CUNNINGHAM v. MACON & B.R. CO. , 156 U.S. 400 (1895)

Under this authority the governor indorsed the bonds of [156 U.S. 400, 403]   the company to the extent of $1,950,000. The bonds were thus entitled:

'State of Georgia.

'United States of America.

'Macon & Brunswick Railroad Company. First and Only Mortgage Bond.'

They acknowledged that the Macon & Brunswick Railroad Company was indebted to Charles J. Jenkins, as governor of Georgia, and to his successors in office, or to the bearer thereof; and also recited the statutory mortgage, which was reserved by the state in the act of 1866. In June, 1870, the president of the railroad company executed an instrument in which he stated that these bonds had been issued in conformity with the statute, and that the company was desirous of confirming the lien held by the state to secure their payment, and that, therefore, he, as president, recognized, on behalf of the company, the validity of the statutory mortgage and of the lien created thereby. To this instrument the state was not a party. In October, 1870, the legislature of Georgia passed the following act:

'An act to amend an act to extend the aid of the state to the completion of the Macon and Brunswick Railroad, and for other purposes.

'Whereas the Macon and Brunswick Railroad has been completed to Brunswick, requiring a greater outlay of money than was originally contemplated, to place the same in complete running order, and to furnish the necessary cars, engines, and machinery; and whereas the state has, by recent legislation, endorsed the bonds of other railroads to the extent of fifteen thousand dollars per mile:

'Section 1. The general assembly of the state of Georgia do enact, that the above-recited act be so amended as to authorize the governor to place the endorsements of the state, to the extent of three thousand dollars per mile, upon the bonds of said Macon and Brunswick Railroad Company, in addition to ten thousand dollars, as recited in the act of which this is amendatory. [156 U.S. 400, 404]   'Sec. 2. Be it further enacted, that all laws and parts of laws in conflict with this act be, and the same are, hereby repealed.' Acts 1870, p. 336.

Under this act bonds to the extent of $600,000 were issued by the railroad and indorsed by the state. These bonds differed in several particulars from those of the first issue. Thus, instead of acknowledging that the corporation was indebted to the governor of the state, they declared that it was indebted to Morris K. Jesup, of the city of New York, or bearer. They made no reference to the mortgage or lien held by the state under the act of 1866, nor did they purport to be secured by mortgage. Each of them contained this recital: 'This is one of a series to the extent of $3,000 per mile of the Macon and Brunswick Railroad Company, indorsed by the state of Georgia in accordance with an act of legislature passed October 27, 1870.' At the time this act was passed the constitution of Georgia contained the following provision:

'The general assembly shall pass no law making the state a stockholder in any corporate company; nor shall the credit of the state be granted or loaned to aid any company without a provision that the whole property of the company shall be bound for the security of the state prior to any other debt or lien, except to laborers; nor any company in which there is not already an equal amount invested by private persons; nor for any other object that a work of public improvement.' Const. 1868, art. 3, 6, subsec. 5.

In August, 1872, the legislature of Georgia passed a resolution declaring that the state's guaranty placed on the bonds of the Macon & Brunswick Railroad Company was binding. In 1873 the company defaulted in the payment of interest on the bonds issued under the act of 1866, and which bore the state's indorsement. In July of that year the governor issued a proclamation reciting the passage of the act of 1866, the issue of the bonds thereunder, and the company's default. He announced also that, in pursuance of the power conferred upon him by that act, he had seized the company's property, and had appointed an agent of the state to take possession and control of the same. In March, 1875, the legis- [156 U.S. 400, 405]   lature passed a resolution declaring that the $1,950,000 issue of bonds which had been indorsed under the act of 1866 were valid and binding obligations of the state, but that the $600,000 issue under the act of 1870 was unconstitutional. null, and void; that it was the sense of the general assembly that the railroad, with its franchises, equipments, and appurtenances, should be sold by the governor at an early date, and, if considered practicable, as early as June 1, 1875, at public or private sale, and upon such terms, and for such a price in money or first mortgage indorsed bonds of the Macon & Brunswick Railroad Company, or bonds of the state, as, in his judgment, might be consistent with the interests of the state, and that no commission or percentage should be authorized or allowed under such sale.

In April, 1875, the governor issued his executive order for the sale of the railroad property which had been under seizure since 1873. This order, after also reciting the act of 1866, and the indorsement by the state of the bonds issued thereunder, proceeded as follows:

'Whereas, among other provisions of said second section of said act, it is expressly provided that after the seizure of all the property of said company, as aforesaid, the governor 'shall sell the road and its equipments and other property belonging to said company, in such manner and at such times as, in his judgment, may best subserve the interest of all concerned;' and having become satisfied that it will be for the best interest of the state and all concerned that all the property of the company seized under said order be sold at an early day, it is therefore

'Ordered, that all the property seized, as aforesaid, now in the possession of Edward A. Flewellen, receiver of the property of the Macon and Brunswick Railroad Company, under said order, be sold to the highest bidder at public outcry at the depot of the Macon and Brunswick Railroad Company, in the city of Macon, between the hours of 10 o'clock a. m. and 4 o'clock p. m. on the first Tuesday in June next.

'The said sale will be made for cash, for bonds of this state, or the first mortgage bonds of the company, indorsed [156 U.S. 400, 406]   in behalf of the state, under the authority of the act approved December 3, 1866. It is further

'Ordered, that the said Edward A. Flewellen, as receiver aforesaid, make out an advertisement under this order, setting forth with requisite particularity all the property to be sold as aforesaid, and publish the same in such public gazettes in this state and in the city of New York as, in his judgment, will give proper publication to said sale.'

The sale thus directed took place on the date fixed, and the property was bought in by the governor, on behalf of the state, for $1,000,000, the purchase having been authorized by the legislature of the state. The governor executed a formal conveyance of the purchase to the state on June 3, 1875, and the state subsequently retired the $1,950,000 of bonds which had been issued and indorsed under the act of 1866. In September, 1877, the complainants (appellants), alleging themselves to be holders and owners of bonds of the Macon & Brunswick Railroad Company, indorsed by the state under the act of 1870, which, they averred, they had acquired in open market after the state had acknowledged her liability thereon, and before the passage of the act declaring the indorsement invalid, filed their bill in the circuit court of the United States for the Southern district of Georgia against the company and certain persons named therein, 'styling themselves directors of the Macon and Brunswick Railroad,' and J. W. Renfroe, treasurer, and Alfred H. Colquitt, governor, of Georgia. This bill, after setting out the facts substantially as here given, charged that the sale made by the governor was void for the following reasons:

'(1) Because neither the legislature nor the governor had the right to exclude the $600,000 series of indorsed bonds from being used as so much cash in the purchase of said road at their face value. Certainly they were entitled to be so used in the event of the exhaustion of the $1,950, 000, which themselves should have _____ received as cash at par.

'(2) Because the governor was not authorized to bid on said property for the state, and the state had no constitutional power to make the purchase, or, if said sale is not void, [156 U.S. 400, 407]   it is certainly voidable, because under the statutory and executed mortgages the state is the trustee of the property mortgaged for the benefit of the bondholders, and had no right to buy at her own sale as such trustee, without incurring the risk of having such sale set aside at the instance of any beneficiary under the trust; and your orator as such beneficiary elects to set said sale aside.'

The bill also alleged the taking up by the state of the $1,950,000 of bonds issued under the act of 1866, subsequent to her purchase of the property, and averred, in the alternative, that, if the sale was not void because of the fact that the mortgage was solely to indemnify the state, then the holders of the bonds issued under the act of 1870 were entitled to a ratable distribution of the proceeds with the holders of those indorsed under the act of 1866, and therefore should receive an equal pro rata share of all sums paid or to be paid by the state on the retired issue of $1,950,000 under the act of 1866. The bill was demurred to by Renfroe, treasurer, and Colquitt, governor, and, after hearing, was dismissed. The complainants thereupon prosecuted their appeal to this court, where the decree below was affirmed. Cunningham v. Railroad Co., 109 U.S. 446 , 3 Sup. Ct. 292, 609. Meanwhile, subsequent to the decree of dismissal below, the railroad and its appurtenances were sold by the state, under proper legislative authority, for $1,250,000, and through a series of transfers, some of them being the result of judicial foreclosure of mortgages, the road finally became the property of the East Tennessee, Virginia & Georgia Railroad Company. In 1886, after the filing of the mandate of this court, affirming the decree of dismissal, a motion was made below for a decree pro confesso against the Macon & Brunswick Railroad Company, and leave was given to file a supplemental bill making the East Tennessee, Virginia & Georgia Railroad Company a party defendant. The amended bill was duly filed. This bill, after substantially reiterating the averments of the original bill, and charging likewise that the sale at which the governor bought in the property on behalf of the state was null and void, alleged that the East Tennessee, Virginia & [156 U.S. 400, 408]   Georgia Railroad Company was a purchaser with notice of the illegality, and then proceeded as follows:

'And your orator charges that the said state of Georgia held the said property, after the seizure thereof, as a trust for the payment of the obligations of the said the Macon and Brunswick Railroad Company to the extent of the avails of a sale of the said property to be made for the interest of all creditors of said company, with the privilege unto the said state of protection, first, out of said avails, of its own indorsement of the bonds of said company; that the said state, in and by the resolution aforesaid, declared its indorsement of the bonds held by your orator to be not binding on it, and in advance of demand upon it by your orator refused thereby to pay the said indorsement, or to enforce its said privilege of protection of said indorsement from the avails of said property so in its hands; that your orator thereby became at least entitled to the advantage of the said mortgage lien of the said state for his protection, to have the said property sold with proper regard to his interests and the interests of his fellow bondholders, to be allowed to participate freely with all other lienors of the said railroad at the sale of the said railroad property by his said trustee in bidding upon said property, and paying therefor in the bonds held by him, herein-before mentioned, with due regard to the protection of any and all prior liens and the costs and expenses of sale.

'And your orator shows that in and by the said resolutions under which said sale was made, and under color of which the said trustee for your orator became possessed of the said railroad property, the said state of Georgia gave notice of its intention to commit a breach of trust by excluding your orator from participation in said sale on equitable terms with the holders of the first mortgage bonds, by excluding your orator, by the provisions thereof, from participation in the avails of said sale or any benefit therefrom by announcing openly to [156 U.S. 400, 409]   the world its intention to sell the said road in its own interest rather than in the interest of the creditors of said company, and by divers other acts and announcements, all concurring to demonstrate positively to the world that the said trustee had determined to exclude your orator from any benefit under the said trust, and that it would not regard or protect in any respect the interests of your orator and his fellow bondholders in the said sale or distribution of avails.

'And your orator shows that in point of fact the said state of Georgia, at the said sale, did commit the said breach of trust according to its previously announced intention, did exclude your orator and his fellow bondholders from their rights of equitable protection at sale by bidding and paying the bonds held by them, did sell the said road in a manner contrary to the interests of the creditors generally of the said road for a very small part of its real value, the price nominally bid therefor being one million dollars, and the real value thereof being four million dollars, and did sell the road to itself for said price, in its own interest, and without regard to the interests of the beneficiaries of the trust, including your orator, and thereupon, in equity, held the said property as a trust for you orator, and subject to his lien for the payment of his said bonds.

'And your orator avers that the said the East Tennessee, Virginia and Georgia Railroad Company and the East Tennessee, Virginia and Georgia Railway Company had full notice in the purchase of said property made by each of the said breach of trust by said trustee, and took the said property subject to the duties and liabilities of said trustee towards your orator,-that is to say, with the lien of your orator unaffected and undischarged by the sale of said property made by said trustee in breach of his fiduciary duty,-and that the said last-mentioned company now holds said property as trustee for your orator, and subject to your orator's lien for the payment of the said indebtedness to him.'

The East Tennessee Company answered the supplemental bill, stating the various conveyances through which the title had finally come to be vested in itself, and asserting the validity thereof. All the facts above stated appear on the face of the pleadings and exhibits. Before the sale was made by the state, John P. Branch, a holder of bonds of the same series [156 U.S. 400, 410]   as those held by these complainants, had filed a bill in the circuit court of the Southern district of Georgia, asking for an injunction to prevent the sale, but the application was denied. Branch v. Railroad Co., 2 Woods, 385, Fed. Cas. No. 1,808. Branch had also taken a decree pro confesso against the Macon & Brunswick Railroad Company, and he was allowed to intervene below, and become a party to the present suit, in which he claims the same rights as those asserted in the original and supplemental bill. The cause was submitted to the court on bill, answer, and exhibits, and resulted in a decree of dismissal. The case was then brought here by appeal.

Chas. N. West, W. W. Montgomery, D. H. Chamberlain, and John Howard, for appellants.

George Hoadly, for appellees.

[156 U.S. 400, 418]  

Mr. Justice WHITE, after stating the case, delivered the opinion of the court.

The case of the appellants rests upon two distinct legal propositions. The first one asserts their right to be subrogated to a mortgage security taken by the state of Georgia, and, by virtue of such subrogation, to enforce the mortgage against the property of the railway company. The other proposition is that they are direct mortgage creditors, and have a specific mortgage lien upon the property of the company. [156 U.S. 400, 419]   A right of subrogation, such as is here claimed by the appellants, does not involve any direct lien in favor of the creditor, resulting from his position as such. It only exists in consequence of his being, as a creditor, entitled to enjoy certain rights which are vested in the surety at the time the subrogation is claimed. This principle is fundamental, and its application is fatal to the complainants. As the creditor's right to subrogation depends on the existence, in the surety, of the rights to which subrogation is sought, it follows that, after the surety has parted with the thing given him for this protection, the creditor can have no subrogation to such thing. In the present case, when the subrogation was claimed, the state had divested herself of all her rights, under the mortgage of indemnity, by selling the mortgaged premises, and had applied the proceeds of the sale to the payment of the debt which the mortgage was given to secure. She had no longer any rights of her own, therefore no subrogation could be derived through her. Aside from this consideration, in order to enforce equitable subrogation against a surety, he must be made a party to the cause. The state of Georgia is not, and cannot be, without her consent, impleaded. All the foregoing doctrine was applied and carefully stated in Chamberlain v. Railroad Co., 92 U.S. 299 , where, speaking through Mr. Justice Field, the court said: 'Whatever right the plaintiff had to compel the application of the lands received by the state to the payment of the bonds held by him, it was one resting in equity only. It was not a legal right arising out of any positive law, or any agreement of the parties. It did not create any lien which attached to and followed the property. It was a right to be enforced, if at all, only by a court of chancery against the surety. But, the state being the surety here, it could not be enforced at all, and, not being a specific lien upon the property, cannot be enforced against the state's grantees. Where property passes to the state, subject to a specific lien or trust created by law or contract, such lien or trust may be enforced by the courts whenever the property comes under their jurisdiction and control. Thus, if property held by the government, covered by a mortgage of the origi- [156 U.S. 400, 420]   nal owner, should be transferred to an individual, the jurisdiction of the court to enforce the mortgage would attach, as it existed previous to the acquisition of the government. The Siren, 7 Wall. 158, 159. But where the property is not affected by any specific lien or trust in the hands of the state, her transfer will pass an unincumbered estate.'

The appellants must therefore rely for the maintenance of any rights they may possess upon their second proposition, which is to the effect that the bonds which they hold were secured by the statutory mortgage created by the act of 1866, and that the mortgage rights thus existing were not affected by the sale made by the state in 1875, but are yet subsisting, and may be enforced against the mortgaged property in the hands of the present defendant. It is obvious that, if the statutory mortgage created by the act of 1866 was solely for the indemnification of the state, and not for the security of the bondholders, the latter, whatever may be their indirect rights by subrogation, cannot directly avail themselves of the statutory mortgage. Chamberlain v. Railroad Co., 92 U.S. 299 ; Tennessee Bond Cases, 114 U.S. 663 , 5 Sup. Ct. 974, 1098. In order, therefore, to give them the relief which they seek, the statutory mortgage must be treated as having been given to secure the holders of the bonds. But, if this view be taken, the claim here asserted is untenable. If there be a mortgage in favor of complainant's bonds, it must result from the terms of the act of 1866; but these bonds were not issued under that act, and owe their existence to the authority conferred by the act of 1870. This act reserved no mortgage, and the bonds of relator, having been issued under it, do not purport to be secured by mortgage. The claim that they are so secured is deduced from this contention: The act of 1870, it is asserted, purported to be an amendment to the act of 1866; therefore the provisions as to mortgage found in the act of 1866 were incorporated into and became a part of the act of 1870. Between 1866 and 1870, however, the following amendment to the constitution of Georgia was adopted, and it was in force when the act of 1870 was passed:

'The general assembly shall pass no law making the state [156 U.S. 400, 421]   a stockholder in any corporate company; nor shall the credit of the state be granted or loaned to aid any company without a provision that the whole property of the company shall be bound for the security of the state, prior to any other debt or lien, except to laborers; nor any company in which there is not already an equal amount invested by private persons, nor for any other object than a work of public improvement.'

Under these provisions, if we were to construe the act of 1870 as desired, the result would be to make that act clearly violate the amendment to the constitution just cited; for, if the statutory mortgage secured the bondholders, then the bonds issued under the act of 1866 were necessarily secured by a first mortgage, and those issued under the act of 1870 by a second. This conclusion can be avoided only in one or the other of two ways: First. By contending that the incorporation of the provisions of the act of 1866 into the act of 1870 made the bonds issued under the latter act equal in rank of mortgage with the bonds issued under the former. But to admit this contention would make the act of 1870 void, because it would, if thus construed, impair the obligations of the contract made with the holders of the bonds first issued. Or, second, by contending that, inasmuch as the mortgage created by the act of 1866 was in favor of the state, and not in favor of the bondholders, the issuance of the bonds of the second series simply increased the aggregate amount of the state's liability, and that there was no difference between the two in rank of lien and mortgage, since the state held both the first and the second series, and the two were practically issued under one act. But this would be an assertion that the statutory mortgage created by the act of 1866 was solely for the benefit and indemnification of the state, and that the holders of the bonds were not directly interested therein. If this position be assumed, it defeats the complainants, as we have already seen.

However, it is claimed that, even if the state's indorsement of the bonds issued under the act of 1870 was in violation of the constitutional amendment, the only result is to render the indorsement void, and thus the bonds are left outstanding as [156 U.S. 400, 422]   valid contracts of the railroad company, secured by the statutory mortgage reserved in the act of 1866. This contradicts the plan text of that act, since it only purported to reserve a mortgage in favor of bonds indorsed by the state. And, besides, if this argument were adopted, it would render efficacious a legislative violation of the constitutional amendment, since it presupposes that there was power in the general assembly to allow the mortgage security, which had been taken by the state solely in order to secure the bonds she had guarantied, to be transferred to others as a means of securing bonds to which her guaranty could not be constitutionally affixed. In other words, that the state, having a first mortgage security, which she had taken to secure bonds, of which she was an indorser, could vitiate such security by allowing others to participate in the benefits thereof, and thus do by indirection what the constitution forbade her to do directly.

Nor does the case of Railroad Cos. v. Schutte, 103 U.S. 118 , sustain this argument of the appellants. There the state of Florida issued her bonds to aid the railroads, securing herself by a first mortgage on the roads, and taking in exchange bonds of the companies. It was certified on the state bonds that they were protected by a first mortgage 'as security for the holders thereof.' The bonds, thus drawn, were indorsed by the railroad companies, and issued by them. The obligation of the state was found unconstitutional, but it was held that, inasmuch as the railroad companies had indorsed the bonds thus drawn, they had guarantied the existence of the mortgage, and the holders of the bonds were therefore entitled, as against them, to insist upon the validity of the mortgage, and to assert legal rights by virtue thereof. In the present case there is no mention of the existence of a mortgage on the face of the bonds declared on by the complainants; nor is there any statement of such mortgage in the act of 1870, under which they were issued. The claim here is merely that a mortgage resulted from the statute passed in 1866, which statute in express terms reserves a mortgage only for such bonds as are indorsed by the state. The case relied on involved no question of the existence of a mortgage, but [156 U.S. 400, 423]   the point at issue was whether an admittedly existing mortgage could be enforced against the corporations. Here, on the contrary, the question is whether the mortgage under the act of 1866 ever existed quoad the bonds issued under the act of 1870

These conclusions are decisive of the cause, but other considerations, which affect the merits of the controversy, are equally fatal to the appellants. It cannot be doubted that, even if the bonds issued under the act of 1870 were secured by the statutory mortgage reserved by the act of 1866, they were second in rank, and therefore their holders were junior mortgage creditors. Nor can it be gainsaid that the statutory mortgage conferred upon the state a power to sell the mortgaged property. This power was exercised in 1875. The grounds upon which it is asserted that the sale was void are: First, that before the sale it was announced that only bonds of the issue of 1866 would be received in payment, and that at the sale it was declared that such bonds would only be received at their market value. There is no averment in the bill that the first mortgage creditors complained of these requirements, nor does it contain any allegation that the holders of the second series of bonds, who are now championing the rights of the first mortgage creditors, bid at the sale, or in any way manifested their willingness to free the property from the first mortgage debt. The rights of the second mortgage creditors were necessarily subordinate to the paramount rights of the creditors first in rank. The property of the company had been for nearly two years under seizure, the default having occurred in 1873. It was the plain duty of the second mortgage creditors, if they were interested in preventing the sale, and wished to tender their bonds in payment, to bid a sufficient amount to lift the prior incumbrance. Not only is there no averment that they did this, but the bill contains an assertion that, in the event the mortgage indemnified only the state, then equality of rank existed between the holders of the second and the holders of the first series of bonds; and upon this alleged equality the complainants, as holders of the second series, base their claim to participate [156 U.S. 400, 424]   ratably in the distribution of the purchase money, and thus infringe upon the unquestioned rights of the bondholders under the act of 1866.

The other ground of attack upon the sale was the incapacity of the state to purchase at her own sale, which, it is claimed, resulted from the fact that the statutory mortgage reserved by the act of 1866 made the state a trustee for the bondholders. Conceding this, the state was both a trustee and a mortgagee, and she had a direct individual interest in the property, by reason of her indorsement on the bonds. The general assembly of the state of Georgia had expressly authorized the governor to bid in the property, on behalf of the state, in case there was no bid sufficient to protect the outstanding obligation which bore the state's indorsement. Even if this provision be considered inapplicable upon the ground that the state could not lawfully bid at the sale under a power conferred upon herself by herself, the complainants' position would be untenable. It is conceded that the settled doctrine in Georgia is that the purchase by a trustee is not absolutely void, but merely voidable, at the option of the cestui que trust. Worthy v. Johnson, 8 Ga. 236. Let us suppose, for the sake of argument, that the cestuis que trustent in this case were the holders of the bonds which were issued under the act of 1866 and of those which were issued under the act of 1870. The bill contains an averment that the holders of the first class surrendered their bonds to the state after her purchase of the property, and that she has discharged her liability under her indorsement upon their bonds. In retiring these bonds the state paid off the first mortgage debt, not only to the extent of her bid, but to nearly twice its amount. The action of the first mortgage creditors in accepting the extinguishment by the state of their securities and the mortgage by which they were secured was, in effect, a ratification of the sale, and established its legal validity, so far as they were concerned.

Under these circumstances, conceding that the second series of bonds were secured by a second mortgage, their holders cannot equitably be allowed to avoid the sale without tender- [156 U.S. 400, 425]   ing reimbursement of the amount of the first mortgage. Their claims were subordinate to those of the holders of the first series, and they have no recourse until the latter are paid, and it would be grossly inequitable to allow them to avoid a sale which has been ratified by those who were primarily interested in the price resulting therefrom, without compelling them, as a prerequisite, to do equity by protecting the first incumbrancers. Collins v. Riggs, 14 Wall. 492; Jones, Mortg. 1669; Pom. Eq. Jur. 1220 et seq. Instead of doing this, although nearly two years had elapsed between the sale and the filing of the bill, the complainants assert that their bonds are, in the contingency last stated, equal in rank of mortgage lien with those of the holders of the first series, and hence that they are entitled to an equal participation in the proceeds of the mortgaged property. Indeed, in the discussion at bar, the contention was advanced that the retirement of the first mortgage bonds by the state, after her purchase, extinguished the prior mortgage by which they were secured, and that, the sale being voidable at the instance of complainants,- an option which their bill asserts,-the second mortgage, which was held by them, has thus become first. No offer to pay the amount of the first mortgage was made prior to the purchase of the property by the defendants, and their title cannot now be divested, even if such an offer were made. We think the complainants are not entitled to the relief which they claim, and that the property passed to the defendants free from any lien under the statutory mortgage arising from the act of 1866 or 1870, even if from the latter any such mortgage ever resulted.

Affirmed.