A railway company contracted with parties associated together as
a construction company for the construction of a portion of its
road, the payment to be made in mortgage bonds. Two of the
directors were also parties in the construction contract. As part
of the transaction, the other parties in the construction contract
agreed to assume subscriptions by all individual directors of the
railroad company to the capital stock of that company (which was
worthless), and relieve them from all liability under it.
Held that the contract could not be enforced in equity
when resisted by stockholders in the corporation, and that mortgage
bonds issued under it to the construction company were voidable at
election of the parties affected by the fraud while in the hands of
parties who took from the construction company not in the ordinary
course of business, but under circumstances which threw doubt upon
their being holders for value or without notice; also
held
that notwithstanding the invalidity of the contract, the holders of
the bonds in a suit for the foreclosure of the mortgage were
entitled to a decree for the payment of the sums actually expended
for construction under the contract and remaining unpaid, which
were payable and paid in bonds declared void.
Bill in equity to foreclose a railroad mortgage. Decree of sale
and sale made. Then stockholders petition to intervene on the
ground of fraud, and by permission intervened, praying to set aside
the sale, and to have the mortgage decreed invalid. The decree
below set aside the sale and decreed the bonds to be invalid.
Appeal.
MR. JUSTICE MILLER delivered the opinion of the Court.
This is an appeal from a decree of the Circuit Court for the
District of Nebraska dismissing appellant's bill for a foreclosure
of a railroad mortgage.
Page 109 U. S. 523
The mortgage was made by the Brownville, Fort Kearney and
Pacific Railroad Company to secure the payment of bonds issued by
said company to certain persons who had contracted to build its
road, and to whom 610 of said bonds of $1,000 each had been
delivered. There was a default in the payment of these bonds. After
they were executed and delivered the Brownville and Fort Kearney
Railroad Company became consolidated under the laws of Nebraska
with the Midland Pacific Railroad Company, under the new name of
the Nebraska Railway Company. In the bill of foreclosure, both
these companies -- that is, the Brownville Company and the Nebraska
Company -- are made defendants, and an answer confessing
plaintiff's right to relief being filed, the court rendered a
decree of foreclosure, and apparently a sale was had.
But at this stage of the proceedings certain parties interested
as stockholders of the original Brownville and Fort Kearney Company
were permitted to make themselves defendants, and the first decree
was vacated.
These parties set up by way of answer and cross-bill that the
contract for the construction of the road, on account of which the
bonds were issued, was fraudulent and void, and so were the bonds
issued under it, and they resisted the foreclosure of the mortgage
on that account.
The fraud charged in this answer and cross-bill is founded on
two allegations:
1. It is alleged that two of the board of directors who took
part in making the construction contract were interested with the
other parties in the contract.
2. That the other contractors besides these two made an
agreement at the same time that the construction contract was made,
with twelve of the shareholders of the railroad company, that they
would relieve them, as subscribers to the stock of said company,
from the payment of any further assessments upon the stock which
they had subscribed for, by paying out said stock and having same
assigned to them; in all, not to exceed $16,500 of the $41,000 of
individual subscriptions to said company. The names of the persons
thus relieved by the construction
Page 109 U. S. 524
company included all the directors of the railroad company at
the time the contract for construction was made. As the stock was
worthless and these parties were liable to be called on to pay up
this $16,500, the effect upon the directors in making a
construction contract with the men who relieved them of their
liability, two of them being also parties in the construction
contract, is readily seen.
These allegations are proved beyond question, and the circuit
court held the contract void, and the bonds issued in fulfillment
of it also void, and dismissed the bill.
We concur with the circuit judge that no such contract as this
can be enforced in a court of equity where it is resisted and its
immorality is brought to light. But as this Court said in the case
of
Twin Lick Oil Co. v. Marbury, 91 U. S.
587, such contracts are not absolutely void, but are
voidable at the election of the parties affected by the fraud. It
may often occur that notwithstanding the vice of the transaction --
namely, the directors or trustees, or a majority of them, being
interested in opposition to the interest of those whom they
represent, and in reality parties to both sides of the contract --
that it may be one which those whose confidence is abused may
prefer to ratify or submit to. It is therefore at the option of
these latter to avoid it, and, until some act of theirs indicates
such a purpose, it is not a nullity.
In the present case, the stockholders of the corporation, whose
officers accepted those benefits at the hands of the parties, with
whom they were, in the name of the corporation, making a contract
for over a million of dollars, do denounce and repudiate that
contract. The conduct of these directors is utterly indefensible.
The case of
Wardell v. Union Pacific Railroad Co.,
103 U. S. 651, is
in precise analogy to this.
See also same case in 4 Dillon
330.
The original contract being such that the contractors can
maintain no suit on it, the bonds which they received are affected
with the same vice, and cannot be enforced unless they are
negotiable instruments in the hands of innocent holders for
value.
This principle is set up and relied on to reverse the decree
Page 109 U. S. 525
on the ground that the bonds are in the hands of the Burlington
and Missouri River Railroad Company. This company is no party to
the suit, but it appears in evidence that while it has possession
of these bonds, it did not receive them by any purchase in the
ordinary course of business. They came into their possession as
part of a transaction in which they purchased the consolidated
Nebraska Company's railroad, and these bonds were probably taken as
security against their being used to injure the title. It is also
shown that as further security in the same direction, the
Burlington and Missouri Railroad Company yet retains $400,000 of
the price of the road, which they agreed to pay. Under these
circumstances, we do not see that that company is in condition to
avail itself of the doctrine of
bona fide holders for
value.
But we are asked to reverse the decree so far as to permit the
trustee in this case to recover such a sum as the construction
company actually earned in building the road. The matter was
referred to a master, who, on this hypothesis, reported that the
contractors had done work for the railroad company, which it had
accepted, to the value of $205,947.66 beyond what they had received
payment for, except as it was paid by these bonds. He also reported
that this work was of that much advantage to the company, and its
value or cost is estimated as on a
quantum meruit, without
regard to the prices fixed by the contract.
We are of opinion that appellant's view of this part of the
transaction is sound.
The bonds and mortgage in the hands of the trustee were issued
in payment for this work. To the extent of $205,947.66, the
consideration is good, and no sound principle is seen on which they
cannot to that extent be enforced. To this extent they do not rest
on the original contract, but on work, labor, and material actually
furnished to the company and received by it. These services and
materials are not estimated by the prices named in the contract,
but by their real value to the company.
In the analogous case of
Wardell v. Union Pacific Railroad
Co., 4 Dillon 339, the circuit court, after rejecting
Page 109 U. S. 526
the fraudulent contract on the same grounds that we reject this
one, said:
"By what rule shall we measure Mr. Wardell's rights? He has
spent time and labor and money in discovering the mines, and in
placing them in condition to be profitably worked. . . . Apart from
the contract, and if it had never existed, he is entitled to a fair
and reasonable compensation for his labor and time and skill. The
fraud gives the railroad company no right to these without just
compensation."
This ruling was affirmed in this Court on appeal in the same
case.
103 U. S. 103 U.S.
651.
See also Gardner v. Butler, 30 N.J.Eq. 702.
There is another principle of equity jurisprudence which leads
to the same conclusion.
The stockholders who have resisted complainant's claim were not
parties to the original suit for foreclosure, nor were they either
necessary or proper parties as the case then stood. The decree and
sale were made in a suit where all the usual parties to such a suit
were agreed.
These stockholders had no legal right to interfere. It was only
by permission of the court that they were allowed to come in and
contest the validity of the mortgage. In doing this, they became
actors. They filed their cross-bill.
In this condition of the case, they are amenable to the rule
that they who seek equity must do equity. It is just that they
should pay a fair price for what they have received; that this
mortgage, given for the construction of the road, though excessive
by reason of the fraud in the contract, should stand for the
reasonable value of what the company actually received in the way
of construction. To permit these intervenors to defeat the mortgage
on any other terms would be unjust, and would make the court the
instrument of this injustice.
The decree of the circuit court must therefore be reversed,
and the case remanded to that court, with directions for a decree
in favor of the plaintiff for the sum of $205,947.66, with
interest. If a sale becomes necessary this sum must be
paid
Page 109 U. S. 527
out pro rata on the bonds secured by the mortgage, on their
being produced and cancelled, or surrendered for cancellation,
provided the road sells for so much.
MR. JUSTICE FIELD and MR. JUSTICE MATTHEWS took no part in the
hearing or decision of this case.