Memphis v. Dow/Opinion of the Court

by by John Marshall Harlan

United States Supreme Court

120 U.S. 287

Memphis  v.  Dow

From these facts it appears that at the date of the mortgage of May 2, 1877, appellant's entire assets consisted of the property, rights, and privileges purchased by Pierson, Dow, and Matthews, trustees, at the sale under the decree foreclosing the mortgage of December 1, 1873, and by them conveyed to it, on the express condition that the beneficial owners should receive therefor, besides $1,300,000 in stock, its mortgage bonds for $2,600,000. That amount, in the stock and bonds of the appellant, was the valuation placed by such owners upon their interests, after taking into account as well the amount previously expended in the construction and maintenance of the road as the probable value, in the future, of the stock and bonds to be given for a surrender of those interests. The transaction was, in its essence, a purchase of said property, rights, and privileges by the appellant at an agreed price, to be paid in its stock and bonds. A part of the price was paid when the $1,300,000 of stock was issued. But appellant disputes its liability upon the bonds given for the balance upon the theory that they were prohibited from issuing them by the eighth section of the twelfth article of the constitution of Arkansas, adopted in 1874. That section provides that 'no private corporation shall issue stocks or bonds, except for money or property actually received, or labor done, and all fictitious increase of stock or indebtedness shall be void.' In support of this view, our attention is called to the fact, admitted by the demurrer, that the full value of the property, rights, and privileges conveyed to appellant did not xceed $1,300,000, the amount at which the capital stock was fixed; and, consequently, it is argued, the $2,600,000 of bonds were issued without any consideration received in money, property, or labor, and represented only a fictitious indebtedness. In other words, appellant's vendors were fully compensated for their interests by taking to themselves its entire stock.

We do not concur in this view of the case. It does not, we think, rest upon a sound interpretation of the state constitution. The prohibition against the issuing of stock or bonds, except for money or property actually received or labor done, and against the fictitious increase of stock or indebtedness, was intended to protect stockholders against spoliation, and to guard the public against securities that were absolutely worthless. One of the mischiefs sought to be remedied is the flooding of the market with stock and bonds that do not represent anything whatever of substantial value. In reference to a provision in the constitution of Illinois, adopted in 1870, containing a prohibition as to railroad corporations similar to that imposed by the Arkansas constitution upon all private corporations, the supreme court of the former state, in Peoria & S. R. Co. v. Thompson, 103 Ill. 201, said: 'The latter part of the clause of the constitution in question, which declares that 'all stocks, dividends, and other fictitious increase of the capital stock or indebtedness of such corporation shall be void,' we think clearly points out the chief object which the constitutional convention sought to accomplish in adopting it; and to this we must look, in a large degree, for a solution of the language which precedes. The object was, doubtless, to prevent reckless and unscrupulous speculators, under the guise or pretense of building a railroad or of accomplishing some other legitimate corporate purpose, from fraudulently issuing and putting upon the market bonds or stocks that do not and are not intended to represent money or property of any kind, either in possession or expectancy, the stock or bonds in such case being entirely fictitious. * * * Under this provision of the constitution, railroad companies have no right to lend, give away, or sell on credit their bonds or stock, nor have they the right to dispose of either except for a present consideration, and for a corporate purpose.'

Recurring to the language employed in the Arkansas constitution, we are of opinion that it does not necessarily indicate a purpose to make the validity of every issue of stock or bonds by a private corporation depend upon the inquiry whether the money, property, or labor actually received therefor was of equal value in the market with the stock or bonds so issued. It is not clear, from the words used, that the framers of that instrument intended to restrict private corporations-at least when acting with the approval of their stockholders-in the exchange of their stock or bonds for money, property, or labor, upon such terms as they deem proper: provided, always, the transaction is a real one, based upon a present consideration, and having reference to legitimate corporate purposes, and is not a mere device to evade the law, and accomplish that which is forbidden. We cannot suppose that the scheme whereby the appellant acquired the property, rights, and privileges in question, for a given amount of its stock and bonds, falls within the prohibition of the state constitution. The beneficial owners of such interests had the right to fix the terms upon which they would surrender those interests to the corporation of which they were to be the sole stockholders. And, that subsequent holders of stock might not be misled, each certificate of stock states upon its face that 'the holder takes this stock subject to $2,850,000 of mortgage bonds of the company, which are secured by two mortgages duly recorded.' All that was done was to reorganize the Little Rock & Memphis Railroad Company upon the same basis, substantially, as to capital stock an bonded indebtedness, as existed, in respect to these properties, rights, and privileges, before the adoption of the state constitution, and while they were held and controlled by the companies which preceded the appellant in the ownership. There was, consequently, no fictitious increase by appellant of its stock or indebtedness. Under these circumstances, it cannot be fairly said that the bonds secured by the mortgage were issued without any consideration whatever actually received in property.

Equally untenable is the position that the bonds were void because made to bear interest at a rate in excess of that specified in the act of January 22, 1885, now section 5488 of the Revised Statutes of Arkansas. Mansf. Dig. Ark. The seventh section of that act provides that 'whenever any railroad company heretofore or hereafter incorporated in this state shall, in the opinion of the directors thereof, require an increased amount of the capital stock, they shall, if authorized by the holders of a majority of the stock, be, and they are hereby, authorized to increase their capital stock to any amount not exceeding the estimated cost of their road, and shall have power to borrow money on the credit of the corporation, not exceeding its authorized capital stock, at a rate of interest not exceeding seven per cent. per annum, and may execute its bonds therefor in sums of five hundred dollars or one thousand dollars; and to secure payment thereof may pledge the property, both real and personal, and the income of said company, and to secure the payment thereof may execute a deed of mortgage or other instrument of writing; and such company are hereby authorized to sell, negotiate, pledge, or mortgage such bonds for the benefit of such company, and on such terms and at such places, either within or without this state, and at such rates and at such prices as, in the opinion of such directors, will best advance the interests of such company; and if said bonds are thus sold bona fide, at a discount, such sale shall be valid in every respect, and such securities as binding for the respective amounts thereof as if sold at their par value.'

It is sufficient to say that this statute has no application to the present case; for there was here no increase of the existing capital stock of a corporation, nor were the bonds secured by the mortgage of May 2, 1877, executed for money borrowed, but for property, rights, and privileges conveyed to appellant at an agreed price, to be paid in its stock and bonds.

It results from what has been said that the validity of the bonds cannot be disputed upon any of the grounds stated. Neither the constitution nor the statutes of Arkansas interpose any obstacle to the full performance by the appellant of the terms and conditions upon which only it acquired the ownership of the interests in question.

The appellant, in the mortgage to the appellees, covenanted that the interests conveyed were free from incumbrances, and that it would warrant and defend the title against all lawful claims whatsoever. Its duty, therefore, was to protect those interests against prior liens. Appellant having neglected to perform that duty, the appellees, as junior incumbrancers, had the right to protect the mortgaged estate against a forced sale. Upon payment of the amount due the state, they became entitled to the benefit of her lien upon the property. Although the appellees did not purchase the state's claim, or become, technically, the assignee thereof, her lien will be regarded, in equity, as subsisting, so far as is necessary for their protection.

In behalf of the appellant it is contended that the decree below went beyond what was required for the indemnification of the appellees. The debt due the state, by the terms of her contract with the old company, bore interest at the rate of eight per cent. per annum until paid. The entire claim, with interest at that rate, was paid by the appellees. But the decree below gave a lien, as against the ppellant, for the amount so paid, with interest from the date of such payment at the same rate as was stipulated in the contract between the state and her debtor. The constitution of Arkansas provides that 'all contracts for a greater rate of interest than ten per centum per annum shall be void as to principal and interest, and the general assembly shall prohibit the same by law; but, when no rate of interest is agreed upon, the rate shall be six per centum per annum.' Article 19, § 13. And by statute it is provided that 'judgments or decrees, upon contracts bearing more than six per cent. interest, shall bear the same interest as may be specified in such contracts, and the rate of interest shall be expressed in all such judgments and decrees; and all other judgments and decrees shall bear interest at the rate of six per cent. per annum until satisfaction is made as aforesaid.'

The right of subrogation is not founded on contract. It is a creature of equity; is enforced solely for the purpose of accomplishing the ends of substantial justice; and is independent of any contractual relations between the parties. All that the appellees can, in good conscience, demand, is reimbursement for their outlay in protecting the mortgaged property against the prior lien of the state. When relief to that extent is accorded, they will have no just ground to complain, especially as the debt held by the state was not the personal debt of the appellant. There was no agreement between them and the appellant in respect to interest upon any sum they might be compelled to pay in order to relieve the property from prior incumbrances. It, therefore, they are adjudged to have a lien upon the mortgaged property for the whole amount actually paid to the state, with interest thereon from the date of such payment, at the rate established by law in the absence of an agreement as to rate, they will be fully indemnified. It is not for the court or for parties to say that the rate of interest fixed by law, in the absence of an agreement, is not adequate compensation for delay in the payment of money. It results that the decree, so far as it allows to appellees interest in excess of 6 per cent. per annum on the aggregate amount of principal and interest paid by them to the state, is erroneous.

One other question remains to be determined. The appellant insists that the court below erred in giving judgment against it for $29,580.87, the amount found to be due the appellees for services and counsel fees herein, and for costs paid out by the appellees in this suit. We are of opinion that the decree in this respect was right. This allowance, as to its amount, is fully sustained by the evidence in the cause. And it is authorized by that clause and condition in the mortgage of May 2, 1877, which provides that the appellant 'will, from time to time, as incurred, pay all charges, costs, and expenses' of the appellees, or either of them, 'in and about the execution of the trust,' and 'will indemnify and hold harmless' the appellees 'against all costs, charges, damages, and expenses which they or either of them may sustain or be put to in consequence of accepting this trust, or of anything which may be done or omitted to be done under it, saving only such damages as may be incurred by or arise from the culpable act or neglect' of said appellees.

The decree below is reversed, so far as it gives the appellees interest upon the aggregate amount paid by them into the treasury of the state, at the rate of 8 per cent. per annum from the time of such payment; and the cause is remanded, with directions to allow interest upon that amount from the date of payment, at the rate only of 6 per cent. per annum. In all other respects the decree is affirmed. The appellant will have its costs in this court.

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