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Railroad Company v. Soutter, 80 U.S. 13 Wall. 517 517 (1871)

Railroad Company v. Soutter

80 U.S. (13 Wall.) 517


A railroad belonging to an incorporated company, and then under a first and second mortgage, was sold on execution and bought in by certain bondholders whom the second or junior mortgage was given to secure. These purchasers organized themselves (as they were allowed to do by statute in the state where the road was) into a new corporation, and worked the road themselves and for their own profit. After a certain time, the mortgagees under the first or senior mortgage pressed their debt to a decree of foreclosure, and to prevent a sale of the road, the new corporation paid the mortgage debt. Subsequently to this, and on a creditors' bill, the sale made to the creditors under the second mortgage was set aside as fraudulent and void as against other creditors of the corporation which owned the road originally. Held that no bill in equity would lie by the new corporation against the mortgagees under the first mortgage to be paid back (as paid under a mistake of fact) what had been thus paid to them by the new corporation, or to be subrogated to their decree of foreclosure.

The Milwaukee & Minnesota Railroad Company filed a bill in equity, in June, 1859, against Soutter (survivor of

Page 80 U. S. 518

Bronson), Russell Sage, and several other natural or individual persons, as also against the Milwaukee & St. Paul Railway Company, a corporation, to recover back certain large sums of money, amounting in all to $462,057.80, which they had paid into court, in December, 1865, in part liquidation of certain bonds held by the individual defendants in this suit, which bonds had been issued by the La Crosse & Milwaukee Railroad Company in 1857, and were secured by a mortgage upon a portion of the railroad of the last named company. By way of alternative relief, the complainants prayed that they might be subrogated to the benefit of the decree of foreclosure of the mortgage, under which they had paid they money in question. The Milwaukee & St. Paul Railway Company were made defendants because they were the parties now in possession of the railroad and other mortgaged premises and asserted themselves to be the owners thereof.

The facts on which the complainants rested their claim, as set forth in their bill, were substantially as follows:

The La Crosse & Milwaukee Railroad Company, in 1858, after giving the bonds and mortgage above mentioned, gave two other mortgages, one on their road and one on their land grants, to secure certain other bonds issued by them. Failing to pay the interest coupons on the latter bonds, William Barnes, the trustee named in the mortgages, in May, 1859, sold the mortgaged premises and all the franchises of the company at public auction and became the purchaser thereof in trust for the bondholders under the laws of Wisconsin for the sum of $1,593,333. The bondholders thereupon, in May, 1859, organized a new company by the name of the Milwaukee & Minnesota Railroad Company (the corporation now complainant in the case), and Barnes conveyed the property to the said company, which thereafter conducted its business under and in pursuance of the charter of the La Crosse & Milwaukee Railroad Company, and immediately entered into possession of the said property and franchises.

But the prior mortgage of 1857 still subsisted on a portion of the road. Of this mortgage Bronson and Soutter

Page 80 U. S. 519

were the trustees, and they filed another bill to foreclose their mortgage, and, after protracted litigation (of which the part in this Court is reported in Bronson v. La Crosse Railroad Company) obtained a final decree in 1865 [Footnote 1] for the amount of interest coupons due on the bonds secured thereby, amounting to upwards of $450,000, which decree contained a proviso that if the Milwaukee & Minnesota Railroad Company (the now complainants) should pay the amount of the decree before a sale of the mortgaged premises, the receiver (the road being then in the hands of a receiver) should deliver the property to them -- that is to say, they had the usual privilege of redeeming the property by paying the decree. Thereupon the complainants, on the 30th of December, 1865, paid into court the amount of $462,057.80, as above stated, the money being afterwards distributed to the holders of the various bonds secured by the Bronson and Soutter mortgage, who are the individual defendants in this suit. The money thus paid was paid by the complainants as purchasers, and claiming to be owners, of the property upon an acknowledged encumbrance and in relief of the property claimed.

Prior to this payment, however, certain judgment creditors of the La Crosse & Milwaukee Railroad Company filed in the United States District Court for Wisconsin a creditor's bill against the present complainants, alleging that the sale by Barnes was fraudulent and void and praying that it might be set aside as such and that the complainants might be enjoined from any further interference with the property or franchises of the La Crosse & Milwaukee Railroad Company. This suit had been pending for some considerable period, and was pending here on appeal -- the case of James v. Railroad Company [Footnote 2] -- when the complainants paid their money into court, as before stated, and, some time after its payment and distribution, a decree was made on said creditor's bill, in accordance will the prayer thereof, and directing that the property should be resold, and the proceeds

Page 80 U. S. 520

applied, after payment of prior liens, to the satisfaction of the judgments on which the creditor's bill was founded.

The complainants accordingly now asked to have their money returned to them on the ground that they paid it under a mistake. Their allegation was that they supposed they owned the property when they did not; that they supposed they were lifting an encumbrance off of their own property when they were, in fact, lifting it off of property decided to belong to other parties. Their bill, speaking of the order allowing them to pay the amount of the decree, represented that the

"said order was made by this court upon the understanding and theory entertained and believed by the judges of said court, and by your orator, and by all persons and parties interested in said cause, that your orator was the owner of said equity of redemption."

And again, that

"your orator paid said sum of money into this court, this court distributed the same, and the several persons hereinbefore named in that behalf received the same with, upon, and under, and only with, upon, and under, the belief, understanding, and theory, that your orator was the owner of the equity of redemption of the mortgaged premises and property in said cause, and that your orator was thereby paying and extinguishing a lien, charge, and encumbrance upon property owned by your orator as aforesaid."

It further stated that

"after paying the money, your orator for the first time discovered that the said foreclosure of the Barnes mortgage was fraudulent and void as to the creditors of the La Crosse & Milwaukee Railroad Company, and as against the said last-named company, and that, in fact and in law, your orator never was the owner of the said equity of redemption, and that the payment made by your orator into court, and the distribution of the said moneys and the receipt thereof by the said defendants was made, had, and received in mistake of fact as aforesaid."

The bill further stated that Russell Sage, one of the defendants, who received a large portion of the money paid into court, was also a large holder of bonds under the Barnes mortgages, and had advised and encouraged the sale by

Page 80 U. S. 521

Barnes, and participated in the organization of the complainants' company, and alleged further that the board of directors of the corporation complainant became totally changed, and was at the time of such payment wholly composed of persons who had not participated personally in the foreclosure of the Barnes mortgage, and that a large majority of the stockholders and directors at the time of the said payment were persons who had no interest at the time of the foreclosure and no participation in the proceedings.

The defendants demurred to this bill, and on the hearing of the same the demurrer was sustained, and the bill dismissed. From the decree dismissing the complainants' bill, this appeal was taken.

Page 80 U. S. 523

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