was not a party. In October, 1870, the legislature of Georgia passed the following act:
'An act to amend an act to extend the aid of the state to the completion of the Macon and Brunswick Railroad, and for other purposes.
'Whereas the Macon and Brunswick Railroad has been completed to Brunswick, requiring a greater outlay of money than was originally contemplated, to place the same in complete running order, and to furnish the necessary cars, engines, and machinery; and whereas the state has, by recent legislation, endorsed the bonds of other railroads to the extent of fifteen thousand dollars per mile:
'Section 1. The general assembly of the state of Georgia do enact, that the above-recited act be so amended as to authorize the governor to place the endorsements of the state, to the extent of three thousand dollars per mile, upon the bonds of said Macon and Brunswick Railroad Company, in addition to ten thousand dollars, as recited in the act of which this is amendatory.
'Sec. 2. Be it further enacted, that all laws and parts of laws in conflict with this act be, and the same are, hereby repealed.' Acts 1870, p. 336.
Under this act bonds to the extent of $600,000 were issued by the railroad and indorsed by the state. These bonds differed in several particulars from those of the first issue. Thus, instead of acknowledging that the corporation was indebted to the governor of the state, they declared that it was indebted to Morris K. Jesup, of the city of New York, or bearer. They made no reference to the mortgage or lien held by the state under the act of 1866, nor did they purport to be secured by mortgage. Each of them contained this recital: 'This is one of a series to the extent of $3,000 per mile of the Macon and Brunswick Railroad Company, indorsed by the state of Georgia in accordance with an act of legislature passed October 27, 1870.' At the time this act was passed the constitution of Georgia contained the following provision:
'The general assembly shall pass no law making the state a stockholder in any corporate company; nor shall the credit of the state be granted or loaned to aid any company without a provision that the whole property of the company shall be bound for the security of the state prior to any other debt or lien, except to laborers; nor any company in which there is not already an equal amount invested by private persons; nor for any other object that a work of public improvement.' Const. 1868, art. 3, § 6, subsec. 5.
In August, 1872, the legislature of Georgia passed a resolution declaring that the state's guaranty placed on the bonds of the Macon & Brunswick Railroad Company was binding. In 1873 the company defaulted in the payment of interest on the bonds issued under the act of 1866, and which bore the state's indorsement. In July of that year the governor issued a proclamation reciting the passage of the act of 1866, the issue of the bonds thereunder, and the company's default. He announced also that, in pursuance of the power conferred upon him by that act, he had seized the company's property, and had appointed an agent of the state to take possession and control of the same. In March, 1875, the legislature passed a resolution declaring that the $1,950,000 issue of bonds which had been indorsed under the act of 1866 were valid and binding obligations of the state, but that the $600,000 issue under the act of 1870 was unconstitutional. null, and void; that it was the sense of the general assembly that the railroad, with its franchises, equipments, and appurtenances, should be sold by the governor at an early date, and, if considered practicable, as early as June 1, 1875, at public or private sale, and upon such terms, and for such a price in money or first mortgage indorsed bonds of the Macon & Brunswick Railroad Company, or bonds of the state, as, in his judgment, might be consistent with the interests of the state, and that no commission or percentage should be authorized or allowed under such sale.
In April, 1875, the governor issued his executive order for the sale of the railroad property which had been under seizure since 1873. This order, after also reciting the act of 1866, and the indorsement by the state of the bonds issued thereunder, proceeded as follows:
'Whereas, among other provisions of said second section of said act, it is expressly provided that after the seizure of all the property of said company, as aforesaid, the governor 'shall sell the road and its equipments and other property belonging to said company, in such manner and at such times as, in his judgment, may best subserve the interest of all concerned;' and having become satisfied that it will be for the best interest of the state and all concerned that all the property of the company seized under said order be sold at an early day, it is therefore
'Ordered, that all the property seized, as aforesaid, now in the possession of Edward A. Flewellen, receiver of the property of the Macon and Brunswick Railroad Company, under said order, be sold to the highest bidder at public outcry at the depot of the Macon and Brunswick Railroad Company, in the city of Macon, between the hours of 10 o'clock a. m. and 4 o'clock p. m. on the first Tuesday in June next.
'The said sale will be made for cash, for bonds of this state, or the first mortgage bonds of the company, indorsed in behalf of the state, under the authority of the act approved December 3, 1866. It is further
'Ordered, that the said Edward A. Flewellen, as receiver aforesaid, make out an advertisement under this order, setting forth with requisite particularity all the property to be sold as aforesaid, and publish the same in such public gazettes in this state and in the city of New York as, in his judgment, will give proper publication to said sale.'
The sale thus directed took place on the date fixed, and the property was bought in by the governor, on behalf of the state, for $1,000,000, the purchase having been authorized by the legislature of the state. The governor executed a formal conveyance of the purchase to the state on June 3, 1875, and the state subsequently retired the $1,950,000 of bonds which had been issued and indorsed under the act of 1866. In September, 1877, the complainants (appellants), alleging themselves to be holders and owners of bonds of the Macon & Brunswick Railroad Company, indorsed by the state under the act of 1870, which, they averred, they had acquired in open market after the state had acknowledged her liability thereon, and before the passage of the act declaring the indorsement invalid, filed their bill in the circuit court of the United States for the Southern district of Georgia against the company and certain persons named therein, 'styling themselves directors of the Macon and Brunswick Railroad,' and J. W. Renfroe, treasurer, and Alfred H. Colquitt, governor, of Georgia. This bill, after setting out the facts substantially as here given, charged that the sale made by the governor was void for the following reasons:
'(1) Because neither the legislature nor the governor had the right to exclude the $600,000 series of indorsed bonds from being used as so much cash in the purchase of said road at their face value. Certainly they were entitled to be so used in the event of the exhaustion of the $1,950,000, which themselves should have _____ received as cash at par.
'(2) Because the governor was not authorized to bid on said property for the state, and the state had no constitutional power to make the purchase, or, if said sale is not void, it is certainly voidable, because under the statutory and executed mortgages the state is the trustee of the property mortgaged for the benefit of the bondholders, and had no right to buy at her own sale as such trustee, without incurring the risk of having such sale set aside at the instance of any beneficiary under the trust; and your orator as such beneficiary elects to set said sale aside.'
The bill also alleged the taking up by the state of the $1,950,000 of bonds issued under the act of 1866, subsequent to her purchase of the property, and averred, in the alternative, that, if the sale was not void because of the fact that the mortgage was solely to indemnify the state, then the holders of the bonds issued under the act of 1870 were entitled to a ratable distribution of the proceeds with the holders of those indorsed under the act of 1866, and therefore should receive an equal pro rata share of all sums paid or to be paid by the state on the retired issue of $1,950,000 under the act of 1866. The bill was demurred to by Renfroe, treasurer, and Colquitt, governor, and, after hearing, was dismissed. The complainants thereupon prosecuted their appeal to this court, where the decree below was affirmed. Cunningham v. Railroad Co., 109 U.S. 446, 3 Sup. Ct. 292, 609. Meanwhile, subsequent to the decree of dismissal below, the railroad and its appurtenances were sold by the state, under proper legislative authority, for $1,250,000, and through a series of transfers, some of them being the result of judicial foreclosure of mortgages, the road finally became the property of the East Tennessee, Virginia & Georgia Railroad Company. In 1886, after the filing of the mandate of this court, affirming the decree of dismissal, a motion was made below for a decree pro confesso against the Macon & Brunswick Railroad Company, and leave was given to file a supplemental bill making the East Tennessee, Virginia & Georgia Railroad Company a party defendant. The amended bill was duly filed. This bill, after substantially reiterating the averments of the original bill, and charging likewise that the sale at which the governor bought in the property on behalf of the state was null and void, alleged that the East Tennessee, Virginia & Georgia Railroad Company was a purchaser with notice of the illegality, and then proceeded as follows:
'And your orator charges that the said state of Georgia held the said property, after the seizure thereof, as a trust for the payment of the obligations of the said the Macon and Brunswick Railroad Company to the extent of the avails of a sale of the said property to be made for the interest of all creditors of said company, with the privilege unto the said state of protection, first, out of said avails, of its own indorsement of the bonds of said company; that the said state, in and by the resolution aforesaid, declared its indorsement of the bonds held by your orator to be not binding on it, and in advance of demand upon it by your orator refused thereby to pay the said indorsement, or to enforce its said privilege of protection of said indorsement from the avails of said property so in its hands; that your orator thereby became at least entitled to the advantage of the said mortgage lien of the said state for his protection, to have the said property sold with proper regard to his interests and the interests of his fellow bondholders, to be allowed to participate freely with all other lienors of the said railroad at the sale of the said railroad property by his said trustee in bidding upon said property, and paying therefor in the bonds held by him, herein-before mentioned, with due regard to the protection of any and all prior liens and the costs and expenses of sale.
'And your orator shows that in and by the said resolutions under which said sale was made, and under color of which the said trustee for your orator became possessed of the said railroad property, the said state of Georgia gave notice of its intention to commit a breach of trust by excluding your orator from participation in said sale on equitable terms with the holders of the first mortgage bonds, by excluding your orator, by the provisions thereof, from participation in the avails of said sale or any benefit therefrom by announcing openly to the world its intention to sell the said road in its own interest rather than in the interest of the creditors of said company, and by divers other acts and announcements, all concurring to demonstrate positively to the world that the said trustee had determined to exclude your orator from any benefit under the said trust, and that it would not regard or protect in any respect the interests of your orator and his fellow bondholders in the said sale or distribution of avails.
'And your orator shows that in point of fact the said state of Georgia, at the said sale, did commit the said breach of trust according to its previously announced intention, did exclude your orator and his fellow bondholders from their rights of equitable protection at sale by bidding and paying the bonds held by them, did sell the said road in a manner contrary to the interests of the creditors generally of the said road for a very small part of its real value, the price nominally bid therefor being one million dollars, and the real value thereof being four million dollars, and did sell the road to itself for said price, in its own interest, and without regard to the interests of the beneficiaries of the trust, including your orator, and thereupon, in equity, held the said property as a trust for you orator, and subject to his lien for the payment of his said bonds.
'And your orator avers that the said the East Tennessee, Virginia and Georgia Railroad Company and the East Tennessee, Virginia and Georgia Railway Company had full notice in the purchase of said property made by each of the said breach of trust by said trustee, and took the said property subject to the duties and liabilities of said trustee towards your orator,-that is to say, with the lien of your orator unaffected and undischarged by the sale of said property made by said trustee in breach of his fiduciary duty,-and that the said last-mentioned company now holds said property as trustee for your orator, and subject to your orator's lien for the payment of the said indebtedness to him.'
The East Tennessee Company answered the supplemental bill, stating the various conveyances through which the title had finally come to be vested in itself, and asserting the validity thereof. All the facts above stated appear on the face of the pleadings and exhibits. Before the sale was made by the state, John P. Branch, a holder of bonds of the same series as those held by these complainants, had filed a bill in the circuit court of the Southern district of Georgia, asking for an injunction to prevent the sale, but the application was denied. Branch v. Railroad Co., 2 Woods, 385, Fed. Cas. No. 1,808. Branch had also taken a decree pro confesso against the Macon & Brunswick Railroad Company, and he was allowed to intervene below, and become a party to the present suit, in which he claims the same rights as those asserted in the original and supplemental bill. The cause was submitted to the court on bill, answer, and exhibits, and resulted in a decree of dismissal. The case was then brought here by appeal.
Chas. N. West, W. W. Montgomery, D. H. Chamberlain, and John Howard, for appellants.
George Hoadly, for appellees.
[Argument of Counsel from pages 410-418 intentionally omitted]
Mr. Justice WHITE, after stating the case, delivered the opinion of the court.

## Notes

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