Gibbes v. Greenville & Columbia R. R. , 18 S.C. 289 ( 1882 )

The opinion of the court was delivered by

Mr. Chief Justice Simpson;

Eor the proper understanding of the questions involved in this case, it will only be necessary to state the facts connected with the claim of the petitioner, the Carolina National Bank. In July, 1872, by an order of the court in the above causes, the property of the Greenville and Columbia Railroad Company was placed in the possession and under the management of the president and directors of said company, who were thereby directed to conduct and carry on the business of said company, subject to the orders of the court. It has since been decided by this court that this order constituted the president and directors receivers. Under-this order, the road was operated from its date in July, 1872, to November, 1878. During this time the president and directors borrowed certain moneys from the petitioner which were used in the conduct and management of the business of the company.

The amount thus borrowed, after several renewals and payments, was finally reduced, on April 13th, 1877, to $20,000, evidenced by one note for that sum, which was renewed from that date to July 13th, 1878, the date of the last renewal. To secure the payment of this money, the president and directors deposited with the petitioner two hundred and sixty-eight bonds of the said Greenville and Columbia Railroad Company for $500 each. These bonds were sold by the petitioner on March 13th, 1880, for $13,400, the proceeds being applied to the note. The balance the petitioner seeks in this proceeding to establish against the fund in court, arising from the annual income of the road while in the hands of the receiver, or from the proceeds of the sale thereof.

Clyde, Logan and Bryan, who were holders of a large amount of the second mortgage bonds of the company, and upon whom the petition was served, answered, resisting the petition upon the ground that the receivers had no right to borrow money, nor the president to make the note in question. They also asserted the right by way of counter-claim, to have the bonds hypothecated to the petitioner surrendered to the court, or their value accounted for by the petitioner for the benefit of the second mortgage bondholders.

To this counter-claim the petitioner replied, and the case came to a hearing before Judge Fraser, who dismissed both the petition and the counter-claim. From this decree, both the petitioner and the defendants, Clyde, Logan and Bryan, have appealed. The appeal of the petitioner involves, mainly, a question of fact, to wit, whether the loan contracted by the president and directors, and which was the basis of petitioner’s claim, was necessary to the proper conduct of the road under their charge as receivers.

Without attempting to define the exact powers with which the receivers in the case were invested by the order of June, 1872, it is sufficient to say, in the language of Cowdrey v. The Railroad Company, 1 Wood 336, and quoted in the decree of Judge Eraser, “ that all outlays made by the receivers in good faith in the ordinary course, with a view to advance and promote the business of the road, and to render it profitable and successful, are purely within the line of discretion which is necessarily allowed a receiver entrusted with the management of a railroad in his hands.” This, no doubt, is the general rule, and no one who is at all familiar with the history of the Greenville Bail-road since June, 1872, when the order of Judge Melton was passed, by which the president and directors were converted into receivers, and the various decisions of this court on the transactions of these receivers and the liability of the funds in them hands to claimants, rendered since 1872, can fail to see that this general rule has not been, in the least, narrowed or contracted in its application to their management. On the contrary, if not enlarged, it has been enforced with a most liberal construction. This was, no doubt, due to the anomalous character of the order and the necessities which prompted it, and for the accomplishment of which, no doubt, it was passed. See Fifty-four Bond Case, 15 S. C. 304; Ex parte Brown and Wife, Ib. 531; also the recent case of Ex parte Benson & Co., ante 38.

While this court clearly held in the two former cases, that this order constituted the president and directors receivers, yet a distinction was drawn, especially in the case of Ex parte Brown, p. 531, by Judge Fraser, as to their powers, and the powers of General ’Conner, who was subsequently distinctly and in terms appointed receiver, displacing the president and directors. This distinction grew out of the different language employed in the two appointments. In the first, the president and directors were ordered to continue in the possession and management of the property, and to make report, that proper orders may be made. Under the latter, General Conner was appointed receiver eo nomine, “ and he was required to demand and receive possession of all of the property of the company, to keep and preserve the same subject to the control, order and direction of the court, with power and authority to manage and operate the said railroad, to receive and disburse the income, the disbursements to be confined to the expense of running the road.”

Whatever may be the law applicable to receivers generally, we think that the case of Ex parte Brown and Wife, and the Eifty-fow Bond Case, have modified that law as to these receivers ; or, in other words, the president and directors were appointed under a peculiar order, which order has been construed by this court in the two cases above referred to, and the law in reference to them is found in said cases. Under this view, and governed by these cases, we repeat that the only question before Judge Eraser was whether the borrowing of the money was necessary to the proper and successful management of the road. Judge Eraser seems so to have understood the case, where he says: “ If it were clearly shown that -money was borrowed, to carry on the road as a common carrier, I would not say that it ought not to be repaid out of the fund. Before this can be done, however, the court ought to have proper evidence that it was necessary for this purpose, and if not, the parties must look to the personal responsibility of the receiver.”

In applying this principle, we think that Judge Fraser erred in his finding when he declined to be controlled by the testimony of Mr. Manson on the subject of the necessity of this loan. This witness had been in charge of the accounting and treasury department of the company since 1872; was treasurer from 1875 to 1878, when General Conner was appointed receiver; was entirely familiar with its financial condition; was a very intelligent and experienced witness, and was the only witness on this subject. He testified that when money was borrowed, there was necessity for borrowing, and this he states without qualification, and the explanations which he gave as to the condition of the road seem to sustain him.

The president and directors were receivers at the instance of the bondholders. These bondholders stood by and suffered this road to be operated under the order of June, 1872, for over six years, with no intimation that the rigid doctrine, now contended for as to the duties and powers of receivers, should be applied to the case, and we think it too late, now, for such claim. The road certainly received the benefit of this money, and it would be highly inequitable to throw the lender upon the general responsibility of the receiver — inequitable both to the lender and to the receivers, and this should not be done unless imperatively demanded by the legal principles involved. The manifest preponderance of the testimony, in our judgment, is against the finding of fact by the Circuit judge, as to the necessity of the loan in question by the petitioner to the receivers, and this finding is therefore reversed.

As to the counter-claim, we concur with the Circuit judge in dismissing it. “A counter-claim must be one existing in favor of a defendant and against a plaintiff, between whom a several judgment might he had in the action and arising out of one of the two following causes of action: 1. A cause of action arising out of the contract or transaction set forth in the complaint as the foundation of plaintiff’s claim, or connected with the subject of the action. 2. In an action arising in contract, any other cause of action arising also on contract, and existing at the commencement of the action.” Code, § 173.

Tested by this provision of the code, we do not find a single element of a counter-claim in the matter attempted to .be set up here by Clyde, Logan and Bryan. In the first place, no separate judgment could be rendered in their favor against the petitioner for the "bonds in question, even if the petitioner could be held liable for these bonds. If these bonds were, in fact, trust property, which the, petitioner improperly obtained from the trustee, he might, by a proper proceeding, be made to account to that estate for their value, subject to distribution under the . order of the court among the eestuis que trust; but we do not see how, under this petition, Clyde, Logan and Bryan could obtain a judgment in their behalf for the value of these bonds. In fact, they do not ask this; they claim that the bonds in question shall be delivered to the master, or their value paid to the master. This at once shows that the matter set up is not a counter-claim, and this is further evident from the fact that the claim does not fall under either of the two classes mentioned in the code above as constituting a counter-claim.

It is neither a claim arising out of the contract or transaction set forth in the complaint as the foundation of plaintiff’s claim ; nor does it arise on contract existing in favor of Clyde, Logan and Bryan at the commencement of the action. If it is a valid claim at all, it arises from an equity principle established and to be enforced through the equity jurisdiction of the court. Its foundation, if any, is that wholesome equity doctrine which holds a party responsible for trust property purchased with a knowledge of the trust and in violation of the rights of the cestuis que trust. Here a petition was filed, under a call for creditors, to establish a note against an insolvent company, so as to receive payment out of the funds in court; another creditor resists this debt and sets uj>, by way of counter-claim, the fact that the petitioner has diverted a portion of the trust fund from its proper destination, and demands that he shall return this property to the trust-estate. If this demand is a just one, and well founded, there is a remedy; but it would be stretching the doctrine of counter-claim beyond all precedent to pei’mit this question to be adjudged and determined under such a proceeding.

"We think that the claim of the petitioner should be established against the income fund in the hands of the court, and that the counter-claim should be dismissed. It is the judgment of this court that the decree below be affirmed as to the counter-claim, and reversed as to the claim of the petitioner, and that the case be remanded to be enforced according to the principles herein announced.