Whelpley v. Erie Ry. Co.

NELSON, Circuit Justice. The question involved in this alleged overissue of stock depends upon the construction of several provisions of the laws of the state of New York concerning the powers and duties of railroad corporations. Different and conflicting constructions of such provisions are insisted upon by the respective parties, and the questions involved therein, must necessarily come up for consideration and disposal, on the final hearing of the ease, on pleadings and proofs; but, in the view I have taken of the ease, it will not be necessary, or. perhaps proper, to express an opinion in re-sper-T to them, on this preliminary motion. I am satisfied, on an examination of the bill, and of the papers in opposition, that a case has not been made out that will authorize the court to uphold the order for the injunction, or for the appointment of a receiver, even assuming the stock in question to be a part of an illegal issue or an over issue. If the moneys received on the issue of the bonds which were converted into stock had been kept apart and separate from the general funds of the company, and could be traced and identified, an equity might well arise in behalf of the defrauded stockholders, against the particular fund, and attach to the same. In equity and conscience, the money paid on the issue of the bond, and thus traced and identified, would be the money of the person who paid it; and the holder of stock, into which the bond had been converted, and who would represent the bond on which the money was paid, would stand in the same equitable relation to the fund as the person who paid the money. But the bill, in this case, does not place the right of the plaintiff to follow the moneys advanced on the alleged fraudulent issues of stock, on the ground that such moneys were kept separate and apart from the general funds of the company. On the contrary, it sets up the right to have set apart from these general funds a sufficient amount to reimburse, the plaintiff for these advances, thereby, impliedly, at least, admitting that they have been commingled with the general mass. Besides, the opposing papers show that this is the fact. Judge Story thus states the principle applicable to such a case (2 Story. Eq. Jur. § 1265): “Where there is any fraud touching property, they” (courts of equity) “will interfere, and administer a wholesome justice, and sometimes even stern justice, in favor of innocent persons who are sufferers by it, without any fault on their own side. This is often done by converting the offending party into a trustee, and making the property itself subservient to the proper purposes of recompense, by way of equitable trust or lien. Thus, a fraudulent purchaser will be held a mere trustee for the honest. but deluded and cheated, vendor.” And, as stated by Lord Ellenborougb. in Taylor v. Plumer, 3 Maule & S. 562, 575, “it makes no difference, in reason or law, into what other form, different from the original, the change may have been made, whether it be into that of promissory notes for the security of the money which was produced by the sale of the goods.” &c., “for, the product of. or substitute for, the original thing, still follows the nature of the thing itself, as long as it can be ascertained to be such, and the right only ceases when the means of ascertainment fail, which is the case when the subject is turned into money, and mixed and confounded in a general mass of the same description.” See. also. Thompson v. Perkins [Case No. 13,972], and 2 Story. Eq. Jur. $ 1259. In the latter condition of things, the aggrieved party can come [920] in only as a general creditor, and is entitled to no preference, or priority, oyer that class of creditors. This is the condition of the plaintiff in this bill. It is claimed, by the counsel for Belmont •and Lucke, that the receiver should be removed as unfit and disqualified, on the facts set forth and admitted in the ease, and some other person be appointed in his place; and that the company is estopped from contesting the matter, because it assented to the appointment of the receiver. I do not assent to this view. The company waived the notice which is required by the rules and practice of this court, before an injunction can be issued; but the order for the injunction; and for the appointment of a receiver, depended upon the judgment of the judge who granted them. Indeed, I am not prepared to admit that an order for an injunction, or a receiver, can be made in an improper case, even with the consent of both parties, more especially where the rights of third persons may be concerned. My conclusion, on the whole, is, that Belmont and Lucke be permitted to join as parties to the suit, that the injunction be dissolved, and that the order appointing a receiver be vacated and set aside.