680

It placed." reason

REPORTER,

vol. 52.

and not the rule, that of liens can be disthis. fact of the sacredness of contract liens for the seems to be grpwing an idea that the chancellor, in the IlXhiB elthitable po wets, has unlimited discretion in this matter of the displalJ6n'lent of'vested liens."

9011rtserfo'rthe petitioners urge upon the court the considemtion of the vaiuer 'of these services in securi1lg the means for constructing the road. BhHhe services by the petitioners are not within that favored class protected in Fosdick v. Schall. Indeed, if they had obtained and supplied the money used in constructing the road, this would not 00., U. S. 416, 9 Sup. Ct. have helped thein. , Wood v. Trust, Rep. 131iOowdrey v. Railroad 00., 93 U. S. 352; Dunham v. Railway Co., 1 WaH. 267; Railroad QI. v. Wilson, 138 U. S. 501, 11 Sup. Ct. ' ' Rep. 405. Nor does it affect the question that their services incidentally benefited the mortgage creditors, and added to the value of the property covered by the mortgage. There Were, no contract relations with these creditors. In Htind'V;J;W,uroad 00., 21 S. C. 162, the law is clearly stated: : "No onecanlegaUy claim compensation for voluntary services to another,

etc.;

however behlidcial they may be, nor for incidental benefits and advantages to one floWing; to: him on account of services rendered to another by whom he may have been employed. 'Before a legal charge can be sustained. there must be a contract pfemployment, either expressly made or superindUced by the law or the '

See v.. Railway Co., 51 Fed. Rep.60. The petitions are dismissed.

GOUrJD'I1. LITTLE ROCK, M.'R. & T. Rv. Co. et al.
(Qtrcuit Court, E. D. Arkansas. October 28, 1892.)
No. 951.

1·.

Under tlle d,ecisionlill>,f Arkansas and at common law, an Insolvent corporation may rpake preferences among its creditors in good faith, so long as its right to do so is not res,wained by statute. Ex 'P'rll"te Conway, 4 Ark. 302, and Ringo v. Biscoe, 13 Ark. 563, followed. Rouse v. Bank, 22 N. E. Rep. 293,46 Ohio St. 493, questioned.· '
SAME-LoANS BY DIREOTORIiI.

.OF CREDITORS.

2.

Adval\QllS made in good faith by certain directors of a railroad, and used for legitimatl) corporate purposes. their inducement being to protect and give value to their own large interests as creditors and stockholders, but all other stockholders and cred,itore being' equally protected tllerllby, constitute a valid debt, enforceable by suit; and a deed of trust on certain lands 'thereafter executed by the direction of the stockholders and board of directors to secure it is as valid as if given to any other C1;editors. Trelitifng tlie directors as trustees, the payment of the deht is an essentialprerequillite 'to 'the avoidance of the deed of trust given to secure it, whether the 'debt was a or precedent, one. .'
AliI 'rRtl'STEES.

"

.

GOULD tJ. LITTLE ROCK, M. R. & T. RY. CO.

681

In Equity. Bill by Jay Gould against the Little Rock, Mississippi River & Texas Railway Company and Henry Wood, as trustees, to foreclose a deed of trust on certain lands. On her own motion, Sallie Leverett, as administratrix of the estate of J. M. Leverett, deceased, was made a defendant, and filed an answer and cross bill. Cross bill dismissed, and decree for complainant. Statement by CALDWELL, Circuit Judge: Onthe 25th day of April, 1884, the Little Rock, Mississippi Ri'Ver & Texas Railway Company, an Arkansas corporation, in pursuance of a resolution of its stockholders, and also of its board of directors, executed by its secretary, to Henry Wood, as trustee, a deed of trust in the nature of a mortgage on certaih lands belonging to the company to secure the payrrientto Atkins, Winchester, Dexter, and Redfield the sum of ilbout $425,000. The money the deed of trust was given to secure was, from time to time, advanced 'by Atkins, Winchester, Dexter, and Redfield to the company for the construction and improvement of the railroad and the purchase of the necessaryequipments, and to pay pressing debts, and was needed and used for these purposes. At the time tne money was advanced and the deed of trust eucuted, Atkins was president of the company, and Dexter and Winchester were stockholders and directors in thecorripany, and Redfield was a stockholder and a director part of the time, but was not a director when the deed was executed. They were aU large holders of the stock and bonds of the company,. and in control of the road and its affairs. There is nothing in the'tecord to show what number of persons constituted the board of directors. The statute of the state regulating the organization of railroad companies provides tkatthe board shall consist of not less than 5 nor more than13,and counsel for interveners in their brief that there were 8 directors. Atthe time the money was advanced the company owned its line of road and the rolling stock used in operating the same, and other property, but there were mortgages on this property, to secure bonds issued by the company, equal to or exceeding its value. The credit of the company was not good. .It had no means .of raising money to meet pressing demands and make necessary improvements, except by selling its mortgage bonds at a ruinous sacrifice. In this condition of affairs, the parties named loaned or advanced the money mentioned in the deed of trust to the company from time to time, as its necessities demanded, borrowing. money themselves for this' purpose. The company could obtained the money from any other source, and those who adnot vanced it were impelled to do so to protect and preserve the large interests thllyalready had in the property. As collateral security for the money advanced, the company pledged its first mortgage bonds to the amount in par value of $297,000, its second mortgage bonds to the amount in par value of $206,500, and 3,430 shares of the capital stock of the conipany. It was known this security was inadequate at the had to offer; and aftertime it wastaken, but it was all the wards,' when the state made a grant of tands to the company, the deed of trust in suit was executed thereon as additional security for these loans

682

,

:yol. 5.2.

''\lfthe,deed of trust the floatand the company continued it wa,ssold in 1887, IIlortgage given, to secure its, first mort;' :,

the d,ateof ing to.bea:g(}ing,qqppem,

I

gaRe . ',. Some time before this sale of the rqad,the mortgagees mentioned in the deed, for the consideration.of;$400;Oqo, p!'id in cash, assigned and due froI)1 the compa,ny and the deed of trust tosecure as 'Yell as the collateralsecurities which they held, ',' ,The purchase price of the road at the forecIolj.ure holders qf the fiJ'st mortgage bands received for the, bonds; ;l.lrili the plaintiff received 56.. this percentage,! in the aggregate ,to $167 ,864 040 on the first seQ1,:uity fox debt secured lU()rtgage bQw}s,"Ihichbe :held qy;the ;suit, and this is all thnt has ever, been paid i ,;'J.'he :Iilec()nd mortgage bonq.s and stock were rendered worthIes,s bytlle This bill was filed by the {lod the ,trustee named in the deed, to foretrustee appeared, and cqnfessed close the. Levereth theestate.qf,J;. deceaslld, \Vas thereupon filEllia;o)l;\lls.}fe:ranq.: cross bill, alleging that 00 the 28th day of ¥arl:lh, ,sl;te recqvereCll a defendant company of Desha pounty" Ark., upon whiGh execHUons ,a,lld,,lev.ied upon the lands DlEl\\tioned in plaintiff's ,Sh,eaver$,among: other tpings, deed is void, becaqse, :lit Jts: :tlxecution, Atkins W'":iI president, and Winchester l of the cOlDpanYt and theprincipal bonds, aodthe compauy insolvent;'rhere w,as a answer to theoros8 bill, which denied.a¥ iUiJlllegl;ltions. 'podge,Cp JO,hnson"JQr plaintiff. SOlF.. Ohrk, Dan W;"Jonea, Thomas,B. Martin,'8.nd.Ratcliffe&Fletcher. for defendant Leverett, oontended' that-. The deed of trust 'was Void. because made to secure debts d'ue to the directors of the companY when it'w,asinso}vel\t, and cited Lippinoott,v. Oa7'riage 00., 25 Fed. Rep. 577,586; H,owe,Brown &-,00. v. Sanford, Fork ([0 Tool 00., 44
231; White, ([0 Paig,fJ Manu,f:g .00. v. Henry B. 00.,30, FEld. Adams v ·. 00..· 35 Fed. R,ep,,433; Haywood v. Lumber 00;,'64 Wis. 639, '26 N. W . .!;tap. 184; Rouse Bank, 46 Ohio St. 493,22 N.EI Rep. 293;Oo1l.sol'tdated Ta?lk Line 00. v; (:JUg Va1Vfl,ish (Jo., 45 'Fed. Rep. 7; Gibson 'V. Furniture 00., (Ala.) 11 South. Rep. 365. ,,', ' Fed·.
,

,

CALDwELL,QircllitJ,udge;' (after ;8tatingthe jaci$/) .l:.It is the law of A,..kansas, ,the decision ,of its supreme court., 50 ago, that a Gorporllti,op"j of ,tPll.t state ilj1 may make preferences among ,iW all or a part of its property to . C?F., j:.Q'fAlSteElS benefit. Its! rig,ht to prefer
'0

1 . ' ) " - . . . . '"

I,!

GOULD tI. LI'rTLE' ROCK, M.

"=

'P"'RY. CO.

683

one or more of its, bona.ftde 'Creditors toiheexc1usion of others,iIl the prohibiting it, is, 8.Sunrestrictedand li\.bsolute as absence of a is right .of an indlvidrial'debtor to make prefe,rences among his Ex parte Conway, 4 Ark. 302,348, 354; Ringo v. Biscoe, 13 Ark. 563. The established'rule in that state is in harmony current of authorities in this with the general, though Qot quite country dn the question. 2 Mor: Corp. § 802; Allis v. Jones, 45 Fed. Rep, 148; Covert v. Rogers, 38 Mich. 363; Coats v. Donnell, 94 N. Y. 168; Dana v. Bank, 5 Watts & S. 223; Warner v. Mower, 11 Vt. 390; Whitwell v. Warner, 20 Vt. 426; Stratton v. Allen, 16 N. J.Eq. 229; Wilkinson v. Bauerle, 41 N. J. Eq. 635,7 Atl. Rep. 514; Duncomb v. Railroad (».,84 N. Y. 190,88 N.Y. 1; Hartsv.Brown, 77 Ill. 226; &ichwald v. Hotel Co., 106 Ill. 439; B1tell v. Buckingham, 16 Iowa, 284, (opinion by Judge DILLON;) Hallam v. Hotel Co., 56 Iowa, 178, 9 N. W. Rep. 111; Garrett v. Plow 00., 70 Iowa. 697,29 N. W. Rep. 395; Smith v. Skeary, 47 Conn. 47; Bank v. Whittle, 78 Va. 737; AshhurBt's Appeal, 60 Pa. St. 314; Sarget/,tv. Web8ter.13 Mete. (Mass.) 497. In some states, by statute, the property of an insolvent corporation must be devoted to the payment pro rata of all its creditors, and, after the insolvency of the corporation is known, the directors cannot divert its property from such use by giving preferences to some of its creditors; but where there is no such statute the great weight of authority is that the property of an insolvent corporation may be sold and used by its directors in the payment of some of its creditors to the exclusion of others. Its insolvency.does not affect its right t Q make preferences any more than the right of an individual debtor to make preferences is affected by his insolvency. The cases which hold. the contrary doctrine are bottomed on the erroneous theory that the insolvency of a corporation, in effect, dissolves it, and makes the directors mere trustees to distribute its assets ratably among its crEldit.ors. It is undoubtedly true that the property of a corporation is, in one sense, a trust fund for the payment of its debts; but this rule means no more than that the property of a corporation cannot be distributed among its stockholders, or applied to any pllrpose foreign to the legitimate business of the corporation, until its debts are paid. The rule, so far as it relates to the payment of debts, is satisfied whenever the property of a corporation is applied to the payment of any of its bona fide debts. The rule, as has been often pointed out, does not prevent a corporation, whether solvent or insolvent, from making preferences among its creditors, and exercising in good faith absolute dominion over its property in the conduct of its legitimate corporate business, so long as its right'to do so is not restrained by statute or by judicial proceedings. In Fogg v; Blair, 133 U. S.534, 541.10 Sup. Ct. Rep. 338, Mr. Justice FIELD, in delivering the opinion of the court, calls attention to the fact that the property of a corporation is not a trust fund for creditorsin any other sense than we have stated. He says: .. We do 110t question the general doctrinl! invoked bY'the appellant, that the property of 8' railroad company is a trust fund for the of its debts,

684

J1!lDERAL REfORTER I

vol. ,1)2.

but do any place for '.J:'llat doctrine only means that, first be appropriated to the payment of the before any porti()p of it can be distl'ibuted to the stockdebts of the' holders. It does not mean that the property is soaffected by the indebtedness of the Mmpany that it cannot be sold, transferred, or mortgaged to bona fide purchasers 'for a valuableconsid'eration, exceptsubjtlctto the liability to beappropr;iated, tapaY that IndebtedJless. Such doctrine has no existence. The cases of Ourran v.State, 15 How. 304,307, and Woo4 v. ])ummer, 3 Mason, 80S, give DO countenance to anything of the kind. to The case of Rouse v. Bank, 46 Ohio St. 493, 22, N. E. Rep. 293, is cited in support Qf the proposition that the property of an insolvent corporation is a trust fupl,1: for its crediYlrs in aSense that precludes the corporation from making preferences among its creditors, or otherwise using its property in the; conduct of its corporate business. Referring to the doctrine of this case,cthe supreme court of the United States, speaking by Mr. Justice GnAY, saYs: "That decision" itls true. proceeded in Part upon the' theory that the property of an coq:1oration, is' a trust fuDd for its creditors in a wider and more sense thancould,h,e maiqtained upon general principles of 6:rf!ha1T!- v. RaiZroa¢.c0" 102, U. S. 148, 161; Railway Co. v. Ham, 114 U. S.'587, 594, 5 Sup.Ct. 8x'r v. Green; 138 U. S. 80, 44.10 Sup. Ct. Rep. 280; 1J'ou.u v. Blair, 133 U. S. 534, MI, 10 Slip. Rep: 338,; Peters v. Rain, 133 U. 8. '670. 691, 10 Sup. Ct.l{ep.354. Purifier Co. v. McGroarty,136U. S. 237,10 Sup. Ct. Rep. 1017.' ,

St.

A good many courts have from time to time inveighed against the rule of the comtno:n law which al}ows a debtor to make preferences among his imbedded ih our system of juriscreditors, but: the rule ililtoo prudence to be overthrown by judicial decision. and it can no more be overthroWIl by the courts in its application to corporations than to individuals. In Wilkin80n v. Bauerle, 41 N. J. Eq. 635, 7 Atl. Rep. 514, the court said: "Both reason and authority establish the proposition a corporation may sell and transfer its property, and, may 'prefer its creditors, although it is insolvent; unless such conduct is prohibited by law. to this is a correct statenl,ent of the rule, and that it can only be abrogated' by legisla.tion.. It is, next contended that, the :dee'd of trust is void because it was to debts due to persons who were directors of the corppration, and, large holders of its stock /lnd mortgage bonds. The money was actually adyanced by the directors, in good faith for the benefit of thlil pompanYiI and was, used by the company for legitimate ,corporate purposes. It was not loaned or advanced for the purpose of obtaining any advantage over the,cor,poration or its other stockholders Or creditors, but to conserve and protect the interests of all persons interested in t1)eproperty., It is obvious thatthe,dlrectors who made these advances did not do so from choice, or becaUSe they esteemed it a safe or profitable inyestment in itself. They made advances because the corporalq. pressing need of the money, and its failure to get it was tion

GOULD V. LI'llTLE ROCK, M. R. & T. RY. CO.

685

likely to result injuriously to all its creditors and stockholders. The to make the loan was to protect and give value to their own large interests as creditors and stockholders of the corporation; but all other creditors and stockholders, in proportion to their interests, were equally protected and benefited by the loan. Upon these facts, the deed of trust executed by the direction of the stockholders and board of directors to secure the advances previously made by these four directors to the company is a valid security. The advances constituted a valid debt against the corporation, which it was legally liable to pay, and could have been compelled to pay by suit. Where a corporation is legally liable to pay a debt, it may undoubtedly give security for its payment. The use of its property to payor secure a bona fide ,debt is not an unlawful use or diversion of its property, no matter what official relation the creditor sustains to the corporation. The corporation is under the same obligation to pay a bona fide debt due to one of its directors and stockholders that it is to pay a debt due to a and a security given for a debt due to a director and stockholder is as valid as a security given to any other creditor. The doctrine established by _the bestconsidered cases and by the decisions oBhe supreme court of the United States is that the mere factthat creditors of a corporation are directors and stockholders does not prevent their security to themselve.s as to secure a bona .fide loan Of :money previously made to such corporation, and used by it in conducting its legitimate corporate business.. Among the states maintaining this doctrine may be mentioned Vermont, Massachusetts, Connecticut, New York; New Jersey, Pennsylvania, Virginia, Illinois, 1\1innesota, aod Iowa. The rule is thus stated in a recent case by the supreme court of Iowa: "We understand 'that he [a director] may become a creditor of the corporation. may advance it money, or sell it property. and obligations of the corporation executed therefor may be enforced by him. In this regard he occupies JlO different position from that of any other creditor; and. if the debt he holds was contracted in good faith. and there is an absence of fraud OD his part, he may take security or payment. though the corporation be insolvent, and he may thereby acquire priority iuthe payment of bis claiIQ." (Jan'ett v. Plow Co., 70 Iowa, 697. 29 N. W. Rep. 395. The previous cases in that court to the same effect are: BueU v. Btwkingham,16 Iowa, 284; Bank v. Wasson,48 Iowa, 336; Hallam v. Hotel Co., 56 Iowa, 178, 9 N. W. Rep. 111. In discussing the question, the supreme court of Connecticut say: "These creditors had a perfect right to receive pay in money or goods. and the fact that they were stockholders and directors did not modify or abridge that 'right so long as there was no actual fraudulent intent. The fact. if it be'afact"that it operated to prefer these creditors is not sufficient at common law to stamp it as fraudulent, for the common law favored the vigilant. and a ,creditor might rightfully obtain a preference," Smith v. SI.ea1·Y, 47 Conn. 47. And to the same effect, see Duncffmb v. Railroad Co.· 84 N. Y. 190, 88 N. Y. 1; Harts v. Brown, 77 Ill. 226; Reichwald v. Hotel Co., 106 Ill. 439; Stratton v. Allen, 16 N. J. Eq. 229; Wilkinson v. Bauerle, 41 N. J.

i686
Eq. 635,:7,Atl. Rep. 514j1JanJc v.' iWhittle,7l8Vil.. 737; Ashhurst's Ap8t: 314;' Whitwellv;r;Wurner, 20 Vt.425; . Gordonw. Preston, :1: Sargent v. Websfm, IS Mete, {Mass.) 497; Kitchenv. Railloay 224; 01100. v.,#arbul'y,91 U. S.587.
AOje'Xbaustive and luminol1sdiscussicmof tMs questionis,Jound in .the'(opinion of the supreme. court of Minnesota, delivered by 'Judge ,MtTOHELt" in the case of N.W. Rep. 1117. The reasoo,ing oithe learned judgeiwho:delivt)1'ed the opinion of the court in ,that case it ettremelyclear/tootan insolvent ,corporation may pre£eHts:creditors, whether. they of the corporation, or stran,gersjand that there is no doctrine that the insolvency .0£ a oonporation hll,stbeeffect to convert its assets into It "trust fund," in the -technical sense Qfthat term \ and its officers into mere 'trustees charged with the; duty of distributing its assets·ratablyamong its creditors'. Tbe, question has heenJbefore the supreme court of the United'States in several Oases.' In thercaseof Hotel Co. v. Wade, 97 U. S. 13, the court ·said: :. judge's]flBdlng is that the bonds and mQrtgages Were not voiltJIP9l1t1le ground of>lihe money. were also the directors o;Ohe thllt the were sanctioned by the stock.. building,and ,ltvplied pI;lrpose for it 4< .. , '" 'fnthe hght'ot'ttft(!JQlreul11stances attending the trans8ctlpn. as the the conrt is ·Of the opinion that thetlnding'failS to support ,the propos3taonthat the bonds and mortgage were invalid becSl)se the d.frectholders bonds ,.8ndadva,nced .the money. Transactions oftl1e occuHl3d. and ithl'$ naV.6tT been tIle arrangementwaslnv.aWl, where it stockh?lders were consulted, and sanctiOned what done, eIther by theIr votes Or
.. ,i;"::;, .

'i

In the case,ofRichard8oin's Ex'rv. Green, 133 U. S.30;43, 10 Sup. Ct. Rep. 280; th.e;court said: ;. . "UndO'uble'drfy his relation as a directqr' .andofficel' or as 3stockhoJder of the Mtpriic'lU0e' hitu'}rl,lm' ellteringlntocontracts with it. tllldng\tlJ bOndS 8S collateral security;' but courts of equityregay-&,lfjueb;persdnaltl'ansllctions 'ota. party i.n either of. these positions, not perhaps with distrust, but with a( large measure of watchful care; WOOf, .that. the was entered into in good the benefit of the cOID;pany, as well as. pf its creditors, view to his refuse tolend their aid t.o 'its' enfOl:cemerit·; .. . ' . . The attack upon the "alidity of the trust' deed mUllt fail upon another is. open to the com&vOId.thesequnty giVen lUpursuance of stockholders, asW'eUas, the directors. so long as the comt'anyrat8iins ;the· money which was loaned in good faith, and actu'iilly ..il'Ppiopi"iated,to legitimatecorpm·a't6"llSes. The payment of the Jebt thus contracted is an essential prerequisite to the avoidance of the dlJed .M trust gi\'iln to secure itspay.m'enti "And," in the language of the court of, appeals of New York, "this; is. true whether'.the pledge be taket.dQr a pl'eaentor precedent 111 either case the equity to be

':::<

"j,'.'

,:

,'.:

,,;

i#ll:lpa..

MATTHEWS

'V.

FIDELITY TITLE

&;

TRUST CO.

687

regarded equally exists." Duncomb, v. Railroad 00., supra. Let a decree foreclosing the deed of trust for the amount due on the dept therein mentioned, and dismissing the cross bill of Sallie Leverett for want of equity·

MATTHEWS

v.

FIDELITY Trrr..E

&

TRUST' CO.

et ale

(Oircuit Court, W. D. Pen'liByl11ania. August 4, 1892.)

No. 27.

1.

; 14'1' tile OWDer of a mor:tgage, loaned, it to a bank for temporary use, to sustain its cred t when. in a financial strait. . The bank pledged the mortgage with a creditor All cpllatoralsE;lcurity. and lIuhsequent!i plodged with the samE' creditor commerc.ial paper10wned by it, as cOllateral security for the same debt, Afterwards the bank mBde a general assignment. fer the benefit of creditors.· The mortgagor then volnn.t.arilyp.aid, the amount 01 the mortgage to the pledgee. WlloapPliedtM mOIl.ey . towards the debt of tile bank. The pledgee collected the commercial paPer, aIld, after'full'satisfaction, there remained a balance therefrom'in the pledgee'li hands. HeliJ. that by right of subrogationM. was entitled to this balance asagabillt the assignee.
'Pl"O Tata dividend on the full amount 'of his claim. Held, that he was not thereby

J'()B BENBI!'IT 011' CREDITORS.

9.

M. had,proved as a general creditor against the assigned estate, and received a

estopped frpmasserting his right by subrogation to the whole of the fund in the hands of the pledgee, as that fund and his dividend together did UOli'eatisf;v his claim in futL '

In Equity. Bill by John Matthews against the Fidelity Title & Trust Company and others to enforce an alleged right of subrogation. Decree for complainant.' On October 31, 1889, and prior to that time, the complaina:nt, John Matthews,.was the owner of a mortgage for $50,000, made by the Moorhead-McCleane Company, and dat6d,February 1,1887, payable 10 years after date. On the date first above mentioned the Lawrence :Bank was financially embarrassed,and its condition was known both to Matthews and to its president, Young, and on that day Matthews assigned the mortgage to Young for the use of the bank, and received in return a certificate of deposit, btluring interest, for the 8um of $50,000. Subsequently the mortgage was assigned by Young to the president of the Union National Bank to: secure overdrafts made and to be made upon it by the Lawrence Bank. The overdrafts having at length somewhat exceeded the amount of the mortgage,. the Lawrence Bank, as additional security pledged with the Union Bank a large amount of commercial paper. Shortly afterwards, on November 25, 1889, the Lawrence Bank made a voluntary assignment for the benefit of creditors to the defendant the Fidelity Title &1'rust Company. On December 2d following, the Moorhead-MoCleane, Company paid the amount of the mortgage and accumulated interest to the Union Bank, which applied the same to the extinguishlOent oUhe overdra,fts·. , Subseqllently it collected large amounts