Syllabus.

abandoned and cancelled in November, 1881, in Philadelphia. Even if she had the power so to do under the circumstances, still it was not done. The averments of the answer are not only not proved, but are even disproved by Hobbs himself. Hobbs was an officer of the Water Works Company. In his first deposition he gives this version of the transaction relied on in the answer. He says: "I got on the train and went to Philadelphia and told Mr. Starr we insisted upon the payment of that amount and others, and if it was not paid or absolutely provided for while I was there in the city for a day or so, that I should return to Joliet, and the understanding was that Mr. Knowlton and myself would withdraw from the company; Mr. Starr failed, after various plans he had made, to produce the money; he failed in furnishing it, and I returned, he following me back within a few days, and we then withdrew from the company."

The witness is here speaking, as elsewhere appears, of not only this debt, but also of the general liabilities of the concern. Subsequently to this, he still demanded the money from Starr. Pomeroy on Specific Performance, 395, 396; Reynolds v. Nelson, 6 Madd. 18, 19.

As between the appellant and the bondholders, represented by the trustee, it would be inequitable to refuse the consummation of her bargain.

The decree of the Circuit Court is affirmed.

WOOD v. GUARANTEE TRUST AND SAFE DEPOSIT COMPANY.

APPEAL FROM THE CIRCUIT COURT OF THE UNITED STATES FOR THE NORTHERN DISTRICT OF ILLINOIS.

No. 21. Submitted April 25, 1888. - Decided November 19, 1888.

A debt contracted for "construction" is not entitled to the priority of payment, in proceedings for the foreclosure of a mortgage of the property of a railroad corporation, which is recognized in Fosdick v. Schall, 96

Statement of the Case.

U. S. 235, as the equitable right in some cases of a creditor for "operating expenses."

The doctrine in Fosdick v. Schall has never yet been applied in any case except that of a railroad, and whether it will be applied to any other case, quære.

When a third party with his own money takes up maturing coupons on bonds of a corporation, without knowledge of the holders, it is a question of fact, to be determined by the proof, whether it is intended to be a payment, or a purchase which leaves the coupons outstanding. The coupons in dispute in this case having been dishonored before they came into the hands of the appellants, were subject in their hands to all defences which existed against their assignor; and, it being evident that, without the knowledge of the holders of the bonds to which those coupons were attached, he used his money to pay the coupons on bonds which had been sold solely in order to enable him to float the rest of the issue; Held, that it would be inequitable to allow him, either a prefer*ence over those to whom he had sold the bonds, or coequal rights with them.

THE Court stated the case as follows:

This is an appeal by interveners in the suit, one branch of which has been disposed of in the preceding case of Brown v. Guarantee Trust and Safe Deposit Company, ante, 403. In addition to the facts set forth in that case, and which need not be repeated here, it may be stated that on the 23d of May, 1883, an order of the court below was entered, directing the holders of the bonds and coupons issued by the City of Joliet Water Works Company, and secured by mortgage to the appellee in this case, to present them to the clerk of the court, by a certain day, for payment thereon out of the funds then in the hands of that officer.

Pursuant thereto, appellants in this case filed 473 of said coupons held by them, and with them a petition praying that said coupons be decreed to have, in the distribution of said funds, priority of payment as against any of the holders or owners of the said bonds or the subsequently maturing coupons.

The petition alleges, in substance, that for material sold and delivered to Jesse W. Starr, which he used in the construction of his water works system, he was in debt to them $14,000, in part payment of which he transferred to them, in October, 1882, these 473 coupons, at par value, amounting to $7095,

VOL. CXXVIII-27

Argument for Appellants.

and interest from maturity; that the said coupons presented by appellants fell due before the completion of said water works; that upon many of them the amount due at maturity was advanced by Starr to the bondholders, who transferred the same to him; and that the said advance was made out of money which Starr ought to have applied to the payment of his indebtedness for the material so used, and which now constitutes a part of the system of the said water works.

The answer of the appellee contains substantially the statements of the cross-bill set forth in the preceding case. It denies that the coupons presented by appellants had any validity whatever as a lien upon said funds in the custody of the clerk; alleges that all of them were delivered after they were due; and that of the 473 coupons held by appellants, 279 falling due January 1, 1881, and 77 of the 194 falling due July 1, 1881, were detached from the bonds by Starr before they were sold, and before the coupons themselves became dueonly 117 being sold with the bonds prior to their maturity. It further alleges that these last coupons were extinguished, cancelled and paid; that the holders of the bonds, who, as requested, presented said coupons for payment at the office of Starr's broker, had no thought of selling them, and, in fact, did not sell them; that all these acts of Starr-cutting off some and taking up others of said coupons were withheld from the knowledge of said bondholders, were deceptive and fraudulent, were intended to conceal from appellee and the public the fact that the said Water Works Company was insolvent, and, in reality, making default in payment of the interest coupons; and that, as said coupons were delivered by Starr to appellants long after their maturity, they took them subject to all defences which might have been urged against Starr himself.

On May 12th, 1884, the petition of appellants was dismissed at their costs, from which action they have brought this appeal.

Mr. Charles A. Dupee and Mr. Monroe L. Willard for appellants.

Argument for Appellants.

I. As to the coupons actually cashed by Starr. These coupons were about 117 in number. At the time Starr paid them he was owing R. D. Wood & Co. about $14,000 for material which they had, during the few months then preceding, furnished him for the construction of his water works system, and which material became a permanent component part of said system. The money which Starr had been and then was raising was raised for the express purpose of defraying the expense of construction of said system. Therefore it was Starr's primary duty to use his money for such purpose, — just as it is the primary duty of railroad companies to apply the earnings of their roads to the payment of current expenses. But the coupons came due before he had finished his construction. If he should allow them to go to default, the whole enterprise would be wrecked. Therefore, honestly supposing, as we believe, that he would soon have his system completed and on a paying basis, he diverted the funds, which he should have used in paying R. D. Wood & Co., to the purpose of taking up the coupons, and thus avoiding a foreclosure — just as, in the hope of averting disastrous foreclosures, railroad companies have at times diverted funds, which should have been used in paying current expenses, to the payment of mortgage interest. The bondholders got not only the material, but the money which should have been applied in payment thereof. We submit that the claim of appellants, who took these coupons in actual part payment of their bill against Starr, comes exactly within the equitable principles laid down in Fosdick v. Schall, 99 U. S. 235, and that, without regard to whether the coupons were transferred or paid, or were subject to such set-offs as might have existed between the Water Works Company and Starr.

The appellants contend that these coupons were transferred to Starr, and were not so paid as to extinguish their lien. Beasley & Co. suggested to Starr that it would be well for them to pay the coupons. He assented. They informed some of the bondholders that the coupons would be paid at their office in New York. By the mortgage, they were payable in Philadelphia. Beasley & Co. were at no time the company's

Opinion of the Court.

agents, but Starr's. The bondholders knew this, or could have learned it by inquiry. The coupons were paid with Starr's money not the company's. The bondholders knew this, or could have learned it by inquiry. The facts put them on inquiry, but they made none; nor did they cancel the coupons or cause them to be cancelled. Under such circumstances Starr and his assignees for value should be subrogated to all the rights the holders of the coupons had. Ketchum v. Dun

can, 96 U. S. 659.

II. As to the balance of the coupons, the appellants have similar equities. It is true the coupons do not stand in the position of having been cashed for the bondholders, but they were delivered to Starr by the company as part consideration for his construction contract, and remained in his possession until delivered by him to appellants in part payment for a portion of the cost of construction. The company never paid a dollar on them. It would be but carrying out the purpose of their delivery to Starr, to allow their payment in favor of the construction creditors who hold them, and who have suffered more from Starr than any of the bondholders, except, perhaps,

one.

There is no pretence that these coupons were ever paid by anybody. The fact that Starr defaced a large number of them cannot change this.

Mr. J. L. High for appellees.

MR. JUSTICE LAMAR, after stating the case, delivered the opinion of the court.

In this appeal the first claim advanced is, that since the 117 coupons, parcel of the lot in controversy, were paid by Starr with the funds that he had raised for the express purpose of defraying the expense of constructing the water works, it was his primary duty so to use the money; and that his failure so to do amounted to a diversion, which will entitle the appellants to a priority, under the doctrine of Fosdick v. Schall, 99 U. S. 235.