Opinion
02-11-1895
BAKER v. GUARANTEE TRUST & SAFE-DEPOSIT CO. et al.
Howard Carrow, for complainant. D. J. Pancoast, for defendants McNaughton & Co. and other judgment creditors. S. W. Pettitt, of Philadelphia, for defendants Conway, Boney, Physick, and Beckers' Ex'rs. William E. Potter, for defendants Fourth St. Nat. Bank, the trustees of Wood, Mrs. Mary K. Wood, and others. S. W. Beldon, for defendants Wheaton, Sea Isle City B. & L Ass'n, and others. S. W. Pettitt and S. W Beldon, for defendants Burnham, William & Co. and Hildebrand & Wolfe. S. H. Richards, for defendant John P. Whitney. J. M. E. Hildreth, for defendants Mecray, Mrs. Schellenger, Mrs. Weightman, and others. E. A. Armstrong, for defendant New Jersey Trust & Safe-Deposit Co. Thomas E. French, for defendants Roebllng, Sons & Co. and other judgment creditors. J. W. Morgan, for defendant Philadelphia & R. Co. T. B. Harned, for defendants Weeks and others. S. H. & M. P. Grey, for defendants Bethlehem Iron Co., several banks, and others. William J. Kraft, for defendants Mrs. Chearis and R. C. Souder.
Bill by Philip P. Baker, receiver of the Philadelphia & Seashore Railway Company, against the Guarantee Trust & Safe-Deposit Company and others, to declare void a mortgage on the property of such company. Decree for complainant for "part of relief prayed.
Philip P. Baker, appointed receiver of an insolvent railroad corporation whose roadbed and other property was covered by a mortgage, having sold the entire property under order of the court free of the mortgage, now brings this bill against all the creditors, of which there are two classes (those who hold the bonds of the railway company secured by the mortgage, and those whose claims are unsecured except by judgments recovered subject to the mortgage), for the purpose of obtaining and distributing the proceeds of the sale. This becomes, in effect, a bill of interpleader by the receiver, in an action by the judgment creditors against the claimants under the mortgage.
This is, in form, a bill by the receiver of an Insolvent railroad corporation, appointed by this court, praying that a certain mortgage which covers the roadbed and other property of the company may be declared to be void. In effect, however, as matters now stand, it is a bill of interpleader. The roadbed, and all the property of the railroad, has been sold by the receiver by order of this court, pending the suit, free and clear of the mortgage, and the proceeds are in his hands to be distributed; and, under the prayer for other relief, he asks the direction of the court in their distribution. All the creditors of the insolvent corporation of every class have been made parties, and the real contest is between them. There are, primarily, two classes of creditors,—those who hold the bonds of the railway company secured by the mortgage directly attacked by the receiver, and those whose claims are unsecured except by judgments recovered subject to the mortgage. The bondholders, however, are disputing among themselves as to which are entitled to participate in the fund; and it may be here observed that, if any of the bonds are held to be entitled to the benefit of the lien of the mortgage, then there are enough of that character to absorb the whole fund, which is less than $200,000. The particular allegations of the bill and answer are not important. The serious matter insisted upon at the hearing was that the bonds were issued in advance and excess of the payments on account of stock subscriptions, in violation of the provisions of the act of February 19, 1878 (Supp. Revision, p. 824). A general outline of the facts, as developed at the hearing, is as follows:
The insolvent company, the Philadelphia & Seashore Railway Company, was formed by articles of association entered into on the 6th day of August, 1889, by 16 gentlemen, and the object of the organization was to build a railway from the village of Winslow, on the line of the Philadelphia & Atlantic City Railway, in the county of Camden and state of New Jersey, to the borough of Sea Isle City, in the county of Cape May and state of New Jersey. The amount of the capital stock was declared to be $900,000, to be divided into 18,000 shares, of $50 each, and the length of the road was stated to be 35 miles, though. In point of fact, it was about 40 miles. Ail of those 16 gentlemen were declared, by its provisions, to be directors for the first year. They were stated to be 13 in number, but, in point of fact, each of the 16 was named as a director. The articles of association were not filed with the secretary of state until the 18th of November, 1889, on which day the company paid $70,000—$2,000 a mile upon 35 miles of the road—to the state treasurer. The articles of association contained subscriptions to the stock amounting to 1,400shares, or $70,000. Of these, Edward R. Wood, of Philadelphia, subscribed 754 shares; John J. Deery, of Philadelphia, subscribed 500. The remaining 146 shares were subscribed by the others of the 16 gentlemen who signed the articles, in sums varying from 1 to 40 shares. Of the $70,000 paid to the state treasurer on the 18th of November, 1889, $60,706 was furnished by Mr. Edward Wood under an agreement comprised in a resolution of the board of directors adopted on the 3d day of October, 1889, in these words: "Whereas, it is important that the charter of the Philadelphia & Seashore Railway Company should be obtained at once, in order to secure business during the season of 1890, from which a profit of many thousand dollars is looked for, and to save loss of Interest and waste on moneys collected, and to secure more prompt and efficient work in construction; and whereas, sufficient moneys have not yet been received from subscribers to the stock of said company under the ten per cent. call to pay the required state deposit; and whereas, Edward R. Wood has agreed to pay upon his subscription to said stock sufficient in excess of the ten per cent. called in to make the necessary amount for deposit, namely, seventy thousand dollars, on condition of being protected against loss and guarantied in the return of the same as soon as other payments upon stock of the company, whether by himself or other parties, amount to the said sum of seventy thousand dollars: Therefore be it resolved, that the said Edward R. Wood shall be, and is hereby, constituted the proper officer of this company to collect the amount of this deposit by installments from the state as the same may become repayable to this company, by reason of the progress of construction on its road, and apply the amounts so received in repayment of his said advance payment. Further resolved, that in case of the abandonment of the construction of the said road so proposed by this company, whether caused by the failure on the part of subscribers to make good their subscriptions or otherwise, the said advance payment of the said Wood shall at once be repaid to him; and after six months from date of deposit, unless he shall be reimbursed his said advance, he shall be the sole judge of whether such abandonment shall be necessary, and in such event the officers of this company are hereby instructed to render him all necessary assistance to collect from the state said deposit. Further resolved, that said Edward R. Wood is hereby empowered to draw upon the treasurer of the company for the two per cent. premium charged by the Trust Company of North America, which he has been required to pay to obtain the said funds."
This resolution, taken in connection with the fact that the total amount of subscriptions contained in the articles of association amounted to just $70,000, indicates that, between the date of the articles of association (August 6th) and the date of this resolution, considerable additional subscriptions to stock had been made. In point of fact, this was true, as the books show that large subscriptions to stock were actually at some time made in addition to those mentioned in the articles of association; and over $10,000 had, before November 18, 1889, been paid in thereon by numerous persons on account of stock subscriptions; but the subscription books or lists, or whatever evidence there may have been of the actual subscriptions of stock outside of the articles of association, were not produced, and appear to have been destroyed or suppressed by the agents or officers of the company, and never to have come to the hands of the receiver. Mr. Wood raised this $60,706 by temporary loans on either his own credit or the credit of the company, or both. He appears to have had very little, if any, free capital of his own to invest in the enterprise. Subsequently, on the 20th of November, 1889, Mr. Wood resigned his position as director and treasurer of the company, and entered into a contract with the company on the 27th day of November, 1889, which may be best understood by setting it out in full:
"Agreement between the Philadelphia & Seashore Railway Company, a corporation under the laws of the state of New Jersey, of the first part, and Edward R. Wood, of Philadelphia, of the second part: Whereas the party of the first part desires to build a railroad from Winslow Junction, on the Philadelphia & Atlantic City Railroad, to points in Cape May county; and whereas, the party of the second part is familiar with the construction of railroads, and is also the holder of a certain valuable contract or traffic agreement with the Philadelphia & Atlantic City Railroad Company, securing to him and his assigns a connection with that road and business facilities believed valuable to the extent of many thousand dollars of annual Income: Now, therefore, this agreement witnesseth:
"First That said party of second part agrees to construct for party of first part a railroad from Winslow Junction, on the system of the Philadelphia & Reading Railroad, to a point on the seashore, at Ludlam's Beach, as near as may be to Corson's Inlet, and extending thence, through the city of Sea Isle, to the southwestern portion of the Island; provided, always, that the said party of the first part, or the landowners along the line of said proposed railroad and the city authorities of Sea Isle, shall grant a suitable and convenient 'right of way' for this purpose; and provided, further, that the party of the first part will in due course and shortly hereafter organize, or render every proper assistance to the process of organizing, a railroad company to build a railroad, which shall serve as an extension or branch, from near Tuckahoe to the city of Cape May. and also that said party of the first part herebyagrees that any contract it may make, Influence, or control for building the same shall be given to said party of the second part upon the same general terms and conditions, so far as they may be thereto applicable, as those which govern this contract for building the line to Sea Isle.
"Second. That it is agreed said railroad shall be built with seventy pound steel rails, of best quality; that bolts and fastenings shall be equal to Pennsylvania standard, and ties of standard size and weight; and that the grades of the road to be built shall be equally favorable to traffic as those on Philadelphia & Atlantic City Railroad.
"Third. That it is also agreed that party of second part shall erect attractive and commodious station houses, sufficient, in his opinion, to accommodate the business of each place, and to equip the road with such rolling stock as he shall consider requisite for its business; provided, that on the completion of said road, and of its contemplated extension to Cape May, the total rolling-stock equipment shall not be less than six locomotives, thirty passenger coaches, and thirty freight, gondola, and construction cars.
"Fourth. That the price to be paid to said Wood for construction and equipment of the railroad to Sea Isle City shall be five hundred and fifty thousand dollars ($550,000) in the stock of this company, and a like amount in the first mortgage bonds thereof; and the said Wood also agrees to construct the line from Tuckahoe to Cape May for three hundred and fifty thousand dollars ($350,000) In the stock of this company, and a like amount in its first mortgage bonds, as aforesaid; provided, that the total amount to be issued to the said Wood for all the railway construction and equipment which he herein undertakes shall net exceed nine hundred thousand dollars ($900,000) of the stock, and nine hundred thousand dollars ($900,000) of the bonds, of this company. Provided, further, that no part of said mortgage bonds shall be Issued until an amount at least equal thereto shall have been issued of the capital stock in bona fide return for cash, labor, or material expended upon said road. Provided, further, that the said securities shall not be issued more rapidly than at the rate of ten thousand dollars ($10,000) each of stock and bonds per mile in payment of the construction of the said railroad, and the additional amounts due to said party of the second part shall be held in reserve, and shall be paid to him in due proportion as he shall supply the equipment of locomotives, passenger coaches, and freight cars; and provided that the sum of fifty thousand dollars ($50,000) each in stock and bonds out of the said ten thousand dollars ($10,000) per mile shall be held as a reserve by the party of the first part until the completion of the roadbed and line of rails to the termini determined upon; and it is understood that twenty-five thousand dollars ($25,000) shall be that part of the above reserve of the fifty thousand aforesaid which shall be applicable to the construction of the line to Sea Isle, and shall be payable when said line is completed, and the additional twenty-five thousand dollars ($25,000) shall be applicable to the construction of the branch to Cape May, and payable on the completion of that road to Cape May city. Provided, further, that the securities which may be issued to said party of second part under this contract shall not be additional to those due by this company for any subscriptions, whether made to its stock or to its bonds, and the said party of the second part shall at all times protect the said party of the first part in this respect, and shall stand ready to receive cash at par instead of stock or bonds, as the case may be, and by so doing shall permit the treasurer of the company to reserve out of the payments due unto him as much of the stock or as many of the bonds as may be needed to make deliveries to the subscribers to either of these securities.
"Fifth. That it is understood that, until five hundred thousand dollars ($500,000) shall have been realized by subscriptions or from sales of the securities of this company, the said party of second part shall have authority to make necessary purchases and contracts upon the credit of this company, and shall not be obliged to use his own credit.
"Sixth. That this contract shall not be transferable by party of the second part, except by the consent of board of directors of party of first part.
"Seventh. That, unless prevented by adverse litigation, the party of second part agrees to finish the said railroad on or before the 1st day of October, 1890.
"Eighth. That the cost of securing the 'rights of way' shall be borne by the party of second part.
"Witness the signatures of the proper officers of the company, attesting the corporate seal thereof, and of the said E. R. Wood, this 27th day of November, 1889. Charles W. Potts, President Edward R. Wood. Witness: Chas. Rudderow, Jr. Attest: G. A. Benson, Treas."
On the 6th of December, immediately following the execution of this contract, the company executed the mortgage here in controversy to the defendant, the Guarantee Trust & Safe-Deposit Company, to secure 900 bonds of $1,000 each, with interest at 6 per cent. per annum, payable semiannually, principal payable in the year 1913. This mortgage was executed in pursuance of a resolution of the stockholders on the 25th of November, 1889, in these words: "Resolved, that in pursuance of the authority contained in an act of the legislature of the state of New Jersey, entitled 'An act to amend an act entitled An act to authorize the formation of railroad corporations and regulate the same, approved April second, one thousand eight hundred and seventy-three'; said amendment having been approved February19, 1878,—the board of directors of this company be, and they are hereby, authorized and empowered to make and execute the bonds of this company to the aggregate amount of nine hundred thousand dollars, to bear interest at the rate of six per cent. per annum, and to execute and deliver a mortgage to the Guarantee Trust & Safe-Deposit Company, a corporation of the state of Pennsylvania, as trustee, on all the lands, privileges, franchises, and appurtenances of, and belonging to, this company, which said mortgage shall constitute a first lien on all the railroad and branch lines of this company now in process of construction, and hereafter to be constructed, its cars, real estate, and franchises, acquired and to be acquired, to secure the payment of said bonds; and that said bonds and mortgage shall be in such form as the said board of directors shall deem proper: provided, the said bonds shall not be issued to an amount exceeding the paid-up capital stock of this company, and the proceeds of the sale of said bonds shall be used for the purpose of aiding in the construction of said railroad."
And a corresponding resolution of the directors of the company on the same day, in these words:
"Resolved, that in pursuance of the authority contained in the act of the legislature of the state of New Jersey, entitled 'An act to amend an act entitled An act to authorize the formation of railroad corporations and regulate the same, approved April second, one thousand eight hundred and eighty-three,' said amendment being approved February 19, 1878; and in further pursuance of the authority of a resolution of the stockholders of this company expressed in their resolution adopted at a meeting held on the 25th day of November, A. D. 1889,— this company do make its coupon bonds to the amount of nine hundred thousand dollars, to wit, nine hundred bonds, for one thousand dollars each, to be numbered consecutively from No. one to nine hundred, both inclusive, all to be dated on the —day of —, A. D. 1889, and to bear interest at the rate of six per cent. per annum, in lawful money, payable semiannually, on the — days of—and —, in each year, until the principal sum is paid, and that said bonds be made in the form following; provided, however, said bonds shall not be issued or sold to an amount exceeding the paid-up capital stock of this company:
"'No.—. $1,000. United States of America. State of New Jersey. First Mortgage Bond. The Philadelphia & Seashore Railway Company. Know all men by these presents, that the Philadelphia & Seashore Railway Company, a corporation created by the laws of the state of New Jersey, is hereby indebted to the bearer hereof in the sum of one thousand dollars, lawful money of the United States of America, which sum the said company promises to pay to the bearer hereof on the—day of —, in the year one thousand nine hundred and thirteen, with Interest thereon at the rate of six per centum per annum, payable semiannually at the office of the trustees in the city of Philadelphia on the first day of—and —, in each year, upon presentation and surrender of coupons hereto annexed, as they severally become due. This bond is one of a series of nine hundred each, of like date, tenor, amount, and effect, numbered, respectively, from one to nine hundred, inclusive, and amounting in the aggregate to nine hundred thousand dollars; and the payment of each and all of which is equally secured by a deed of trust or mortgage bearing date the— day of —, eighteen hundred and eighty-nine, duly executed and delivered by the said railway company to the Guarantee Trust & Safe-Deposit Company, trustee, covering the railroad of the said company, and its equipments, appurtenances, property, franchises, and things in the said deed of trust or mortgage mentioned and described. Provided, however, that in case of nonpayment of any half-yearly installment of Interest on this or any of said bonds, which shall have become payable and shall have been demanded, and the continuance of such default for the period of ninety days after any such demand, the principal of this bond shall become due in the manner and with the effect provided in the deed of trust or mortgage securing the payment of the same, hereinbefore mentioned. The commission on business paid to this company from the Philadelphia & Read Ing Railroad system under the traffic agreement signed March 23, 1889, shall be used for the general purposes of the company, and to that extent lightens the interest charge upon the Philadelphia & Seashore Railway Company. This bond shall pass by delivery, or it may be registered by its owner on the books of the company at the transfer agency of said the Philadelphia & Seashore Railway Company, after a registration of ownership certified thereon by the transfer agent of the company. No transfer, except upon the books of the company, shall be valid unless the last transfer shall have been to bearer, and transferability by delivery thereof restored; but this bond shall continue subject to successive registrations and transfers to bearer, as aforesaid, at the option of the holder. This bond shall not become obligatory until it shall have been authenticated by a certificate indorsed hereon and signed by the trustee named above, or its successors, as such trustee. In witness whereof, the said Philadelphia & Seashore Railway Company has caused its corporate seal to be hereunto affixed, and the same to be attested by the signatures of its president and secretary, and has also caused the coupon hereto annexed to be signed by the treasurer this—of—, in the year one thousand eight hundred and eighty-nine.'
"Resolved, that in pursuance of the authorityaforesaid, and to secure the payment of said bonds to be made and issued as provided in the above resolutions, this company do make, execute, and deliver to the Guarantee Trust & Safe-Deposit Company, a corporation of the state of Pennsylvania, as mortgagee in trust, a mortgage upon all the railroad and branch lines of this company now in process of construction or hereafter to be constructed, its cars, real estate, and franchises, acquired and to be acquired, to be more fully described in said mortgage, with the hereditaments and appurtenances thereto belonging or appertaining."
The mortgage recites these resolutions, and gives the form of the bonds, and conveys "all the right, title, and interest of the said party of the first part in and to all the railroad and property now owned or hereafter to be acquired by the party of the first part, that is to say, all of its railroad now made or in operation, and constructed and yet to be constructed, including its main line and branch line or lines, and including the right of way, roadbed, superstructure, iron, ties, splices, chains, bolts, nuts, and spikes, all lands and depot grounds, station houses and depots, fences, viaducts, bridges, timber, materials, and property purchased or to be purchased for the construction, equipment, or operation of said road, all machine shops, tools, implements, and personal property used thereon or upon or along the line of said railroad, or at its stations, all engines, tenders, cars, and machinery, all kinds of rolling stock, whether now owned or hereafter purchased by said party of the first part, and all other property of said company, and all its rights and privileges therein or appertaining thereto, and all the revenues, tolls, and income of said railroad and property, and all the franchises and rights of the said party of the first part, and all property and rights acquired by virtue and under authority thereof, now owned or hereafter to be acquired; and together, also, with all and singular the estate, rights, liberties, privileges, hereditaments, and appurtenances whatsoever unto the hereby granted and mentioned premises, estate, property, rights, privileges, and franchises belonging or appertaining, or to belong or appertain, and the reversions and remainders, tolls, incomes, earnings, rents, issues, and profits thereof, accruing or to accrue from the same or any part thereof; to have and to hold the above-described and hereby granted property, rights, franchises, and appurtenances unto the said party of the second part, their successors and assigns, forever, for the only proper use, benefit, and behoof of said party of the second part, their successors and assigns." It also contained a covenant on the part of the mortgagor for future conveyance of subsequently acquired property and for general further assurance.
On the 8th of August, 1889, the 16 gentlemen who organized the Seashore Company, together with John J. O'Neil,—17 in all,— signed articles of association for the incorporation of the Tuckahoe & Cape May Railroad Company, the object of which was to build a railway from Tuckahoe, on the line of the Philadelphia & Seashore Railway, to Cape May, a distance of 25 miles, and the amount of the capital stock was $400,000. The directors named were 12 of the gentlemen named as directors of the Sea Isle City Company, with the addition of Mr. John J. O'Neil. These articles, were filed with the secretary of state, and the deposit of $50,000 made with the state treasurer on February 4, 1890. If both these roads had been completed, the result would have been a complete connection by rail from Camden, via Winslow Junction, to Cape May city, as well as to Sea Isle City, which is some seven or eight miles south of Tuckahoe.
On the 16th of December, 1889, Mr. E. R. Wood executed a contract with one E. A. Tennis for the construction of the Tuckahoe branch, as follows: "Articles of agreement made and concluded this 16th day of December, 1889, by and between E. A. Tennis, party of the first part, and the Philadelphia & Seashore Railway Company, by their contractor in chief, party of the second part, witnesseth, that for and in consideration of the payments and covenants hereinafter mentioned, to be performed by the said party of the second part, the said party of the first part doth hereby covenant and agree to construct and finish, in a thorough, workmanlike, and substantial manner, and to the acceptance of the engineer of said party of the second part, all the grading, masonry, and all other work to which prices are affixed, on sections numbered four and five of the said work, to be finished in all respects as described in the following specifications. * * * Sections four and five extend from main line, at Tuckahoe, to Cape May city. * * * The said Philadelphia & Seashore Railway Company reserves the right to make alterations, at any time during the progress of the work,, in the alignment or grades: to change the limits of sections; to vary the dimensions and change the location of structures; or to substitute one kind of work for another. * * * In witness whereof the said parties hereto have hereunto set their hands and seals, the party of the first part by his own hand and seal, and the party of the second part by the signature of their authorized agent and contractor in chief, the day and year first above mentioned. E. A. Tennis. Phila. & Seashore Ry. Co., per E. R. Wood. In presence of G. L. Williams."
This contract was not expressly authorized by any recorded action of the directors of the Seashore road, and the evidence fails to show affirmatively that they knew of it at the time of its execution, but they did know of it subsequently. Mr. Wood commenced work by subcontractors on the main line in December, 1889, and Tennis commenced on the Cape May branch shortly after. The workon the main line was pushed with considerable vigor. From the start, Wood had complete control of all the bonds actually handed out by the trust company up to some time in the fall of 1890, when a rupture between him and the directors occurred, and they assumed and acquired control of the unused bonds. The deliveries by the trust company to the railway company, as shown by the trust company's books, were as follows: December 27, 1889, Nos. 1-100; February 6, 1890, Nos. 101-150; April 8, 1890, Nos. 151-200; April 28, 1890, Nos. 201-250; May 17, 1890, Nos. 251-300; June 18, 1890, Nos. 301-330; July 2, 1890, Nos. 331-430; and August 21, 1890, Nos. 431-500. Nos. 466-500, inclusive, were recalled and returned to the trust company on the 3d of September, 1890. This was shortly after the rupture between Mr. Wood and the directors of the company. On the 14th of May, 1891, the trust company delivered 297 bonds (Nos. 466-762) to the directors. These issues, excepting those last named, were used by Wood, sometimes by actual sales, at first at or near par; sometimes by pledging as collateral to loans made on the notes of the railway company; sometimes for construction materials to be furnished to the company; and sometimes as collateral to his own notes. The company's books do not show all of these transactions, and the date when each bond was actually handed out to an actual holder, other than Wood, must be determined, so far as it can be determined, in part by the books, and in part by other evidence. Counting the $60,706 paid in by Wood at and before November 18, 1889, —the date of the filing of the articles of association with the secretary of state and paying the deposit to the state treasurer,—as so much paid on account of capital stock, makes the total paid in for stock account, November 27, 1889, $79,116.50. On that day 900 shares of stock were issued to E. R. Wood, but no further payment on account of stock had been made by him, and in fact no more ever was paid by him, so far as any books show. On the same day (November 27, 1889) the contract for the construction of the railroad, above set forth, was executed. On the 29th of November, 500 additional shares were issued to Wood, but were immediately surrendered to the company for the purpose, as the circumstances indicate and as appears by the entries on the cashbook, of being held in trust by the directors to secure certain of them who had advanced to Wood part of the $60,706 which he bad paid in on stock account. On the 10th of December, 1889, there had been paid in on the stock of the company $2,975 additional to the $79,116.50 previously paid, making a total of $82,091. On that day 70 bonds (Nos. 1-70, inclusive) were mentioned on the books as delivered to Mr. Wood, but were not charged to him. These bonds were passed away by Wood to divers individuals, and have all been presented or accounted for except Nos. 37 and 38, the holders of which have not appeared. On January 6, 1890, 13 bonds (Nos. 71-83, inclusive) were delivered to the Fourth Street National Bank of Philadelphia as collateral to a loan on a note of the company for $10,000, actual cash, less discount paid to the company, and entered on the cashbook. On January 31, 1890, 13 bonds (Nos. 84-96, inclusive) were delivered to the New Jersey Trust & Safe-Deposit Company to secure a loan on the note of the company for $10,000, actual cash paid to the company, and entered on the cashbook. At that date there had been paid in on account of capital-stock since December 10, 1889, $18,020, making a total of cash paid in on account of stock, January 30, 1890, $100,111. On February 6, 1890, there had been paid in the additional sum of $1,585 on stock account, making a total of $101, 696; and on that day 15 bonds (Nos. 97-111, Inclusive) were issued to the defendant the Bethlehem Iron Company, as collateral to a contract entered into by that company with the Philadelphia & Seashore Company for furnishing steel rails for its road. This contract was dated September 5, 1889, before the corporate existence was perfected, and executed on behalf of the company by E. R. Wood as treasurer. There is no entry on the minutes of any authority by the directors to execute it. It provided for the delivery, in installments, of 7,000 tons of rails, at $28.25 per gross ton, payable half in cash upon delivery, and the balance in the four-months notes of the railroad company Indorsed by Wood, with bonds of the company at 80 per cent. of par value as collateral. This delivery of bonds to the Bethlehem Iron Company was about $10,000 in excess of the amount paid in on stock account at that date. From this time on there were further payments on account of stock until the total amounted to $161,905; but the issues of bonds were always in excess of the amount at the time thereof paid in on account of capital stock, unless there was work done and paid for by Wood, on his contract, in excess of what he had received from the company, which could properly be credited to him as so much cash paid on account of stock issued to him in excess of the payment of $60,706 made by him on stock account prior to November 18, 1889. Whether there was any such excess is a disputed fact in the case.
There were issued to Wood altogether 7,840 shares of stock, of which he still holds 7,580; and there were issued to other parties, prior to the rupture between Wood and the directors, 2,338 shares of stock. Some of this was actually paid for in cash, and as to some there is no evidence whether it was paid for or not. There were also moneys paid in on account of stock subscriptions for which no stock was issued. The total amount paid in on stock account is $161,905, including the $60,706 paid by Wood. All of the 465 bonds delivered to the railway company by the trust company during Wood's control werepassed away by him, and are in the hands of parties claiming to be bona fide holders, and have been presented to the complainant with a demand of payment, except Nos. 37 and 38, above mentioned, and Nos. 440-453, inclusive, held by the defendant the Philadelphia Warehouse Company as collateral security for a balance of $577.71, due for money advanced to the Bethlehem Iron Company upon rails. Early in the summer of 1890, the Philadelphia & Seashore road, as far as Tuckahoe, was so nearly finished that trains could be run upon it. About $100,000 had also been paid out in cash or bonds by Wood, claiming to act in behalf of the Philadelphia & Seashore road, sometimes in his own checks, and sometimes in the checks of the Philadelphia & Seashore Company, in procuring rights of way and terminals for and in construction of the Tuckahoe & Cape May road. The construction of the Tuckahoe & Cape May road was not so far advanced as that of the main line, and trains could not be run upon it No money had been paid in on account of stock of the Tuckahoe road, and no stock or bonds of that road had at that time been Issued. Besides the money actually paid out for its construction, as above stated, the Philadelphia & Seashore road was in debt on its (the Tuckahoe & Cape May Railroad's) account for $42,160.73, including therein so many of the rails contracted for from the Bethlehem Iron Company as were intended for use on that road, and yet unpaid for. In addition to this Indebtedness, the Philadelphia & Seashore road was also Indebted to other parties in the sum of $202,522.04, unpaid claims for work done upon the main line. This indebtedness had been Incurred by Wood under the clause in his contract authorizing him to pledge the credit of the company. This state of affairs so embarrassed both the company and Mr. Wood that no more money could be raised, and further work was stopped.
In the month of August 1890, the board of directors began an investigation of the affairs of the company, and, on the 2d of September, passed a resolution the result of which was to take away the control of the affaire of the company from Mr. Wood, and place it in the hands of a finance committee of the board; and, on the 15th of September, they passed a resolution excluding Mr. Wood from the privilege previously accorded him of attending meetings of the board, and employed counsel to ascertain their rights under the contract of November 27, 1889. On the 7th of October, 1890, report of the condition of the road was made to the board by a committee, and on the 14th of October the board rescinded the contract with Mr. Wood, took the construction of the road out of his hands, and attempted to go on with it themselves by a contract with one Jamison. Shortly after this meeting of October 14th, to wit on the 25th of October, Mr. Wood filed a bill in this court against the company and the individual directors, asking that the contract might be specifically performed, and that the resolution of October 14th, rescinding the contract, might be declared void, and the directors restrained from issuing any of the stock or bonds of the road, or from doing anything under the contract which the directors had entered into with Jamison, and that the trust company might be restrained from delivering any of the bonds to any person. That bill was answered, and the cause litigated, resulting in the dismissal of the bill in March, 1891, for reasons given in the opinion of Vice Chancellor Bird, reported in 21 Atl. 574 (Wood v. Boney). On the 5th of March, 1891, the Johnson Signal Company filed its bill against the company, as a creditor, asking for the appointment of a receiver; and on that day the chancellor made an order, returnable on the 11th of March, to show cause why an injunction should not be granted, and a receiver appointed, according to the prayer of the bill, and the same order contained interim restraint in these words: "Said defendants and their officers and agents, and each and every of them, do refrain from contracting any debt or receiving any debt, except in the usual and ordinary conduct of their business, due or coming to them, and from paying out or transferring any of their moneys and effects and property, real and personal, except as aforesaid, and from continuing their business, except in the ordinary transaction thereof." The bill and a copy of this order were served upon the company by leaving them at the office of the company (312 Market street, Camden), and a copy of the order was also served at the office of the president of the company. There was no contention that the making of this order did not come at once to the knowledge of the officers of the railway company. The hearing of the matter was postponed on the return day of the order, and a new order to show cause why a receiver should not be appointed was made on the 5th of May, returnable on the 11th of May. The restraining order of the 5th of March, so far as appears, was never discharged. An answer was filed by the company, and depositions were taken on the merits of the application for a receiver. In the meantime, on the 13th day of July, 1891, the Bethlehem Iron Company filed a similar bill, praying for the appointment of a receiver, and the two causes were consolidated on the 20th of July, 1891; and on that day a decree of insolvency was made, and a receiver appointed. On the 5th of May, 1891, the directors of the Seashore Company authorized the officers to enter into a contract with C. T. Hobart & Co. for the completion of the line of its railroad into Sea Isle City, and also, if counsel should advise, for the completion of the line from Tuckahoe to Cape May city, and also passed resolutions calling on the trust company to deliver to them the remainder of the bonds in their hands On the 9th of May, the president submittedto the board of directors a proposition on the part of Hobart & Co. to finish the Sea Isle section,—that is, so much of the road as lay between Tuckahoe and Sea Isle City, to the center of the town of Sea Isle City,—to procure rights of way and room for terminal stations in that town, and to build stations and abutments at Richland, etc., in consideration of 5,010 shares of stock, fully paid, and 200 of the bonds of the company; and it was thereupon resolved that the company enter into a contract accordingly with Hobart & Co., and that it be executed and delivered by the president, and "that the stock and bonds be issued and delivery thereof made when satisfactory security be given to the president that work will be completed." And it was further resolved that, if Hobart & Co. did not enter into the contract as proposed, "the president is authorized to enter into a contract with such other person or persons as he can to finish the road upon the same terms and conditions." And it was "resolved that the officers of this company issue to Hobart & Co., or to such person or persons as shall contract for the finishing of the road, 5,040 shares of its capital stock, certified and fully paid, and 200 bonds, the full consideration named in the contract approved this day." On the 12th of May, the president reported that he had executed and delivered a contract with Hobart & Co. to finish the road upon the terms and conditions set out; and the contract, being read, was approved, and the officers were authorized to issue a certificate to Hobart & Co. for the stock. Under this contract the 5,040 shares of stock were actually issued to Hobart & Co., and the 200 bonds delivered to them or upon their order.
The history of this stock and these bonds may be further given as follows: Previous to entering into the contract, the directors had procured an estimate to be made of what it would cost to put the road from Tuckahoe to Sea Isle City in running order, including some necessary work upon the bridge at the crossing of their road with the West Jersey road at Richland, and other matters, and found the cost estimated at $27,620; and they also, as testified to by Mr. Gorman, a director, and member of the Philadelphia bar, who acted as their counsel, had procured an estimate of the cost of finishing the road from Tuckahoe to Cape May city; and, according to Mr. Gorman's evidence, they conceived the Idea of giving the whole of the remaining stock and bonds of the Seashore Company to anybody who would finish both roads; but, finding legal difficulties in the way of their undertaking to finish the Tuckahoe & Cape May road, they concentrated their energies on the finishing of the Sea Isle City section of the main line, and formed and developed the scheme of having that finished by contract for the precise cost of the Job, by pledging a large portion of the unissued bonds and stock for that purpose, but retaining the control of the same; and for that purpose they made a proposition to Hobart & Co., who were represented by Mr. John J. Deery, one of the firm, and also one of the original subscribers to the stock of the company, to finish the road to Sea Isle City on a cash basis, the directors furnishing the money necessary, and issuing the bonds and stock to secure themselves or whoever actually furnished the money. With that view they procured Mr. Conway, a gentleman of some means, engaged in the liquor business in Philadelphia, but having real estate interests at Sea Isle City, to advance a part of the money.
Conway's Claim.
He, in fact, advanced ten thousand and odd dollars of his own money, and borrowed seventeen thousand dollars of Mr. Boney, the president of the company, gave him his note for it, and paid the whole, twenty-seven thousand and odd dollars, to Mr. Deery. With this money in hand, the contract was entered into with Hobart & Co., and passed by the board of directors. A certificate for 5,040 shares of stock was issued to Hobart & Co., and the 200 bonds and the certificate of stock were delivered nominally to them by the hands of Mr. Deery, but were immediately delivered—bonds and stock certificate—to Mr. Conway. He paid the $27,620 to Mr. Deery formally, but Mr. Deery immediately, in pursuance of an arrangement to that effect, handed the money to Mr. Boney, the president of the company, upon the understanding that Mr. Boney was to pay it to Hobart & Co. as fast as they actually did the work on the road, and the money was in fact (less $364) paid to Hobart & Co. on their vouchers, for work actually done and materials actually furnished, without any profit to them. Conway was repaid that money, in part, by three persons,—George H. Becker. Emlen Physick, and Morris Boney. All of those persons except Conway were directors of the company, and Boney was its president. Conway held the 200 bords in pledge for the amount of money which he advanced upon the understanding that he was to be repaid by some of the directors of the company. After the road went into the hands of a receiver, Mr. Becker, now deceased, Dr. Physick, and Mr. Boney agreed to divide the burden of this $27,620 with Mr. Conway. Dr. Physick and Mr. Becker each paid Mr. Conway $7,000, and Mr. Conway paid to Mr. Boney $10,000 of the $17,000 which he had borrowed of him; so that the matter stood thus: Calling the whole amount with interest, $28,000, Mr. Boney advanced $7,000 as part of the $17,000 loaned by him to Conway; Mr. Becker and Dr. Physick each advanced $7,000 to Conway direct who was still out $7,000. While Mr. Boney holds Mr. Conway's note for $7,000, the agreement is that he is not to pay it but to hold the one-quarter of the 200 bonds for Mr. Boney's benefit Dr. Physick got 42 1/2 of the 200 bonds.and Mr. Becker's estate holds which are 85 of the 200 bonds delivered to Hobart & Co. The balance is in the hands of Mr. Conway, for the benefit, of himself and Boney. No sworn claim has been put in by either Conway, Physick, Boney, or Becker's estate on account of this payment of $27,020. Their bonds have all been presented to the receiver, and their counsel say that what they ask is a dividend equal to the amount of the money they have actually advanced, viz. $27,620.
Claim of Emlen Physick.
Of the 465 bonds issued in Wood's time, 25 are held by the defendant Dr. Emlen Physick. Of these, 17 (Nos. 54-70, inclusive) are part of the first 70 issued and delivered to Wood, and were handed by him to Dr. Physick. The remaining 8 bonds (Nos. 151-158, inclusive) were delivered to Dr. Physick by the company, on Wood's order, about the 17th of April, 1890. Physick became a director November 20, 1889, immediately after Wood's resignation, and took the place of John J. Deery, who had also resigned at the same time. No stock had been issued to him or Deery at that time, but Physick had paid, on November 9th, $2,500, and, on November 15th, $2,500, on account of stock which he had, presumably, previously subscribed for. As before stated, no actual subscription book or list was produced, and Wood swears, without being contradicted, that Physick's subscription was made for him by his friend Deery, who had subscribed, as before stated, for 500 shares in the original articles of association, by Physick's direction. Subsequently, Physick paid $20,000 additional in installments,, and 500 shares of stock were issued to him—340 on February 17, 1890, and 160 on April 15, 1890. The 25 bonds before mentioned were given to him by Wood, as an inducement or bonus for his taking and paying for 500 shares of stock. The arrangement or contract between Wood and Physick to this effect was made before the company was organized, and on its strength Deery, by Physick's direction, subscribed, as his figurehead, for 500 shares. The mode of building the railroad provided for in the contract of November 27th with Wood—viz. to be paid for by the bonds and stock—was part of the original scheme, which appears to have been wholly devised by Wood, and included, as abundantly appears, the building of not only the main line to Sea Isle City, but also the branch from Tuckahoe to Cape May city. Dr. Physick was a resident of Cape May city, and largely interested in real estate in that neighborhood, and was anxious to have this opposition railway built. The arrangement between him and Wood was that he should put $25,000 into the main line, from Winslow Junction to Tuckahoe and Sea Isle City, and $25,000 into the road from Tuckahoe to Cape May city, and was to receive, in consideration of his advance, $25,000 of stock and $25,000 of bonds for the contribution to the main line, and an equal sum in stock and bonds for his contribution to the Tuckahoe and Cape May line. In effect, he agreed to go in upon the same foundation as Wood did,—to the extent of $50,000 in cash. The installment paid in by Physick, as above stated, on his subscriptions to stock, forms part of the amount above stated to have been paid in on stock account at the time of the pledging of the several batches of bonds with the Fourth Street National Bank, the New Jersey Trust & Safe-Deposit Company, and the Bethlehem Iron Company, and without those payments all those issues were excessive. The delivery of the last 8 bonds to Physick, on or about April 17, 1890, was clearly in excess of the amount then paid in for stock. Physick claims a dividend upon those 25 bonds. He also holds 43 bonds of the 200 issued to Hobart & Co., as hereinbefore stated.
Bethlehem Iron Company.
The Bethlehem Iron Company fulfilled its contract previously mentioned, and delivered thereunder a few pounds only short of the precise 7,000 tons contracted for. They were paid on account of those deliveries, in cash, $98,146.54, and hold the railroad company's notes for an aggregate of $99,603.41, besides interest As collateral to the notes, they hold 125 bonds of the company, viz. Nos. 97-111, 201-238, 266-287, being 75 bonds of those issued by Wood, and Nos. 711-760, being 50 of the 297 issued by the directors after the rupture with Wood. They were delivered to the Bethlehem Iron Company, May 22, 1891, as collateral for the last of the four notes given, which was for $41,504.23. This note was given under the contract for rails delivered the previous October, and should have been given at or before the delivery, but was not given, owing to the rupture between Wood and the company, which occurred about that time. The Bethlehem Iron Company took legal measures to enforce their demand, and succeeded in procuring the note and collateral bonds just mentioned, on May 22, 1891. They were strictly entitled to them the previous October. Afterwards (July 13, 1891) they filed their bill for a receiver, and under it after its consolidation with that of the Johnson Signal Company, the receiver was appointed.
Burnham, Williams & Co.
Burnham, Williams & Co., proprietors of the Baldwin Locomotive Works of Philadelphia, agreed on December 25, 1889, to deliver six engines to the company, and did afterwards actually deliver two of the six which came into the hands of the receiver, and were sold by him. The delivery was made subject to a contract, such as they are in the habit of entering into with railroad companies that do not pay cash, by the terms of which the property in the machines was to remain in the builders until the machines were paid for. The question of the right of the claimants to be repaid insolido, out of the fund, the amount which the locomotives produced at the sale, has not been litigated. The question now is as to certain bonds which they hold as collateral. Not receiving any payment from Mr. Wood, they pressed him and the company, and finally succeeded in procuring 10 bonds (Nos. 456-465, inclusive) on August 30, 1890. These were the very last bonds issued by Wood, and were issued at the very last of his having any control over the assets of the company. There was no previous agreement to take the bonds. The creditors never had any promissory note of Wood or of the company, and they simply took those bonds as collateral as the best they could do at the time. The amount due on their claim is $10,000, with interest.
Fourth Street National Bank.
The Fourth Street National Bank holds 42 of the bonds as collateral for two promissory notes,—one for $9,000, dated August 20, 1890; and the other for $9,750, dated September 12, 1890. Of these bonds, 13 (Nos. 71-83, inclusive) were, as above stated, originally issued to the bank on the 6th of January, 1890, to secure a loan of $10,000. That loan was renewed from time to time, and paid or reduced on September 12th by $250, and then stood at $9,750, and the remaining 29 bonds were given as additional collateral for that and another loan, as follows: On August 20, 1890, the railroad company borrowed $9,000 of the bank, and gave them 20 bonds as collateral. One of these bonds was No. 21, of the first issue of 70 bonds of Wood, and was given by him, with others, on the occasion of a renewal of the first note. The bonds held are Nos. 21; 71-83, inclusive; 159-185, inclusive; and 199.
The Manufacturers' National Bank of Philadelphia.
The Manufacturers' National Bank of Philadelphia holds 18 bonds (Nos. 12, 13, 22, 23, 28, 29, 30; 138-141, inclusive; 298-302, inclusive; 322; and 398). They hold these as collateral to a note of $12,000, made August 22, 1892. This note was given as a renewal and consolidation of previous loans made to Wood, the dates of which are not found on the books of the bank, and for which most, if not all, of those bonds had previously been pledged. The bill book of the railway company shows that they borrowed of the Manufacturers' National Bank on the 10th of June, 1890, the sum of $3,000, and gave as collateral five bonds. The numbers of the bonds are not mentioned. Other than that, there is no proof as to the precise origin of the debt, or the time when the bonds were pledged, nor is there any proof that the creditor had any notice of any invalidity in the bonds taken.
Commonwealth National Bank.
The Commonwealth National Bank holds 17 bonds as collateral to a debt of $8,000. The bonds are Nos. 251-265, inclusive; 437; and 438. The debt originated in a loan of $10,000, made on the 7th of June, 1890, on the note of the company indorsed by Wood; and at that time 15 of the bonds were delivered as collateral. Two thousand dollars was paid on that note, and a new note was given on the 13th of September, 1890, for $8,000. In 1891 they received the two additional bonds on a further renewal of the note.
Seventh National Bank.
The Seventh National Bank holds 21 bonds (Nos. 4-9, inclusive; 31-36, inclusive; 321; 391-393, inclusive; 396; 397; 407-409, inclusive), to secure four notes made by E. R. Wood,—one (1) dated April 2, 1891, for $2,600, for which he deposited as collateral, among other things, 11 of the bonds mentioned, and also the note of the Philadelphia & Seashore Railway Company for $1,800;
(2) a note dated April 7, 1891, made by E. R. Wood, to the order of himself, for $3,700, and pledging as collateral, among other things, 10 of the bonds above mentioned;
(3) a note dated September 13, 1890, made by E. R. Wood, for $3,250, pledging other collaterals; and (4) another note, dated November 12, 1890, for $2,150, made by Wood, and pledging other collaterals. These notes contain a clause that any other collaterals held by the bank for other loans may be applied to the security of these.
New Jersey Trust & Safe-Deposit Company.
The New Jersey Trust & Safe-Deposit Company holds 15 bonds (Nos. 84-96, inclusive; 394; and 395), to secure two notes, —one of $10,000, and one of $1,600. The note for $10,000 is dated July 7, 1890, made by the Philadelphia & Seashore Railway Company, to the order of E. R. Wood, with 13 bonds as collateral. This loan is a renewal of the original loan made on January 31, 1890, as above stated, and is secured by the same collaterals. The note for $1,600 is dated August 25, 1890, made by the Philadelphia & Seashore Railway Company, to the order of E. R. Wood, and is accompanied by two of the bonds (Nos. 394 and 395).
Central National Bank.
The Central National Bank holds bonds Nos. 142 and 143, as collateral to the note of E. R. Wood, dated May 7, 1892, for $4,720. It is the last of a series of renewals of a note made on the 18th of April, 1890, for $4,000, and with that note these two bonds, with other securities, were deposited as collateral. Nothing has ever been paid on it, and the additional $720 represents some additional loan and interest.
First National Bank of Camden.
The First National Bank of Camden holds bond No. 406, as security for a note of E. R. Wood for $575, dated August 1, 1891. That note was given in renewal of a previous note, and the bond was delivered to the bank upon the renewal.
Millville National Bank.
The Millville National Bank holds 3 bonds (Nos. 24, 20, and 27). They came into the possession of the bank on or about the 3d of January, 1890, as collateral security to a note of $2,500 discounted on that day for Edward R. Wood. That note has been renewed from time to time, and upon It, at the time of the hearing, there was due $2,000, with interest from the 24th of July, 1893.
Philadelphia & Atlantic City Railway Company.
The Philadelphia & Atlantic City Railway Company, leased by the Reading Railway, holds 25 of the bonds (Nos. 122-124, inclusive; 134; 135; 144; 145; 193; 194; 200; 296; 297; 303; 304; 306; 307; 354; 454; 455; and 420-425, inclusive). These bonds are held as collateral to a balance of about $25,000, claimed to be due the railway for freight and materials shipped over the road, and for some materials furnished, and for car service on the road. The amount due is disputed by the receiver. The bonds were delivered to the railway company in small installments, of one, two, or three at a time, as their numbers indicate, and were given as collaterals for bills of freight and railroad service from time to time as the indebtedness accrued.
Philadelphia Warehouse Company.
The Philadelphia Warehouse Company holds 14 bonds (Nos. 440-453, inclusive), which their counsel at one time said they made no claim under. But the facts are as follows: The railway company, finding Itself embarrassed in raising the cash payment necessary to get a delivery of steel rails from the Bethlehem Iron Company, applied to the Philadelphia Warehouse Company for assistance. It will be remembered that the contract of the Bethlehem Iron Company required half the price of the rails to be paid in cash, and, on a consignment of rails, the warehouse company, at the request of the railway company, paid (August 26, 1890) to the Bethlehem Iron Company $29,005.50. They paid that to the Bethlehem Iron Company on the understanding that the rails were to be invoiced to the warehouse company, so that they would become the property of the warehouse company, and they would have a lien upon them for the amount of cash which they advanced. But, before they would take the risk of actually sending the cash to the Bethlehem Iron Company, they required a collateral, and that collateral was the bonds in question. The original number was 58, which included the 14 they now hold. The arrangement was that, as soon as the iron was shipped to them and came into their possession, they were to redeliver the bonds to the railway company or to Mr. Wood, who represented them. The iron did come into their possession, and they did redeliver a quantity of the bonds, and, had all been asked for, all would have been redelivered. But in the meantime litigation arose, and they were compelled to incur expenses, and, when they finally gave up their lien on the rails, they found themselves $577.71 short; and the question is whether or not they have a lien on these 14 bonds for the sum of $577.71.
Richland Improvement Company.
The Richland Improvement Company holds three bonds (Nos. 289-291). The company is a New Jersey corporation, of which Mr. Edward R. Wood is the president and principal stockholder. The bonds were originally pledged to the Guarantee Trust & Safe-Deposit Company, the trustee under the mortgage, with other collaterals, to secure a loan of $5,000. After the trust company had sold the other collaterals, a balance was left due them of $113.17, for which they hold these three bonds. The Richland Improvement Company, by Mr. Wood, president, paid $112.97, as the balance, and thus became possessed of the bonds. The original loan was made in the fall of 1889, and was renewed in the summer of 1890, and these securities were then pledged, they having been received by Mr. Wood, as their numbers indicate, during the summer, on account of his contract.
Sea Isle City Lot & Building Association No. 3.
This is an association of individuals under the general land and improvement company act, which owns land at Sea Isle City, and, in order to increase its value, put money into this railway company. They hold 16 bonds, for which they paid the company, in cash, $16,000. They were also, at and before the time they got the bonds, subscribers to the extent of 320 shares, or $16,000. These sums they paid in good faith to the company. The numbers of the bonds are Nos. 25, 39—44, 147, 149, 187, 240-242, 323, 324, 365; Nos. 25 and 39-44, inclusive, being part of the first issue of 70 to Mr. Wood. The checks by which they paid for these bonds were not produced, being in the hands of Mr. Becker, the secretary of the association, who was also a director in the company, and in whose name the stock was issued. He has since died, and the checks have not been found among his papers, but the original orders of the company to the secretary and treasurer to give the checks to buy the stock were produced, and they are dated as follows, all being stated to be given for stock and bonds: March 19, 1890, $5,500, signed by M. J. Kelly, president; April 3, 1896, $6,500, signed by M. J. Kelly, president; May 8, 1890, $4,000, signed by same; May 26, 1890, $2,000, signed by same; June 10, 1890, $6,000, signed by same; June 19, 1890, $2,000, signed by M. J. Kelly, president (the first five were all drawn to the order of William Gorman, who was solicitor for the association, and a director in therailway company, and its counsel; the sixth one—June 19, 1890—was to the order of E. R. Wood); the seventh is July 10, 1890, for $3,000, signed by the president, to the order of E. R. Wood; the eighth is August 7, 1890, for $3,000, signed by M. J. Kelly, president, to the order of E. R. Wood,—in all, $32,000. The shares of stock were issued in batches to Becker, as secretary of the lot association. A part of the shares issued was given from a surrender of the first batch of stock Issued to Wood. The balance appear to be original issues to Becker, as trustee for the company. No credit is given to stock account for any of these issues, except $1,050, and no credit is given to bond account, except one bond (No. 87), credited as cash. The books of the company, however, are not complete in this respect. The whole transaction was in fulfillment of an agreement made between the officers of the railway company and this association to take $10,000 of bonds and $16,000 of stock in the railway company. In point of fact, the bulk of the money went into the hands of Wood, he being supposed to be entitled to it, under the construction contract of November 27, 1889.
Sea Isle City Lot & Building Association No. 4.
This association was an association of precisely the same kind as that called "No. 3," with some little changes in the stockholders, but substantially controlled by the same gentlemen. They hold eight bonds. They made the same sort of agreement as did Sea Isle City Lot & Building Association No. 3, viz. to take $8,000 of bonds and $8,000 of stock. Their bonds are Nos. 195-198, 239, 245, 331, and 353. The first five were paid for in cash to the company, and the checks for the payment are produced. The first is dated March 21, 1890, for $3,500, to the order of the Philadelphia & Seashore Railway Company; the next is dated April 7, 1890, for $3,500, to the order of the Philadelphia & Seashore Railway Company; the next is May 10, 1890, like check, like order, $2,000; the next Is June 9, 1890, like check, to the order of E. R. Wood, for $2,000; the next is July 16, 1890, like check, to the order of Edward R. Wood, for $2,000; the next is July 26, 1890, like check, to the order of Edward R. Wood, for $1,000; and the next is August 8, 1890, like check, to the order of Wood, for $1,000,—in all, $15,000. For these payments they hold the 8 bonds above mentioned, and 140 shares of stock. Of the stock issued, part came from Wood, and the balance was direct from the company. The two last bonds issued seem to have been received from Mr. Wood.
Diamond State Iron Company.
The Diamond State Iron Company holds 21 bonds, as collateral to a balance due them on Iron bolts, screws, and other track materials delivered to the railway company for the laying of its rails. The iron company is a manufacturer of railroad supplies at Wilmington, Del., with an agent In Philadelphia; and that agent really negotiated the sale of the steel rails to the railroad company by the Bethlehem Iron Company, and at the same time made a contract, of precisely the same nature as that of the Bethlehem Iron Company, for the furnishing by the Diamond State Iron Company of the rail fittings. The contract was to pay half in cash, and one-half in notes, secured by bonds as collateral, at 80 cents on the dollar. The deliveries were made to the railway company, but Wood failed to make the proper payments. Some notes were delivered, and, finally, the fittings were delivered, without either cash or notes, but bonds were given as collateral. Finally, on February 28, 1891, the notes of the railway company, which the iron company held to the extent of upward of $6,000, were surrendered, and the whole indebtedness was consolidated in a note of Mr. Wood of $12,000, and the bonds previously delivered as collateral were held as collateral to that They are 21 In number, viz. Nos. 127-133, 292-295, 348-352, 399, 413-416. Of these, all but Nos. 127-133, inclusive, appear by the books of the company to have been delivered directly from the railway company to the iron company. The others just mentioned were delivered to Mr. Wood by the railway company.
Estate of George H. Becker.
The estate of George H. Becker holds 52 bonds, numbered as follows: Nos. 246-250, 366, 367, 380-382,—in all, 10 bonds,— out of the 465 which were delivered to Mr. Wood; and they also hold Nos. 538-579, inclusive,— 42 in all,—a part of the 297 issued by the directors under Boney's presidency, after the rupture with Wood. The 42 are part of the 200 handed by the directors to Deery under the Hobart contract and by Deery handed to Conway to secure the $27,620 which he advanced, and presumably by Conway handed over to Becker to secure him for his $7,000 given to Conway as Becker's one-quarter of the $27,000 and upward paid by Conway to Boney to pay Hobart & Co. for the work done by them. Beyond this proof given by Conway, there is not a particle of evidence to show what the first 10 bonds—part of the Wood issue—were given for. Becker was one of the original incorporators and a director in the company.
Louis Blank.
Louis Blank holds three of the bonds (Nos. 377-379, a part of the issue to Wood). His account of them is this: That he is a confectioner in Philadelphia, and had a slight acquaintance with Mr. Becker, who was a director in the company, and a sort of broker and dealer in moneyed securities in Philadelphia; that he was approached by Becker for a loan of $3,000, and offered these 3 bonds and 30 shares of stock; and that he made the bargain with Becker at Sea Isle City on or about the 14th of August, 1890;and that on the 15th of August, in Philadelphia, Becker came to him with the 3 bonds and a certificate for 30 shares of stock made out in his (Blank's) name; and that he then and there gave Becker a check, which is produced, dated August 15, 1800, for $3,000; and that that check was exchanged for the bonds and certificate of stock and paid. He claims it was a loan to the estate of Becker, but he took no note or other memorandum to show that it was a loan. He has made a claim against the estate for the amount of the loan, with interest, and says that he holds the stock and bonds simply as collateral.
Morris Boney.
Morris Boney holds 65 bonds (Nos. 45-47, 114-121, 146, 383-388, 666-710, 761, 762). Eighteen of these (viz. 45-47, 114-121, 146, 383-388) are of the issue made during Mr. Wood's control, and the remainder are part of the Issue of 297 bonds made by the directors after the rupture with Mr. Wood. Boney was one of the original directors and organizers of the company. As to the first 18 bonds, which may be classified as bonds of the Wood issue, the facts are as follows: Mr. Boney was one of the original projectors and directors of the railway, was largely interested in real estate in Sea Isle City, and, after the resignation of Mr. Potts, he became the president of the railway company. His subscription in the articles of association was for 10 shares, but he actually subscribed for 50 shares, and paid $2,500 for them. The payments were as follows: September 23, 1889, $250; November 21, 1889, $500; December 28, 1889, $500; February 6, 1890, $500; March 10, 1890, $500; April 7, 1890, $250. These payments were made in pursuance of regular calls for installments on account of his stock subscribed; and immediately after the last payment, to wit, April 8, 1890, he received a certificate for 50 shares of stock. In addition to these payments, he advanced to Mr. Wood, on or about the 7th of November, 1889, $5,000, part of the $60,000 which Wood paid in at the start, and which was used to pay the deposit of $70,000 to the state treasurer. For that $5,000, Wood gave him seven bonds (Nos. 45-47, 114-117). The bonds, however, were not given until some time after the money was paid. At the time of the payment of the $5,000 to Wood (November 7, 1889), Wood gave Boney a receipt as follows: "Received of Morris Boney check for $5,000, money to be used for the Phila. and Seashore Ry. Co., and to be returned to Mr. Boney as it comes back from the state treasurer of New Jersey. Mr. Boney shall be secured for its equivalent in first mortgage bonds of the company." The bonds already mentioned were given to him several months afterwards, and were received in full payment of this advance. Later on, on the 31st of May, 1890, he advanced $5,000, by check to the order of the Philadelphia & Seashore Railway Company, and on the same day a certificate for 100 shares of stock was issued to him. Later on, on the 13th of August, 1890, he gave his check for $5,000, to the order of Wood; and, on the 15th of August, 120 shares of stock were issued to him. These shares were issued directly to Boney from the railway company. At the time of the payment of each $5,000, he got $5,000 in the bonds of the company, and in some way got one in addition, making 11 bonds which he got, with 220 shares of stock, for the two payments of May 31st and August 13th, of $5,000 each. The bonds were delivered to him by Mr. Wood, and thestock was issued directly from the company. The extra 20 shares of stock and the extra bond do not appear to have been paid for. The inference from the evidence is that, with regard to this last transaction, Mr. Boney's position resembles that of Dr. Physick's with regard to his 25 bonds and 500 shares of stock. Besides these bonds and stock, Mr. Boney, as before mentioned, holds 47 of the issue of 297 bonds made by himself as president and the other directors, after the rupture with Wood, and those bonds were delivered to him under the following circumstances: Mr. Boney assumed the financial risk of operating the road after he became its president, and, in so doing, ran behind some $7,000, for which he made a claim against the railroad company, and, to indemnify him against that claim, 45 of the 47 bonds were delivered to him by the board of directors; and, besides, he was to hold them in pledge to secure the counsel fees due by the company to Messrs. Gorman & Pettitt. Two of the 47 bonds were those which were redelivered to the company by the Bethlehem Iron Company, it appearing that they had received that much in number more than they were entitled to under their contract; and no claim is made by Mr. Boney on those 2. The real claim, then, is on 45 bonds received as before stated.
James Campbell.
James Campbell holds one of the bonds (No. 305), for which he paid $900 in cash to the company, through the brokerage firm of Townsend & Steelman. That bond is credited on the cashbook with $1,000; but it does not appear when he paid Townsend & Steelman for it. The credit on the books of the company is June 25, 1890.
J. C. Chance, Executor of William D. Jones.
J. C. Chance, executor of William D. Jones, holds five bonds (Nos. 14-16, inclusive, and 243 and 244). As to Nos. 14, 15, and 16, Mr. Jones paid to E. R. Wood $3,045 on a date not given. As to the other two bonds (Nos. 243 and 244), no proof is offered whatever, except that Mr. Jones resided for much of his time at Cape May city, and was somewhat interested in the prosperity of that; city. He appears to be the holder of 30 shares of stock transferred to him April 15, 1890, by Wood,out of the first Issue to Wood, and of another certificate, of 20 shares, issued to him directly, June 23, 1890. There is no entry on the books about any of these transactions.
Annie W. Chearis.
Annie W. Chearis is the holder of bond No. 17, which she bought at public sale of the personal representatives of the estate of Samuel A. Whitney, deceased, paying $500 for it. She was interested in his estate.
Estate of T. H. Whitney.
The estate of T. H. Whitney holds two bonds (Nos. 18 and 19), part of the first issue of 70 to Mr. Wood. T. H. Whitney, deceased, and his brother, Samuel A. Whitney, deceased, were the owners of some real estate in Cape May city, and were interested in the building of these railroads. John P. Whitney, in their behalf, made a bargain with Mr. Edward R. Wood to advance him $3,000 for $3,000 of bonds and $3,000 (par value) of stock of the Philadelphia & Seashore Railway Company; and in pursuance of that agreement, between September 28, 1889, and February 4, 1890, by five different payments, the Whitney brothers advanced to Mr. Wood $2,965, and received from him bonds Nos. 17, 18, and 19, and also 60 shares of stock issued on February 4th, the date of the last payment, being a part of the original certificate for 900 shares issued to Mr. Wood. No. 17 was passed to the estate of S. A. Whitney, and sold at auction, and bought by Mrs. Chearis, as above stated. The aggregate of $2,965 is entered on the cashbook as $3,000 cash from John P. Whitney on stock account, and the 60 shares of stock are charged to Mr. Wood. Each of the payments was charged against the treasurer on the cashbook, precisely as made, and Whitney is credited with the payment of $3,000 in full on account of stock.
Charles E. D'Invilliers.
Charles E. D'Invilliers holds two bonds (Nos. 112 and 113). He paid $2,000 cash, with accrued interest, on the 25th of February, 1890, to the treasurer of the company. He was asked to buy the bonds by Mr. Taylor, who was interested in the road, and who was secretary of the company, and a clerk for Wood. Before buying the bonds, he inquired how much stock had been sold, and was informed that $250,000 had been sold. This witness received no stock as a bonus.
Edward J. Etting.
Edward J. Etting holds six bonds (Nos. 326-330, inclusive, and 439). This witness, on April 28, 1890, contracted to sell and deliver to the Philadelphia & Seashore Railway 93 tons, more or less, of second-hand iron rails, 52 pounds to the yard, at $33 a gross ton, including the splice bars, delivered at Winslow Junction. The rails were shipped on the 6th of May, and the whole bill amounted to $2,715.13. He made a further sale on the 16th of May, 1890, of spikes and plates, to the amount of $78.43. Not receiving his payment at the time agreed upon, he demanded and received five bonds (Nos. 326-330, inclusive), and afterwards he received No. 439. These bonds were delivered directly from the treasurer of the company, but were charged to Mr. Wood,—the first five on July 18, 1890, and the last on August 25th.
Robert S. Hand.
Robert S. Hand holds one bond (No. 389). He received it from Mr. James Taylor about the 1st of September, 1890, and gave him for it six shares of the stock of this railway company, and $700 in cash. The stock he had received as an original subscriber for stock, and had paid for it in full,—$300. Taylor got the bond from Wood for services rendered. The claimant was interested in real estate in Cape May, and Invested his money partly for the purpose of Increasing the value of his property.
Louis L. Hildebrand and Daniel Wolf.
Louis L. Hildebrand and Daniel Wolf, constituting the firm of Hildebrand & Wolf, lock manufacturers, in Philadelphia, are severally owners of real estate in Cape May city. They each hold one bond; that of Mr. Hildebrand being No. 126, and that of Mr. Wolf No. 125. They first subscribed for 20 shares of stock, and paid for it $1,000, in Installments, making the last payment on April 8, 1890, and were then entitled to 20 shares of stock. The certificate was actually made out, but not delivered. Immediately afterwards, Mr. Taylor, the secretary of the railway company, approached them, and asked them to buy a bond for $1,000; and they agreed that, if he would give them a bond for the stock they had subscribed and paid for, they would pay $1,000 more, and take two bonds. In pursuance of that agreement, on the 10th of April, they gave Mr. Taylor a check for $1,000, and returned him the scrip receipts for the payments on account of the stock, and he handed them the two bonds. The certificate of stock was transferred to Mr. Wood. Mr. Wood handed them one bond, and they paid $1,000 to the company, and got one bond direct from it. There is no entry of the payment for the extra bond. The payment is for the stock, and not for a bond of $1,000, and the delivery of the other bond is not entered on the books of the company.
Daniel Ireland.
Daniel Ireland holds bond No. 375. This claimant paid $800 cash for this bond to Theophilus Weeks, and appears not to have been a subscriber for or holder of any stock.
Estate of James Mecray.
The estate of James Mecray holds four bonds (Nos. 50-53, inclusive). These bonds came into the hands of the deceased as follows: Mr. Wood desired to purchase fromhim, for the purpose of the terminal of the Tuckahoe & Cape May Railroad, some real estate which he owned in Cape May city, and bargained with him for a piece of land for a certain sum, to wit, $7,000, and paid him in cash $2,000, and five of the bonds (Nos. 49, 50, 51, 52, and 53). No. 49 Mecray gave to his daughter, Mrs. Mary J. Schellenger, in part discharge of a mortgage which she held upon the property conveyed by him to Wood.
Mrs. Maiy J. Schellenger.
Mrs. Mary J. Schellenger holds four bonds (Nos. 1-3, inclusive, and No. 49). No. 49 she received from her father, James Mecray, in the manner hereinbefore stated; and Nos. 1-3 she received directly from E. R. Wood, upon the sale by her to him of land adjoining that sold by her father. The price of the land was $7,500, and she took $3,000 in three bonds (Nos. 1, 2, and 3).
Bernard McGrane.
Bernard McGrane holds bond No. 368. He bought it of Michael J. Kelly, and gave him $1,000 in cash for it on August 18, 1890. Kelly was president of one of the land companies at Sea Isle City. He received the bond October 22. 1890.
J. C. McNaughton & Co.
J. C. McNaughton & Co. hold 16 bonds (Nos. 332-347, inclusive), as collateral security for a judgment debt of $14,670.33, based on two promissory notes, one of $8,000 and the other of $3,672.63, both made by the company on the 18th of July, 1890. The note for $8,000 contains a pledge of 16 of the first mortgage bonds of the Philadelphia & Seashore Railway. The judgment included a balance of $2,640.96 on open account. The consideration for the whole was railroad ties sold to the Philadelphia & Seashore Railway. The $8,000 note was really given as collateral for the $3,672.63, with the expectation that further ties would be delivered. The bonds were delivered on the 18th of July. 1890.
William E. Potter.
William E. Potter holds three bonds (Nos. 417, 418, and 436), which he received from Mr. Wood as partial security for services as his solicitor and counsel. These bonds were all a part of those temporarily pledged with the Philadelphia Warehouse Company.
Richard C. Souder.
Richard C. Souder holds bonds Nos. 136 and 137. He received them from Edward R. Wood, and in consideration gave a credit of $2,000 on a bond which he held against the Malaga Glass Company, secured by a mortgage. Mr. Wood was the president and principal stockholder of the glass company. The bonds were received and credited on the mortgage the 1st of May, 1890, the mortgage being given to secure $6,000. One thousand dollars had been paid in cash before the 1st of May, 1890. Mr. Souder still holds his mortgage against the Malaga Glass Company.
Anthony Steelman
Anthony Steelman holds bond No. 320. He was a director of the company, and fully familiar with all its transactions from the beginning. He obtained two bonds from Mr. Wood (Nos. 320 and 325). No. 325 he disposed of to Elijah B. Wheaton, and retains No. 320. He paid Wood part cash, and gave him credit for the balance for railroad ties which he bought for Wood, and paid for with his own money. He took the bonds at $950 each, paying in effect $1,900 cash for them. He does not give the details of the transaction.
E. A. Tennis.
E. A. Tennis holds four bonds (Nos. 402, 403, 419, and 435). These, with a good many others, he received from Mr. Wood on account of the contract with the Seashore Railway, signed by Wood, for the building of the Tuckahoe & Cape May branch. He received 33 bonds in all, at the following rates: 12 at par, 10 at 90, and the balance at 80. He received them instead of cash, and before he took them he knew the particulars of the contract between Wood and the company, and that the Tuckahoe road was not a part of the Philadelphia & Seashore road. Tennis did do some work on the main line, and, according to Wood's evidence, he got 13 of the abovementioned bonds for that work; but which 13 does not appear, and Tennis himself does not testify to that fact.
Theophilus Weeks.
Theophilus Weeks was one of the original corporators and directors of the road. He holds two bonds (Nos. 148 and 376). He was a subscriber in the articles of organization to 19 shares, but he actually took 20, and paid $1,000 in cash. He bought bond No. 148 of Mr. Wood, and paid $1,000 in cash. He bought bond No. 376 of Mr. Tennis, and paid him $800 cash for it. At the same time he bargained for No. 375 for Daniel Ireland, and No. 374 for Mr. Wheaton. Although the bargain was made with Tennis, they were Wood's bonds, and the money was paid to Wood.
Estate of Elijah B. Wheaton.
The estate of Elijah B. Wheaton holds two bonds (Nos. 325 and 374). No. 325 he bought of Steelman. No. 374 he bought, through Weeks, of Wood. Wheaton was a stockholder, but not a director, in the railway company, and had nothing to do with the management of the road.
P. M. Wheaton.
P. M. Wheaton holds 10 bonds (Nos. 188-192, 369-373). Five of these he bought of Townsend & Steelman, brokers in Philadelphia,at 95 cents on the dollar. They are entered on the cashbook as being sold at par, May 28, 1890. The other five he bought through Mr. Tennis, and paid 80 cents on the dollar for them. These were undoubtedly Mr. Wood's bonds. This claimant was a subscriber to 20 shares of the stock, and paid cash for it.
Sabina J. Weightman.
Sabina J. Weightman holds one bond (No. 48). She bought it March 18, 1890, of Mr. Taylor, on his recommendation that it was a good investment, paying $1,023.16. The check was drawn by her as executrix, but the money was her own money.
Estate of Mary and Juliana Wood.
The estate of Mary and Juliana Wood holds nine bonds (Nos. 426-434). Their estate is represented by Richard Wood and George Wood, their trustees. These trustees are brothers of the two cestuis que trustent, and also of Edward R. Wood. Edward R. Wood was also one of the trustees, and he borrowed of the estate $12,000, and put these bonds, with others, among the assets of the estate, as collateral, about the 1st of October, 1890. He used the money for the purpose of building the road. These bonds were actually deposited with the assets of the trust estate in the Philadelphia Safe-Deposit Company. With them was a promissory note dated January 1, 1891, for $3,000, signed by Wood, and payable to the order of the trustees of Mary and Juliana Wood. He owed the estate other moneys besides that $3,000 note. Upon an examination it was found to amount to $17,000. Five thousand dollars was paid in cash, and the amount reduced to $12,000. To secure the $12,000 these nine bonds were retained, and four mortgages were given on real estate of Edward R. Wood, and an extension of time given. Deducting $9,000 from the whole amount of the security ($26,500), there remained $17,500 security, the debt being $13,300.69.
Mary K. Wood.
Mrs. Mary K. Wood, the wife of Edward R. Wood, holds three bonds (Nos. 186, 288, and 412). She owned a house in Philadelphia, and mortgaged it, and raised $10,000, and gave it to her husband, for which she took 14 bonds as security. Afterwards, her husband induced her to part with all except the three bonds. Mrs. Wood also holds about 151 coupons, which her husband handed to her, and which she claims to have either paid the holders, or cut off the bonds which he had in his hands, and from her bonds.
Howard Carrow, for complainant.
D. J. Pancoast, for defendants McNaughton & Co. and other judgment creditors.
S. W. Pettitt, of Philadelphia, for defendants Conway, Boney, Physick, and Beckers' Ex'rs.
William E. Potter, for defendants Fourth St. Nat. Bank, the trustees of Wood, Mrs. Mary K. Wood, and others.
S. W. Beldon, for defendants Wheaton, Sea Isle City B. & L Ass'n, and others. S. W. Pettitt and S. W Beldon, for defendants Burnham, William & Co. and Hildebrand & Wolfe.
S. H. Richards, for defendant John P. Whitney.
J. M. E. Hildreth, for defendants Mecray, Mrs. Schellenger, Mrs. Weightman, and others. E. A. Armstrong, for defendant New Jersey Trust & Safe-Deposit Co.
Thomas E. French, for defendants Roebllng, Sons & Co. and other judgment creditors.
J. W. Morgan, for defendant Philadelphia & R. Co. T. B. Harned, for defendants Weeks and others. S. H. & M. P. Grey, for defendants Bethlehem Iron Co., several banks, and others.
William J. Kraft, for defendants Mrs. Chearis and R. C. Souder.
PITNEY, V. C. (after stating the facts).
The mortgage covering the issue of bonds involved in this case is attacked on the ground of the alleged Illegality—First, of the whole scheme which was embodied in the contract of November 27, 1889, between Wood and the company; and, second, of that part of the contract which provided for the building of the Tuckahoe & Cape May branch or extension. The various issues of bonds under the mortgage are attacked, as to a great number of them, because not issued for money actually loaned, and, as to another numerous class, because issued in excess of the amount of cash actually paid in for capital stock at the time of their issue. Further, it was earnestly argued that these defects were such as to render the bonds actually void in the hands of bona fide purchasers and holders.
The general corporation act (Revision, p. 175, § 1, subsec. 4) authorizes every corporation in this state "to mortgage its real and personal estate and franchises." That act applies to all corporations, and includes corporations owning railroads, and, in the absence of any limitation found elsewhere, would seem to give full power to such corporations in the premises. But the act of April 2, 1873 (P. L. p. 88; Revision, p. 925), known as the "General Railroad Law," by its twentieth section (Revision, p. 931), provides as follows: "That any company incorporated under this act, shall have power to borrow such sum or sums of money, from time to time, not to exceed in the whole its paid up capital stock, as shall be necessary to build, construct or repair their road, and furnish all necessary engines and other equipments for the uses and objects of said company, and to secure the repayment thereof by the execution, negotiation and sale of any bond or bonds, and secured by mortgage on said land, privileges, franchises and appurtenances of and belonging to the said company; provided, that said company shall not plead any statute or statutes against usury in any court of law or equity in any suit instituted to enforce the payment of any bond or mortgageexecuted under the provisions of this section; and provided further, that said bonds shall constitute a first lien on the railroad, its cars, real estate and franchises, and the proceeds of said bonds shall be used for the purpose of aiding in the construction of said railroad." A provision somewhat similar to this in the Massachusetts general railroad law was held by the supreme court of that state, in Com. v. Smith, 10 Allen, 448, to be of itself prohibitory of another mode of mortgaging, upon the principle "inclusio unius est exclusio alterius." It was conceded in that case that the railroad company might alien and mortgage its property without legislative authority, but that such power did not Include the right to alien and mortgage its franchise. In my opinion the intention of the statute was to regulate the general power of mortgaging by the corporation, and to limit it strictly to borrowing money upon its mortgage bonds, and to the amount of cash that had been paid in on account of subscriptions to its capital stock. Water Co. v. De Kay, 36 N. J. Eq. 548. That such was the intention is set at rest by the proviso added to it by the legislature in 1878 (P. L. p. 20; Supp. Revision, p. 824), amending the section just above quoted by adding these words: "And provided further, that if any person or persons shall issue such bonds to any greater amount than the amount that, at the time of such issue, shall have been actually paid up on the capital stock of such railroad, he, she, or they shall be guilty of a misdemeanor, and shall be punished by a fine of not more than five thousand dollars, or by imprisonment at hard labor not more than three years, or by both, at the discretion of the court." That bonds secured by a mortgage, and issued contrary to the provisions of the statute above cited, are void, as between the parties to the transaction, seems to be thoroughly settled in this state. State v. Board of Chosen Freeholders, 39 N. J. Law, 632; Crampton v. Zabriskie, 101 U. S. 601; Waterworks Co. v. Read, 50 N. J. Law, 665, 15 Atl. 10. The decision in the federal supreme court seems quite in point, and renders unnecessary any discussion here. An elaborate argument, sustained by a formidable array of decisions by the courts of our sister states, was made against this result, of which decisions I deem it necessary to say only that they did not deal with our statute, and cannot affect the rule here established. The object of this enactment is manifest. It is to insure a certain measure of value to securities of this nature, issued by railroad companies organized under the general law of this state. The officials of a railway company incorporated under this act, if possessed of common honesty, will apply all moneys received by them on account of stock and bonds to the construction and equipment of the road. Such is clearly their duty; and if an equal sum is derived from each source, and devoted honestly to such use, the result will be that the holder of the mortgage bonds will have for his security property which has actually cost in cash double the amount of his debt. That he should have such security was the intention of the legislature, and any device which leads to a different result is an evasion of the law. Whether the railroad, when so finished and equipped, will be actually and intrinsically worth more or less than its cost, depends upon a variety of facts and circumstances, which each investor must take into account, and judge of for himself. The road, when built, may turn out to be a paying road, or it may not. The result, in that respect, depends on the amount of business it has to do, and the prices which it is able to charge, and the original cost of the road. It is proper, however, to remark that the mere fact that persons may be found who will take and pay for in cash half the cost of a proposed railroad, subject to a mortgage for the other one-half of such cost, is some guaranty to the persons who advance the money upon the mortgage that the enterprise will prove successful, and this guaranty the legislature intended to give by the statute just quoted. The legislature has not forbidden the giving of a mortgage upon a railroad not yet built,—upon property not yet acquired. On the contrary, I think the language of the section in question plainly contemplates such action. Nor do I think there is anything in the policy of the law which forbids it. If the officers of the company are careful to issue the mortgage bonds no faster than actual payments are made on account of subscriptions to capital stock, and then apply the money so received honestly to the construction of the road, there can be no serious objection to executing the mortgage in advance of the construction. The parties advancing their money on these securities have full opportunity to know by actual observation just what has been done, and is being done from day to day. The line of the railroad, as filed in the office of the secretary of state, is open to their inspection, and they thus can protect themselves in that respect.
The mortgage Itself contains nothing to show that it was in any respect illegal, or that an illegal issue of bonds under it was contemplated. On the contrary, it recites the resolutions of both the stockholders and the directors, declaring the purpose and intention to be to issue the bonds for borrowed money only, and to an amount not to exceed the amount at the time actually paid in for capital stock, and to apply such moneys to the construction of the road. In fact, the mortgage itself, on its face, contains what amounts to a solemn promise on the part of the corporation to observe the law in this respect in letter and in spirit.
The mortgage in this case, I conceive, for these reasons, to have been a good and valid contract of pledge at the time it was given, as between the railroad company and future holders of its bonds, if no subsequent infractionof the law just cited had taken place and no fraud had been practiced under it Both these are charged.
First, it is said that it was part and parcel of the whole scheme, as embodied in the contract of November 27, 1889, made between the company and Mr. Wood, that the stock and bonds should be issued for a greater amount than was actually paid in. The case shows clearly that Mr. Wood was the projector of this road. He and Dr. Physick, through Deery, subscribed for 1,254 of the 1,400 shares of its stock subscribed by the articles of association. He (Wood) was its first secretary and treasurer, and its moving spirit, and he resigned and severed his apparent connection with the direction of the road just before the contract was entered into; but he still retained substantial control, and had for several months the privilege of attending the meetings of the board of directors. The contract was under consideration, and its terms substantially agreed on, November 20th, and resolutions passed to execute it on the same day that Wood resigned. The resolutions authorizing the mortgage were made November 25, 1889, and the contract was made and executed November 27th. That contract gave Wood substantially all the stock and bonds ($900,000 of each) for building the two roads; for he was, under it, entitled absolutely to the proceeds of all bonds sold and stock issued by the company to other parties. The circumstances did not warrant the supposition that a very large part of this $900,000 of stock would be taken by outside parties. On the contrary, it is plain that the contemplation of the parties was that Mr. Wood was to become the substantial owner of the road, so far as that ownership was represented by issues of stock, and the contract, in effect, gave him such control; and it was conceded to and exercised by him up to the 1st of September, 1890. The contract did, indeed, limit him, during its construction, to the receipt of $10,000 of bonds and $10,000 of stock to each mile of road built; but it is clear that when the road was finished to Sea Isle City, and equipped, he was to be entitled to all the bonds and stock up to $550,000 of each, not issued to other parties, and he was also entitled to the proceeds of such as should be so issued to other parties; and after the Cape May branch was built he was entitled to the balance, of $350,000 each, of the stock and bonds. Now, if there had been no stock or bonds Issued to any person but Wood and the directors who made the contract, and those bonds had not been made negotiable and the stock assignable, so that they might never have come into the hands of innocent holders, I see no harm in such a contract, since no person could be injured but the Immediate parties. If Mr. Wood built the road wholly with his own money, and owned it, nobody else was concerned in the size of the mortgage he saw fit to put upon it to himself, and no one but the individual directors were interested in the question of how much of their own money they chose to nominally Invest in stock and bonds, as a disguise for a present to Mr. Wood for building the road. But such was not the case, and we must consider the other element actually present, namely, the fact that the innocent public were expected to invest, and did actually invest, in both the stock and the bonds; the latter being declared to be issued in pursuance of, and with the guaranty of, the statute of this state, above cited. Now, the intrinsic demerit of this contract lies in the fact that there is an entire absence of any serious attempt to limit the aggregate amount of the stock and bonds to be issued, under its provisions, to the actual cost of the road and equipment; nor was there any sufficient detailed specification of the character of the work to be done, and of the materials to be furnished. The width of the right of way to be acquired was not fixed. The amount of land to be acquired for terminal facilities at each station was not fixed. The number of ties to the mile was not mentioned. No sidings or facilities for watering engines were provided for. The size and character of the station buildings were left to Mr. Wood's judgment. No provision was made for equipment for the Seashore Line, unless it was finally extended to Cape May city. No provision was made for any telegraphic equipment. Wood, under the contract, secured the right to build the Cape May branch, but was not obliged to do so. It is impossible to read this contract without observing how completely the company was left at Wood's mercy, and the proofs show that he exercised complete control until about September 1, 1890. The line to Sea Isle City, the terminus of the Seashore Line proper, was a fraction less than 40 miles in length, and with sidings a trifle less than 42 miles; and, for building it, $1,100,000 in stock and bonds was contracted to be given. The proofs furnish materials from which a fair estimate can be made of what each of the roads, fully equipped, ought to have cost. We may get at it in two ways: First, by an ascertaining what was the amount actually expended upon them; and, second, what it would cost to put them in good running order, and equip them. The actual amount of cash paid by the company and by Wood for construction and equipment of the main line to Sea Isle City, including the amount paid Hobart & Co. under the Hobart contract, is $224,751; the amount of unpaid bills for the same line is $202,853; making a total of $427,604—and this expenditure left the road in fair running order. The expert's estimate of the cost of putting it in complete running order was $23,520, and for its equipment $126,500; making a total of $577,624,—a trifle more than the amount of bonds to be issued against it The proofs show that the cost of grading and bridges on the Cape May branchwas considerably less than on the main line, and that a trifling additional expense for equipment would complete it for use in connection with the other road; so that $300,000 is liberal for the cost of the Cape May branch. An estimate made up from the opinions of the experts sworn at the hearing, in connection with the bills for work done ami materials furnished, distributes this cost as follows:
| Main Line. | |
| Cost of grading, estimated at $1,500 per mile | $ 60,000 |
| Cost of the bridges (actual) | 29,230 |
| Ties, at 2,600 to the mile | 60,000 |
| 4570 tons of steel rails, 110 to the mile | 137,000 |
| Other hardware and fittings | 30,000 |
| Laying and finishing | 40,000 |
| Station facilities, 10 stations (large estimate) | 20,000 |
| Right of way,—most of it was given,— (actual) | 2,000 |
| Equipments,—five locomotives | 40,000 |
| 20 passenger coaches | 60.000 |
| Five baggage cars, 40 freight, construction, and other cars | 40,000 |
| Incidental expenses | 31,770 |
| In all | $550,000 |
—Just the amount of the bonds issued for this line.
| Cape May Branch. | |
| The Cape May branch, if operated in connection with the main branch, would require one additional engine and ten coaches | $ 60,000 |
| 28 miles of road, including sidings, upon which there were few bridges and stations, and very light grading. | 250,000 |
| $ 310,000 | |
| Add for contingencies | 40,000 |
| $350,000 |
—Milking altogether, for both roads, $900,000, just the amount of bonds to be issued for both lines.
Mr. Wood, in his dealings with the directors, made up monthly statements of the amount of his work done on the main line, based, not on specifications and measurements, but on estimated proportions which the work already done on both lines bore to the cost of the whole job, to be paid to him in stock and bonds, and for that purpose put separate estimates on the different classes of work, high enough to make the aggregate rate reach $1,300,000. Thus, in his estimate of February 20, 1890, he makes the excavations $155,000, or $2,380 per mile for 65 miles (both roads),— an overestimate of above $1,000 a mile. For bridges he makes an estimate of $80,000. The actual cost of the bridges on the main line was $29,230, and the total estimated cost for both lines was $35,000. His estimate for ties is $200,000, which, at GO cents per tie (a large price), would purchase 333,333 for 70 miles of road, counting the sidings. The actual number used in 70 miles is 190,000, which leaves a surplus of 143,333 ties. For rails, he estimates $445,000, or $0,350 per mile, while the actual cost is 110 tons per mile, at $30 a ton, or $3,300,—an overestimate of $3,000 per mile. For fittings, he estimates $76,000, or $1,085 a mile, while the actual cost is about $750. For tracklaying and finishing,: he estimates $98,000, or $1,400 per mile, while a fair estimate would be $800. For the right of way, he estimates $60,000 or $1,000 per mile, while the actual cost was trifling, most of it having been given, and only $2,200 were paid for the whole right of way from Winslow Junction to Sea Isle City. For terminal lauds, I he allows $120,000. The actual cost was but trifling. For stations and so forth, he estimated $60,000, while $30,000 would be a liberal estimate. In his estimate of August 1, 1890, he increased the estimate for excavations from $155,000 to $185,000, and that of bridges from $86,000 to $100,000. He increased the estimate for ties from $200,000 to $235,000, and for rails from $445,000 to $500,000; the fittings, from $76,000 to $80,000; tracklaying, from $98,000 to $160,000. In this estimate he includes nothing for right of way or terminals, and reduces the cost of stations from $60,000 to $40,000. The inflated character of these items is manifest. No serious attempt was made to show that these roads would have cost, if carefully built, for prompt pay, more than $900,000, or $550,000 for the Sea Isle road and $350,000 for the Cape May road, both fully equipped, to be operated as one road. Now, this is just the amount of the mortgage bonds to be issued and delivered to Wood for doing this work; to be issued to him under the solemn guaranty of a statute of the state of New Jersey, and with a deliberate statement on their face that they were issued no faster than an equal amount of cash was paid into the company on account of stock subscriptions actually paid, which cash was, with the proceeds of the sales of these bonds, to be honestly used for the construction of the road. In fact, in view of the dealings between Wood and Physick and Wood and Boney, and of the frank statement and elaborate argument of the learned counsel who supported this transaction, it is quite plain that these sums of $550,000 and $350,000 were fixed at the probable cost of each road and their joint equipment. Now, I think that such a contract was a fraud on the act of the legislature, and the issuing of stock and putting out of bonds under it a fraud on those who took either without notice. It is clear that if the issues of bonds and stock were made as contemplated, and the bonds were held to be protected by the mortgage, the stock would be of little or no value, and the bonds would not have more than half the security contemplated by the law, and provided for and promised on their face. I therefore think that all the persons who are participants in the transaction—the directors, on the one hand, and Wood on the other—are chargeable with being participants in the fraud and breach of the law, and debarred, upon plain principles, from deriving any benefit from it, as against innocent sufferers by the fraud and breach of thelaw. And I come to this conclusion quite independent of another point made against this contract, viz. that it provided for the building of the Tuckahoe & Cape May branch, and was so far ultra vires the contracting railroad company.
The proofs show clearly that all bonds issued, except the first 100 or thereabouts, were so issued in excess of the amount at the time of their issue paid in directly on account of capital stock. An attempt, however, was made to meet this clear result by showing that Mr. Wood had, from time to time, and finally, done work and furnished materials under his contract largely in excess of the amount which he had been paid by the company, or which the company had paid on his account, and that it was plain that for this excess he was entitled, under the contract, to a credit and a corresponding issue of stock; or, in other words, that the excess of his work and materials should be counted as so much paid in on account of stock. In deference to the earnestness with which this view was presented, I have made as careful and thorough an examination as I could of the proofs in the cause, including the mass of checks of both Wood and the railway company, and vouchers for paid claims of every' description that were produced,—and all were produced,—with a view of ascertaining how much foundation in fact there might be for this contention. In dealing with this question it is to be observed that Mr. Wood was not, and clearly is not, entitled to credit on either stock or bond account for the whole amount actually put on either of the roads in labor and materials, for the simple reason that such work and materials were not yet paid for in full, and the railway company stood liable to pay for them. The subcontracts and purchases were made in the name of the railway company, and it was liable as paymaster. It would be absurd to issue certificates of paid-up stock of the company to Mr. Wood in payment for work done and materials furnished which the company still remained liable to pay for. And here is the radical error into which the counsel arguing in favor of this position have fallen. They have claimed credit for Mr. Wood for all the work done and materials furnished upon the roads, whether paid for or not, in the face of claims for several hundred thousand dollars put in against the company, and for which the company is liable. All that Mr. Wood could possibly claim credit for in the way contended for was the amount actually paid out and expended in the construction of the road, the object being to ascertain the amount of the actual assets of the company at any particular time desired, in order to ascertain whether or not there was at that time an excessive issue of bonds. In order to arrive at this, we must take the aggregate amount actually paid, whether by the railway company or by Mr. Wood, on construction account, and add thereto the cash on hand and that deposited with the state treasurer at Trenton. Mr. Wood cannot complain of this mode, as all the moneys of the company were disbursed on his order, and under his immediate supervision, and they presumably went to the construction of the road, and in point of fact the vouchers show that they actually did. Having ascertained this value at the dates of the several issues of bonds, we can compare it with the amount of bonds so issued. Unless the amount so ascertained shall be more than double the amount of the corresponding bond issue, the stock cannot be considered as paid up to an amount greater than the issue of bonds to that date; that is to say, the total payments must equal both stock and bonds issued to date, or there will be no surplus to make the issue of stock greater than the issue of bonds. With this premise I proceed to give the result of my examination, giving first the amount of the assets, counting only what had been paid out on account of the main line to Sea Isle City, and the money in cash in hand on account of that line:
| 1890. Mar. 1. No. of bonds Issued to date. 113. | |||
| Value back of bonds to date should be | $226,000 | ||
| Paid out to date a/c construction | $45,232 00 | ||
| Cash at state treasury | 30.000 00 | ||
| Cash on hand | 11.131 86 | ||
| 11.131 86 | 86.363 | ||
| Deficiency | 86.363 | $189,637 00 | |
| Ap. 28. No. of bonds issued to date, 158. | |||
| Value back of bonds to date should be | $316,000 | ||
| Paid out to date a/c construction | $90,108 00 | ||
| Cash at state treasury | 80,000 00 | ||
| Cash on hand | 110 00 | ||
| 110 00 | 120.218 | ||
| Deficiency | 120.218 | $195,782 00 | |
| June 25. No. of bonds issued to date, 805. | |||
| Value back of bonds to date should be | $610,004 | ||
| Paid out to date a/c construction | $159,044 00 | ||
| Cash at state treasury | 10,0110 00 | ||
| Cash on hand | 2,301 00 | ||
| 2,301 00 | 171,846 | ||
| Deficiency | 171,846 | $438,666 00 | |
| Ausr. I. No. of bonds issued to date. 364. | |||
| Value back of bonds to date should be | $728,000 | ||
| Paid out to date a/c construction | $173,760 00 | ||
| Cash on hand | 73 00 | ||
| 73 00 | 173,833 | ||
| Deficiency | 178,833 | $554,167 00 | |
| No. of bonds issued under Mr. Wood's control, 465. | |||
| Value back of bonds to date should be | $930,000 | ||
| Total paid by Wood & the Co. a/c construction | $197,495 00 | ||
| Cash on hand | 503 00 | ||
| 503 00 | 197 998 | ||
| Deficiency | 197 998 | $732,002 00 |
This brings us to the end of Wood's administration.
During this period considerable payments were made both by Mr. Wood and by the railway company directly on account of the construction of the Cape May branch or extension. This was clearly unwarranted in law, and an unlawful diversion of the company's funds, which did not entitle Wood inlaw to a credit on account of payments for stock.
Waiving this difficulty, I will bring into the problem the various totals of payments on account of the extension, and with the following result:
| 1890. Mar. 1. Deficiency on Phila. & Sea Shore Ky. by above statement | $139,037 | ||
| Paid a/c T. & O. May Ry. for construction | $21,601 | ||
| Cash at state treasury | 34,000 | ||
| 34,000 | 55,561 | ||
| Total deficiency both roads | 55,561 | $84,076 | |
| Ap. 28. Deficiency on Phila. & Sea Shore Ry. as above | $195,782 | ||
| Paid a/c T. & C. May Ky. for construction | $43,575 | ||
| Cash at state treasury | 24,000 | ||
| 24,000 | 67,675 | ||
| Total deficiency both roads | 67,675 | $128,207 | |
| June 25. Deficiency on Phila. & Sea Shore Ry. as above | $438,655 | ||
| Paid a/c T. & C. M. Ry. for construction | $65.200 | ||
| Cash at state treasury | 12,000 | ||
| 12,000 | 77.200 | ||
| Total deficiency both roads | 77.200 | $361,465 | |
| Aus. 1. Deficiency on Phila. & Sea Shore Ry. as above | $554,167 | ||
| Paid a/c T. & c. M. Ry. for construction | $68,500 | ||
| Cash at state treasury | 12,000 | ||
| 12,000 | 80,500 | ||
| Total deficiency both roads | 80,500 | $473,607 | |
| End of Wood's time, deficiency on Phila. & Sea Shore Ry. as above | $732,000 | ||
| Paid a/c T. & C. M. Ry. for construction | $70,815 | ||
| Cash at state treasury | 12,000 | ||
| 12,000 | 82,315 | ||
| Total deficiency both roads | 82,315 | $640,087 |
The result is that all the Wood issues, except the first 100, were overissues, and invalid as between the parties. The fraudulent and illegal character of the transaction above pointed out did not, however, appear on the face of either the mortgage or the bonds issued under it. Those, as already shown, were honest and lawful on their face, and all persons taking them for value without notice of the defect above pointed out had the right to rely upon the statement they contained, and to suppose that they were in fact issued no faster than the law allowed. The defense that they were issued in violation of law depends upon facts within the knowledge only of the officers of the company. They were not of such a character as that ordinary purchasers of the bonds were chargeable with notice of them. The case is clearly distinguishable from the large class relied upon in the argument, where the legislature has prescribed a condition precedent, the existence of which is a matter of record, open to all. The case of Water Co. v. De Kay, 36 N. J. Eq. 548, decided by the court of errors and appeals, is in all its aspects precisely in point, and the very reasons stated by the learned judge who spoke for the court in that case, as reported on pages 563-568, apply here, and render any further discussion quite unnecessary.
In determining who are bona fide holders for value without notice, I feel constrained to follow the rule laid down in Allaire v. Hartshorne, 21 N. J. Law,665, which was mentioned with approval in Armour v. McMichaeL 36 N. J. Law, 92, and to include as bona fide holders such as have taken bonds as security for previously existing debts without notice, and also without any present parting with property or losing any right of action. The distinction, in this respect, between negotiable commercial instruments (with which must now be classed negotiable bonds secured by mortgage) and equitable or unrecorded legal rights in land and unuegotiable choses in action, was pointed out by Chief Justice Green, in Allaire v. Hartshorne, 21 N. J. Law, 605, at 668, and has since been recognized by the courts whenever the question has arisen.
In passing upon the validity of the several batches of bonds in the hands of their several holders I will deal with the first 405 issued during Wood's control The application of this rule will, upon the facts, include and allow the following claims: Burnham, Williams & Co., Fourth Street National Bank, Manufacturers' National Bank, Commonwealth National Bank, Seventh National Bank, New Jersey Trust & Deposit Company, Central National Bank, First National Bank, Millville National Bank, Philadelphia & Atlantic Railroad,—that is, the Reading Railroad,—Philadelphia Warehouse Company (the dividend not to exceed the amount due, the receiver to have the option to redeem the bonds and cancel them). Diamond State Iron Company, Louis Blank (upon condition that he subrogates the receiver to his rights against the estate of Becker), James Campbell, Annie W. Chearis, Charles E. D'Invilliers, E. J. Etting, R. S. Hand, Hildebrand & Wolfe, Daniel Ireland, estate of James Mecray, Mrs. Schellenger, Bernard McGrane, J. C. McNaughton & Co., estate of E. B. Wheaton, P. M. Wheaton, S. J. Weightman. I feel constrained to disallow the claim of Dr. Physick on the 25 bonds received by him from Wood as a bonus for paying for the 500 shares of stock for which he had subscribed. He was a party to the whole scheme from the beginning, and stands in the same position as Wood. Besides, he was an active director, and is chargeable with an actual knowledge of all these transactions. He was elected a director November 20, 1889, and was present on November 25, 1889, when the Wood contract was authorized, and attended all subsequent meetings. It is impossible to suppose that he did not know that, if these bonds were issued according to law,—that is, no faster than actual cash was paid for stock,— and the proceeds were honestly applied to the construction of the road, Mr. Wood would hardly be willing to make him a present of a first-mortgage bond of $1,000 for each $1,000 he had paid in on his stock subscription. The transaction speaks for itself, and I am entirely satisfied that Dr. Physick knew that the issue of bonds alone covered the entire probable cost of the road and equipments. Further, I am satisfied that the transaction between him and Wood took the share it did for the purpose, among others, of using his example as a subscriber to the stock for the purpose of inducing innocent parties to makesubscriptions and pay for stock. At first I was inclined to think that as to 17 of the bonds— Nos. 54-70—delivered to him by Wood be was entitled to claim that they were not in fact overissues, being part of the first issues of 70 bonds to Wood, which were legalized by the early payments of cash on account of stock, and therefore intrinsically good and valuable in everybody's bands. But upon reflection I am unable to adopt that view as between Dr. Physick and other innocent holders of the bonds. He was, as before observed, party to the original arrangement by which the holders of these bonds were to be deprived of the full measure of the benefit of payments for stock to which they were entitled. If the two roads had been honestly built and equipped for a cost fairly represented by an equal amount of stock and bonds, that amount would not have exceeded $450,000 of each, giving the bondholders fair security. Instead of this, he assisted in carrying through a plan by which their security would be reduced at least one-half. This consideration is of itself sufficient to deprive him of the right in this court to stand on an equal footing with the victims of what may be justly called his fraud. There is another consideration which weighs against him. He gave nothing for these bonds. He openly subscribed, through his figurehead, Deery, for 500 shares of stock, and when he paid the company for them he simply discharged his just and legal obligation, and was not entitled to any compensation for so doing. Such a fulfillment of his contract cannot form such an equitable consideration for these bonds as to make him a bolder for value in any sense. For that reason he can have no better standing as their holder than Wood had. Now those 70 bonds were not issued, in the first place, to Wood for cash advanced. The books show that they were simply delivered to him December 10, 1889, without any entry in the books except in the bond account. The first entry on the cash book and journal is February 20, 1890, when Wood is charged and bond account credited with the amount of them. Wood is on the same date credited with $306,455 on construction account, being the amount of the inflated estimate of his work bearing that date, which I have before set forth. On the 14th of February, Dr. Physick paid an installment on his stock subscription of $5,000, which made the total paid by him to that date $17,500—$500 more than the 17 bonds he received from Mr. Wood on that date; and it is clearly inferable that the 17 bonds now in question were handed him by Wood February 20th. That would be their first actual issue. Now, if the first 70 bonds are counted as having been issued on December 10th, then, on February 6th, as has been previously shown, there was an overissue, by delivery of bonds to outside parties, of about $10,000. But if these 17 bonds are not counted as having been issued until February 20th, then there was no overissue on February 6th, and the first overissue was in these very 17 bonds; but it would not be great, for in the meantime $8,760 had been paid in on stock account. Subsequently there were very large overissues, and it is clear that Wood is not entitled to make any claim on any bonds. Further, the evidence does not satisfy me that at the time these 17 bonds were charged to Wood and delivered to Dr. Physick their amount was honestly due to Wood from the company. In order to show such indebtedness, credit must be given him for the Inflated estimate of work done, before referred to. I can form no reliable estimate from it, or from the books of the real amount of work done at that time, and paid for. As before shown, the fact that it was done does not entitle him to credit unless it was also paid for. But, further, the evidence satisfies me that Wood had very little, if any, free capital to invest in this enterprise, and he was obliged, from the start, as before stated, and throughout, to operate in the name and on the credit of the company. He took full advantage of the clause in the contract giving him that power. He had assumed to bind the company in a contract, quite beyond its power, to build the Cape May branch, and had used the money of the company to pay to the state treasurer the necessary deposit for the organization of that road, and had applied those moneys towards the cost of its construction. In all this he was, in effect, acting as the agent and trustee of the company. This aspect of the affair, and the circumstances, rendered it, in my judgment, a positive wrong for him to give away the assets of the company. These bonds, though they may have been nominally his property, were, in morals, and I think in equity, the property of the company. Certainly he had no right to give them away, or to devote them to any use except the building of the road; and quite as certainly, if they were now in his possession, he could not be permitted to found upon them a claim to share in this fund as against innocent and bona fide holders, and, if he cannot do so, then I am unable to see how Dr. Physick can. I will consider his claim to the 43 bunds, part of those issued to Hobart & Co., further on.
J. C. Chance, Executor of W. D. Jones.
J. C. Chance, as executor of W. D. Jones, holds and presents five of the bonds. Of these Nos. 14, 15, and 16 were bought from Mr. Wood, and paid for in cash at par and accrued interest by Jones to Wood, probably about March 1, 1890. As to them the claimant is entitled to a dividend.
The other two—Nos. 243 and 244—are clearly a part of an overissue, and therefore illegal and void, except in the hands of a bona fide holder for value. No proof is offered as to what, if anything, was paid for them, or under what circumstances they come to Jones' possession. Upon this stateof the case I do not see how any claim can be allowed upon them. Their illegality being proven, the burden is thrown on the holder of showing that he paid value for them without notice. This seems to be thoroughly settled in this state. Duncan, Sherman & Co. v. Gilbert, 29 N. J. Law, 521; Fifth Ward Sav. Bank v. First Nat. Bank, 48 N. J. Law, 513, 517, 7 Atl. 318; 2 Rand. Com. Paper, §§ 566-568, 1027, 1028; Holcomb v. Wyckoff, 35 N. J. Law, 35. The reason of the rule is thus stated by Mr. Justice Depue at page 39, where he says: "The notes sued on were fraudulent and void in the hands of Farrington. He could not have enforced them against the maker. By proof that they were obtained by fraud the burden was cast on the plaintiff of showing a consideration for some one of the subsequent transfers that will defeat the maker's equity. What Bryce paid for the notes does not appear. The probability is that he was a mere agent to effect a disposition of them. In the absence of proof that he gave value, the inference is that he was a holder without value paid. As the case stands with respect to Bryce, he could not have recovered on them at all. He therefore had no title which he could transfer by a sale to the plaintiff, and until they reached the plaintiff's hands the notes continued to be affected by the vice which made them void in the hands of the original holder."
Richard C. Souder.
Richard C. Souder is entitled to a dividend upon his two bonds upon condition that he shall, upon proper terms, subrogate the complainant to his right in equity to revoke the credit he gave for them on his mortgage, and to recover the amount due irrespective of that credit. The bonds are a part of the overissue.
Anthony Steelman.
Anthony Steelman, by reason of his connection, as director, with the company, and his familiarity with its affairs, is chargeable with notice of the illegality of his bond by reason of its being an actual overissue; and he is also chargeable with being a party to the illegal scheme which took shape in the contract of November 27, 1889, and he is therefore not entitled to any dividend.
E. A. Tennis.
E. A. Tennis is not entitled to any dividend on his bonds, by reason of his familiarity with the affairs of Wood and the company, and the mode in which the roads were being built. He is chargeable with knowledge that his contract made with the railway company through Wood was beyond the power of the company, and that payments to him were diversions of the funds of the company from their true purpose. It does not appear which of his bonds were paid to him on account of work done on the main line.
Theophilus Weeks.
Theophilus Weeks is chargeable, being a director, with notice of the illegality of his two bonds. He bought No. 148 from Mr. Wood and paid $1,000 for it; and he also obtained No. 376 from Wood, through Tennis, for $800. He is not entitled to a dividend.
The Trustees of Mary and Julianna Wood.
The trustees of Mary and Julianna Wood are, as I think, entitled to be allowed a dividend on their bonds upon condition that they subrogate the complainant, upon equitable terms, to the right they have to collect the whole of their mortgage from E. R. Wood.
Richland Improvement Company.
The Richland Improvement Company is entitled to a dividend on its bonds, not to exceed the amount paid for them,—$112.97, —the receiver to have the option to pay that sum and cancel the bonds. I arrive at this conclusion upon the authority of Vice Chancellor Van Fleet upon the claim of the two banks in De Kay v. Water Co., 38 N. J. Eq. 158, at page 160. The same rule gives the two building associations—Sea Isle City Lot & Building Association No. 3 and Sea Isle City Lot & Building Association No. 4—dividends on their bonds. Some, but not all, of the directors and stockholders in these associations were directors in the railway company. They seem, however, to have paid for their stock and bonds at par in good faith.
Estate of George H. Becker.
The estate of George H. Becker holds 10 of the Wood issue of bonds, the numbers of which show that they were overissues. Becker was a director from the start, and was familiar with the affairs of the company, and is chargeable with notice of the illegal issue of bonds. Moreover, there is not a particle of proof how or from whom he obtained them, or what, if anything, he paid for them. He cannot, therefore, be allowed for them.
Morris Boney.
Morris Boney holds 18 of the Wood issue. Of these he received 7 from Wood in payment of $5,000, previously advanced by him to Wood to help make up the deposit of $70,000 with the state treasurer. Three of the 7 are part of the first 70 issued. At first I was inclined to think that he might be allowed a dividend upon those 3,—Nos. 45, 46, and 47,— but upon reflection I am satisfied that his connection with the whole scheme, the character of which I have already enlarged upon, ought to debar him from even so small a share. The remaining 4 of the 7 taken by him from Wood are clearly overissues, of which he is chargeable with notice. The remaining 11 of the 18 which he received from Wood he received under circumstances precisely similar to those under which Dr.Physick received his 25, and Mr. Boney must fail for the same reason that Dr. Physick failed.
Estate of T. PL Whitney.
T. H. Whitney was not a director, and there is no proof that he had any knowledge of the illegality of the transactions in question, except what arises from the fact that he got $3,000 worth of bonds and $3,000 worth of stock for the payment of $3,000. This is suspicious, but, upon reflection, I conclude it is not sufficient to debar him. He may have his dividend.
With regard to the three bonds held by William E. Potter, the evidence shows that they were received by him from E. R. Wood as the best security that he could get for professional services previously rendered by him to Wood in the suit of Wood v. Boney. Mr. Potter, with honorable frankness, admits that he had previously become acquainted with the facts relied upon to render these bonds invalid, and hence could not occupy the position of a bona fide purchaser for value without notice. These circumstances compel me, with regret, to come to the conclusion that he is not entitled to a dividend. I say "with regret" because I can see no difference in equity between his standing and that of other parties,—say Burnham, Williams & Co., who received bonds as security for a previous indebtedness without giving up anything for them, either in money or other valuable thing, or the postponement of the right of suit. But the rule as laid down in Allaire v. Hartshorne gives them the position of bona fide purchasers, provided they did not have notice of the defect in question. Mr. Potter did have notice, and therefore cannot participate in the fund.
Mrs. Mary K. Wood is entitled to a dividend upon the bonds held by her, and upon so many of the coupons handed to her by her husband as were detached from bonds upon which dividends are to be made, and which coupons fell due after the actual issue of the bonds, and were actually paid for by Wood with his own money, and not with the money of the company.
There remains to be disposed of the batch of 297 bonds, viz. Nos. 406-762, issued by the directors in the spring of 1891. Of those, 50 went to the Bethlehem Iron Company; 200 to Hobart & Co., and through them to Conway; 45 to Boney; and 2 remain with no claim made on them. With the 200 delivered to Hobart & Co. there were issued 5,040 shares of stock. The certificate for this stock was made out to Hobart & Co., and, with the 200 bonds, was handed to Conway, presumably with an assignment on the back of the certificate. Counsel for the present holders of these bonds at the hearing reduced their claim to a dividend on 27 or 28 bonds, representing the money actually expended upon the road by Hobart & Co., and paid for out of moneys advanced by Conway, the value of which expenditure was estimated by an expert at about $21,371. At first I was Inclined to think that the transaction might be shaped into a payment of say $14,000 on account of stock and $14,000 on account of bonds, and a dividend allowed on 14 bonds. The basis in equity for this proposed judicial contrivance was the fact that the other bondholders have received the benefit of the expenditure made in consideration of this issue in an increased value of the road when sold, and that it is no more than fair that they should be compelled to admit these benefactors to share in this benefit. But, upon reflection, I am unable to adopt this view. To do so would be to give judicial sanction to a criminal transaction, and to the guilty parties a benefit from it The same equity which is so relied on exists in favor of the numerous other persons who have done work and furnished materials for the work without security. This issue of the bonds was absolutely void, and Boney, Physick, and Becker are each and all clearly chargeable with notice of it. In fact, it was their criminal act which made these bonds void. It would be going contrary to every principle of judicial action to give either one of them the least benefit of their own criminal conduct. Moreover, as they were each more or less responsible for the illegal and fraudulent character of the whole scheme which resulted so disastrously to the innocent holders of the other bonds, it is, at most, but a grim justice that their illegal attempt at the last stage of the affair to gain an equal footing with those who paid par for other bonds, by paying a much less sum, should result in a benefit to those they intended to overreach. I would gladly make an exception in favor of Mr. Conway if I could see any solid ground for it, since he was not a director, and not so familiar as the others with the previous history of the enterprise. He was, however, aware of the desperate condition of the finances of the concern at the time he intervened, and he could not have mistaken the intrinsic nature of the transaction which he consented to carry through. The facts, spoke for themselves. He received a large certificate for stock and a large batch of bonds, which were issued without any foundation whatever, and could have no validity except what arose from the money which he advanced upon them. He is, moreover, clearly chargeable with notice of the terms of the law which forbade the doing of what was done. Granting that he was ignorant, and that he was misled by bad advice, still, the maxim, "Ignorantia legis neminem excusat," applies, and he must bear the consequences. If these people wished to have the road finished, and to be secured for the money necessary to accomplish it they should have applied to the court for its direction and assistance. Instead of that, they took the risk, not only of disregarding the restraining order of this court, but of breaking a general and wholesome law of the state. The same consideratlonapplies to the bonds held by Mr.
Boney to secure him for the expenses he incurred in operating the road. The result is that none of the bonds numbering beyond No. 465 will be allowed, except those held by the Bethlehem Iron Company.
The position of the Bethlehem Iron Company and the Diamond State Iron Company, with regard to their several bonds, differs somewhat from that of the others. I think they are clearly entitled to the benefit of the fact that the mortgage was valid on its face, and proposed to keep strictly within the letter of the law. Their several contracts provided for the delivery of the materials specified in installments, and only upon payment in cash and notes secured by deposit of bonds. That part of the contract clearly must be construed as meaning bonds lawfully issued, and the railway company had no right to make a demand for a delivery of rails or tracking materials until they were in a position to deliver the bonds without breaking the law. In effect, the deliveries were made only upon the demand of the railroad company at its option. The time fixed in the contract for delivery of the rails was not observed, and probably was not intended to be observed, except to prevent the railway company from demanding the rails faster than the time therein limited. It follows, as it seems to me, that each demand of rails or materials was, in effect, a declaration and assertion by the officials of the railway company that the bonds to be delivered as security for the notes given would be legally issued, and based upon corresponding payments on stock account as required by law. I think the rail-making company and the material men were entitled to so consider it, and to rely upon it. They were not obliged to receive bonds unlawfully issued; and the demand for rails and materials, as before remarked, was an assertion by the railway company's officers, who alone knew the truth, that the bonds were lawfully issued. This short reason covers all except the 50 bonds of the Hobert issue delivered to the Bethlehem Iron Company in May, 1891. That company may be, and probably is, chargeable with notice that this issue was, or might be, illegal. But such notice, if admitted, is not necessarily fatal to their right to a dividend upon them. In determining that right we must bear in mind that they were entitled to these bonds the previous October, when the last delivery was finished. There is no proof that they then had notice of any irregularity. Just how Wood managed to procure the final delivery of the rails without a contemporaneous delivery of notes and bonds does not appear. In fact, the accounts of the company show that the last note—$41,504.23—was given for the one-half payment on deliveries of rails commencing on the 11th of September and ending on the 15th of October,—15 deliveries in all,—when, on the last delivery, a note was given for the balance, and this may account for what actually happened. Whatever may have been the facts, it must be held, for present purposes, that there was no waiver by the rail company of its right, under the contract, to its bonds, for it appears that it pushed its claim vigorously by litigation, and obtained the bonds as the result of the suit. This seems to me to place the rail company where it would have stood if the bonds had been delivered strictly according to the contract, and entitles it to a dividend. In coming to this conclusion I must not be understood as assenting to the doctrine advanced at the hearing that the delivery of the bonds in Pennsylvania was not a crime, and therefore not forbidden by the statute. I think that doctrine unsound. The overissue was illegal and void, because so declared by the legislature. Such declaration Is, indeed, not made in terms, but by necessary implication from the imposition of a penalty for the act. This result cannot be affected by the ability of the wrongdoer to escape punishment by reason of the commission of the act in a foreign jurisdiction.
NOTE BY THE VICE CHANCELLOR. Since the publication of the foregoing opinion my attention has been called to two or three mistakes of fact affecting the right to a dividend on a few of the bonds dealt with. Several bonds which had not been presented at the final hearing have since been presented and proved, and as well as those as to which I fell into error of fact are dealt with in the decree. I do not deem it necessary to give any reasons for such action.