3'86"
84 FEDEltAL' REPORTER.
contained in the plea. course will conser"e, the rlgh,ts ,o,fboth 'parties and avoid the establishment possibly of a trpp.plesome ,and unsound and falls within a legitimate of lIthe equitable discretion always exercised by the court of cha4ceryin relation, to pleas.ll Rhode Island v. Massachusetts, 14 Pet. '210, 257. The costs should abide the event of the suit. Equity r11le 34 provides that :upon the ()verruling of a plea "the plaintiff shall be entitled to his costs in the cause up to that period, unless the court be .satisfied that the defendant had good ground in point of Hiw or fact to interyose the same, and it was not interposed vexatiously or f()r delay." Where m.atter presented by the plea is such that it may reasonably be considered by the solicitor filing the plea to be gOOd, although he be mistaken, and the plea is filed in good faith,' and not vexatiously or for delay, costs should not be allowed under the rule to the complainant. The rule is not susceptible of any other ;construction; 1qr if it should be held to mean that the c9urt Il).ust be, satisfied that the pleats good in law or fact, as the case maybe, the rule could have no dperation, as the plea would not be overruled., Whatever may be the final decision of the court upon the Plerit$ the cause, r think that, in the sense in which the languageis' employed in the 'rule, "the defendant had good ground in p'ointolf law or fact to interpose the plea," and that "it was not intervexatiously or for delay."
= KITTEL v.
AUGUSTA, T.& G. R. No. 41.
CO.
et
at.
(Olrcuit Court of Appeals, Second Cireult.
January 7, 1898.)
1.
INSOLVENT CORPORATION.-,;OFFICER AS CREDITOR-RIGHTS AND
A dIrector of a corporation, who is also a creditor, is not guiHy of a he places his claim In judgment, and sells the property of theC!>11loration thereunqer, provided he thereby oljtains no advantage of other 'creditors; and Where, he buys the property himself, and fails to dIvide the proeeeds with anocher creditor, of whose claim he has no knowledge, he can be held accountable by such other creditor for only a proportionate share of the actual val1;le of the property so obtained,not less than ,the amount ,bId. ,
2.
!:lAME-AcCQUNTING TO OTHER CREDITORS-INTEREST AND COSTS.
Defendant, who was an officer; and also a creditor, of a corporation, property under a judgmllnt obtained by him. Complainant aftersold wards obtained a judgment against 1Jhe corporation, and brought suit to compel payment of the same by defend'ant. No notice of his claim was given, or demand made, before suit. Held that, on rendition of a decree requiring defendant to divide the proceeds of the property sold pro rata, complaInant w3sentitled to interest on the amount recovered, from the date of service of hIs complaint, and to costs.
Appeal from the Circuit Court of the United States for the Southern District of New York. This was a suit in equity by Joseph J. Kittel against the Augusta, Tallahassee & Georgia :Railroad Company, the Carrabelle, Tallahassee & Georgia Railroad Company, and William Clark, and is brought up by cross appeals from the circuit court.
KITTELY. AUGUSTA, T. & G. R. CO.
887
J.ohn A.Straley, for complainant. Chas. B. Meyer, for defendants. Before LACOMBE and SHIPMAN, Circuit Judges. LACOMBE, Circuit Judge. The facts out of which the cause of action arose are as follows: In 1889 and 1890 the complainant, Kittel, loaned $2·9,450 to the Augusta, Tallahassee & Gulf Railroad Company (hereinafter called the Augusta Railroad), upon its promissory notes secured by mortgage upon 109,000 acres of land situated in the Northern district of Florida, and owned by said railroad. The notes not being paid, suit was brought on the mortgage, and judgment of foreclosure entered, directing the sale of the mortgaged premises, which took place in November, 1892. The premises sold did not realize the amount due for notes, interest, costs, expenses of sale, etc.; and a deficiency judgment against the Augusta Railroad, in the sum of $6,893.05, was entered on February 28, 1893, in the United States circuit court for the Northern district of Florida. Execution thereon was duly issued to the United States marshal, and returned unsatisfied. The Augusta Railroad seems to have been undertaken in the hope of increasing the value of some lands in Florida owned by defendant William Clark. It was never built or equipped. Some 13 miles were graded, mainly through a swamp, rails laid on about 11 miles, and one or more bridges nearly completed. It owned a small tug, a locomotive, and a few flat cars. According to the evidence given by complainant's witnesses, from $265,000 to $400,000 was sunk in the enterprise, practically alI of which (except Kittel's loan) was advanced by defendant Clark, who was one of the directors, and substantially the owner of the capital stock. Evidently, it was a speculative enterprise, which turned out disastrously. Appreciating this fact, Clark undertook to close out his interest. Suit was brought in his name in the United States circuit court to recover for moneys loaned by him to the company. and judgment by default entered in his favor on October 6, 1890, for $432,228.42. Clark was at that time in Europe, and, through some error in duplicating part of the loan which figured in two notes, of which one was a renewal, the amount of this judgment was Upon petition to the court the error was rectified, and judgment reduced to $296,484.90. Execution having been issued to the marshal, all the property of the Augusta Railroad (except the land covered by Kittel's mortgage) was sold January 5, 1891, to Clare and associates, for $100,000. Clare was in reality acting on behalf of Clark. A new corporation, the Carrabelle, Tallahassee & Georgia Railroad Company, was organized, and the property turned over to it. This new railroad company is also practically the property of Clark. The relief prayed in the bill was: (1)· That the judgment in favor of defenda:llt Clark against the Augusta Railroad, and proceedings under it, be set aside, vacated, and declared null and void. (2) In the alternative, that the $100,000 received on the sale by Clark be declared the property .of the Augusta Railroad, and subject to paymentof complainant's claim. (3) That injunction be allowed, reo
388
84
FEDERAL REPORTER.
straining the said defendants, or either of them, from disposing of said property. (4) That a receiver be appointed, to whom the said defendants shall be directed to assign said property and all parts of the Augusta Railroad, who shall be authorized to sell, and apply the proceeds to payment of complainant's claim. The judge who heard the cause at circuit held as to the claim against Clark: "He was an active and controlling director, and also a creditor w·ith a just debt. l'he asse'ts of the cOl'p{lration shOUld, and on proper proceedings would, be applied equitably (which would be ratably) upon the corporate debts. He did no more than any credtltor might do, and got no more than any creditor standing out of any trust relation might have. But, as a director, he ought not to have any preference over any other creditor; and, if he should divide ratably with the plaintiff, he would not have. The $100,000 so divided would seem to give the plaintiff $1,901, and leave him $98,099. The plaintiff shOUld a,ccordingly have a decree for that sum, but-it is so small a part of what he ha;s cla,imed---'"Without costs."
As to the claim against the Carrabelle Railroad, he held that the property in Florida could not be reached from here by a receiver, since it is without the jurisdiction, and that the Carrabelle Company could not be held liable for the $100,000, since it never had anything to do with that money; and he dismissed the bill, as to that company, with costs. The bill was dismissed as to the defendant the Augusta Company without costs. The cross appeals present many questions for consideration, but, by concession or withdrawal upon the oral argument, a large part of them are disposed of. Counsel for the appellant Clark stated that he would not press his assignments of error which questioned the propriety of the judgment against Clark for $1,901. It will therefore not be necessary to enter into any discussion of the law bearing upon this branch of the case; but we may state that, upon the facts disclosed by the record, we concur with the court below that equity, as administered in the federal courts, should require Clark to divide the proceeds of the sale ratably with complainant. At the of the oral argument, counsel for complainant stated that he pressed his appeal only on four points: (1) That the court erred in taking $100,000, only, as the sum to be thus divided ratably; (2) that complainant should have interest on his recovery; (3) that the court erred in refusing: to give complainant costs; and (4) in giving cos,ts to the Carrabelle Railroad. . It may be stated at tMoutset that although, under the decisions, Clark was technically guilty of fraud, as against Kittel, in procuring a sale of the whole property of the company of which he was a director in order to pay the debt due to himself, without protecting .Kittel's claim, we are satfsfied from the record that no actual fraud walil perpetrated by him. Indeed, he seems to have been himself imposed upon, a,nd deluded into an improvident investment, the only really valuable fruits of which were the 109,000 acres mortgaged to the complainant, and bought in by him on foreclosure. Clark was not only a creditor of the company for nearly $300,000, but, except for Kittel,hewas apparently the only creditor. There is some vague testimony by one Blake, the promoter of the scheme, and at one time
KITTEL V. AUGUSTA, T. &. G. R. CO.
389
president of the Augusta CJompany, to the effect that "it was somewhat indebted; that it owed a number of tradesmen; it owed some of its employes; it owed some attorneys." But the treasurer of the road testified that, so far as he knew, there were no other creditors than Clark and Kittel, and that no claims of any such creditors have been presented against the company. Moreover, when Clark sold the property on his judgment, January 5, 1891, it was not yet determined whet,her or not Kittel's security would nM be sufficient to protect his loan, for the sale in foreclosure under the Kittel mortgage was not until November, 1892. The enterprise in which he (Clark) had embarked was evidently a failure; his money, to the extent of more than $300,000, had been sunk in it, producing nothing of value but the unfinished road, with its paltry equipment; efforts to dispose of the bonds had failed; the railroad practically lived only upon his advances, and when they ceased the work would cease; he had good reason to believe that he was not being dealt with in good faith by some of his official associates; the very loan of Kittel for which most of the real estate was mortgaged seems to have been kept from his knowledge; and he might, with good reason, decide to call a halt, and realize what he could. There was no inequity in his putting his claim in judgment. That such judgment was originally entered for an excessive amount was a clerical error, promptly corrected on his own motiori, and not evidence of any bad faith. There was no inequity in his issuing execution upon his judgment, nor in selling the property upon his execution. Equity will nM allow a director to obtain preference over other creditors by such judgment, execution, and sale, although bona fide, and therefore the court below required him to share the proceeds with the other creditor. Such proceedings by a director-creditor are sometimes characterized as fraudulent, either because, in the particular cause before the court, other facts showed that actual fraud was present, or because the word is used, inartificially, to indicate that equity will not permit a director to secure a preference over other creditors in this way. It is consonant with entire good faith for a director who is a creditor to enter judgment, issue execution, and sell all property seized under such execution, provided he does not thereby secure any preference, but divides the proceeds ratably with all others who are entitled to share with him. We know of no authority which controverts this proposition. If he neglects to share with another creditor, solely because he did not know of his claim, equity may require him to share when the claim is presented, because it would be inequitable for him to benefit by a pref. erence which it may be presumed that he secured because he was a director. But that is a very different thing from holding that such a transaction is sufficient evidence of actual fraud on his part. If by such judgment, execution, and sale, the director gets possession (or secures possession to his friends) of the property at less than its value, he must account with the other creditors on the basis of the actual value, for he cannot thus secure an advantage to himself over the other creditors. But the court cannot evolve any fanciful estimate of value. It must determine that question from the evidence. The starting point is the price at which it was sold under the court's
390
84 FEDERAL REPORTER.
order, and the director cantIOt show that it was worth less. Has it been shown in this case that it was worth any more than $100,000? The only testimony which it is contended tends to. show a greater value is that of the sanguine promoter of the scheme. Wben asked as to the fair and reasonable value of the property, he replied that, "considered as a basis for the enterprise as projected," it was worth the amount of bonds and stock "intended to be issued" per mile; and, as there were to be $17,000 of bonds and $17,000 of stock issued for each mile, the "eleven miles of road would make a valuation of $374,000." This, of course, is mere wild speculation. The same witness further testified that the "total amount expended was $265,000 to $270,000," and that he "sbould think the property ought to have been worth what it cost, if properly utilized." Tbis testimony is not especially persuasive, even if the court were disposed to place much confidence in the witness' estimate. 'l'he question is, what was the property worth when it was sold, not what it would be worth after half a million more had been expended in properly utilizing it. We must accept $100,000, therefore, as the actual value of tbe property sold. In view of the conclusions already expressed, to the effect that the defendant Clark was guilty of no actual fraud, and that when he received the proceeds of the sale it was not known that there would be any deficiency in Kittel's security; and in view, furtber, of the evidence in the case that, although nominally sold for $100,000, the property was really bought in in the interest of Clark himself (no money passing· on the transaction), and that he, through Clare and his associates, or through the Carrabelle Railroad, has since held property which has been wholly unproductive, and that until this suit was brought no· demand was made to share in the proceeds of the $100,000, and no notification given of the amount of deficiency judgment,-we concur with the court below in the conclusion tbat no interest is to be allowed, either from the date of the sale of the Augusta Railroad, or from the date of the deficiency judgment. The complaint in this suit, however, apprised defendant Clark that there was a creditor of the old road, entitled, ex mquo et bono, to share propbrtionately in the procee9s of the sale. If he wished t() avoid payment of interest thereafter, he should have tendered the proportionate amount. Complainant is therefore entitled to interest on the $1,901, his proportionate· share, from the date of the service of the complaint; and, for the same reason, he is entitled to his costs in the circuit court. Upon the only theory in this case upon which the proof will justify a decree in favor of the complainant, the Carrabelle Railroad is not a necessary party to the suit. The circuit court therefore properly dismissed the bill as to that corporation with costs. The decree of the circuit court is therefore modified, and the cause remanded to that court, with instructions to decree in favor of complainant against defendant Clark for $1,901, with interest from the date of the service of complaint, and costs; in favor of the Augusta Railroad, dismissing the bill, without costs; and in favor of the Carrabelle Railroad Company, dismissing the bill, with costs. As to the
DE NEUFVILLE V. NEW YORK&N. RY. CO.
391
costs in this court, inasmuch as complainant hllS, upon appeal, in· creased the amount of his decree against thedefendlllit Olark, com· plainant is entitled to costs of this appeal. Inasmuch as complainant has, by his appeal,failed to disturb the decree of the circuit court in favor of the Carrabelle Railroad Oompany, that company is entitled to costs of this appeal against complainant.
DE NEUFVILLE v. NEW YORK & N. RY. CO. et aL
(Circuit Court, S. D. New York.
January 10, 1898.)
EQUITY PRACTICE-INJUNCTION PENDENTE LITE.
Aninjull'ctlon pendente lite, restraining the issue of bonds under a mortgage by a railroad company having no title to part ,of the property described, will not. be granted when complainant can obtain full and complete relief on final hearing, and in the interim can suffeT no damage, through the issue of such bonds.
This was a suit in equity by Oharles De Neufville against the .New York & Northern Railway Oompany, the New York Oentral & audson Railroad Company, and others. 'l'he cause was heard ona motion for preliminary injunction. Simon Sterne, for the motion. Oharles F. Brown, opposed. LACOMBE. Circuit Judge. The decision of the court of appeals in Farmers' Loan & Trust 00. v. New York & N. R. 00., 150 N. Y. 410,44 N. E. 1043, reversed the judgment of foreclosure under which the New York & Putnam Railroad Oompany claimed to own and hold the property of the New York & Northern Railroad Oompany, of which complainant was a stockholder. The lease, therefore, of the New York & Putnam Railroad Oompany to the New York Oentral & Hudson River Railroad Oompany was ineffectual to convey any rightor title to such property, and the inclusion of such property in the new mortgage was wholly unwarranted. But this decision of the court of appeals was render'ed in October, 1896, and the mortgage was not executed until June 1, 1897. The trustee under the mortgage is charged with knowledge--and so, indeed, is every bondholder-that the enumeration of such property in the mortgage given by the New York Central & Hudson River Railroad Oompany created no lien thereon in favor of the mortgagees. The question now presented is whether complainant shall have an injunction pendente lite restraining the sale and issue of any more bonds under the new mortgage (bonds have already been issued to the amount of over $4,000,000), and requiring so much of the mortgage as covers the property in question to be canceled and discharged of record. It might be a sufficient answer to this application to suggest that the trustee under the new mortgage has not yet been made a party. But assuming that, by a supplemental pleading setting up the making of the mortgage, such trustee were brought in, there is no reason for granting the relief prayed for in