Weed v. Gainesville, Jefferson & Southern Railroad

Lamar, J.

(after stating the foregoing facts.) The Gainesville, Jefferson and Southern Railroad Company was authorized to issue $250,000 of stock and $245,000 of first-mortgage bonds. It obtained subscriptions for $120,000 of stock, and sold $83,500 of bonds. With the proceeds it constructed about one half of its road. Its funds, being then exhausted, and it being unable to sell the remaining 'bonds or to secure subscriptions to the balance of the capital stock, its officers were advised to interest the lessees of the Georgia Railroad in the completion of the work. After many negotiations a contract was made, March 31, 1883, by which, in consideration of $145,350 to be paid in installments, it sold to the Georgia Railroad Company $130,000 of the Gainesville Company’s capital stock “fully paid up,” and $161,500 first-mortgage bonds to be left with a depositary until performance of the undertakings by the Georgia Railroad Company, but bonds to be delivered at the rate of $1,000 of bonds for $900 cash paid, “the payments to be applied first in payment in full of the stock and the overplus to be in full for the bonds.” On the $161,500- bonds thus acquired the Georgia Railroad Company placed an indorsement guaranteeing the payment of the principal and interest. Thus indorsed they were sold in open market. By virtue of the ownership of $130,000 of capital stock the Georgia Company elected the officers of the Gainesville Company and proceeded to build the road, advancing $107,000, in addition to the purchase-price under the contract of March 31,1883. During the fifteen years of its management the Georgia Company made advances aggregating $365,000, much of which went to pay the coupons on the mortgage bonds. Default was made in 1897. There were two bills, one by a bondholder and one by the trustees, to foreclose the first mortgage on the Gainesville road; another to foreclose the second mortgage; and still another to foreclose a mortgage of the Walton road, which had been merged with the Gainesville Company. These four cases were consolidated. There were interventions by a stockholder, and by the holders of $83,500 of unindorsed bonds, contending that the purchase of the majority of the Gainesville stock by the Georgia Company was ultra vires, and in restraint of. trade; attacking the contract of March 31, 1883; and claiming that the present owners of the $161,500 bonds sold thereunder to the Georgia Company at less than par were not entitled to share equally in the proceeds of the sale of the mortgaged property. The Georgia Company was made a defendant, and there were prayers that it should account for its management of the Gainesville road, and for all profits made by it on a resale of the bonds bought at 10 and resold at 105; and for general relief. The Georgia Company answered, and filed a counter-claim for $365,000 against the Gainesville Company. There was an immense-mass of evidence, a report by the auditor, a recommittal, another report, and many exceptions. This resulted in a record exceedingly voluminous. The court overruled all the exceptions to the auditor’s report, and decreed that the road be sold, and that all the bonds should share equally in the proceeds. The holders of the $83,500 of unindorsed bonds filed a bill of exceptions to this court. The assignments of error may be so grouped as to somewhat shorten what would otherwise be an exceedingly lengthy opinion. All those in reference to the allowance for fees for the receiver and attorneys were abandoned. Those relating to exceptions to the auditor’s findings of fact are sufficiently dealt,with in the headnotes. Civil Code, §§ 4594, 4595, 4596, 5876.

The construction of the Gainesville Railroad did not lessen or increase, but created competition where none previously existed. But if the geographical situation or character of business transacted had made the Georgia and the Gainesville competing roads, the State, the stockholders, or the parties alone could have attacked' the contract of March 31, 1883, as being ultra vires, or in restraint of trade. Bondholders are not authorized to act as guardians for the public or the parties, in having such a contract set aside or declared to have been illegal; certainly not in a case where the bondholder prays that the subscriber to the stock under such contract be held liable for the unpaid subscription. Civil 'Code, §§ 5800, 3668. The trustees under the mortgage represent all of the bondholders. And where bondholders are allowed to intervene pro interesse suo, the death of one of a class will not cause-the suit to abate, nor will it be necessary to have the representative bondholder made a party, her interest being represented by the trustee and the other bondholders making the same contention as that on which she relies. The fact that the trustee represented all bondholders also makes it unnecessary for the bonds to be proved before final decree of foreclosure. Here all the pleadings admitted that the entire issue of bonds had been sold; and if any question as to ownership is raised, the court can frame an order to have the same determined by reference to a master, and by proper provision in the order of distribution. Civil Code, §§ 4842, 4853, 4856.

The holders of the $83,500 unindorsed bonds insist that, on the doctrine of two funds, those holding the $161,500 of bonds indorsed by the Georgia Company, and the indorsement secured by the pledge of Atlanta & West Point stock, should be required to exhaust this source of payment before being allowed to participate in the proceeds of the sale of the mortgaged property. But the indorsement was not a lien, and was not equally accessible. The indorsement was not a liability, and the collateral was not the property of a common debtor. In no sense does the case come within the provisions of the Civil Code, §2691, that “a creditor having a lien on two funds of the debtor, equally accessible to him, will be compelled to pursue the one on which other creditors have no lien.”

The main contentions relate to the attack on the contract of March 31,1883, which recited that the Gainesville Company sold to the Georgia Company $161,500 of bonds, and $130,000 of fully paid-up stock for $145,350, payable in installments; the stock and bonds to be deposited in escrow and the Georgia Company to receive $1,000 in bonds for every $900 in cash paid; but the installments to be applied first to the payment of fully paid-up stock, and the balance to be in full payment for the bonds. There was no objection to the introduction of parol evidence seeking to show that the paper did not set forth the real consideration; and the holders of the unindorsed bonds, amounting to $83,500, insisted (a) that this was a sale of bonds at 90 with the stock as a bonus, and that therefore the Georgia Railroad Company was liable as for an unpaid subscription of $130,000. (5) The City of Gaines-ville, an intervening stockholder, insisted that it was a sale of stock at par, and of bonds at ten cents on the dollar, in consequence of which the bonds were infected with usury, (c) The Gainesville Company in its original answer contended that the stock and bonds had been sold in a “lumping trade,” and the Georgia Company, uniting in this line of defense, also insisted (d) that the sale was made to it as a construction company, on the further agreement that it was to advance what other sum might be needed to complete the road; that it had actually advanced $107,000 additional, besides complying with its'agreement to reduce freight rates. The uncontradicted evidence may probably have been sufficient to have a finding on this last theory. But the auditor found that it was a sale of stock at par, and of $161,500 of bonds at ten cents on the dollar. For the reasons set out in his report he held that this transaction was not usurious, because the law applicable to loans on ordinary paper did not apply to a sale- of corporate bonds. The City of Gainesville excepted to this ruling, and, over the objections of the intervening bondholders, withdrew the exceptions before the decree. As to which we hold that where there are various and independent parties to the litigation, and one files exceptions, the others have no vested interest therein; that the exceptions may be withdrawn, and other parties to the record can not complain of the dismissal, or use the original exceptions as a basis for the assignment of error here. Civil Code, §§ 4845, 4903. The case might be different if the trustees or other representatives of parties who had intervened had filed an exception, and his beneficiaries had relied thereon and failed on that account to make an independent exception. But here there was no such relation between the intervening bondholders and those who originally complained of the auditor’s finding on the subject of usury.

It is not necessary to elaborate the proposition that if the contract of March 31,1883, should be construed as a sale of bonds at 90 and the stock as a bonus, there was no usury. If so, then nothing which thereafter occurred rendered invalid that which was valid in its inception. If the Georgia Railroad Company improperly included the $107,000 advanced by it as a construction company as an item in the set-off, or if it took second-mortgage bonds for a part thereof, this might affect that company’s right under the second mortgage, and it might reduce the amount of the judgment to which it was entitled on the set-off; but it could not be effective to invalidate bonds now in the hands of innocent third persons. If the contract was a sale of bonds at 90 and the stock was a bonus, the liability on the unpaid subscription was barred in six years. Georgia Manufacturing Co. v. Amis, 53 Ga. 228. But whether barred or not would be immaterial to the plaintiffs in error, because a liability of $130,000 would not exhaust, but only reduce, the judgment for set-off of $365,000. Or, if the Georgia Company was liable on its stock subscription of $130,000, for the profit made on the resale of the bonds, for the $75,000 secured by the second mortgage, for waste and mismanagement or other act done by it as a majority stockholder; and if it be conceded that such claims are not barred; and if the intervening bondholders, as creditors, had the right to enforce such cause of action; and if the pleadings warranted a judgment on any or all of these claims, yet it appears that the Georgia Company has a claim for $365,000 cash advanced to the Gainesville Company, much of which went to pay the coupons including those held by the complaining intervenors. And unless the claims against the Georgia .C°mPany exceeded the amount of the set-off, the plaintiffs in error have no cause to complain, since they must be paid in full on their first lien before the Georgia Company can get anything on the judgment for $365,000.

The auditor, however, did not predicate his finding that there was no usury upon the idea that the Georgia Company as a construction company had advanced a sum sufficient to remove any taint of usury. Nor did he sustain the contention of the plaintiff in error that the bonds had been sold at 90, with the stock as a bonus; but he put his decision squarely on the proposition that a corporation may lawfully sell its bonds at a discount greater than eight per cent. If this question were one between the Georgia Company and the Gainesville Company, the original parties to the transaction, we would be called upon to determine the point. But these bonds are in the hands of innocent third persons, who pur-' chased the same at 105 from the Georgia Railroad Company; and the contest is between bondholders over the proceeds of the road. The majority of the court are of the opinion that the question of usury and the effect thereof is not presented by any of the assignments of the plaintiff in error. The writer is of the opinion that it is' presented, because of the assignment on the court’s ruling that all of the bonds should share equally, and yet the result would not be changed. And, speaking for myself and not for the court, whether there was usury or no usury in the original sale of the bonds, subsequent bona fide holders before the bonds were due, without notice of any usury, are all entitled to share alike out of the property mortgaged to secure the entire issue. All of the. decisions in this State apparently to the contrary are predicated upon Daly v. Lumpkin, 1 Ga. 407. But that case is in perfect harmony with the uniform current of authorities, being put, as it was, upon the express language of the act of 1829 (Cobb’s Dig. 393), which declared that any note or bond infected with usury was void both as to the usury and legal interest. The bona fide holder of a negotiable instrument is protected from the defense of usury, since the present statute not only does not make, such contract void, but section 3694 requires both an “illegal and. immoral consideration ” in order to. affect such paper in the hands, of an innocent purchaser. Contracts to pay usury are unlawful,, but only as to the usurious interest; but mere illegality in the consideration is not-sufficient to defeat the right of an innocent holder. In Rhodes v. Beall, 73 Ga. 641, the common-law authorities were recognized, but the court there, in considering a contract which by act of Congress was even declared void, said: “The statute which makes such contract illegal and void must also make the same a crime, or the act itself must be immoral and contra, "bonos mores, to affect the bona fide holder of negotiable paper.” “ A contract may be illegal without being immoral; but the consideration, to make the defense available, must be both immoral and illegal.” Perkins v. Rowland, 69 Ga. 664.

Many courts in construing the statute of usury have recognized that if the instrument thus infected is declared to be void, it obtains no validity by being transferred to an innocent third person. If the contract is merely declared to be unlawful or illegal, and. the act is not made a crime, then an innocent purchaser takes the same free from the defense of usury. Thus Judge Story in Fleekner v. United States Bank, 8 Wheat 338, says, “Thestatutes of usury of the States, as_ well as of England, contain an express provision that usurious contracts shall be utterly void; and without such an enactment, the contract would be valid, at least in respect to persons who are strangers to the usury.” And in Converse v. Foster, 32 Vt. 828, cited and followed in the carefully considered case of Lynchburg National Bank v. Scott, 91 Va. 656, it was held tint: “The English statute against usury . . nob only imposes a penalty for such illegal act, but expressly declares that all notes, bonds, and other securities given for such illegal consideration shall be utterly void. All the cases . . turn upon this very distinction and difference between the statutes. In those cases in which the legislature has declared that the illegality of the contract or consideration shall make the security void, the defendant may insist on such illegality, though the plaintiff took the same bona fide and gave a valuable consideration for it. But unless it has been so expressly declared by the legislature, illegality of consideration would be no defense to an action at the suit of a bona fide holder for value, without notice of the illegality?” See, to the same effect, Webb on Usury, § 159, and authorities cited.

The law is opposed to usury, but it favors bona fide holders of negotiable paper. In protecting such innocent holders, it is not considering solely the rights of the respective parties to the litigation, but serving public policy to protect the innocent purchaser on the one hand, and on the other to enable owners of a valid paper to sell the same without the delay which would be inevitable if the purchaser in each instance were required to make an investigation of the consideration on which the negotiable instrument issued. If there is no consideration whatever, and the paper thereafter comes into the hands of an innocent purchaser, he would be entitled to recover the face value. Why, then, should it be that he would be liable if he received nothing, and not liable when he received something, unless that something was both illegal and immoral, and therefore by statute unenforceable? Bonds like these are now universally held to be negotiable, and pass by delivery. As in the present instance, they may be sold by the company to one purchaser at one price, and to another at another price. Or, as appears here, they may be held in this country and in Europe. To require each separate purchaser at the point of issue, or at a distance, to make an' independent investigation as to the consideration for which each separate bond was originally put upon the market, would be to establish a rule which, if it did not absolutely prevent the sale of such security, would disastrously affect a borrower’s rights to use his credit. A subsequent purchaser would have to make the investigation where the bonds were issued at par, as well as when they were sold at á usurious rate. The innocent borrower would thus suffer with the guilty. Consequently, and in pursuance of an imperative public policy, many States, whose statutes would admit of such a defense against ordinary negotiable paper, have enacted provisions preventing corporations from setting up the defense of usury when sued on corporate bonds. Others have declared by statute that the plea of 'usury should not be available against a bona fide holder of negotiable paper. Other courts, without statute, have declared that this defense is not available in a suit on bonds. Others (Junction R. Co. v. Bank of Ashland, 12 Wall. 226) have preserved this policy by holding that a sale of bonds was not a loan. Contra, Schermerhorn v. Talmann, 14 N. Y. 93. And our statute (Civil Code, § 3694) has prevented such defense against bona fide purchasers, by declaring that illegality of consideration shall not prejudice a bona fide holder of negotiable instruments, unless the consideration is both illegal and immoral.

Cited by plaintiffs in error. Purchase of stock ultra vires: Collins v. Central R. Co., 40 Ga. 582; Nashville R. Co. v. Kentucky, 161 U. S. 677; 101 U. S. 71; 130 U. S. 1; 118 U. S. 290; 139 U. S. 24. Right of bondholders to sue: Cook on Corp. §§735, 816; Fouché v. Merchants Bank, 110 Ga. 839; 2 Elliott on R. §§378-9; 146 U. S. 631; 88 Ga. 471. Competition: Thomas v. Railroad Co., 101 U. S. 71, 82; Branch v. Jessup, 106 U. S. 468, 478; Pennsylvania R. Co. v. Pullman Palace Car Co., 139 U. S. 24, 48; Civil Code, § 2983; 85 Ga. 348; 88 Ga. 702; Guilmartin v. Middle Ga. R. Co., 101 Ga. 570; Wilkinson v. Bertock, 111 Ga. 187. Two funds: Citations supra, and 110 Ga. 697; 101 U. S. 292.

Cited by defendants in error. Embarrassed corporation may sell stock at less than par: Cook on Stock (3d ed.), 58; Vancolt v. Vanbrunt, 82 N. Y. 535; Clark v. Bever, 139 U. S. 96; Coit v. Gold Co., 119 U. S. 342; Handley v. Stultz, 139 U. S. 417; Morrow v. Nashville Co., 87 Tenn. 262; Railroad Co. v. Dow, 120 U. S. 287; Stein v. Howard, 65 Cal. 616. Two funds: Civil Code, § 2691; Carter v. Neal, 24 Ga. 346; Vance v. Roberts, 86 Ga. 457.

Judgment affirmed.

All the Justices concur, except Simmons, C. J., absent.