OF THE Supreme Court of the United States, AT DECEMBER TERM, 1864. . 283*] *GREENE C. BRONSON and James T. Soutter, Trustees, etc., Compts. and Appts., v. THE LA CROSSE & MILWAUKEE RAILROAD COMPANY, The Milwaukee & Minnesota Railroad Company, Selah Chamberlain, Henry Vallette et al. (See S. C., 2 Wall., 283-312.) that Company and the intention of the court in making those orders. We say first, that the answers by Fleming and Rockwell were not an appearance of the Company, or answer of the Company in fact. The Company was a distinct legal person, which could sue Mr. Fleming or Mr. Rockwell, or be sued by them. They were each as distinct from the other as John Doe is dis Answers of stockholders not made defendants—tinct from Richard Roe. A corporation must cross-bill irregularly filed—lien of judgments subsequent to mortgage-mortgagor cannot prejudice mortgagee's rights-priority of mortgage liens. Liens of judgment subsequent to a mortgage are cut off by its foreclosure. Dealings of a mortgagor with a third person, over which the mortgagees had no control subsequent to the execution of the mortgage, cannot affect prejudicially the rights of the mortgagees. Where a third mortgage on a railroad and the bonds issued under it, were made in express terms subject to the payment and satisfaction of the bonds issued under the second mortgage, all persons taking the third mortgage bonds, took them with a full knowledge of and subject to, the prior lien and indebtedness. appear by its authorized attorney, and its answer must be under seal, authenticated and attached by the proper officers. The law intrusted the management of its affairs to a Board of Directors, and in the eye of the law and for the purposes of this suit, it alone represents the Company. It was for that Board to determine whether any defense and what defense was expedient, and whether it would file an answer admitting our rights, or by silence give an admission in law. That Board of Directors chose the latter mode, and from that fact the court below gave us an order pro confesso against it. Its position as defendant to a foreclosure suit gave the court below no power to take the management of the suit from the Directors (or in other words, from the defendant interested) and give it to a man who, although a stockholder, was in the law a stranger. It certainly gave no power so to do on a petition without notice to the directors interested Argued Feb. 1, 2, 3, 4, 8 and 9, 1864. Decided in the result. If they had abused their powers, or misrep APPEAL from the District Court of the resented the interests of the Company in such United States for the District of Wisconsin. The case is stated by the court. Messrs. J. M. Carlisle and Brown, for appellants: The Milwaukee and Minnesota Railroad Company did not appear in the court below, and the bill was taken as confessed against it. It is now too late for the Company to attempt a defense. Bronson v. Mil. & La Crosse R. R. Co., 2 Black, 524 [ante, 349]. As to them, our case is confessed in its full extent. But it will be objected that in fact it has two answers on file by order of the court below, by two different stockholders; and this raises the question, both as to the power of the court over a manner as to justify a decree of ouster, that should have been obtained by decree of a state court having jurisdiction over such matter, upon proper proceeding for that identical purpose; and then the management of company affairs and of its defense would be in such new hands as the law intrusted it to, and not in a mere volunteer for the purpose of litigation. The two orders allowing Rockwell and Fleming to defend, do not properly bear the construction contended for by counsel for Fleming. This order authorizes Fleming to make a defense in the name of the Company, but it is the right of Mr. Fleming and not of the Company which was to be defended. A similar order was then in existence with regard to Rockwell, and his answer was in. The answers of Fleming and Rockwell merely serve the office of protecting their individual interests; but as they have neither lien nor legal interest, and as the rights of the Company were represented by that defendant, they had no foundation for litigation, and had no rights to urge in this court. As to 600 of these bonds, the answers neither disclose who were the purchasers, what was the particular consideration paid, the time of the several transactions, nor the names of the present holders. It alleges, generally, that so many bonds were sold to various persons, for which in the aggregate only a certain sum was received in money, and the balance, 80 cents on $1, in Barstow bonds, or corruption bonds, or in stock. What part was paid in Barstow bonds, what in corruption bonds and what in stock, we are not informed; nor does the answer distinguish between the different transactions; so that, consistently with the allegations, some of the 600 bonds might have been paid for in money and Barstow bonds altogether. Company could (being mere purchasers) avail itself. The remaining charges, to wit: the transac tion of Bronson, that of Soutter, that of Foster, that of Dow, that of Chamberlain, and that of unknown individuals, in unknown times, in regard to 600 bonds whose numbers are unknown, were (disconnected from the first false charge, that the whole mortgage was given to cheat creditors) allegations of frauds upon the La Crosse Company or its stockholders, which they, and they alone, could prosecute. The defendants have utterly failed in their proofs to establish the allegations of fraud contained in their answer. The charge that the mortgage was, in its inception, intended as a fraud upon the creditors, is disproved by their own witnesses. But if this court will examine the circular produced by the defendants, inviting subscriptions to this mortgage, and representing that the $400,000 sought to be raised would finish the road to the Mississippi, and the proof of subsequent events, it will be evident to them that all the fraud which was committed was upon the purchasers of these bonds. It does not tell us what Barstow or what corruption bonds were; we presume they were classes of bonds issued by the Company, and which the Company were prohibited from dis- There is nothing in the conditions of sale puting; it does not even inform us what bonds which evidences fraud. In the great commercial are attacked, as it gives no numbers; no inno- convulsion of the fall of 1857, not only did cent purchaser holding a bond could look at railroad bonds go down (in many instances) to such bond and say this was one of those in about fifty per cent., but even the bonds of the tended to be included in the 600. If such per- United States itself were at a great discount. son should conclude that his was one of the 600 Under these circumstances, the La Crosse road and should be prepared to disprove, the an- wanted $400,000 to complete its connection swer might be: "Your bond is one of those pur- with the Mississippi. That connection was chased by Foster or Dow or Bronson or Sout-worth millions to the road, and would place it ter." In fact, no person could know what in a condition to make all its prior expenditures charge he was to meet. The answer did not profitable. give the complainants (mere trustees) a hint as to who was the purchaser or holder of the bond attacked. The charge as to the transaction with Foster merely alleges in general terms, that the La Crosse Company was overreached; that as to Dow, is in the same position; that as to Soutter is a little more distinct in its charge of fraud on the La Crosse Company, but like the rest, fails to state what bonds were so obtained; the charge as to Chamberlain is a general one, that in some way, under a pretense of settling a claim for damages, he obtained a larger sum than should have been allowed him. The charge that the Directors made the mortgage in fraud of creditors, is the one in which allcgations are the most specific; but even with these, no debts are stated, no creditors given, nor is it charged that any one of the holders of bonds was aware of the condition of the Company or of the fraudulent intentions of the Directors. No combination is anywhere charged. We insist upon this rule, to wit: that when the answer seeks to attack bonds issued by a railroad company, to various parties, by various transactions, and to set aside such bonds as fraudulent, it must, in regard to each transaction, contain all the allegations which would be necessary in an original bill against the holder, to set aside such bond. Story, Eq. Pl., 251-254. An intention to defraud subsequent purchasers is nowhere alleged or proven, and, consequently, there is no part of the answer of which the Milwaukee and Minnesota Railroad It is shown by the testimony of the witness for the plaintiff, that Bronson purchased stock of the Company, and paid in cash under its promise to repurchase if he should desire, and that he receive these bonds in lieu of cash for this stock; that Soutter delivered unsecured bonds for the same amount, and merely won the security, the Company ratifying the transaction; that Dow purchased his bonds, and was subsequently employed as financial agent by a new Board of Directors. By its testimony it is shown that Foster, after receiving and selling these bonds under a pledge by the way of security, settled with the Company and received an additional amount of land grant bonds. As to the 600 bonds, the testimony is as loose as the allegations of the answer. And we insist that fraud, even as against those witnesses, is never presumed but must be proven, and that there is no proof of fraud sustaining the allegations of the defense. Mr. M. H. Carpenter, for Mil. & Min. R. R. Co. and Creditors: This decree should be reversed and the complainants compelled to answer the cross-bill filed by the Milwaukee and Minnesota Railroad Company, September 3d, 1860. 1. It was not necessary that leave of the court should be granted to authorize the crossbill. Whoever has a right to answer and defend against a bill of complaint in equity, has also the right to file a cross-bill if otherwise proper. The petition of Fleming was for leave to answer; and that the "said Company might have time, at least thirty days, to perfect the | James T. Soutter, the other trustee, under cirsale and prepare a cross-bill as (should) be cumstances even more questionable. He did necessary." "The court granted leave to answer; not obtain even the consent of the debtor Comand the leave to answer carried with it leave to pany. file the cross-bill in aid of the answer. The rule is, that the party must file the cross-bill at the earliest opportunity; but it may be done even after reference to a master without leave of the court, if the party has had no earlier opportunity." 3 Dan. Ch. Pr., 1745; Story, Eq. Pl., sec. 397; La Touche v. Dunsany, 1 Sch. & L., 137. 2. But if leave of the court be held necessary, the order of the court made at the time the cross-bill was filed, directing subpoena to issue upon, and that service thereof be made on the solicitors of the complainants in the original suit, was equivalent to leave to file a cross-bill. 3. The defendants in the cross-bill actually appeared and filed their demurrer. This, as a matter of practice, was an appearance for all purposes in the cause. The filing of the demurrer without an order of the court, saving the motion to dismiss, was a waiver of the motion and overruled it. Story, Eq. Pl., sec. '442. The motion to dismiss was a dilatory and technical defense to the cross-bill. If the party had desired to save his motion, leave of the court to file demurrer, subject to it, should have been obtained. Without such leave of court, the demurrer overruled the motion as an answer would overrule a demurrer, notwithstanding the defendant should protest that he filed it subject to the decision of the court on the demurrer. The Company received for this $1,000,000 of bonds, only about $2,000,000 in cash; the balance was paid in stock or worthless securities, or taken vi et armis, as in the instance of Soutter. A mortgage thus conceived in fraud and under which bonds have thus been obtained, should only be sustained in favor of those who are bona fide holders, and to the extent of their advance in cash upon their bonds. The testimony shows that the circular, inviting stockholders to subscribe, was generally circulated. Vallette, in his answer, shows, that before he purchased his bonds he was informed of the scheme in which the mortgage had originated. He is not, therefore, a bona fide holder; and it is fair to presume against bondholders who make no proof of being bona fide holders, that they purchased bonds with notice. Cone v. Baldwin, 12 Pick., 545; Hall v. Hale, 8 Conn., 336. Chamberlain took $200,000 of the bonds from the Company at fifty cents on $1, in payment of a pretended claim for damages, which the contract in evidence shows to be entirely unfounded and fraudulent. The Milwaukee and Minnesota Company is entitled to insist on this objection to the mortgage. The Milwaukee and Minnesota Company is entitled to claim protection, both as a purchaser and as a creditor. Finch v. Earl Winchelsea, 1 P. Wms., 277; 2 Fonbl. Eq., 168, and notes; Wallwyn v. Lee, 9 Ves., 31, 32; 2 Pow. Mort., 654, and notes. The mortgage sought to be foreclosed by As a purchaser, a mortgagee having a specific this suit was fraudulent and void as to cred-lien, and having parted with money on the paritors. It originated in a scheme of an embar- ticular property, is regarded as a purchaser. rassed Corporation to turn its stock into a lien upon its property, setting creditors at defiance. And there can be no doubt, as the bonds secured by this mortgage were delivered to stockholders and paid for in stock, that they are fraudulent as to creditors in the hands of such original owners. Take the instance of the $15,000 bonds to Greene C. Bronson, one of the trustees. Bronson was a stockholder of the Company, not its creditor, and pretended to sell to the Company his stock for $15,000, bonds secured by a mortgage on its property. The orders made by the district court subsequent to July 15, 1862, being coram non judice, are void and will be reversed. The orders for rolling stock and paying money to Chamberlain on the Cleveland judg ment and on his other claims, and paying money to the City of Milwaukee, should be reversed; Chamberlain be ordered to refund the money received by him, and the order should be enforced by attachment. The orders for rolling stock, $107,000, were erroneous and should be reversed. The receiver should be authorized to keep the mortgaged premises in repair, but not to make permanent improvements thereon from the fund in court. These orders were irregular in this, that they were granted without notice to anyone, and many of them by the judge at chambers. This was clearly a fraud upon the creditors of the Company and the bonds in his hands are void. The assets of a corporation constitute a fund for the payment of its debts. "If they are held by the corporation itself, and so invested as to be subject to legal process, they may be levied on by such process. If they have been distributed among stockholders, or gone into the hands of other than bona fide creditors or purchasers, leaving debts of the corporation unpaid, such holders take the property charged with the trust in favor of cred-guarded from abuse by the proper chancery itors, which a court of equity will enforce, and compel the application of the property to the satisfaction of their debts." Curran v. Arkansas, 15 How., 307. By the above transaction, Bronson was transformed from the condition of one of the corporators of an insolvent Corporation, to that of its preferred creditor. Fifty-five bonds, $55,000, were taken by The disposition of funds or property in court, that is, in the receiver's hands, is carefully practice. To justify such disposition upon a motion, it must be a case where the title of the party claiming is perfectly clear, and has been admitted or adjudicated; but even then there must be a motion, and notice of it must be given, not merely to opposite party through his solicitor, but must be served upon the party personally. And in those cases where the right is not established, the court will not act |