Source: https://supreme.justia.com/cases/federal/us/156/400/
Timestamp: 2019-04-19 20:18:37+00:00

Document:
Justia › US Law › US Case Law › US Supreme Court › Volume 156 › Cunningham v. Macon & Brunswick R. Co.
(1) That the plaintiffs were not entitled to be subrogated to the mortgage security taken by the state, and as such to maintain this suit, because the property had passed out of the possession of the state when this suit was brought, and because the state was a necessary party to the enforcement of such a claim.
(2) That the only bonds secured by the statutory mortgage were those issued in 1866, and that those issued in 1870 were not secured by it.
(3) That even if they had been secured by it, these complainants were junior creditors to those holding the bonds of 1866, with rights subordinate to theirs, and it was their duty to attend the sale and protect themselves by raising the bid to an amount sufficient for that purpose.
(4) That they could not avoid the sale without tendering reimbursement to the first mortgage creditors, which they had not done.
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 encumbrances 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 governor, 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 time as in his judgment may best subserve the interest of all concerned."
Acts of 1866, No. 178, p. 127.
"Macon & Brunswick Railroad Company. First and Only Mortgage Bond."
"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."
"This is one of a series to the extent of $3,000 per mile of the Macon and Brunswick Railroad Company, endorsed by the State of Georgia in accordance with an act of legislature passed October 27, 1870."
"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."
Constitution of 1868, Art. 3, § 5.
passed a resolution declaring that the $1,950,000 issue of bonds which had been endorsed 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 endorsed bonds of the Macon and 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.
"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."
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."
"1st. Because neither the legislature nor the governor had the right to exclude the $600,000 series of endorsed 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."
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."
"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 endorsement of the bonds of said company; that the said state, in and by the resolution aforesaid, declared its endorsement 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 endorsement, or to enforce its said privilege of protection of said endorsement 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, hereinbefore mentioned, with due regard to the protection of any and all prior liens and the costs and expenses of sale."
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."
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. Macon & Brunswick Railroad, 2 Woods 385. Branch had also taken a decree pro confesso against the Macon and 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.
The case of the appellants rests upon two distinct legal propositions. The first one asserts their right to be subrogated to a mortgage security taken by the State of Georgia, and, by virtue of such subrogation, to enforce the mortgage against the property of the railway company. The other proposition is that they are direct mortgage creditors, and have a specific mortgage lien upon the property of the company.
owner, should be transferred to an individual, the jurisdiction of the court to enforce the mortgage would attach, as it existed previous to the acquisition of the government. The Siren, 7 Wall. 158, 74 U. S. 159. But where the property is not affected by any specific lien or trust in the hands of the state, her transfer will pass an unencumbered estate."
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 than a work of public improvement."
Under these provisions, if we were to construe the act of 1870 as desired, the result would be to make that act clearly violate the amendment to the Constitution just cited, for if the statutory mortgage secured the bondholders, then the bonds issued under the act of 1866 were necessarily secured by a first mortgage, and those issued under the act of 1870 by a second. This conclusion can be avoided only in one or the other of two ways: First, by contending that the incorporation of the provisions of the act of 1866 into the act of 1870 made the bonds issued under the latter act equal in rank of mortgage with the bonds issued under the former. But to admit this contention would make the act of 1870 void, because it would, if thus construed, impair the obligations of the contract made with the holders of the bonds first issued. Or second, by contending that inasmuch as the mortgage created by the act of 1866 was in favor of the state, and not in favor of the bondholders, the issuance of the bonds of the second series simply increased the aggregate amount of the state's liability, and that there was no difference between the two in rank of lien and mortgage, since the state held both the first and the second series, and the two were practically issued under one act. But this would be an assertion that the statutory mortgage created by the act of 1866 was solely for the benefit and indemnification of the state, and that the holders of the bonds were not directly interested therein. If this position be assumed, it defeats the complainants, as we have already seen.
valid contracts of the railroad company, secured by the statutory mortgage reserved in the act of 1866. This contradicts the plain text of that act, since it only purported to reserve a mortgage in favor of bonds endorsed by the state. And besides, if this argument were adopted, it would render efficacious a legislative violation of the constitutional amendment, since it presupposes that there was power in the General Assembly to allow the mortgage security, which had been taken by the state solely in order to secure the bonds she had guaranteed, to be transferred to others as a means of securing bonds to which her guaranty could not be constitutionally affixed. In other words, that the state, having a first mortgage security, which she had taken to secure bonds, of which she was an endorser, could vitiate such security by allowing others to participate in the benefits thereof, and thus do by indirection what the Constitution forbade her to do directly.
the point at issue was whether an admittedly existing mortgage could be enforced against the corporations. Here, on the contrary, the question is whether the mortgage under the act of 1866 ever existed quoad the bonds issued under the act of 1870.
ratably in the distribution of the purchase money, and thus infringe upon the unquestioned rights of the bondholders under the act of 1866.
The other ground of attack upon the sale was the incapacity of the state to purchase at her own sale, which, it is claimed, resulted from the fact that the statutory mortgage reserved by the act of 1866 made the state a trustee for the bondholders. Conceding this, the state was both a trustee and a mortgagee, and she had a direct individual interest in the property by reason of her endorsement on the bonds. The General Assembly of the State of Georgia had expressly authorized the governor to bid in the property on behalf of the state in case there was no bid sufficient to protect the outstanding obligation which bore the state's endorsement. Even if this provision be considered inapplicable upon the ground that the state could not lawfully bid at the sale under a power conferred upon herself by herself, the complainants' position would be untenable. It is conceded that the settled doctrine in Georgia is that the purchase by a trustee is not absolutely void, but merely voidable at the option of the cestui que trust. Worthy v. Johnson, 8 Ga. 236. Let us suppose for the sake of argument that the cestuis que trustent in this case were the holders of the bonds which were issued under the act of 1866 and of those which were issued under the act of 1870. The bill contains an averment that the holders of the first class surrendered their bonds to the state after her purchase of the property, and that she has discharged her liability under her endorsement upon their bonds. In retiring these bonds, the state paid off the first mortgage debt not only to the extent of her bid, but to nearly twice its amount. The action of the first mortgage creditors in accepting the extinguishment by the state of their securities and the mortgage by which they were secured was in effect a ratification of the sale, and established its legal validity so far as they were concerned.
reimbursement of the amount of the first mortgage. Their claims were subordinate to those of the holders of the first series, and they have no recourse until the latter are paid, and it would be grossly inequitable to allow them to avoid a sale which has been ratified by those who were primarily interested in the price resulting therefrom, without compelling them, as a prerequisite, to do equity by protecting the first encumbrancers. Collins v. Riggs, 14 Wall. 492; Jones on Mortgages § 1669; Pomeroy's Equity, sec. 1220 et seq. Instead of doing this, although nearly two years had elapsed between the sale and the filing of the bill, the complainants assert that their bonds are, in the contingency last stated, equal in rank of mortgage lien with those of the holders of the first series, and hence that they are entitled to an equal participation in the proceeds of the mortgaged property. Indeed, in the discussion at bar, the contention was advanced that the retirement of the first mortgage bonds by the state, after her purchase, extinguished the prior mortgage by which they were secured, and that, the sale being voidable at the instance of complainants -- an option which their bill asserts -- the second mortgage, which was held by them, has thus become first. No offer to pay the amount of the first mortgage was made prior to the purchase of the property by the defendants, and their title cannot now be divested, even if such an offer were made. We think the complainants are not entitled to the relief which they claim, and that the property passed to the defendants free from any lien under the statutory mortgage arising from the act of 1866 or 1870, even if from the latter any such mortgage ever resulted.

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