American Loan & Trust Co. v. Minnesota & Northwestern Railroad

Mr. Justice Baker delivered the opinion of the court: On September 26,1881, a corporation was formed under the laws of the State of Wisconsin, called the Chicago, Freeport and St. Paul Railroad Company, for the purpose of building a railroad from the boundary line between the States of Wisconsin and Illinois, in a northwesterly direction, to the eastern boundary line of the State of Minnesota. On December 16,1881, the St. Paul, Minneapolis and Chicago Railroad Company was organized under the laws of the State of Minnesota, for the purpose of constructing a railroad from the eastern boundary line of Minnesota, in a north-westerly direction, to the city of Minneapolis. And on December 27, 1881, the Chicago, Freeport and Northwestern Railroad Company was organized under the laws of the State of Illinois, to construct a railroad from a point near the city of Chicago, via Freeport, to the north boundary line of the State of Illinois. On January 4, 1882, there was a consolidation of the Wisconsin corporation and the Minnesota corporation, in pursuance of the statutes of said respective States, and the consolidated company was called the Chicago, Freeport and St. Paul Railroad Company. On March 20, 1882, this Chicago, Freeport and St. Paul Railroad Company of Wisconsin and Minnesota, and the Chicago, Freeport and Northwestern Railroad Company of Illinois, entered into articles of consolidation, which were recorded March 30, 1882, in the office of the Secretary of State of the State of Illinois. By these latter articles of consolidation the new consolidated corporation was to be known and designated as the Chicago, Freeport and St. Paul Eailroad Company, and its line of railroad was to extend from a point in Chicago, in a westerly direction, to Freeport, thence in a northerly direction to Cadiz, in Wisconsin, and thence in a northerly and westerly direction to Minneapolis, in the State of Minnesota. On April 10,1884, the said consolidated Chicago, Free-port and St. Paul Eailroad Company executed its trust deed or mortgage to the American Loan and Trust Company of New York, appellant herein, to secure the payment of $10,000,000 in first mortgage bonds of $1000 each, which trust deed, soon after its execution, was recorded in the counties of Cook, DuPage, Kane, DeKalb, Stephenson and Ogle, in the State of Illinois. This mortgage was upon all the lines and property of the railroad company in the States of Illinois, Wisconsin and Minnesota, and covered both the present and the after-acquired property of the company. It appears that only 160 of these $1000 bonds have ever been issued; that said 160 bonds are outstanding and are held by bona fide purchasers for value, and that none of the past due interest coupons upon said bonds have been paid. Commencing with May, 1885, and ending with December 30, 1885, said consolidated Chicago, Freeport and St. Paul Eailroad Company procured right of way contracts from forty-eight land owners, covering about eighteen miles of right of way, from Maywood, in Cook county, to the Fox river, at St. Charles, in Kane county, and shortly - after these contracts were obtained they were recorded in the respective counties of Cook, DuPage and Kane. It appears that about 1854 a corporation was organized under the laws of Illinois for the purpose of procuring a right of way one hundred feet wide through Cook, DuPage and Kane counties to the west bank of Fox river, and building thereon a railroad called the St. Charles Air Line; that it partially constructed its road-bed, but in 1855 abandoned said right of way and road-bed, and the former owners of the land taken therefor resumed possession thereof, and thereafter occupied and claimed ownership of the same uninterruptedly for twenty years. In March, 1886, the board of directors of the Chicago, Free-port and St. Paul Railroad Company adopted and laid out its line of railroad, one hundred feet in width, npo-n the old road-bed of the “St. Charles Line,” from a point at the city limits of Chicag'o, at a place called Maywood, to the west bank of Fox river, at St. Charles, in Kane county. In February, 1886, the appellee, the Minnesota and Northwestern Railroad Company, was incorporated under the laws of the State of Illinois, and authorized to construct, equip and operate a railroad from the city of Chicago to East Dubuque, in JoDaviess county, and in April, 1886, it made its surveys over and upon the same line as that made by the Chicago, Freeport and St. Paul Railroad Company, — that is to say, over the old “St. Charles Line,” from Maywood, near the city limits of Chicago, to the west bank of Fox river, at St. Charles; and before it made its said surveys it was notified that the Chicago, Freeport and St. Paul Railroad Company had already surveyed and located its railroad, as above stated, and had procured the above mentioned contracts for its right of way, but that deeds therefor had not yet been taken. The appellee employed the former attorney of the Chicago, Freeport and St. Paul Railroad Company, who had procured the right of way contracts for said company, to obtain the execution of deeds conveying to it, appellee, the same lands described in said right of way contracts, and for the same considerations named in said contracts. Most of the land owners executing such deeds supposed they were executing the deeds called for by the terms of their respective right of way contracts. Said attorney obtained deeds conveying said right of way to appellee, and appellee entered into possession of the same and constructed thereon its railroad, and is now using the premises as a part of its railroad route from Chicago to East Dubuque. On December 27, 1886, appellee, the Minnesota and Northwestern Railroad Company, executed a trust deed to the Metropolitan Trust Company of the city of New York and Robert H. Benson of London, England, as trustees, to secure an issue of $8,000,000 in bonds. Said trust deed was duly recorded, and it purported to convey to the trustees all and singular the railroad of the Minnesota and Northwestern Railroad Company, extending from Chicago to Dubuque, constructed and to be constructed, with all the appurtenances thereto, and all property used in connection therewith, together with all its easements, franchises, privileges and immunities, and all of its right of way. The litigation now before us grows out of a bill in equity exhibited in the circuit court of Cook county by the appellant, the American Loan and Trust Company, as trustee under the trust deed of April 10, 1884, at the request of the holders of the 160 bonds secured thereby, against the appellee, the Minnesota and Northwestern Railroad Company, the Chicago, Freeport and St. Paul Railroad Company, the Chicago, Freeport and Northwestern Railroad Company, and the Metropolitan Trust Company of New York and Robert H. Benson, trustees under the trust deed of December 27, 1886. The above stated facts are substantially those that appear in the voluminous bill of complaint found in the record, and the bill charges that the “Minnesota Line,” in procuring the deeds for said right of way in the manner stated, fraudulently circumvented the “Freeport Line” as to its rights under the contracts of right of way which it had previously obtained by its attorney, and who had recorded the same prior to the execution of said deeds, and that the “Freeport Line” having offered to pay the “Minnesota Line” what it had paid out for the deeds, the title to said right of way lands should be declared to be held by the “Minnesota Line” in trust for the “Freeport Line.” The bill also charges, that although the Chicago, Free-port and St. Paul Railroad Company (the consolidated company,) executed the trust deed to appellant and issued the 160 bonds, yet it was the act and deed of the Illinois corporation, the Chicago, Freeport and Northwestern Railroad Company. The bill prays that appellant be subrogated to all the rights of the “Freeport Line” in reference to the right of way contracts, and that the deed of trust executed to appellant under date of April 10, 1884, be declared a first and prior lien upon the lands described in the right of way contracts, and that an account be taken of the amount due upon the 160 bonds, and that either the Chicago, Freeport and Northwestern Railroad Company (the Illinois company) or the Chicago, Freeport and St. Paul Railroad Company (the consolidated company) be decreed to pay to appellant, upon a day certain, the amount so found to be due, and in default thereof said railroad companies, and all persons claiming under them, be forever excluded and debarred from all equity of redemption with reference to the lands described in said right of way contracts; and that an account also be taken of the amount the “Minnesota Line” paid for the deeds of the land described in those right of way contracts, and if the “Minnesota Line” elects to retain possession and use of the same as its railroad roadbed, it be required to pay- to appellant a sum of money not exceeding the amount of the 160 bonds, interest, costs, charges and allowances of this suit, and that upon receipt of the payment of this amount appellant convey to the ‘Minnesota Line” all right, title and interest in the usurped right of way lands, as the court may direct. The bill also contains a prayer for general relief. The circuit court sustained a demurrer to the bill and dismissed it out of court, whereupon this appeal was taken. A motion was made in this court by appellee to dismiss the appeal for want of jurisdiction, and that motion was reserved to the hearing. The ground of the motion is, that a freehold is not involved, because the object of the bill is simply to enforce and foreclose a lien on real estate. The fourth and fifth assignments of error found in the record are as follows: “Fourth — The court erred in holding that the Chicago, Freeport and St. Paul Railroad Company is an invalid corporation, and without power to execute the trust deed and right of way contracts in controversy. “Fifth — The court erred in holding that the Chicago, Freeport and St. Paul Railroad Company was not a de facto, if not a de jure, corporation, and that it did not have the power to execute the trust deed and right of way contracts in controversy.” It thus appears that the primary question involved in the litigation is that of the existence or non-existence of a franchise, and this being so, it is immaterial whether a freehold is involved or not. This court has jurisdiction of the cause upon a direct appeal from the circuit court. The motion to dismiss cannot prevail, and is denied. By an act approved and in force February 28, 1854, railroad companies organized in this State were authorized to consolidate with railroad corporations of other States. (Laws of 1854, p. 9.) But specification 237 of section 1 of “An act to repeal certain acts therein named,” approved March 31, 1874, and in force July 1, 1874, (Rev. Stat. 1874, pp. 1012, 1021,) said act of February 28, 1854, was in express terms repealed. The attempted consolidation of. the Chicago, Freeport and Northwestern Railroad Company of Illinois with the consolidated Chicago, Freeport and St. Paul Railroad Company of Wisconsin and Minnesota was in 1882. Appellant does not claim that there was at that time any statute of this State that authorized or permitted such consolidation, but contents itself by calling our attention to paragraphs 50, 57 and" 65 of chapter 32, and paragraphs 23, 27, 43 and 44 of chapter 114, Starr & Curtis’ Annotated Statutes, as being the statutes of the State then in force and pertaining to the subject, and submits that there was a color of authority for consolidation. Said paragraphs 50 and 57 manifestly have reference only to companies incorporated under the laws of this State, and paragraph 65 does not purport to authorize any consolidation of corporations, but merely makes provision for the debts and liabilities in cases where consolidation is permitted. Said paragraph 23 (sec. 22 of the Railroad Incorporation act of March 1, 1872,) is simply ,a substantial re-enactment of section 11 of article 11 of the constitution of 1870, and is a mere limitation upon and not a grant of power, and said paragraphs 43 and 44 are paragraphs 34 and 35 of chapter 114 of the Revised Statutes of 1874. One of them empowers railroad companies to enter into operative contracts, and the other' gives them the right of connecting with each other and with railroads of other States, upon such terms as may be mutually agreed on. Attention may, in this connection, be called to the last paragraph of “An act to facilitate the carriage and transfer of passengers and property by railroad companies,” approved May 24, 1877, and in force July 1, 1877. (Laws of 1877, p. 167; 2 Starr & Curtis’ Stat. p. 1922.) It is there provided: “That nothing in this act shall be held or construed to authorize any railroad or railway company doing business under any charter granted by this State, to consolidate with any railroad or railway company out of this State, so as to form one continuous line of railroad.” This legislation, taken in connection with the specific repeal of the act of 1854, seems to indicate a legislative public policy adverse to the consoli-' dation of railroad companies organized under the laws of this State with railroad companies formed in other States. And the same general policy seems to be denoted by the proviso to the act approved March 30,1875, and in force July 1, 1875. (Laws of 1875, p. 96; 2 Starr & Curtis’ Stat. p. 1917.) The proviso is, that nothing in that act shall be so construed as to authorize any corporation acting by or organized under the laws of any other State to purchase or otherwise become the owner of any railroad in this State. The rule of construction applicable to the several statutory provisions that have been mentioned is, that every power that is not clearly granted is withheld, and that any ambiguity in the terms of the grants must operate against the corporations and in favor of the public. (Black v. Delaware & R. C. Co. 24 N. J. Eq. 455.) So the conclusion must be, that in 1882 railroad corporations organized under the laws of Illinois had no authority whatever, unless granted in their respective special charters, to consolidate with railroad companies of other States. Indeed, the statutes of the State then in force seem plainly to show a then prevailing legislative and public policy opposed to such consolidation; and it is hardly necessary to suggest that the act of June 14, 1883, (Laws of 1883, p. 124; 2 Starr & Curtis, p. 1916,) and the act of June 30,1885, (Laws of 1885, p. 29; 3 Starr & Curtis, p. 1031,) are not retrospective, and do not affect the questions at issue in this litigation. The principal contention of appellant is, that any attempt at consolidation by a corporation of Illinois, when not questioned by the State itself, is good as against third persons, and especially wrongdoers. This claim is too broad, and the authorities cited in that behalf do not sustain it. Corporations cannot be consolidated without express sanction of the State. But this sanction maybe either by authority given in a general law, by the special charters of the consolidating companies, by a statute passed before consolidation, or by a subsequent legislative ratification of an unauthorized consolidation. (4 Am. & Eng. Ency. of Law, pp. 272i, 272k, and notes; Pearce v. M. & I. R. R. Co. 21 How. 441; Clearwater v. Meredith, 1 Wall. 25; N. Y. & S. C. Co. v. Fulton Bank, 7 Wend. 412.) And if the power to consolidate with other railroads is withheld, it is regarded as a prohibition against the exercise of such a power. 3 Wood on the Law of Railroads, sec. 486. The rule óf the law, instead of being as broad as is claimed by appellant, may be stated thus: Where there is a defacto corporation, its corporate existence, except in a few exceptional cases, cannot be questioned collaterally, and can only be inquired into by the State, and in a direct proceeding. (Hudson v. Green Hill Seminary, 113 Ill. 618.) But in order that there should be a defacto corporation two things are essential: First, there must be a law under which the corporation might lawfully be created; and second, user. Where the law authorizes a corporation, and there is an attempt, in good faith, to organize, and corporate functions are thereupon exercised, there is a corporation defacto, the legal existence of which cannot ordinarily be questioned collaterally. This is not only the doctrine of Hudson v. Green Hill Seminary, supra, but of numerous other decisions in this courts And in said Hudson case this court quoted with approval the language of the Supreme Court of Indiana in Williamson v. Kokomo Building and Loan Ass. 89 Ind. 389, as follows: “The rule stated does hot go to the extent of precluding strangers from showing that there was no law authorizing a corporation.” In Heaston v. Cincinnati, etc. Railroad Co. 16 Ind. 275, it is held that there must be a corporation de facto under an authority sanctioning such a corporation de jure. In Eaton v. Walker, 76 Mich. 579, it is said: “But the two things necessary to show a corporation, even defacto, do not exist. There is no law under which the power they assume might lawfully be created, and the mere fact that they assumed to act as such, even in the full belief that they were legally incorporated, would not constitute them a corporation de facto.” (See, also, Swartwout v. Michigan Air Line Railroad Co. 24 Mich. 389; Detroit Schuetzen Bund v. Detroit Agitations Verein, 44 id. 313.) In Evenson v. Ellingson, 67 Wis. 634, it is held that a body which cannot become a corporation de jure cannot become a corporation defacto. In City of St. Louis v. Shields, 62 Mo. 247, it is held that if a corporation be acting under legislative sanction and color of law, its corporate character cannot be questioned collaterally. In Pape v. Capitol Bank, 20 Kan. 440, in discussing the matter of a defacto corporation, it is said by Brewer, J., that the charter of a corporation, with acts of user, is sufficient as against collateral inquiry; that the same principle obtains in respect to incorporations organized under a general law, but that there must in such cases be a law under which the incorporation can be had. And see, also, Cooley’s Const. Lim. (6th ed.) p. 310. The authorities relied on by appellant do not support its proposition that an attempt at consolidation by a corporation is good as against third persons. In Leavenworth v. Chicago, etc. Railway Co. 134 U. S. 688, the consolidation was under a statute of the State of Missouri, which provides: “A certified copy of such articles of agreement, etc., shall be filed with the Secretary of State, when the consolidation shall be considered duly consummated, and a certified copy from the office of the Secretary of State shall be deemed conclusive evidence thereof.” In the case at bar there was no statute under which the consolidation could have been made, and the act of the Secretary of State in filing and recording the agreement for consolidation was wholly without warrant or authority of law, and consequently had no effect to either legalize the supposed consolidated company or give it the status of a defacto corporation. In Mitchell v. Deeds, 49 Ill. 416, the laws of both Illinois and Wisconsin authorized consolidation. In President and Trustees v. Thompson, 20 Ill. 197, it is held that to prove the existence of a corporation it is sufficient to produce the charter and prove acts done under it. And all the other cases cited, so far as they are within our reach, are either of like character, or else, by their facts, cases of corporations by way of estoppel as against those challenging corporate existence. Our attention, is called to no case in winch it is held that in the absence of any general law or special charter, or other statute authorizing incorporation or consolidation, as the case maybe, and also in the absence of subsequent legislative ratification, the juristic personality of a corporation or consolidated corporation is complete and conclusive against all the world except the sovereign power. For the reasons we have stated the supposed consolidated corporation of the States of Wisconsin, Minnesota and Illinois, called the Chicago, Freeport and St..Paul Railroad Company, is not, and never was, a corporation, either dejure or defacto. The right of way contracts and the trust deed made to appellant were and are invalid, and this because there was no corporation in existence with capacity to either obtain a right of way, or contract or act or be bound. Pearce v. M. & I. R. R. Co. 21 How. 441. The contracts for right of way can not be regarded as contracts made by the land owners with the Chicago, Freeport and Northwestern Railroad Company of Illinois. They do not purport to be the contracts of said company, and there are no facts stated that show that they are its contracts. The supposed consolidated corporation, being without capacity to make a contract, could neither bind itself nor the’ Illinois corporation. The resolutions of the Chicago, Freeport and Northwestern Railroad Company of Illinois, that are set out at large in the bill of complaint, avail nothing. The proposed authority to execute a trust deed and bonds was an authority that was to be exercised either by the Illinois corporation itself, or by a consolidated corporation of Illinois, Wisconsin and Minnesota, and the Illinois company executed no such deed or bonds, and no such consolidated corporation ever had either a de jure or de facto existence. Besides this, the Illinois company had no power or authority to issue bonds, or authorize any other person or corporation to issue bonds, for the purpose of constructing railroads in the States of Wisconsin and Minnesota. The capital and property of the Chicago, Freeport and Northwestern Railroad Company of Illinois could not lawfully be subjected to the payment of the liabilities of the Chicago, Freeport and St. Paul Railroad Company, that was lawfully organized under the laws of Wisconsin and Minnesota for the construction of certain railroads in said States. The demurrer to the bill of complaint admits only the facts that are well pleaded, and not the conclusions of law that are stated by the pleader. The view we have taken of the case renders it unnecessary to consider or decide various other matters that are discussed by counsel. We think there was no error in sustaining the demurrer and dismissing the bill. The decree of the circuit court is affirmed. Decree affirmed.