Foster v. Mansfield, C. & L. M. Railroad Company/Opinion of the Court

by Henry Billings Brown

United States Supreme Court

146 U.S. 88

Foster  v.  Mansfield, C. & L. M. Railroad Company

The bill in this case was dismissed in the court below upon the ground of laches, and also for the want of equity. The propriety of this action is now before us for review.

As the alleged fraudulent sale of this road, which constitutes the gravamen of the bill, took place August 28, 1877, and the bill was not filed until August 30, 1887, 10 years thereafter, there is certainly a presumption of laches, which it is incumbent upon the plaintiff to rebut. His reply is that he did not discover the fraud until a few months before the filing of the bill. The allegation of the original bill in that particular is very general, namely, that 'until within a few months prior to the filing of this bill he and those whom he represents were entirely ignorant of each and all of the fraudulent proceedings hereinafter set forth, and that this bill of complaint was filed in this court as soon after the acts of fraud, hereinafter set forth, came to his knowledge, as he could satisfy himself of the truth thereof. * * * And your orator had no knowledge of any of the fraudulent acts hereinbefore complained of until very recently accidentally discovered.' The amended bill is much more specific in its details, and avers that a certain supplemental mortgage, which appears to have been executed by the Coldwater Company, Cotober 1, 1872, to the same parties as trustees, for the purpose of effecting the sale and negotiation of its bonds, at the time of its execution by the officers of the company contained a full reference to the contract of May 4, 1872, the same having been inserted for the purpose of giving to all the purchasers of bonds due notice regarding the obligations of the Pennsylvania Company, but that after the execution of said supplemental mortgage, and the same had come into the possession of the officers of the Pennsylvania Company, it was altered by striking out all reference to the interest contract of May 4, 1872, or by taking out of the mortgage the page on which said reference was made, and substituting therefor another page, in which said reference was omitted, and the mortgage was recorded as so altered; that the plaintiff and the other stockholders were thereby kept from all knowledge of this contract, and of the obligations of the Pennsylvania Company, and were also ignorant of the alteration of the supplemental mortgage until after the filing of the original bill. The amended bill further avers that during all this time the records of the railroad company were kept out of the reach of the stockholders; that no meeting of stockholders was ever called after that of January, 1874; no notice was given for the election of directors; and that the knowledge of the contract of May 4, 1872, was purposely kept from the stockholders, plaintiff believing that the decree of foreclosure was final, and the company hopelessly insolvent, and that there was no advantage in keeping up the organization of the company, and hence no annual meetings were called or held, all of which was brought about by the Pennsylvania Company as a part of the scheme and conspiracy to obtain the property, and defraud the stockholders of the Coldwater Company out of the same. Plaintiff further alleged that some time during the month of May, 1886, he was shown a copy of the contract of May 4, 1872; that until that time he neither knew nor had any means of knowing or suspecting the unlawful proceedings alleged in the bill, or that there was or could be any lawful or valid defense to the foreclosure; that he began at once a careful examination of all the facts, but was greatly retarded by his inability to discover the records or papers of the company, or to find the original of this contract, and did not find them until within six months of the time of filing the bill; that the majority of the board of directors was made up of the officers and employes of the Pennsylvania Company, and, acting in this interest, kept from stockholders all means of obtaining information, and neglected to make reports or call stockholders' meetings for the purpose of enabling them to obtain information; and that, if the plaintiff had known of the existence of such contract, or any of the matters in defense of the bill of foreclosure, during the pendency of those proceedings, he would have called the same to the attention of the court.

Do these allegations exhibit such a state of facts as acquits the plaintiff of the charge of laches? Taken literally, they show that plaintiff had no knowledge of the contract of May 4, 1872, until May, 1886; but it also appears that in the original answer to the foreclosure bill, which was filed March 1, 1876, the substance of this contract was set out, and the same allegations of fraud with respect to the conduct of the Pennsylvania Company up to that time were made in the answer as are made in the plaintiff's bill in this case. This answer, though nominally withdrawn by consent of the parties, does not appear to have been actually taken from the files; and, being a part of the records of the court, the presumption is that it would not be so taken away without leave of the court. It is also certified here by the clerk as a part of the record of the foreclosure suit. Not only was the contract set forth in this answer, but in the answer and cross petition of Swan, Rose & Co., judgment creditors of the road to the amount of $600,000, which was filed December 18, 1876, the same contract was set forth, and the authority of Hickox, the president of the defendant company, to make such contract, was denied; and it was averred that the Pennsylvania Company had wrongfully obtained certificates for a million and a half of stock, and had assumed to manage and control the affairs of the company.

The defense of want of knowledge on the part of one charged with laches is one easily made, easy to prove by his own oath, and hard to disprove; and hence the tendency of courts in recent years has been to hold the plaintiff to a rigid compliance with the law, which demands, not only that he should have been ignorant of the fraud, but that he should have used reasonable diligence to have informed himself of all the facts. Especially is this the case where the party complaining is a resident of the neighborhood in which the fraud is alleged to have taken place, and the subject of such fraud is a railroad with whose ownership and management the public, and certainly the stockholders, may be presumed to have some familiarity. The foreclosure of this road could not have taken place without actual as well as legal knowledge of the fact by its stockholders, and if they believed they had any valuable interest to protect it was their duty to have informed themselves by an inspection of the records of the court in which the foreclosure was carried on of what was being done, and to have taken steps to protect themselves, if they had reason to believe their rights were being sacrificed by the directors. If a person be ignorant of his interest in a certain transaction, no negligence is imputable to him for failing to inform himself of his rights; but if he is aware of his interest, and knows that proceedings are pending, the result of which may be prejudicial to such interests, he is bound to look into such proceedings so far as to see that no action is taken to his detriment. An examination of the records in this case would have apprised the plaintiff, not only of the existence of the contract of May 4, 1872, but of the alleged fraudulent conduct of the Pennsylvania Company thereunder, and of the withdrawal of their answer by the directors, which is now claimed to be decisive proof of fraud. An inquiry of the directors, two of whom had protested against the resolution to withdraw the answer, and were within easy reach of the plaintiff, would have disclosed all the material facts set forth in plaintiff's bill, even to the reasons assigned for withdrawing the answer. The slightest effort on his part would have apprised him of the proceedings subsequent to the sale; of the purchase of the road by Lessley, the alleged employe of the Pennsylvania Company; of the subsequent organization of the Northwestern Ohio Railway Company; and of the lease of the new railway company to the Pennsylvania Company. Had he asked the leave of the court to intervene for the protection of his interest, it would have undoubtedly acceded to his request. Instead of this, he permits the sale to take place, and the road to pass into the hands of a new corporation, which has operated it for 10 years without objection from the bondholders or creditors of the Coldwater Company, and without question as to its title. In the mean time many of the witnesses, including both Cass and Scott, trustees, whose alleged fraudulent betrayal of their trust constitutes the gravamen of this bill, are dead, as well as Lewis, the president, and Fish and F. V. Smith, directors, of the defendant company, one of whom participated with Lewis in the meeting at which the attorneys were instructed to withdraw their defense, and all opportunity of explanation from them is lost. It is evident that the plaintiff in this suit has fallen far short of that degree of diligence which, under the most recent decisions of this court, the law exacts in condonation of this long delay. Bailey v. Glover, 21 Wall. 342; Hammond v. Hopkins, 143 U.S. 224, 12 Sup. Ct. Rep. 418; Hoyt v. Latham, 143 U.S. 553, 12 Sup. Ct. Rep. 568; Felix v. Patrick, 145 U.S. 317, 12 Sup. Ct. Rep. 862.

We are the more readily reconciled to this conclusion from the fact that it does not appear that, if this sale were set aside and held for naught, the decree would redound to the advantage of the plaintiff. The only allegation as to his interest is that he is the owner and holder of 258 shares of the capital stock of the company of the par value of $12,900. It does not appear how much of its authorized capital stock of $4,000,000 was actually issued, though there is an allegation in the bill that the Pennsylvania Company wrong fully obtained $1,500,000 of the stock of the Coldwater Company in addition to the preferred stock, which the plaintiff averred was to be issued for actual expenditures at cash values made by this company. Whatever amount was issued, it is safe to infer that plaintiff's interest was comparatively very small. If the decree were set aside, and the case reinstated, as he demands, his rights, as well as those of the other stockholders, would be subordinate to those of the bondholders, and probably, also, to those of the judgment creditors of the road. It is a difficult matter to say what amount of bonds was earned by the Pennsylvania Company, although it is admitted that iron was laid on 75 miles of the road, and the road completed for at least 47 miles, for which the Pennsylvania would be entitled to bonds at $20,000 per mile, and also that the company raised nothing towards the sinking fund which was provided for by the original mortgage. Under these circumstances, the trustees could hardly fail to obtain another decree of foreclosure for a large amount; and, as the road was hopelessly insolvent, it is hardly within the bounds of possibility that it should sell for more than enough to pay the amount adjudged to be due, to say nothing of the judgment creditors' claims of Swan, Rose & Co. In a case of this kind, where the plaintiff seeks to annul a longstanding decree, it is a circumstance against him that he does not show a probability, at least, of a personal advantage to himself by its being done. A court of equity is not called upon to do a vain thing. It will not entertain a bill simply to vindicate an abstract principle of justice, or to compel the defendants to buy their peace, and, if it appear that the parties really in interest are content that the decree shall stand, it should not be set aside at the suit of one who could not possibly obtain a benefit from such action.

In the view we have taken of this case upon the question of laches it is unnecessary to consider whether the plaintiff has made such a case of fraud in the original decree as justifies the interposition of a court of equity.

The decree of the court dismissing the bill is therefore affirmed.

Notes