GEORGE A. CUNNINGHAM et al., Appts. | fifty miles from the city of Macon, and is

v.

THE MACON & BRUNSWICK RAIL-
ROAD COMPANY et al.

See S. C. Reporter's ed. 400-425.

thoroughly equipped, and daily trains are running thereon, and seventy miles additional are graded and ready for the superstructure; and whereas its completion to Brunswick would greatly inure to the benefit of the state in developing its agricultural, commercial, and manufacturing interests; and whereas, by reason

Bonds of Macon & Brunswick Railroad Company-Acts of 1866 and 1870-right of sub-of the financial embarassments *resulting 402 rogation-enforcing such right-purchase by trustee-tender, when necessary to avoid mortgage sale.

L The owners of the bonds of the Macon & Brunswick Railroad Company indorsed by the state of Georgia under the state act of 1870, have no right to be subrogated to the mortgage security, given to said state by the state act of 1866 on the property of said company to secure said state for its indorsements of the bonds of said company under the act of 1866; nor are the bonds so indorsed under the act of 1870 secured by said statutory mortgage created by the act of 1866, nor was the state incapacitated to purchase

from the late war, the stockholders of said railroad are unable to supply the capital necessary to the completion of this great work:

"Section 1. Be it enacted, etc., That his excellency, the governor, be and he is hereby authorized to place the indorsement of the state on the bonds of the Macon & Brunswick Railroad Company which said company may issue, to the amount of ten thousand dollars per mile for as many miles of said road as are now completed, and the like amount per mile for every additional ten miles, as the same may be completed and placed in running order, on the following terms and conditions, to wit: Before any such indorsement shall be made the governor shall be satisfied that as much of the road as the said indorsement shall be applied for it really finished and in complete running order, and that said road is free from all liens, or mortgages, or other incumberences, which may in any manner endanger the security of the state; and upon the further condition and express understanding that any indorsement of said bonds, when thus made, shall not only vest the title to all property of every kind which may be purchased with said bonds in the state, until all the bonds so in5. The holders of bonks secured by a second mort-dorsed shall be paid; but the said indorsement gage cannot equitably be allowed to avoid a sale under the first mortgage without tendering re

at her own sale under said mortgage. 2. Where the creditors' right to subrogation depends on the existence, in the surety, of the rights to which subrogation is sought, after the surety has parted with the thing given him for his protection, the creditor can have no subrogation to such thing.

8. In order to enforce equitable subrogation against a surety, he must be made a party to the

cause.

In Georgia the purchase by a trustee is not absolutely void, but merely voidable at the op

tion of the cestui que trust.

imbursements of the court of the first mortgage. [No. 91.]

Argued Nov. 22, 23, 1894. Decided March 4, 1895.

PPEAL from a decree of the Circuit Court

shall be, and is hereby understood to operate as a prior lien or mortgage on all of the property of the company, to be enforced as hereinafter provided for.

"Sec. 2. In the event of any bond or bonds indorsed by the state, as provided in the first section of this act, or the interest due thereon,

APPEAL a Circuit. Dis shall not be paid by said railroad company at

trict of Georgia, dismissing a suit in equity, brought by owners of bonds of the Macon & Brunswick Railroad Company indorsed by the state under the act of 1870 to participate in the sale of said railway on equitable terms with the holders of the first mortgage bonds and to establish a lien apon the property of the company, etc. Affirmed.

Statement by Mr. Justice White:

The Macon & Brunswick Railroad Company was chartered by the legislature of Georgia in 1856. Acts of 1856, p. 181. In December, 1866, the legislature of the state authorized the governor to indorse the bonds of the road to the extent of $10,000 per mile. The act reads as follows:

"An Act to Extend the Aid of the State to the Completion of the Macon & Brunswick Railroad, and for other purposes.

"Whereas the Macon & Brunswick railroad has been completed to the distance of

NOTE.-As to subrogation, right of assignee to, and as to prior incumbrances; junior incumbrance, right of, see note to Bank of United States v. Peter, 10: 89. As to the doctrine of subrogation; who entitled to, see note to German Bank of Memphis v. United States. 37: 564.

maturity, or when due it shall be the duty of the governor, upon information of such default by any holder of said bond or bonds, to seize and take possession of all the property of said railroad company, and apply the earning of said road to the extinguishment of said bond, or bonds, or coupons, and shall sell the said road and its equipments, and other property belonging to said company in such manner and at such time as in his judgment may best subserve the interest of all concerned.' Acts of 1866, p. 127.

Under this authority the governor indorsed the bonds of the company to the extent [403 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 | dorsement. In July of that year the governor issued in conformity with the statute, and that issued a proclamation reciting the passage of the company was desirous of confirming the the act of 1866, the issue of the bonds therelien held by the state to secure their payment, under, and the company's default. He anand that, therefore, he, as president, recog-nounced also that, in pursuance of the power nized, on behalf of the company, the validity conferred upon him by that act, he had of the statutory mortgage and of the lien cre- seized the company's property and had apated thereby. To this instrument the state pointed an agent of the state to take posses. was not a party. In October, 1870, the legis- sion and control of the same. In March, 1875, lature of Georgia passed the following act: the legislature *passed a resolution de- [405 "An Act to Amend an Act to Extend the Aid claring that the $1,950,000 issue of bonds of the State to the Completion of the Macon & which had been indorsed under the act of Brunswick Railroad, and for Other Pur- 1866 were valid and binding obligations of the poses. 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.

Whereas the Macon & 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, indorsed 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 indorsements of the state, to the extent of three thousand dollars per mile, upon the bonds of said Macon & Brunswick Railroad Company, in addition to ten thousand dollars, as recited in the act of which this is amendatory.

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 $3000 per mile of the Macon & Brunswick Railroad Company, indorsed by the state of Georgia in accordance with an act of legislature passed October 29, 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 than a work of public improvement.'

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 in

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 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 & Brunswick Railroad Company, under said order, be sold to the highest bidder at public outcry at the depot of the Macon & 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 in behalf of the[406 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

& 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 & *Georgia Railroad Company was a pur-[408 chaser with notice of the illegality, and then proceeded as follows:

$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 per- "And your orator charges that the said sons named therein, "styling themselves di-state of Georgia held the said property after rectors of the Macon and Brunswick railroad,' the seizure thereof as a trust for the payment and J. W. Renfroe, treasurer and Alfred H. of the obligations of the the said the Macon & Colquitt, governor of Georgia. This bill, Brunswick Railroad Company to the extent after setting out the facts substantially as here of the avails of a sale of the said property to given, charged that the sale made by the gov- be made for the interest of all creditors of said ernor was void for the following reasons: 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 indorsements 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, hereinbefore mentioned, with due regard to the protection of any and all prior liens and the costs and expenses of sale.

"1st. 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.

"2d. Because the governor was not authorized to bid on said property for the state, and the state had no constitutional power to make the 407] purchase, or if said sale is not void *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 mortgagee 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. Macon & B. R. Co. 109 U. S. 446 [27:992]. 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

"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 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[409 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 accord-Iv. Macon & B. R. Co. 2 Woods, 385; Devol v. ing to its previously announced intention, did McIntosh. 23 Ind. 529; Burroughs v. United exclude your orator and his fellow boudhold- States, 2 Paine, 569: Cullum v. Branch Bank ers from their rights of equitable protection at of Mobile, 23 Ala. 797; Van Orden v. Durham, sale by bidding and paying the bonds held by 35 Cal. 136; Haven v. Foley, 18 Mo. 136, 19 them, did sell the said road in a manner con- Mo. 632; Troy v. Smith, 33 Ala. 469; Price v. trary to the interests of the creditors generally Trusdell, 28 N. J. Eq. 200; Moses v. Murgaof the said road for a very small part of its real troyd, 1 Johns. Ch. 119, 7 Am. Dec. 478; Pratt value, the price nominally bid therefor being v. Adams, 7 Paige, 615; Kunkel v. Fitzhugh, one million dollars and the real value thereof 22 Md. 567; Curtis v. Tyler, 9 Paige, 432; being four million dollars, and did sell the Bank of Auburn v. Throop, 18 Johns. 505; road to itself for said price in its own interest Maure v. Harrison, 1 Eq. Cas. Abr. 93; Wright and without regard to the interests of the bene- v. Morley, 11 Ves. Jr. 23. ficiaries of the trust, including your orator, and thereupon, in equity, held the said property as a trust for your orator and subject to his lien for the payment of his said bouds.

|

as in his judgment might be consistent with | Michoud v. Girod, 45 U. S. 4 How. 513-561 (11: the interests of the state. 1080-1102); Wormley v. Wormley, 21 U. S. 8 Wheat. 421 (5: 651).

The record discloses circumstances from which a breach of trust will be presumed. From the date of the seizure the state appropriated all the earnings to its own use, and commenced ab initio a breach of trust. Wormley v. Wormley, 21 U. S. 8 Wheat. 421 (5: 651).

The purchase by the state was a constructive fraud upon the bondholders, and is subject to their disaffirmance.

If the state was a tortious trustee she can claim nothing in respect to her improvements, betterments, and the payment of her indorse

ment.

Milwaukee & M. R. Co. v. Soutter, 80 U. S. 13 Wall. 517 (20: 543); Hughes v. Edwards, 22 U. S. 9 Wheat. 489 (6: 142).

The state is said to be an indispensable party. No one need be made a party against whom, Worthy v. Johnson, 8 Ga. 236, 52 Am. Dec.if brought to a hearing, the plaintiff can have 399; Michoud v. Girod, 45 U. S. 4 How. 503 no decree. (11:1076); Wormley v. Wormley, supra; Ex 2 Mad. Ch. 184; Wych v. East India Co. 3 parte Crow Dog, 109 U. S. 556 (27: 1030); Mc P. Wms. 310, N. 1; The Siren v. United States, Cool v. Smith, 66 U. S. 1 Black, 459 (17:218); 74 U. S. 7 Wall. 152 (19: 129); United States v. United States v. Walker, 63 U. S. 22 How. 299 Douglas, 77 U. S. 10 Wall. 15 (19: 875); Louisi(16: 382); Galena v. United States, 72 U. S. 5ana Board of Liquidation v. McComb, 92 U. S. Wall. 705 (18:560); United States v. 356 Cad- | 531 (23: 623); United States v. Lee, 106 U. S. 196 dies of Tobacco, 78 U. S. 11 Wall, 652 (20: 235); | (27: 171). Arthur v. Homer, 96 U. S. 137 (24: 811): Chew Heong v. United States, 112 U. S. 536 (28:770). Purchasers from a tortious trustee take the property subject to the same trust, if they have notice, actual or constructive, of the trust and of its breach.

Perry, Trusts, 217, 860, 506; Mechanics Bank of Alexandria v. Seton, 26 U. S. 1 Pet. 299 (7: 152); Duncan v. Jaudon, 82 U. S. 15 Wall. 165 (21:142); Oliver v. Piatt, 44 U. S. 3 How. 333 (11: 622); Kitchen v. Bedford, 80 U. S. 13 Wall. 414 (20: 637); Cook v. Tullis, 85 U. S. 18 Wall. 332 (21:933); Kitchen v. Bedford, 80 U. S. 13 Wall. 413 (20: 637).

Mr. George Hoadly, for appellee:

The bonds, secured by the Strang and Goodwin mortgage, were negotiable, being payable to bearer. They have doubtless to some extent changed hands since the execution of this release by Strang & Goodwin, and these subsequent purchasers would not seem to be bound by this release.

Carpenter v. Longan, 83 U. S. 16 Wall. 271 (21: 313).

Even a lis pendens does not affect the negotiability of commercial paper.

Secor v. Witter, 39 Ohio St. 230, Daniel, Negotiable Instruments, & S00a.

The state of Georgia is an indispensable, but

A purchaser under a quit-claim deed is not an innocent purchaser for value, but takes sub-impossible party defendant to this case. There ject to all equities.

Oliver v. Piatt, supra; May v. LeClaire, 78 U. S. 11 Wail. 217 (20: 50); Alexander v. Rodriguez, 79 U. S. 12 Wall. 333 (20: 406).

The purchaser of the legal title, having no tice that the estate is affected by other interests than those of the vendor of that title (as of the existence of a secret trust) is bound to inquire into the extent and terms of those interests. Sergeant v. Ingersoll, 15 Pa. 343: Hiern Mill, 13 Ves. Jr. 114; Smith v. Low, 1 Atk. 490; Taylor v. Stibbert, 2 Ves. Jr. 440; Vattier v. Hinde, 32 U. S. 7 Pet. 252 (8: 675); Witkow ski v. Stubbs, 91 Ga. 440.

fore the decree below ought to be affirmed without further examination of the questions involved.

Christian v. Atlanta & N. C. R. Co. 133 U. S. 233 (33:589); Swasey v. North Carolina R. Co. 71 N. C. 571, 1 Hughes, 17.

Second series of bonds not secured, except by state's indorsement.

A grant by the state cannot be created or env.larged by implication.

A purchaser of property, pendente lite, is fully bound, as was the original trustee.

Warren County v. Marcy, 97 U. S. 96 (24: 977); Union Trust Co. of New York v. Southern | Inland Nav. & Imp. Co. 130 U. S. 565 (32:10483); Tilton v. Cofield, 93 U. S. 163 (23: 858); Illinois Cent. R. Co. v. Turrill, 110 U. S. 296 (28: 154); Perry, Trusts, 223: The Siren v. United States, 74 U. S. 7 Wall. 158 (19: 132); Chamberlain v. St. Paul & S. C. R. Co. 92 U. S. 306 (23: 718). Persons claiming rights against property sold under decree, who are not parties or repre sented in the proceedings, are not bound by the judgment or by the sale under it.

United States v. Arredondo, 31 U. S. 6 Pet. 691 (8: 547); Charles River Bridge_Proprs. v. Warren Bridge Proprs. 36 U. S. 11 Pet. 420 (9: 773); Northrestern Fertilizing Co.v. Hyde Park, 97 U. S. 659 (24: 1036); Newton v. Mahoning County Comrs. 100 U. S. 548 (25: 710); Hannibal & St. J. R. Co. v. Missouri River Packet Co. 125 U. S. 260, 271 (31: 731, 735).

The Georgia constitution of 1868 forbade indorsement of state upon second series of bonds.

The security provided by the Act of 1866 was for the indemnity of the state only, and not for the protection of the bondholders.

Branch v. Macon & B. R. Co. 2 Woods, 385; Kelly v. Alabama & C. R. Co. Trustees, 58 Ala. 489; Forrest v. Luddington, 68 Ala. 1; Colt v. Barnes, 64 Ala. 108; Gilman v. New Orleans & S. R. Co. & Immigration Asso. 72 Ala. 566; Morton v. New Orleans & S. R. Co. & Immigra

Brooklyn v. Etna L. Ins. Co. 99 U. S. 362 (25: 416); Pennoyer v. Neff. 95 U. S. 714 (24: 565); Woodworth v. Blair, 112 U. S. 8 (28:615)tion Asso. 79 Ala. 590. There is no prescription or bar of limitation against a cestui que trust in cases of even con structive fraud, or breach of trust, short of twenty years.

Boone v. Chiles, 85 U. S. 10 Pet. 224 (9: 405);

The bondholders (second series) held no specific lien or title by law or contract. Their right, if any, was by way of subrogation, and incapable of enforcement against a state or its grantee.