version into preferred stock, might offer to purchase with it a certain quantity of the stock at a specified price per share, and the holder of the stock might refuse the offer, either for the reason that he did not wish to part with his stock or that the price offered was insufficient. Could the conversion or purchase of the stock be enforced in either of the cases put? Clearly not. There would have to be a meeting of the minds of the parties upon essential points in the transaction not covered by the terms of the plan; in fact, there would have to be a new contract before the conversion or purchase could be accomplished. If, by the plan, a lien upon the lands and their proceeds was created in favor of the preferred stock, it was an equal and impartial lien for the whole body of the stock, each share having an equal lien with every other share. The conversion of the preferred stock into lands, so far made, has not recognized this equal right of shareholders. Some, in the conversion of their shares, have undoubtedly gotten better lands for the same price than others, and the conversion of about $15,000,000 of the stock at its par value, heretofore made, has taken so great a part of the lands designated by the plan for the purpose that the remainder of such lands, at a fair valuation, will not equal 30 per centum of the par value of the preferred stock still unconverted. The strong inference from this is that no such lien, in fact, ever existed and was not claimed or considered by the parties in interest to exist, otherwise, how could the company and a part of the preferred stockholders have been permitted for nearly 20 years to have openly and manifestly violated the rights and equities of the other preferred stockholders without protest or complaint on their part? The tenth section of the act of incorporation prohibited the company from making a mortgage or lien in any way except by the consent of the Congress of the United States. The only consents ever given by the Congress in this behalf were by two joint resolutions, one approved March 1, 1869, and the other approved May 31, 1870. By the former, consent was given to the company to issue its bonds and to secure the same by mortgage upon its railroad and telegraph line, and by the latter the company was authorized to issue its bonds to aid in the construction and equipment of its road and to secure the same by mortgage on its property and rights of property of all kinds and descriptions, real, personal, and mixed, including its franchise as a corporation. Neither of these consents covered a lien upon the lands in question for the benefit of the preferred stock, therefore, the making of such a lien was expressly prohibited by the charter. It is claimed that, because the Jay Cooke mortgage bondholders and other bondholders and creditors of the Northern Pacific Railroad Co. took in payment of their claim and for the surrender of the property which they had acquired under a foreclosure of the mortgage, the preferred stock issued under the plan of reorganization, they and those who have since become the holders of such stock, have rights and equities in the lands set apart for the conversion of the stock, whch are superior to those of subsequent creditors of the corporation. This claim is best answered by a quotation from the opinion of the court in Warren v. King (108 U. S. 389, at page 399): "Whatever position the holders of the preferred certificates occupied before they accepted preferred stock, whatever special rights of lien they had, they became corporators, proprietors, shareholders and abandoned the position of creditors, and took up toward existing and future creditors the same position which every stockholder in a corporation occupies toward existing and future creditors. His chance of gain, by the operations of the corporation, throws on him, as respects creditors, the entire risk of the loss of his share of the capital, which must go to satisfy the creditors in the case of misfortune. He can not be both creditor and debtor. by virtue of his ownership of stock." Present creditors of the company can question the right of the preferred stockholders to these lands. Such lands are about the only remaining capital of the company. The capital stock of an incorporated company is a trust fund for its creditors. publicly pledged to them for their security. They have a lien upon it in equity, and if diverted, may follow it as far as it can be traced, and subject it to the payment of their claims, except as against bona fide holders for value and without notice. The lands heretofore conveyed by the company in consideration of the conversion and extinguishment of its preferred stock may be within the reach of its present creditors, if the title still remains in the original grantees from the company, or in those who purchased with knowledge that the consideration received by the company was its preferred stock. If an unpaid stock subscription can be reached by the creditors of a corporation, about which there is no doubt, it is equally clear that the creditors of a corporation can prevent its capital from being distributed to its stockholders to the prejudice of such creditors. The consent of every stockholder of the company to a plan for the reduction of its capital, forbidden or unauthorized by its charter, would not bind subsequent creditors, even if such plan had been brought to their notice prior to their dealings with the company. Strangers dealing with a corporation are only bound to look to its charter to ascertain the extent of its corporate powers and privileges, and notice to them that the corporation will do something in violation of its charter or beyond its authority is of no effect. It is claimed that Congress by acts approved at various dates from July 10, 1882. to June 3, 1896, has recognized and confirmed the plan adopted in the reorganization of 1875 for the conversion of the preferred stock into lands. These acts referred to the Northern Pacific Railroad Co. and were briefly for the following purposes: Granting to the company a right of way across the Crow Indian Reservation; appropriating money to pay the company for transportation in 1887; directing that settlers whose lands proved to be within the company's grant should receive other lands in lieu thereof; confirming a deed from the company to the city of Portland; confirming the company's agreement of 1876 with the Puyallup Indians, and granting a right of way through their reservation on payment by the company; giving the company certain privileges on making certain payments for the Yakima Indians; appointing commissioners to examine the company's land grant and to designate the mineral lands, and appropriating money to pay the commissioners; making provision for the relief of settlers who had innocently taken up lands in the company's second indemnity belt in Minnesota between 178 and 1879. While such acts recognized the existence of the company as a corporation de jure, they did not confer upon it any additional corporate powers beyond those expressed or implied in the acts themselves, and did not validate or cure any illegal or unauthorized acts or contracts of the company not especially referred to in them. None of the acts in question referred to the capital stock of the company or to the plan adopted for converting the preferred stock into lands, hence none of them authorized the company to diminish its capital stock, or confirmed the plan for such diminution. And the prayer of the petition should be denied. Indorsed Filed August 25, 1898. ALFRED L. CAREY, EDW. KURTZ, Clerk. (Whereupon, at 11.55 o'clock a. m., the committee adjourned until 10.30 o'clock a. m. Friday, June 18, 1926.) JOINT CONGRESSIONAL COMMITTEE ON THE PACIFIC RAILROAD LAND GRANTS, The committee met at 10.30 o'clock a. m., Hon. N. J. Sinnott (chairman) presiding. The CHAIRMAN. The committee will come to order. Mr. KERR. May I make a suggestion to preserve the continuity of the record, Mr. Chairman ? At the last session Mr. McGowan, after reading the report of Alfred L. Cary, special master, with respect to the Salomon case, regarding the exchange of preferred stock for land, stated that Judge Jenkins in passing on the report of the special master before him had sustained the conclusions but had not adopted the reason ing of the special master. The opinion is not reported except as it is found in the bound volume of the proceedings of the 1896 foreclosure, and I think it ought to be included in the record. The single question before the special master and before the court, as disclosed by these two opinions, was as to the right of the preferred stockholders as against a creditor of the insolvent corporation to exchange preferred stock for land, and I will ask to have the opinion in the record, and will read just one sentence: So far as the argument of the special master leads to that conclusion, I adopt that argument as part of this memorandum of opinion. There are other matters determined by the special master-such as the question of ultra vires and of the validity of the mortgage-which were not necessary, I think, to the decision of the question involved, and upon which I express no opinion. The exceptions will be overruled and the report of the master confirmed. (The decisions referred to follow :) OPINION OF THE COURT ON EXCEPTIONS OF PREFERRED STOCKHOLDERS TO REPORT OF SPECIAL MASTER Circuit Court of the United States for the Eastern District of Wisconsin. The Farmers' Loan & Trust Co., complainant, v. Northern Pacific Railroad Co. and others, defendants. In equity. April 13, 1899. Upon exception of preferred stockholders to the report of special master filed August 25, 1898. Van Schaick & Norton for Sidney H. Solomon. Sullivan & Cromwell for Northern Pacific Railway Co. Jenkins, Circuit Judge: Sidney H. Salomon, a preferred stockholder, filed with the special master, in behalf of himself and others like situated, a petition praying that the owners of the preferred stock of the defendant company might be declared in equity to have a first lien upon the lands east of the Missouri River and in Minnesota and North Dakota, which were not covered by the mortgage or trust deed foreclosed, to have that lien declared superior to the rights of the general creditors of the company, and that the proceeds might be applied to the retirement and cancellation of the preferred stock. The special master reported thereon that the prayer of the petitionr should be denied, and that report contains an exhaustive statement of the facts and an elaborate argument upon the legal propositions involved. The exceptions thereto have been argued before the court by counsel for the petitioner, but the court has not been favored with any argument in behalf of the general creditors of the railroad company, except such as is contained in the report of the special master. I have carefully considered the question involved, and, in view of the completeness and thoroughness of the special master's report. deem it needful only to say that, under the decision in Warren v. King (108 U. S. 389), I fully concur in the report so far as it holds that as against gen eral creditors, whatever may be their rights otherwise, the preferred stockholders are not entitled to an equitable lien upon the lands east of the Missouri River in priority to the right of the general creditors of the railroad company. I base this conclusion upon the authority of Warren v. King, supra, and upon the grounds therein stated. So far as the argument of the special master leads to that conclusion, I adopt that argument as part of this memorandum of opinion. There are other matters determined by the special mastersuch as the question of ultra vires and of the validity of the mortgage-which were not necessary, I think, to the decision of the question involved, and upon which I express no opinion. Mr. KERR. On the same day Judge Driver inquired as to the quantity of lands conveyed on account of preferred stock. Mr. McGowan gave the figures and asked that I check the matter. Full details as to these transactions are contained in answer No. 19 in my letter of December 14, which has been filed with the committee and request made that it be printed. It appears from this letter that separate records are not kept as to the amount of preferred stock received in exchange for lands and the amount of preferred stock retired from the proceeds of the sale of lands, but taking those together the aggregate of land sales is 4,255,963 acres. The average selling price of the land was $3.70 an acre. The total amount of stock received and retired was $15,747,063.26. Full details by way of explanation are found in this answer to question 19. Mr. McGowan. I quoted you correctly on that, did I not? Mr. McGowan. And I made the proper observation, I believe, with reference to Judge Jenkins's opinion in connection with the master's report in the Salomon case. Mr. Chairman, in the hearings of last spring I brought to the attention of the committee the punctuation of the joint resolution of May 31, 1870, 16 Stat. 378, and at that time I made the observation that the printed statutes did not show the comma after the words "sold or disposed of," as they appear in the resolution of 1870. I have had an opportunity to procure from the State Department a certified copy of the joint resolution of May 31, 1870, which shows that this comma does appear after the words "disposed of." That portion reading: "Provided, That all lands hereby granted to said company which shall not be sold or disposed of," then there appears the comma or remain subject to the mortgage by this act authorized,". 66 I would like to offer this certified copy of the joint resolution. (See pp. 2593 and 2760 hearings.) Mr. VAILE. A photostatic copy, is it not? Mr. McGowan. A photostatic copy, yes, sir, I should have said. I do not know that there is any need for any particular discussion of it this morning, but we regard it as a material point, and I would like to put it in now that I have it available. Senator KENDRICK. What is the importance of it, Mr. McGowan? Mr. McGOWAN. Well, at the prior hearings, at the preliminary hearings, when Mr. Britton was before the committee representing the Northern Pacific-and I think his position is the same as that of Mr. Kerr-was this: That so long as there was a mortgage on this land grant it was not necessary for the company to dispose of the - lands at $2.50 an acre. Now, I at that time pointed out that the printed statutes do not show this resolution as it appears on the records of the State Department, and my position in connection with it, and following the rule of strict construction that I read to you the other day, and following the interpretation of this resolution from a grammatical standpoint, and which is supported by an opinion by two professors of Yale University and which is in the record, I say that it was perfectly clear from the wording of the joint resolution, taking into consideration its punctuation and the debates that preceded its passage, that it must have been the intention of Congress that even though there should be a mortgage on the land grant, on July 4, 1884, which was five years from the completion of the railroad, that the mortgage would not estop the running of the provision requiring that the lands be opened to settlement and preemption at $2.50 per acre. For instance, I read the joint resolution this way: Provided, That all lands hereby granted to said company which shall not be sold or disposed of, [and the comma is in the joint resolution] or remain subject to the mortgage by this act authorized at the expiration of five years after the completion of the entire road shall be subject to settlement and preemption like other lands at a price to be paid said company not exceeding $2.50 per acre. Senator KENDRICK. Well, the question naturally arises, it seems t me there, that the security would be without value if you eliminate the right to sell the land to the highest bidder. Mr. McGoWAN. Well, the question of the highest bidder does no come in until the next paragraph, Senator Kendrick, but as to th question of the security back of the bonds, the same proposition tha you mentioned there, was raised in the Oregon-California grant, ar the Supreme Court in that grant said that the rights of the mor gagees could be no greater than the rights of the railroad compar inasmuch as the grant was a grant cum onere-that is, a grant with. burden and therefore the rights of a person accepting the la: grant as security for a mortgage could not be any greater than t rights of the railroad itself. In the Oregon and California case ( U. S. 393, and 243 U. S. 558) the Supreme Court held there was g obligation on the part of the company to sell the lands and that the mortgagee placed his mortgage subject to this requirement. I s the O. & C. decision applies with like effect to the Northern Paci grant. Senator KENDRICK. If there was a condition in the original tit the same condition applies to the mortgagee? Mr. McGOWAN. Yes, sir: coupled with this fact, that the security of course, was thought to be more than ample, in that through th Territories the acreage of the Northern Pacific grant was 25,600 acre per mile and in the States 12,800 acres per mile. Mr. Kerr, would you like to take a look at this photostatic copy the joint resolution of May 31, 1870, before it goes into the record! Mr. KERR. NO; I do not care to. (The photostatic copy referred to follows:) No. 11022 UNITED STATES OF AMERICA-DEPARTMENT OF STATE To all to whom these presents shall come, greeting: I certify that hereto annexed is a true copy of a resolution of Congress approved May 31, 1870, the original of which is on file in this department entitled "An act authorizing the Northern Pacific Railroad Co. to issue is bonds for the construction of its road, and to secure the same by mortga and for other purposes." In testimony whereof I, Frank B. Kellogg, Secretary of State, have here unto caused the seal of the Department of State to be affixed and my na subscribed by the chief clerk of the said department, in the District of Colu bia, this 17th day of June, 1926. [SEAL.] FRANK B. KELLOGG, By E. J. AYERS, FORTY-FIRST CONGRESS OF THE UNITED STATES OF AMERICA, AT THE SECOND SESSION, Begun and held at the city of Washington on Monday, the sixth day December, one thousand eight hundred and sixty-nine. A RESOLUTION Authorizing the Northern Pacific Railroad Company issue its bonds for the construction of its road, and to secure the same mortgage, and for other purposes. Resolved by the Senate and House of Representatives of the United State of America in Congress assembled, That the Northern Pacific Railroad Compe be, and hereby is, authorized to issue its bonds to aid in the construction |