APPEAL FROM THE CIRCUIT COURT OF THE UNITED STATES FOR THE WESTERN DISTRICT OF WISCONSIN.
MR. JUSTICE BREWER delivered the opinion of the court.
The case comes before us on appeal from a decree of the Circuit Court for the Western District of Wisconsin, of date September 2, 1889, dismissing the bill of plaintiff and appellant for want of equity. The original bill was filed in that court on July 25, 1885. The defendants named therein were
the Chicago, Portage and Superior Railway Company, (to be hereafter called the Portage Company, the Chicago, St. Paul, Minneapolis and Omaha Railway Company, (to be hereafter called the Omaha Company,) Ransom R. Cable, Henry H. Porter, A. A. Jackson and Charles J. Barnes. After some preliminary pleadings the defendants filed answers, testimony was taken, and the case was submitted for hearing on the pleadings and proofs.
The plaintiff sued as trustee in a deed of trust executed by the Portage Company on January 1, 1881, to secure a proposed issue of negotiable bonds to the amount of $10,200,000, of which 758 bonds of $1000 each were claimed to be still outstanding and unpaid. The deed of trust covered all the property of the railway company, including a certain grant of lands made by the United States to the State of Wisconsin and transferred by the State to it. The claim, in a general way, was that these lands had been wrongfully wrested by the Omaha Company from the Portage Company, and a decree was asked declaring this deed of trust a first lien on such lands. The wrongs specifically charged in the bill are those set forth in the suit of Angle against the same two railway companies, reported in 151 U.S. 1, to which case, therefore, reference may be had for a full statement thereof. That case was disposed of on demurrer, while this is before us upon the proofs; and in view of the opinion there filed the question we have now to consider is whether the testimony sustains the charges.
The plaintiff states three propositions, each of which it claims is established by the evidence, and either one of which it says entitles it to the relief prayed for:
"First. -- That the Omaha Company wrongfully and fraudulently prevented the Portage Company from complying with the conditions of the grant, and caused the grant to be transferred to itself.
"Second. -- That the Omaha Company, by its wrongful acts, became the sole stockholder of the Portage Company, and as such stockholder wrongfully and fraudulently used its powers and position to strip the Portage Company of its property and transfer it to itself.
"Third. -- That the act of the legislature of Wisconsin of February 16, 1882, revoking the grant to the Portage Company, and the act of March 7, 1883, confirming the revocation, did not divest or attempt to divest the creditors of the Portage Company of their legal or equitable rights, nor attempt to prevent them from having these lands appropriated so far as may be necessary to the satisfaction of their debts. Otherwise these acts would be null and void as impairing the obligation of a contract and invading private rights."
Involved in and essential to the plaintiff's case is the specific charge that the Omaha Company bribed certain officials of the Portage Company (in whose hands was perhaps the only valid outstanding stock of the Portage Company, and held by them in trust) to dispose of that stock, so that the Omaha Company, with knowledge of the trust attending the stock, and in breach thereof, became the controlling, if not the sole, stockholder in the Portage Company. It is true that on Janu ary 20, 1882, A. A. Jackson, of Janesville, Wisconsin, G. J. Barnes, of the city of Chicago, Illinois, and J. C. Barnes, of the city of New York, transferred to R. R. Cable, who was acting for the Omaha Company, one million dollars of the capital stock of the Portage Company standing in the name of Jackson, and so much of another million dollars of capital stock, standing in the name of J. C. Barnes, as was absolutely valid and full paid stock, together with five hundred shares standing in the name of C. J. Barnes. This transaction is challenged, and its honesty and good faith are primary matters of inquiry.
In order to a clear understanding a brief statement of what had theretofore transpired is essential. Prior to 1880 the Portage Company had done a little work in the construction of the line aided by the land grant, and but little. The work had been stopped, and the company was practically a dormant corporation, owning the land grant and subject to certain indebtedness. Its principal, if not sole, creditor was the Chicago and Northern Construction Company; which had done all the work on the road. This construction company, having expended some money in construction, for which the railroad
company was indebted to it, was itself indebted to A. A. Jackson, an attorney of Janesville, in the sum of $18,000; to I. C. Sloan, an attorney of Madison, in the sum of $2000; and to Edward Ruger, of Janesville, for engineering services, in the sum of $10,000, (for which sums these parties had recovered judgments,) and to others in smaller sums, aggregating not exceeding $10,000. At the time of the negotiation hereafter referred to, with Gaylord and others, the railway company had issued $400,000 in bonds and $500,000 stock, of which issue the construction company owned and held all the bonds and $350,000 of the stock. Mr. J. C. Barnes was the individual who had put the most money into the construction company, and was practically its owner. In the summer of 1880 one Willis Gaylord entered into arrangements with Barnes for the reorganization of the railway company, and the securing of means for the construction of the road. The exact terms of the arrangements between Gaylord and Barnes may be open to some question, for Gaylord was not produced as a witness, and Barnes' recollection was not clear. A contract in writing, executed on the 20th of September, 1880, between Gaylord, the New England and Western Investment Company and William H. Schofield, by which the latter two parties were to render their services in securing funds for the building of the road, throws some light on the question. It recites:
"And whereas, in the securing of said railway company's charter, land grant, rights of way, surveys, about sixty (60) miles of roadbed graded and other lawful and proper expenses, there has been over seven hundred thousand dollars of money expended, which is represented by the aforesaid charter, land grant, rights of way and other property, it is to be provided that out of the new series of first mortgage bonds there is to be set apart and made a special trust seven hundred (700) of said new first mortgage bonds of $1000 each; also ten per cent of the capital stock of the company, and, by the order in writing of said Willis Gaylord, countersigned by the president of said railway company, paid to the persons entitled to receive the same, as designated by the said Gaylord, in full liquidation and satisfaction of all claims and demands (except as
hereinafter stated) of the present owners of said railway, and for all expenditures and claims made and due for said charter, land grant, right of way, surveying, grading and all and every kind of expense on account of said railway company (not including a certain amount of floating debt now outstanding, which does not exceed forty thousand dollars ($40,000) and to be provided for hereinafter), and the aforesaid $700,000 in first mortgage bonds are to have the interest coupons for the first two years from their date cut off and cancelled, and the said bonds, together with ten per cent of the capital stock as aforesaid are to be placed in trust, as a special trust, and be delivered to the parties entitled to receive the same, as designated by the said Gaylord, to be delivered, however, only pro rata, as the other bonds and stock are delivered for material or money, and as the road is constructed and put in operation in sections of ten (10) miles each.
"And whereas there is in the form of floating debt, in lawful and proper claims, approximately but not exceeding $40,000, it is to be provided that when, through said examination, the enterprise is found to be satisfactory to said investment company, and the proposed new bonds and stock are prepared and deposited as herein provided for, then said investment company will proceed at once to the negotiation of the same, and will, as soon as cash to the amount of $40,000 shall have been procured, pay or cause to be paid said sum to A. S. Barnes & Co., in payment of said floating debt, and on such payment being made, the reorganization or substitution of new directors and officers of said railway company, as herein provided, shall then take place.
"And the said Gaylord shall furnish satisfactory evidence and assurance that the said $700,000 of first mortgage bonds and ten per cent of capital stock will pay, cancel and fully release all claims, demands and encumbrances against said railway company, except said floating debt, and that the floating debt aforesaid does not and shall not exceed $40,000."
Apparently, from this recital, the $40,000, or such a matter, due by the construction company to Jackson and others, was treated as a debt of the railway company and was to be paid
in cash, leaving the indebtedness of the railway company to the construction company to be satisfied by the $700,000 bonds and the 10 per cent of the stock. It would seem from other evidence that Barnes was to take $350,000 of the bonds and the stock and Gaylord was to take the balance of the bonds, although there is testimony that Gaylord was to receive fifty of the Barnes bonds for personal services and by way of commission. There was a modification of this contract on January 20, 1881, but the change is not material to this controversy. On March 28, 1881, the action of Gaylord in the two contracts of September 20, 1880, and January 20, 1881, was approved by the directors of the railway company, who also, on the same date, passed a resolution as follows:
"Resolved, . . . that for all present outstanding stock certificates new certificates of stock for a like amount shall be issued and delivered to the parties entitled to receive the same upon the surrender and cancellation of their old certificates of stock and in exchange therefor."
The second day thereafter, on March 30, a resolution was passed, which, after referring to the appropriation of bonds to the amount of $700,000 and stock to the amount of a million for the purpose of discharging the indebtedness of the company, recites the receipt of full value in real property and other valuable consideration for such bonds and stock, and gives the consent of the company to the immediate issue of one half the amount thereof.
Just before the passage of these two resolutions, and on March 26, 1881, the construction company assigned to Jackson its claim against the railway company for bonds and stock, as well as all of its claims and demands of any and every kind against the railway company. Jackson took this assignment really for J. C. Barnes, and was to hold the claim, thus assigned, for him until he should be able to pay the amounts due to Ruger, Sloan and others. Subsequently, and on May 17, 1881, Jackson forwarded to the president of the railway company a letter, giving notice of the assignment, stating that of the 400 bonds which had belonged to the construction company 361 had been surrendered to the railway company
to be exchanged for new bonds, and that he had in his possession the remaining 39, and proposing to surrender the 39 and release all claims for the 361 upon the issue to him of $650,000 of full paid stock. Whereupon the board of directors took the following action:
"On motion of Wm. T. Watson, duly seconded, the following resolution was adopted:
"Whereas A. A. Jackson, as the assignee of the Chicago and Northern Pacific Construction Company, holds 39 bonds of this company issued by this company under its former name of the Chicago and Northern Pacific Air Line Railway Company, bearing date July 1, 1872, with the coupons thereto annexed, and as assignee of said construction company he is also entitled to receive from this company 361 bonds of this company of $1000 each, with interest thereon from the 1st day of July, 1872, at the rate of seven per cent per annum, amounting in all, on the 1st day of June, 1881, to the sum of $649,663.00; and
"Whereas the said Jackson has made a proposition to this company, in writing, proposing to surrender to this company said 39 bonds so held by him and to release this company from its liability and obligation to deliver to him 361 bonds and interest upon the company issuing and delivering to him 6500 shares of the capital stock of this company:
"Therefore Resolved, That the proposition of A. A. Jackson be, and the same is hereby, accepted, and the president and secretary are hereby authorized and directed to sign, seal and deliver to said A. A. Jackson certificates of full paid stock of this company of the par value of $650,000, upon said Jackson's delivery to them of said 39 bonds, with the coupons thereto annexed, and a properly executed instrument releasing and discharging this company from its liability and obligation to execute and deliver to him bonds of this company for $361,000 and interest at 7 per cent from July 1, 1872, in pursuance of his proposition; and
"Resolved, That the proposition of A. A. Jackson be entered upon the records of this company in ...