French v. Shoemaker (81 U.S. 314)
APPEAL from a decree of the Circuit Court for the District of Virginia; the case was thus:
In the year 1854 the legislature of Virginia passed an act to incorporate the Washington and Alexandria Railroad Company. Two persons, J. S. French and Walter Lenox, subscribed for the whole stock; French taking three-fourths and Lenox one-fourth, and French being made president of the company. The road was built. French and Lenox, however, spent very little money of their own in its construction, but raised large sums by borrowing. When, therefore, the road was built the company was seriously embarrassed. Two deeds of trust had been executed in 1855, and in 1857 another deed was made to Lenox, as trustee, to secure bonds, issued to raise money for the purposes of the road.
The civil war broke out when the road was in this condition. French and Lenox went South, and the government took military possession of the road.
During their absence, a proceeding was instituted in the Alexandria County Court for the removal of Lenox as trustee in the deed of trust to him, and for the substitution of a new trustee in his place. A new trustee, one Stewart, was appointed, and he proceeded in alleged conformity to the deed of trust to sell the railroad.
Under the sale thus made, a new company was organized, which assumed the name of the Washington, Alexandria, and Georgetown Railroad Company; and the government having relinquished the road in 1865, this company took possession of it at once; and not long afterwards entered into a contract with the Adams Express Company, represented by one Shoemaker, in relation to the conveyance of express freight, and the furnishing by the company of means to work the road. This contract did not prove satisfactory, and by consent of both parties, a lease for ten years was made to two persons, named Stevens and Phelps, in May, 1866; and in the following June, another contract for means of operation and for the conveyance of express freight was made for ten years with the Adams Express Company.
Litigation soon arose upon this lease and upon these contracts. One Davison, asserting himself to be a stockholder of the Washington, Alexandria, and Georgetown Railroad Company, filed his bill in the Alexandria County Court, in November, 1866, alleging that the lease was made without authority, and in fraud of the rights of the stockholders, and praying that it might be set aside and annulled. The Adams Express Company filed its bill about the same time, in the Circuit Court of the United States for the District of Virginia, praying for the enforcement of its contract with the company, and with the lessees; and under that proceeding an order was made by the Circuit Court for the appointment of receivers of the road, who took possession.
The Washington and Alexandria Railroad Company, describing itself as that company, by J. S. French, its president, had already in March, 1866 (the government having, with the suppression of the rebellion, given up, as already said, its possession, and French and Lenox having returned from the South), filed its bill in the Alexandria County Court asserting its title to the road, charging fraud in the whole proceeding for the organization of the Washington, Alexandria, and Georgetown Railroad Company, and praying that it might be declared void, and that a decree might be made establishing its own original title to the road as unimpaired by that proceeding. But French, when he returned to Alexandria, was very needy, and so much in debt that he was quite without means to work this railroad if he had had it, or even to get a decree establishing the old company's title to it. Lenox was little or no better off. And the debts of the road were very heavy.
In this condition of their pecuniary concerns, and in the general state of opposed and opposing interests, in November, 1866, French and Lenox had an interview in Washington, at the house of Mr. Merrick, who had been the counsel of Stevens and Phelps, with Shoemaker (representing the Adams Express Company), Stevens and Phelps, the lessees under the new, or as it was sometimes styled the 'spurious' road, and Dean Smith, who had been counsel of Shoemaker, at which interview an inchoate agreement was made for the organization of a new company and the payment of the debts of the old one. This meeting, which was a long one, and where the whole condition of things was largely gone into, was apparently satisfactory to French. Shoemaker, Stevens and Phelps, and Smith were the active managers of the Washington, Alexandria, and Georgetown Railroad at this time, and perhaps its formal directors, but all seemed to be of the opinion that the sale by the trustee Stewart and the new organization could not stand in law.
This inchoate agreement remained unacted upon for some months, its details being the subject of conversations among the parties. It was subsequently reduced to writing, and at another meeting signed by all the parties except French, who was absent. It was not then dated; the date was left in blank.
The stipulations of this agreement in substance were:
1st. That French and Lenox would convey all their interest in the Washington and Alexandria Railroad Company to a corporation to be formed as specified, or to devote all of that interest to the common benefit of the parties, in the proportion specified, should the Washington and Alexandria Railroad be revived and the corporation by that name again come into existence.
2d. That when the parties should have agreed to reorganize and should actually reorganize that company, or should organize another company on the basis of the title of French and Lenox, Stevens and Phelps would assign to the company all their interest as lessees of the Washington, Alexandria, and Georgetown Railroad Company, or hold the same for the exclusive use of the parties to the agreement, according to their respective interests.
3d. That Shoemaker, for himself and the Adams Express Company, would aid the corporation to be formed or reorganized by money and credits; that is, to pay, settle or compromise all liabilities of the Washington and Alexandria Railroad Company, the liabilities of the lessees of the Washington, Alexandria, and Georgetown Railroad Company for stock and materials for the road, and all the bon a fide liabilities incurred by them in behalf of the road; Shoemaker to be substituted in all rights of creditors paid by him; all compromises to be for the benefit of all the parties or the new organization; no advances to discharge liens to be refunded until the final end of litigation; a majority in interest to have the right to substitute other securities for any thus acquired by him; and the net receipts of the company to be formed or reorganized to be devoted to reimburse the advances made by him, except 20 per cent. of the receipts, to be divided among the parties to the agreement in proportion to their interests.
4th. That the agreement should be carried into effect on the rendering of the decree of the Alexandria County Circuit Court in the case of The Washington and Alexandria Railroad Company v. The Washington, Alexandria, and Georgetown Railroad Company, and the new company to be formed or reorganized with a capital stock of 3000 shares, to be divided among the parties thus: French and Lenox, 1250; Stephens and Phelps, 850; Shoemaker, 500; Dean Smith, 200; G. W. Brent, 200.
5th. The lessees to be continued under the new corporation as general superintendent and manager, receiving $250 per month each until otherwise ordered by the board of directors, as to salary.
When the agreement thus reduced to writing was presented to French, early in the year 1867, by Mr. G. W. Brent, who was the professional adviser of French and Lenox, French refused to sign it, for certain reasons which were the subject of conversation between him and Brent; one of the reasons being that a certain $5000 which were to be advanced to him were not provided for in the agreement. Finally, however, on the 6th of December, 1867, French signed the contract. On the same day a separate contract was made between French and Shoemaker, by which the latter advanced the former $5000 on the transfer to the latter of French's right and interest in the road. By this separate deed from French to Shoemaker, French conveyed, on account of $5000 paid him by Shoemaker, all his right and interest in the railroad, for the purpose of securing the payment of the $5000, and for the purposes set forth in the agreement of same date, 6th December, 1867.
After the courts in Virginia had finally decided, as they did on 28th August, 1868, the case of The Washington and Alexandria Railroad Company v. The Washington, Alexandria, and Georgetown Railroad Company in favor of the plaintiff therein, reinstating the said company and annulling the charter of the new company, Lenox (September 22d, 1868) called a meeting of the parties who had signed the agreement of 6th December, 1867; the purpose of the meeting being to carry into effect the provisions of that agreement. French was present at the meeting. The meeting directed, among other things, that Mr. Brent should prepare and publish a call to form the new company in accordance with the provisions of the Virginia code. The proceedings were printed and French received a copy. Acting under the instructions given to him, Brent did prepare a form of call and caused to be called a meeting at the Mansion House Hotel, in Alexandria, Va., for the 29th October, 1868.
The meeting was duly held. Lenox was present, and voted on the stock assigned him by the agreement of 6th December, 1867. Shoemaker was elected president of the company. One day previously, that is to say, on the 28th day of October, 1868, French filed a bill of complaint in the Circuit Court of Alexandria County, Virginia, against Shoemaker, the Adams Express Company, and Lenox, setting forth that Lenox had made a fraudulent combination with Shoemaker to injure and annoy the said Washington and Alexandria Railroad Company, and had called a meeting of stockholders at the Mansion House, in Alexandria, for the 29th October, and he prayed an injunction against them to forbid their holding the meeting under said notice, from electing a board of directors, &c.
In the meantime, that is to say, on the 30th day of September, 1868, a writ of possession had been issued from the Circuit Court of Alexandria County, Virginia, in the suit of The Washington and Alexandria Railroad Company v. The Washington, Alexandria, and Georgetown Railroad Company, commanding the sheriff to put the former, the plaintiff, into possession of the railroad and its appurtenances. This writ of possession was taken out by French, as president of the company.
Hereupon Shoemaker filed in the Circuit Court of the United States for Virginia, against French, the bill on which the decree now appealed from was made. The bill had been prepared and was sworn to by Shoemaker on the 27th of October, 1868. A subpoena, ordered against French on the same day, and a rule to show cause why an injunction should not be issued, were served on French, all on the same 27th October; the day before he, French, applied for an injunction to prevent the meeting at the Mansion House to organize the new company.
The bill set forth most of the facts above stated, that the complainant had offered to convey to French his interest in the stock and property of the Washington and Alexandria Railroad Company, on his paying the $5000 advanced, which he had refused to do. It then prayed that the said French might be restrained from doing any act whatever as president of the Washington and Alexandria Railroad Company; from interfering with the road and property of the said company, or with the complainant and the parties to the agreement, in carrying out the provisions thereof and in organizing a new company, or from taking any legal proceedings for that purpose; and prayed, further, that French's interest might be sold by a commissioner of the court for the payment of the said sum of $5000.
The answer of French set up as its main defence needy circumstances and imposition. It was thus:
'The parties-Shoemaker, Stevens, Phelps, Smith-whom the defendant met at Mr. Merrick's, were all strangers to him. Some of them he had never seen before; others of them he had seen and knew by sight. His interview with them was solely on the recommendation of his counsel, G. W. Brent. Such was the embarrassment under which the defendant was suffering resulting from the fraudulent deprivation of his property and the consequent want of himself and family, that he was scarcely in a condition to investigate the nature of the proposition; and such was the confidence which he had in his attorney, the said G. W. Brent, under whose counsel he acted, that it was impossible for him to suspect the propriety or the advantages of the proposition thus made to him. Before, however, these propositions were reduced to writing, the defendant was suddenly called by telegraph to his home in Southwestern Virginia, on account of the illness of a member of his family. This was in the month of November, 1866. The defendant heard nothing more of these negotiations until his return, in the month of January, 1867, when the contract referred to in complainant's bill, signed by the complainant, the said Stevens, Smith, Brent, and Lenox, was handed to the defendant by the said Brent, and the defendant was pressed by him to sign the same. The defendant declined to sign it, upon the grounds that it was not in accordance with the verbal agreement; that it contained no stipulation for the advance of the sum which was agreed to be advanced to the defendant, and the advance of which was the great inducement to his making the said agreement; and that the contract, in many particulars, was essentially different from the agreement discussed at the meeting. The defendant was then threatened by the said Stevens, and those acting in concert with him and the complainant, that they would keep the defendant out of possession of the road for years; that they would set up the contract in a court of equity, and making the impression upon the mind of the defendant that, by protracted litigation, they would render his property in said road unavailing to him. Thus assailed, importuned, and threatened, the defendant, after having for nearly one year resisted their influences, being greatly pressed by his necessities, was at length forced to sign the said contract upon the condition that the complainants would advance to the defendant the sum of $5000, and the further condition that the contract should be immediately carried into effect.
'The defendant avers that the contract was void in law and equity, because against public policy, having been fraudulently made by the said complainant, Stevens, Smith, and Phelps, in violation of the fiduciary relations they sustained to the said Washington, Alexandria, and Georgetown Railroad Company; that the contract to purchase the interest of the said defendant and the said Lenox, and to furnish, supply, and advance the means to carry on the litigation of the suit then pending was illegal, and of the nature of champerty; and that for these reasons, if there were none other, the complainant is not entitled to the relief prayed for in his said bill, and especially is not entitled to the injunction prayed for therein; the contract being obnoxious to the maxim that 'ex turpi contractu non oritur actio.'
'That upon the face of the contract there was no consideration sufficient to support said contract, and that it was drawn with the fraudulent purpose and design of deceiving and defrauduing the defendant, and he avers that the assignment aforesaid, which he executed only as a mortgage to secure the $5000 advanced to him by the complainant, was fraudulently prepared by the complainant, the said Smith and the said Stevens, with the design of deceiving the defendant into an assignment of his interest and estate in the said road, for purposes other than that which he intended.
'The defendant averred that the complainant, Phelps, Stevens, Smith, and Brent, have conspired together for the purpose of oppressing and defrauding him; that to this end they have imposed upon his confidence, taken advantage of his necessities, seized upon his property, appropriated the earnings of the road, three-fourths of the stock of which is owned by him, for the purpose of preventing the company, of which he is president, from obtaining possession of the road.'
A cross-bill was also filed by French to set aside the arrangement. It set up the same facts as the answer; admitting, notwithstanding, that he, French, was for a long time willing and anxious to carry out the arrangement, and asserting that the other parties had wholly failed to perform their part of it, though he, French, had frequently urged them to do so. It further insisted that Stevens and Phelps were necessary parties to the original bill. The answer to the cross-bill denied all its important allegations of fact.
The case as made out by the proofs was much as that already stated. There was no doubt that French was needy, and it seemed probable that his want of money was the prevailing consideration with him when he finally determined to sign the contract, but it was not proved that he acted unadvisedly or otherwise than his best interests in the complicated and embarrassed condition of the road and his own embarrassed condition might reasonably seem to suggest.
The questions were: 1. Whether Stevens and Phelps were necessary parties to the original bill. 2. If not, whether the contract of December 6th, 1867, was binding on French? If it was, then of course his act in taking possession of the road with the view of excluding the other parties to the contract, and his application to the Circuit Court of Alexandria County, Virginia, for an injunction to restrain the parties to the agreement from holding a meeting to reorganize, was a breach of faith which justified the complainant in invoking the authority of the Circuit Court against him.
As to the first point the court below said:
'If the original bill sought any relief as against Stevens and Phelps, or any aid from the court in carrying into effect the settlement contract as to them, it would be necessary to make these persons parties. But such is not the case. The bill seeks no relief as against them. There does not appear to be any controversy between them and the original complainant. And we cannot see that the cross-complainant has a right to have any controversy he may have with them settled in this suit. It is very certain that at the time the settlement contract was made he had no cause of complaint against them. Nothing, so far as they were concerned, appears to have been concealed from him. The plain language of the agreement, which he had before him nearly a whole year, stated their relation, and gave all the notice of circumstances connected with them which a court of equity will require. If their subsequent conduct affords ground of complaint, it must be in regard to the stock assigned to them; but this may be, and should be, as we think, submitted to judicial scrutiny, in a proceeding founded on the settlement contract; not hostile to it. The objection that Stevens and Phelps are not made parties to the original bill must therefore be overruled.'
On the second point-the merits-the court was of opinion that the equity of the case was with the complainant, and accordingly decreed that French be enjoined from any use of the title of the president of the Washington and Alexandria Railroad Company, and from any action to interfere with any proceeding for the reorganization of the said company under the contract of the 6th of December, 1867, and from any proceeding whatever not in accordance with the said contract, without prejudice, however, to his right to the stock assigned to him by the said contract, or to assert any claim he might have against the company reorganized under the contract, or against Shoemaker, or against the Adams Express Company, not in contravention of the contract, or to pursue by proper proceedings in law or equity any claim he might have in respect to the distribution of stock made by the contract, founded upon failure of consideration or other cause.
From this decree French brought the case here by appeal.
Messrs. H. O. Claughton and B. Stanton, for the appellants; Messrs. T. J. Durant and J. H. Bradley, contra.
Mr. Justice CLIFFORD delivered the opinion of the court.