LAFAYETTE Co. and others v. NEELY and others.

(Circuit Court, W. D. Tennessee. October 6, 1884.)

1. EQUITY PRACTICE-CORPORATIONS-NINETY-FOURTH EQUITY RULE-TENNESSEE CODE, § 1492-1497.

Where a Tennessee corporation has been dissolved by a foreclosure sale of its franchises, but its existence is continued by statutory provision for a term of five years, during which suit may be brought in its name to wind up its affairs, a bill by stockholders is well filed under the ninety-fourth equity rule, if it appear that the suit is not a collusive one, and that the plaintiffs have applied to such of the late directors as they can reach to bring the suit, and they have refused.

2. SAME SUBJECT-STATUTORY RECEIVER UNDER TENNESSEE ACT, 1852, c. 151– TENNESSEE CODE, § 1101.

But where the corporation was a railroad company, indebted to the state for aid under the internal improvement acts of 1852, and was, at the time of the dissolution, in the hands of a receiver appointed by the governor, the receiver was, under those acts, by operation of law, the manager of the company, and the proper person to bring suits in the name of the dissolved corporation, as required by the Tennessee Code; and if the suit be against the receiver himself to call him to account, the ninety-fourth equity rule would not apply, as it would be unreasonable to ask him to sue himself. The stockholders, therefore, may proceed in their individual right without compliance with the ninetyfourth rule in that respect.

3. EQUITY-TRUSTS-RIGHT OF BENEFICIARY TO AN ACCOUNT-ACCOUNTING WITH

EXECUTIVE DEPARTMENT.

It is quite a matter of course that a trustee shall, in a court of equity, pass his accounts whenever demanded by the beneficiary; and he cannot escape an account by showing that the judgment creditors of the beneficiary will absorb the fund, or that he is a statutory receiver, authorized to report to the governor of the state, to whom he has made a satisfactory report. An act of the legislature conferring exclusive power over such account on the executive department would probably be unconstitutional.

4. SAME SUBJECT-UNSATISFACTORY ACCOUNT.

But where it appears that the beneficiary has not been injured by the too general statement of the account, and a failure to file vouchers in the executive department, and there is no showing of false or fraudulent conduct, a court of equity will not, for the mere satisfaction of the plaintiff, require the receiver to account more in detail, and file his vouchers, when the plaintiffs have been foreclosed of their interest in the fund by a mortgage sale.

5. EQUITY PLEADINGS-GENERAL ACCUSATION OF FRAUD.

Mere epithetic accusations of fraud will not suffice in equity pleading, but the facts must be stated which show the conduct complained of to be fraudulent.

6. MORTGAGOR AND MORTGAGEE — ACCOUNT FOR RENTS AND PROFITS-FORECLOSURE SALE-Right of PURCHASER-SENIOR AND JUNIOR MORTGAGES. Where a prior mortgagee is in possession, and pending his possession there is a foreclosure sale under a subsequent mortgage, a person buying the property subject to the prior lien, in the absence of any agreement or other circumstance fixing the amount of the incumbrance, is entitled to an account with the senior mortgagor to ascertain the amount due to him at the time of the sale from the mortgagee, and his bid, presumably, included only the amount found due on that accounting.

7. SAME SUBJECT-CREDITS ALLOWED-PERMANENT IMPROVEMENTS.

On such accounting the senior mortgagee will be allowed credits for all permanent improvements and necessary expenditures during his possession, and all incumbrances paid before the sale.

8. SAME SUBJECT RAILROADS - TENNESSEE INTERNAL IMPROVEMENT ACTS OF 1852-TENNESSEE CODE, § 1101-STATE RECEIVER.

This principle applies to a receiver in possession of a railroad under the Tennessee internal improvement acts of 1552, (Code, § 1101,) during whose

possession the road is sold at the suit of its own mortgage bondholders, and the equity of the purchasers to the accumulated earnings in his hands is paramount to that of the stockholders and creditors, and the bill of the latter for an account will be dismissed.

9. SAME SUBJECT-TENNESSEE RAILROAD LIQUIDATION ACT OF 1869, c. 38.

This principle of the general law of the relation of the parties is strengthened by the liquidation act of 1869, c. 38, under which the purchasers, by consent of plaintiffs, liquidated the company's debt to the state on the express condition that the purchasers should be substituted to the lien of the state upon the earnings in the receiver's hands. The plaintiffs cannot now repudiate that agreement by diverting the fund to the payment of other debts, or by distribution of it among the stockholders.

In Equity.

Harry M. Hill and Humes & Poston, for plaintiffs.

E. C. Walthall, Wright & Folkes, and James Fentress, for defendants.

HAMMOND, J. The objection that this bill does not show conformity to the ninety-fourth equity rule cannot, I think, be maintained. The bill was filed April 1, 1882, and if we date the alleged dissolution of the corporation at the time of the foreclosure sale on August 27, 1877, which is the very earliest date at which it can be said to have been dissolved, the suit was commenced within the five years allowed by our statutes for a dissolved corporation to bring suits in its corporate name, notwithstanding the dissolution. Tenn. Code, 1492-1497; Rogersville & Jefferson R. R. v. Kyle, 9 Lea, 691; Kelley v. Mississippi Cent. R. Co. 2 Flippin, 581; S. C. 10 Cent. Law J. 286; S. C. 1 FED. REP. 564. But if a later date be fixed, such as the confirmation of the sale or the final decree in the foreclosure suit, which would bring the date of the suit beyond the five years of the statute, it is clear the ninety-fourth equity rule does not apply, if it be conceded that it applies during the five years to a dissolved corporation with continuing power to sue under the peculiar features of the abovecited Tennessee statutes, as to which I express no opinion. The rule does not, in terms, include a dissolved corporation, (Jones, Rules, 151,) and it seems settled that the dissolution of a corporation, and its inability to proceed by suit, does not deprive the shareholders of a remedy in their own name in a court of equity. Rogersville, etc., R. R. v. Kyle, supra, at p. 698; Shields v. Ohio, 95 U. S. 319, 324; Bacon v. Robertson, 18 How. 480; Lum v. Robertson, 6 Wall. 277. Of course, when the functions of the directors, managers, and shareholders have closed by dissolution, they no longer occupy that relation, and it is in their own right as individuals that the shareholders must seek redress. It cannot be, therefore, that in such a case the ninety-fourth rule was intended to operate. Greenwood v. Freight Co. 105 U. S. 13, 16. Conceding, however, that the rule extends to a Tennessee corporation during the five years of posthumous existence granted to it by the state statutes, the amendment shows that the plaintiffs have done everything that they could reasonably be required to do, under the existing circumstances, to comply with the rule. Affidavit is made that

plaintiffs were shareholders at the time of the transaction, and that the suit is not a collusive one to confer on a court of the United States jurisdiction of a case of which otherwise it would have no cognizance, which manifestly, without the affidavit, it is not; and, after all, this is the main requirement of the rule, if not its chief object, and the only one in the power of the court to accomplish by a rule of practice; for, it cannot be assumed that the court intended to or could, under a power to prescribe rules of practice, impose limitations on the jurisdiction on the federal courts not imposed by any act of congress. - The rule should not, at least, be so construed until the supreme court itself has affirmed the power to do this. The cases upon which the rule is predicated explain its meaning, and they do not require impossibilities on the part of a shareholder. In the leading case of Hawes v. Oakland, 104 U. S. 450, 461, where the required efforts to secure corporate action are described, it is said that the plaintiff may "show a case, if this be not done, where it could not be done, or it was not reasonable to require it;" and the "total destruction of the corporate existence and the annihilation of all corporate powers" constitute an acknowledged exception to the rule. Greenwood v. Freight Co., supra. See, also, Detroit v. Dean, 106 U. S. 537; S. C. 1 Sup. Ct. Rep. 560; Hayden v. Manning, Id. 586; S. C. 1 Sup. Ct. Rep. 617; and Dimpfel v. Ohio & M. Ry. Co. 110 U. S. 209, S. C. 3 Sup. Ct. Rep. 573, for a further elucidation of the principles upon which the rule is founded.

Now, by the Tennessee Code, "the managers of the business of such corporation at the time of its dissolution, by whatever name known, are the trustees of the stockholders and creditors," authorized by these statutes to settle its affairs and "sue for and recover the debts and property of such dissolved corporation in its corporate name." Tenn. Code, SS 1494, 1495.

The principal defendant, Neely, was himself, at the time of the dissolution of this corporation, the statutory receiver appointed by the governor under the act of February 11, 1852, c. 151, § 5, p. 207, (Code, § 1101,) "to take possession and control of said railroad and all the assets thereof, and manage the same, etc., and to continue in possession of said road, fixtures, and equipments, and run the same, and manage the entire road" until the debt to the state was paid. State v. E. & K. R. R. 6 Lea, 353, 355; Erwin v. Davenport, 9 Heisk. 44. If this was not the "annihilation of all corporate powers," it certainly did, in fact, as appears by this bill, paralyze those corporate powers; for the road was surrendered by him to the purchasers under the foreclosure sale, he accounted only to the gov ernor or these purchasers, and the directors or stockholders have not since attempted any corporate action or kept up any corporate organization. Either Neely was himself the person to whom, under this rule and these state statutes, application should have been made to bring this suit in the corporate name,-which were a vain thing to

do, and it is unreasonable to ask it,-or no such application could, under the terms of the statute, be made at all. The directors and stockholders were, by the statutes, superseded or deprived of their power, and under the law it has never been restored to them. Erwin v. Davenport, supra. Furthermore, the amended bill alleges that the plaintiffs have applied to such of the directors as they could find to take corporate action in this matter; but that they are scattered throughout the country,' and have apparently abandoned all their functions and refused to act. Having made all stockholders who choose to come in parties, it would seem, under the circumstances, unreasonable to require that corporate action should be sought through application to them. The bill does not with sufficient precision name the directors to whom application was made, nor show in detail the efforts to comply with the rule in that regard, as it should have done; but, under the facts disclosed, I am of opinion that the plaintiffs have done the best they could, and for the reasons stated overrule that ground of demurrer.

The plaintiffs insist that at all events the corporation was, and now they are, entitled to an account against their trustee, this statutory receiver of their property. Certainly I have been unable to find any case where the trustee can refuse to account because the beneficiary would get nothing if an account were had, by reason of his inability to respond, which is not set up here, however, or any other reason, such as that there are judgments against the beneficiary which would absorb the products of the account, as has been stated. is the case here, inasmuch as there is an immense amount of the mortgage debt unpaid, for which there is a judgment of this court still unsatisfied. The valueless character of such litigation is set out in Bayliss v. Lafayette, etc., Ry. 8 Biss. 193, but evidently the court hesitated to dismiss the application, and was content to advise the parties that if the litigation should be fruitless, there was no practical value in it. I cannot assent to the doctrine that a trustee may thus escape an account, any more than that a court should refuse a judg ment because it appeared that the execution would be returned nulla bona. An account against a trustee is almost always a matter of course. Pulliam v. Pulliam, 10 FED. REP. 23, 26. It will, however, only be granted at the suit of one having a right to the fund of which an account is asked. Neither can the fact that the defendant accounted with the governor, and received his commendation for the faithful discharge of a trust, assuming that we take judicial notice of the executive action in this regard, avail him as a defense. The act of 1852, under which he held his trust, does not make the executive department the exclusive arbiter of this trust, nor authorize it to acquit the trustee of all liability by approving his accounts. There seems to be no intention to deprive the courts of their powers in such matters, and the remedy on the bond of the receiver can only be concurrent with that of compelling a settlement through the medium of

a court of equity. If the act undertook to invest the executive department with exclusive power over the accounts of this receiver, it is, on well-settled principles, probable that the courts would pronounce it unconstitutional. Jones v. Perry, 10 Yerg. 59; Cooley, Const. Lim. 87-114, 392.

Other objections to the bill have been taken by the demurrer and in argument, which, for the present, at least, we will pass, and come to the substantial controversy between these parties upon this demurrer; and that is, the contention that the facts disclosed by the bill show that the plaintiffs have really no interest in the funds for which they allege the defendants are liable. Why take this account, say the defendants, when it appears that, as between the plaintiffs and the foreclosure purchasers, the funds in the hands of the receiver were the property of those purchasers? They insist that it is not pretended that he withholds them, or has appropriated them to his own use, but only that he has improperly turned them over to those purchasers, and that, even if he still retains them, they do not belong to the plaintiffs. If this be so, undoubtedly this bill should be dismissed. But there is some difficulty in determining it upon demurrer, by reason of the somewhat meager and indefinite statements of the bill as to the precise facts of the case, though both parties seem desirous of having the question determined, and have endeavored, by amendment, to make the bill more definite.

Generally, the facts are that this railroad having been constructed under the internal improvement laws of Tennessee, more particularly considered in the case of Stevens v. L. & N. R. R. 3 FED. REP. 673; State v. E. & K. R. R. 6 Lea, supra, and Rogersville & J. R. R. v. Kyle, 9 Lea, supra, the state held a statutory lien for the aid extended to it, paramount to all other liens whatever. Being in default for the interest and sinking fund due, under those laws, upon the state bonds it had received, the defendant Neely was, by the governor, appointed receiver to take charge of the road, and discharge the duties required by those acts of the legislature. While he was so in control of the road, it was sold by a decree of this court, under a foreclosure suit, to satisfy a very largé mortgage debt, subordinate to the lien of the state for its debt. By the statutes and the decree, this sale was cum onere, and the purchasers took the title subject to the debt due the state. The purchasers organized a corporation, which, under authority of law, by subsequent consolidation and changes of name, became the present Illinois Central Railroad Company, a defendant to this These purchasers liquidated the debt due the state by paying it off, principal and interest; how, does not precisely appear by the bill, except that it was done by buying the bonds of the state secured by its lien, which were paid in and canceled, the bonds being purchased at a heavy discount. But it is seemingly agreed in argument that they did this by taking advantage of the act of February 25, 1869, c. 38, p. 50, which permitted any railroad company to pay the

bill.