VAN WEEL v. WINSTON and others.

115 U.S. 228 (6 S.Ct. 22, 29 L.Ed. 384)

VAN WEEL v. WINSTON and others.1

Decided: November 2, 1885

Syllabus from pages 228-229 intentionally omitted

Statement of Case from pages 229-234 intentionally omitted

J. K. Edsall and W. H. Moore, for appellant.

Argument of Counsel from pages 234-236 intentionally omitted

M. W. Fuller and W. C. Goudy, for appellees.

MILLER, J.

This is an appeal from a decree of the circuit court of the Northern district of Illinois, dismissing the bill of Van Weel, who was plaintiff below and is appellant here. The original bill was filed December 12, 1876, and several amended bills were filed, until, on May 22, 1880, complainant filed what he calls his amended and supplemental bill, substituting it in lieu of his previous bill and amended bills. The defendants named in this bill are the Chicago & Southwestern Railway Company, of Iowa and Missouri, Frederick H. Winston and George C. Campbell, citizens of Illinois, Calvin F. Burnes, a citizen of Missouri, and David Dows and Frederick S. Winston, citizens of New York. Mr. Van Weel describes himself as an alien, and a subject of the king of the Netherlands, and a holder and owner of bonds of the Chicago & Southwestern Railway Company for $67,000, principal, and overdue interest on them to the amount of $35,175. He brings this suit, as his bill alleges, not only for himself, but on behalf of numerous other holders of the same issue of bonds, whose names he gives, to the amount, including interest, of $671,000. The bill was demurred to, the demurrer was sustained, and a decree rendered dismissing it, from which this appeal is taken.

The contest seems to be mainly between complainant, Van Weel, on one side, and Frederick H. Winston on the other. Calvin Burnes, a citizen of Missouri, has not been served with process within the Northern district of Illinois, and has not appeared by himself or attorney. The same may be said of David Dows and Frederick S. Winston, who are citizens of New York. F. H. Winston has demurred separately, and if the bill cannot be sustained against him it is obvious, from its character, that it is not good against the other defendants. The bill is a long one, the allegations are not classified, nor the true foundations of relief very clearly stated. It is full of the words 'fraudulent' and 'corrupt,' and general charges of conspiracy and violation of trust obligations. Mere words, in and of themselves, and even as qualifying adjectives of more specific charges, are not sufficient grounds of equity jurisdiction, unless the transactions to which they refer are such as in their essential nature constitute a fraud or a breach of trust for which a court of chancery can give relief. Ambler v. Choteau, 107 U. S. 590; S. C. 1 Sup. Ct. Rep. 556.

The charges in this bill on which relief is sought may be arranged under two heads: (1) Fraudulent misrepresentations of the defendant affecting the character and value of the security on which the bonds in question were negotiated. (2) The violation of certain obligations, in the nature of a trust, which he assumed in regard to the security and ultimate payment of the bonds. A few of the most important matters applicable to both these charges as found in the bill may be thus stated:

A company had been incorporated under the laws of Iowa to build a railroad from the town of Washington, in that state, on the line of the Chicago, Rock Island & Pacific Railroad Company, in a south-westerly course to the Missouri river, or to the line of the state of Missouri in that direction. Another corporation had been organized under the laws of Missouri to build a railroad in that state from a point opposite the city of Leaven worth, in Kansas, to the Iowa state line, in the direction of the city of Des Moines in that state. These companies were consolidated into one, under the name of the Chicago & Southwestern Railway Company, with the declared purpose of building a single road from Washington to the Missouri river at a point opposite Leavenworth. Of this company Mr. Winston became the president, and a member of the executive committee of its board of directors. The company issued bonds for $5,000,000, which were guarantied by the Rock Island Company, and made a mortgage on the entire line of its road to secure their payment. The length of this line was 266 miles, and the money raised on these bonds secured its rapid completion. In the mean time another corporation had been organized in Missouri to build a road from the Missouri river opposite the city of Atchison, in the state of Kansas, to some point on the line of the Chicago & Southwestern road. This road was called the Atchison Branch, and when the main branch of the Southwestern road was nearly finished, lacking, as the bill avers, only 50 miles of its completion, a consolidation was effected between the company organized to build this branch road to Atchison and the original Chicago & Southwestern Company, in which consolidation the corporation retained the name of this latter company. This company, as consolidated, at once determined to raise a new loan of a million of dollars, to be used mainly for the purpose of building the Atchison Branch road, on which but little, if any, work had been done. As a security for the bonds of this loan, they made another mortgage, which was a first mortgage on the Atchison Branch, and a second mortgage on the main line. These bonds were all sold, and the two lines of road completed within a reasonable time; and it may as well be added that both mortgages were forfeited in a few years for non-payment of interest, and the mortgages foreclosed by a sale of the roads under two different foreclosure suits.

The charge of actual fraud against Mr. Winston grows out of certain acts and representations made by him in connection with the sale of these bonds by the Chicago & Southwestern Company. In order that no injustice may be done the complainant in regard to his allegations on this point, the language of the bill will be here given:

'Your orator further complains and states that the said Frederick H. Winston, and his confederates afterwards, to-wit, on or about the first day of June, A. D. 1871, contrived and entered into a scheme to secure a loan of the further sum of $1,000,000, for the ostensible purpose of building a branch line of road as hereinafter stated, but in reality to enable him and his confederates to get control of, and convert to their own use, a large part of the funds secured and advanced to build said branch road. And to that end said Winston, as president of said Southwestern Company, caused a circular to be issued, a true copy of which is hereto annexed, marked 'Exhibit A,' to which reference is made as if it was incorporated herein, in which, among other things, speaking as president of said Southwestern Company, he said: "On the first day of May, 1871, the Chicago & Southwestern railway, from Washington, Iowa, to Leavenworth, Kansas, a distance of 266 miles,—now finished and in operation, 216 miles,—will be fully completed and opened for business under the auspices and management of the Chicago, Rock Island & Pacific Railroad Company. The two roads, thus under one management, will constitute a through line, and the shortest through line, from Chicago and the Great Lakes of the North to the extreme Southwest. Congratulating our friends and ourselves upon the prompt sale of our first issue of bonds, as well as their present established market value, both in this country and in Europe, we would present for sale, through the financial agents of the company, a second issue, for the purpose of constructing a branch railroad from the main line to Atchison, Kansas, a distance of about fifty miles.'

'Said Winston, after setting forth the advantages of Atchison as a commercial and railway center, continued as follows:

"To carry on the arrangements before stated, the Chicago & Southwestern Railway Company have issued one thousand bonds, dated June 1, 1871, each for one thousand dollars, due thirty years after date, with semi-annual coupons annexed, at the rate of seven per cent. per annum, principle and interest payable in American gold coin at the American Exchange National Bank, in the city of New York; all of which are equally secured by a first mortgage on the road to be built, its assets, rights of way, earnings, and other property, as well as by a second mortgage upon the Chicago & Southwestern Railway, its property and franchises.'

'It was further stated in said circular that said mortgage would be 'a safe and reliable security,' the value of which would be better appreciated by the fact that the 'Chicago, Rock Island & Pacific Railroad Company had already agreed to lease, and would when completed operate, the whole line' on terms that would pay a handsome dividend to the stockholders, and 'which in no event' would be 'less than the interest on all the bonds outstanding,' and that the value and security of the contract aforesaid was 'equal to a direct indorsement of the bonds' by the Rock Island Company.

'It was further stated in said circular:

"The Chicago & Southwestern Railway, for over two hundred miles west from Washington, is pointing almost directly to Atchison, so that its extension to that place involves less curvature than that of the established line to Leavenworth.' 'The Atchison Branch, through the populous counties of Buchanan, Clinton, and Platte, offers railroad facilities to wealthy agricultural communities, which in return must afford a heavy and lucrative local traffic. Every tract over which it will pass is a farm, teeming with the abundant products of the famous Platte purchase.' 'With the offering of the first loan of the Chicago & Southwestern Railway Company we were admonished, as the originators of a new enterprise, to avoid the language of eulogy and enthusiasm. Difficult as was the task to those who knew its real merits, we have compensation now in a final and complete success, far beyond any expectation we dared to hope to excite by any statement in our former publication. Reviewing with a just pride all that was then written, we feel authorized to claim the confidence of the numerous friends, both in Europe and in this country, of the Chicago & Southwestern Railway Company, to whom we have more than verified all our statements.' 'To complete the connections of the Chicago & Southwestern Railway, to extend its power and usefulness, and to increase its business and earnings, by the construction of the Atchison Branch, we now offer this loan, and commend it to our friends as a safe and desirable investment.' Dated 'NEW YORK, June, 1871,' and signed 'F. H. WINSTON, President.'

'The falsehood and fraud in these representations is in the alleged fact that the branch road, when built, was only twenty-nine miles and not fifty, whereby the bondholders were deprived of the security of twenty-one miles of road which they had a right to expect to make good their bonds, and that it was known to Winston at the time that the road would not be as long as thus represented, and would not go through all the counties named. There was one of these counties in point of fact not touched by the road.'

The first observation to be made on this subject is that circulars, on which this allegation is founded, are exhibits to the bill, and, in every instance, they are clearly the circulars of the Chicago & Southwestern Railroad Company. They are signed by Mr. Winston as president of that company, and purport to be issued from its office and in the charging part of the bill, copied above, and all through it, he is said 'to be speaking as president of that company.' There is no allegation anywhere that Winston ever gave his personal pledge or statement to any one about to invest in the bonds of the company that the road would be 50 miles long, or any other length. It is obvious from the nature of these circulars that the branch road had not then been located, and Mr. Winston, as an individual, could give no pledge on that subject which would bind the company, nor could he do so as president of the company. The road had yet to be located, and this could only be done by the board of directors, of whom Mr. Winston was but one of eight or ten. A source of much safer reliance as to the security which these purchasers of the bonds were getting was the mortgage given by the company. This, of course, was made and recorded before the negotiation for the loan was commenced, and copies of it accompanied the bonds when offered for sale. Every prudent man, knowing that this mortgage was his main security, would examine it, or his agent would, before investing his money. In this mortgage or deed of trust, the trustees being David Dows, Frederick S. Winston, and Calvin F. Burnes, the property conveyed is described as 'the branch railroad of said party of the first part, as the same now is or may be hereafter surveyed, and being constructed and leading from the Missouri river, in the state of Missouri, at a point opposited the city of Atchison, in the state of Kansas, by the most practicable route, not exceeding 50 miles in length, to a junction with the main line of the railroad of said party of the first part.'

Whatever representations may have been made in the circulars of the company was, according to all rules of evidence, superseded by this solemn instrument between the parties. If they differed in any respect, the latter must be looked to as the security on which the bondholders alone had a right to rely. This instrument, so far from giving any pledge or assurance that the branch road should be 50 miles long, or near that, is careful to say it shall not exceed that length. The limitation is in its length, not its shortness. The latter is provided for by saying that it should be by the most practicable route. It is impossible to read this description of the line of road conveyed as security for the bonds without seeing clearly that the line was not yet located,—that its future location was to be governed by two considerations: (1) that it should be the most practicable route between Atchison and the main line of the road; and (2) that its length should not exceed 50 miles. If the most practicable line, by which is evidently meant the best working line for the company who was building it, should require a shorter line than 50 miles, there is not the shadow of a promise or suggestion that it should not be so long, and no longer, as that required. But in the provision that its length should not exceed 50 miles there was a protection against wasting the money received from the bondholders on a long and unprofitable line of road made only for the benefit of people living along that line. But this line of road was not the only security for the payment of these bonds. The mortgage included also the entire main line from Washington to Leavenworth, (266 miles,) which was now nearly completed. This made a direct connection between the rich agricultural country of western Missouri and the city of Chicago by means of the Chicago, Rock Island & Pacific Company, then a rich and prosperous corporation, so deeply interested in this Southwestern Railway that it had guarantied $5,000,000 of the bonds of the company. It was further stipulated in this mortgage or deed of trust that the proceeds of the sale of these bonds should be placed in the hands of the Rock Island Company, which should only pay them out in the regular prosecution of the work. It was further provided in that mortgage that if any of these proceeds remained with that company after the completion of the road, it should be paid over to Frederick H. Winston or his agent.

It cannot be doubted that this mortgage on the main line, though a second lien, was regarded as an important part of the security of the bondholders under it, and when taken in connection with the aid and interest of the Rock Island Company the precise length of the branch line could not have been held to be very important. In fact, as the two lines belonged to one company, and that company was liable for all the bonds, it was obviously the interest of the bondholders and of the stockholders that the branch line should be so located as to make it add to the profits of the entire enterprise on which the bondholders held a lien.

In regard to the allegation of fraud in this matter it is apparent (1) that all that is charged against Mr. Winston is that he signed, or permitted his name to be affixed to, a circular which stated the probable length of the branch road, then unsurveyed and unlocated, as about 50 miles; (2) that the place of junction with the Southwestern road, which necessarily determined the length of the branch road, was not described or mentioned; (3) that in the mortgage which was made on said branch road all that was said was that it should not exceed 50 miles; (4) that it is nowhere averred that the line was not properly located, or that it should have been located otherwise; (5) that the security which the bondholders had upon that line and the other seemed to render the place of connection between the branch and the main line unimportant as regards the security for their loan.

We are of opinion, therefore, that the complainants had no right to rely on the statement concerning the length of the line as materially affecting their security, and that Mr. Winston committed no fraud in the part he took in that matter. This view is reinforced by the admission of the bill that the branch road was completed mainly out of the money arising from the bonds sold to plaintiff and others, and that several years after both it and the main line had been finished and in operation, both roads were sold under the two mortgages; that the branch line was sold under foreclosure proceedings inaugurated by Van Weel, and was bought in for $10,000 by Mr. Berg, one of Van Weel's associates as bondholder, and that they now, as far as appears, own the road their money was used to build.

Other transactions are mentioned as fraudulent, such as that Mr. Winston converted some of the money arising from these bonds to his private use, and not to the purposes of the company. The answer to this is that Mr. Winston came under no obligation to see to the application of this money as the bondholders might think it ought to be applied. They had bought their bonds, paid their money, and received their security. The money so diverted was the money of the Southwestern Company, and not their money. The wrong done by Winston in that matter, if wrong there was, was done to that company, and not to the bondholders. They had provided their own means of insuring the building of this branch road by disbursing the money through the Rock Island Company, and it was successful. The road was built. There was no privity between Mr. Winston and these bondholders as to his use of money which they had loaned to the company, which was no longer their money. The error which pervades the bill throughout is to treat this corporation, to which the bondholders loaned their money, as if it had no existence, as if they had loaned it to Mr. Winston and held his personal obligation that it should all be honestly applied, and be responsible for the repayment of the loan. If Mr. Winston cheated this company out of its money, the right to redress for that wrong is in the company or in its stockholders. As a creditor of the company, Mr. Van Weel has no right to interfere in the matter until he has a judgment against the company, with an execution returned nulla bona. He has not, in this suit, shown any right to use the name of the company, or of its stockholders, to obtain redress for a tort committed on them. U. S. v. Union Pac. R. Co., 98 U. S. 614.

There are probably other allegations of fraud, but they are no better founded than these, and we can give them no further attention.

2. As regards the matter of trust, which is one of the grounds of relief set up in the bill, we need not occupy much time in its consideration. The trustees in the mortgage, which is the only express trust that we can find set out in the bill, were Frederick S. Winston, David Dows, and Calvin Burnes, neither of whom reside within the jurisdiction of the court, or has been served with processes or appeared to the suit. If, however, they were before the court, they are not charged with any breach of the duty with which they were entrusted. The application of the money arising from the mortgage bonds was not by the mortgagees intrusted to them, nor had they any control over it after the bonds were sold. It is not alleged that they refused to foreclose the mortgage when it became forfeited by non-payment of interest, or that they failed to perform any duty imposed upon them by the mortgage. It is asserted, however, that Frederick H. Winston, as president of the company, was bound to see that the money raised on these bonds was used exclusively in the construction of the branch road, and that, in this regard, he was a trustee for the lenders of the money. We are unable to see any such trust in the matter.

The contracting parties in regard to this loan were the bondholders and the Southwestern Company. The one became debtor for the money loaned, the other became creditor. Mr. Winston, as the president of the company, represented the company, the borrower. The lenders desired a security for the repayment of their money, which they obtained in the mortgage, and their trustees in that trust were Dows, Burnes, and F. S. Winston. They in that instrument undertook to secure the building of this road out of the money loaned by requiring its deposit with the Rock Island Company, and its disbursement, for that purpose, under its supervision. But if the loan should produce more than was necessary for that purpose, what was to become of it? Was it to go back to the lenders? There is no hint of the kind. It was impracticable to do so, because the bonds would, many of them, have changed hands. As to the new owner, it would have been a mere gratuity to return it; and the original lender had no interest in the matter. Instead of this, it is expressly declared that the Rock Island Company could relieve itself of further obligation in the matter by payment to Winston as president of the company. When thus paid, did he hold it as trustee for the bondholders? If so, under what trust or what obligation? Could he return it to the bondholders, with the bonds still outstanding against the company? Or did he hold it merely as the representative of the company of which he was president? We think it was clearly the money of the company, and could have been used by it for the purchase of rolling-stock, general equipment, or any other legitimate use of its own money. This money belonged to the company. The road was built,—the only interest in the nature of a trust which the lenders had attempted to protect by the control of the funds. The obligation of Mr. Winston in the disposition of the money, if any of it came to his hands, was to the company. If it was lost, it was the company's loss, not appellants'. If he improperly or fraudulently converted it to his own use, he was liable to the company and not to the plaintiff in this suit. There was no privity or trust relation between him and them in this regard.

We think appellant has shown no right to relief in this suit, that the demurrer was properly sustained, and the decree of the circuit court dismissing the bill is therefore affirmed.

Fraudulent Representations.

Where fraud has been committed, and by it plaintiff has been injured, equity will relieve against it, Singer Manuf'g Co. v. Yarger, 12 Fed. Rep. 487; Elfelt v. Hart, 1 Fed. Rep. 264; Taylor v. Saurman, 1 Atl. Rep. 44; otherwise, however, if no damage is sustained. Dunn v. Remington, 2 N. W. Rep. 230.

Misrepresentations are fraudulent, Lynch v. Mercantile Trust Co., 18 Fed. Rep. 486; Buckner v. Street, 15 Fed. Rep. 365; Chandler v. Childs, 3 N. W. Rep. 297; Cavender v. Roberson, 7 Pac. Rep. 152; even when believed to be true by party making them, Lynch v. Mercantile Trust Co., 18 Fed. Rep. 486; Seeberger v. Hobert, 8 N. W. Rep. 482; and the vendor cannot purge himself of fraud by offering to rescind. Lynch v. Mercantile Trust Co., 18 Fed. Rep. 486.

Fraudulent representations must be material, Hall v. Johnson, 2 N. W. Rep. 55; and must have been relied on. Lynch v. Mercantile Trust Co., 18 Fed. Rep. 486; Seeberger v. Hobert, 8 N. W. Rep. 482. But the purchaser need not suppose every statement made to him literally true in order to entitle him to relief. Heineman v. Steiger, 19 N. W. Rep. 965.

Where the vendor honestly expresses an incorrect opinion as to the amount, quality, and value of the goods he disposes of in a sale of his business, and good-will thereof, and the purchaser sees or knows the property, or has an opportunity to know it, no action for false representations will lie. Collins v. Jackson, 19 N. W. Rep. 947. And mere 'dealing talk' in the sale of goods, unless accompanied by some artifice to deceive the purchaser or throw him off his guard, or some concealment of intrinsic defects not easily detected by ordinary care and diligence, does not amount to misrepresentation, Reynolds v. Palmer, 21 Fed. Rep. 433; unless there be false statements in some manner affecting the character, quality, value, or title of the articles sold. Bank of Barnesville v. Yocum, 9 N. W. Rep. 84. But a statement recklessly made without knowledge of its truth is a false statement knowingly made within the settled rule. Cooper v. Schlesinger, 4 Sup. Ct. Rep. 360.

Whether or not omission to communicate known facts will amount to fraudulent representation depends upon the circumstances of the particular case, and the relations of the parties. Britton v. Brewster, 2 Fed. Rep. 160. Where a vendor conceals a material fact, which is substantially the consideration of the contract, and which is peculiarly within his knowledge, it is fraudulent misrepresentation. Dowling v. Lawrence, 16 N. W. Rep. 552.

Fraud is a good defense to an action on a contract, but it is not sufficient to plead fraud in general terms. The specific statements and acts relied upon as constituting the fraud must be set out. Mills v. Collins, 25 N. W. Rep. 109.

Evidence of fraudulent representations must be clear and convincing. Wickham v. Morehouse, 16 Fed. Rep. 324. Where a man sells a business, and the contract of sale contained a clause including all right to business done by certain agents, evidence that the seller was willing to engage in the same business with such agents is not proof of fraud in making the contract. Taylor v. Saurman, 1 Atl. Rep. 44. Equity will not presume the ratification of fraudulent contract. Northern Pac. R. Co. v. Kindred, 14 Fed. Rep. 77.

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See note at end of case.