Commonwealth of Virginia v. State

Miller, J., delivered the opinion of the Court. After a persistent and successful struggle of more than forty years with many disasters and innumerable difficulties, the Chesapeake and Ohio Canal Company has at last received from its tolls and revenues a surplus over and above its ordinary expenses, applicable to the payment of its preferred or lien creditors. Under the pi’oceedings in this cause a part of this surplus has been paid into Court, and the immediate question now to be decided is, to whom shall this fund be paid ? Inasmuch, however, as there is a confident and apparently well-founded expectation that there will hereafter be large and increasing revenues annually accruing, to be applied to the same purpose, all parties in interest desire an adjudication by this Court of the priorities of the several classes of creditors of the Canal Company, not only to the fund now to be distributed, but to such future earnings.

Most of the questions that will necessarily govern future distributions, arise and must be decided in order to settle the proper disposition of the present fund. We shall, therefore, address ourselves to the decision of these priorities. The several classes of claimants, parties to this proceeding, and who are contesting priorities and preferences inter sese as well as against the State of Maryland, are: 1st. The holders of obligations or bonds to the amount of $56,896.48, issued to such of the creditors of the former Potomac Company as came in and accepted the terms offered by the resolutions of the Canal Company in 1834, for a portion of their several claims as then agreed upon. ⁵²⁸ 2d.

The holders of what are termed “Repair bonds,” to the amount of $200,000, issued in 1849, guaranteed by the State of Virginia, due on the 1st of July, 1869, and bearing coupons for semi-annual interest. 3d. The holders of what may be termed “Preferred construction bonds,” to the amount of $1,699,500, issued under the Maryland Act of 1844, ch. 281, due thirty-five years after date, with coupons for semi-annual interest, $300,000 of which were also guaranteed by Virginia. The State of Virginia, having paid as guarantor part of the over-due coupons of each class of bonds, and being also assignee of the claim of Selden, Withers & Co., for payment of other coupons of the Preferred construction bonds, is complainant in the cause. The State of Maryland, the largest and most generous creditor of the Canal Company, has, by an Act of her Legislature, consented to be a party to the bill and submits her rights to the adjudication of the Co,urt.

All the legislation of Congress, of Virginia and of Maryland, chartering and aiding this corporation, is referred to and made part of the bill and answers.. The necessities, resources, revenues, loans and financial condition of the Canal Company, from time to time, as set forth in the annual reports of its several presidents, with accompanying documents, are also spread upon the record, giving to the Court all necessary information to enable it fully to understand the important questions it is called upon to decide. A detailed statement of what is thus disclosed, constituting as it does a familiar part of the legislative, judicial and financial history of the State, is unnecessary and could not be given without protracting this opinion to an inordinate length. We shall content ourselves, therefore, with only such reference thereto as is essential to a fair understanding of the several legal points that have been argued and arise for decision. 1st.

The holders of the obligations issued to the creditors of the Potomac Company assert for their rights, an absolute priority over all other claims. The argument for this pre ⁵²⁹ ference, in which there is most force, is that by its charter, and as a fundamental condition thereof, the Canal Company was bound and assumed the obligation to pay the claims of these creditors, in the mode prescribed by»the 12th section of the Act of 1824, ch. 79. It is unquestionably true, that the assent of the Potomac Company, with the transfer of its property, rights and franchises, was essential to, and made a condition upon which the Canal Company obtained its corporate existence, and the provisions in the charter of that company in favor of the stockholders and creditors of the former company, could not be abrogated or impaired, without their assent, by any subsequent acts of the Canal Company, or even by any legislation conjoint or separate on the part of Congress, Virginia or Maryland. It is also true, that by such transfer the Canal Company received substantial and most valuable property, rights and privileges, and may be regarded as having held them clothed with a trust in favor of these creditors, to be performed in the mode specified in its charter.

If these creditors, therefore, were now standing upon the terms of the charter, expressly or substantially executed, and had done nothing which could be fairly construed as a waiver or abandonment of the privileges thus secured to them, the preference now claimed could not be successfully resisted. But it was clearly competent for them to waive any lien or priority thus existing and protected, and if they have done so by accepting different terms, and another and different security for their debts, they have lost their preference by their own act, and can have no just cause of complaint. It becomes important, then, to ascertain what the charter of the Canal Company gave them, and what they have accepted and received. The 12th section of the Act of 1824, ch. 79, makes it “ the duty ” of the Canal Company, “ so long as there shall be and remain any creditor of the Potomac Company, who shall not have vested his demand against the same in the stock of the Canal Company, (which the Act enables him to do) to pay such creditor or creditors annually, such dividend ⁵³⁰ or proportion of the net amount of the revenues of the Potomac Company, on "an average of the last five years preceding the organization of the” Canal Company, “as the demand of such creditor or creditors at this time, may bear to the whole debt of $175,800.” By this, the sum of $175,800, the supposed aggregate amount of debts, is made the basis on which the dividend is to be apportioned.

The net average revenues for five years being ascertained, it is easy to calculate what per cent, this would pay on the sum stated as the total amount of debts, and the same per cent, must necessarily be paid on the amount due the creditors respectively. Smith vs. Chesapeake and Ohio Canal Co., 14 Peters, 47 . Thus, if the net average revenue should be ascertained to amount to three per cent; on $175,800, then each creditor was to receive an annual payment of three per cent, on the entire amount of his claim, thereby making a permanent investment of his debt at an interest of three per cent. This was the extent of the responsibility assumed by the Canal Company, and no lien or preference was given to these creditors beyond the express terms of this contract or obligation.

Now what have they accepted and received, and in what position as lien-holders do they now stand? Erom the face of the obligations or bonds issued to them, and now represented in this case, it appears that it having been found difficult to decide what were the net revenues of the Potomac Company, or whether, under a strict construction of the law, it had any net revenues, two resolutions were adopted by the Canal Company in 1834; by the first of which they offered to pay on the 1st of July, 1834, to such of the creditors of the Potomac Company as have not subscribed their claims to the stock of the Canal Company, one-half the amount certified to be due them under the second section of the Act of 1824, ch. 79, provided no such payment shall be made to any creditor who shall not, before a certain time, file in the office of the Canal Company his acceptance of the terms offered by this resolution, as a full satisfaction of his claims against the late Potomac Company and the Canal Company ⁵³¹ as assignee thereof; and by the second, it was provided that the payment, thus authorized to be made, shall be paid out of the tolls of the Canal Company already received and which may not be indispensable for the completion of the canal below Dam No. 5, and if the disposable tolls on the 1st of July, 1834, shall not be sufficient to satisfy the demands then made, interest shall be allowed from that day until the whole amount admitted to be due under the first resolution, shall be paid, which interest shall be paid, semi-annually, out of the toll account, in preference to any other demand. Each of the creditors whose claims are now before us, signed his acceptance of the terms offered in these resolutions in full satisfaction of his claim against the late Potomac Company and against the Canal Company as assignee thereof, and received from that company its bond for one-half the amount of his debt, issued pursuant to a resolution passed on the 10th of October, 1835, with interest to be paid thereon half-yearly from the 1st of July, 1834. These bonds were actually issued to the several creditors, as they respectively came in from time to time and assented to the prescribed terms, between the 10th of June, 1836 and the 12th of November, 1845, and the semiannual interest was paid upon them to the 1st of January, 1841, This statement of the case clearly enough shows there was a wide and substantial difference between what was secured by the charter and w'hat was actually accepted and received.

Instead of an annuity or perpetual dividend of a certain sum, on the whole amount of their respective claims, they agreed to accept part of the principal with semi-annual interest thereon, if not paid at a specified time, and received the bonds of the Canal Company as security therefor. Though called in the proceedings of the Canal Company, and even in the Act of 1844, ch. 281, an adjustment of their claims “under the 12th section” of the charter, it was in fact a compromiso and acceptance of substantially different terms, of diffei’ent amounts and secured in a different way. Being accepted with full knowledge of all the facts, in legal effect and operation, ⁵³² it constituted a waiver of any lien or priority these creditors may have had resting upon the terms of the charter and the character of the original transaction, and consequently, let in to absolute priority over such claims the mortgage to the State of Maryland, of the 23d of April, 1835, to secure its loan of $2,000,000. But though these creditors have thus lost, by abandonment and waiver, any original lien or priority they may have held, we are yet of opinion they are entitled to the position in the order of preference, assigned to them by the Act of 1844, ch. 281, and to the extent there prescribed.

The fifth section of that law in effect provides, that when the revenues of the Canal Company shall be more than sufficient to pay the interest due and in arrear on the bonds which that Act authorized to be issued, the sum of $5,000 shall be annually appropriated by the Canal Company, to pay the interest on the bonds issued to the creditors of the Potomac Company, and out of the surplus net revenues a sinking fund shall be provided for payment of the principal of the Preferred bonds. In the mortgage for the benefit of the preferred bondholders,’the revenues and tolls are devoted in the same manner — 1st, to pay the semi-annual interest on the Preferred bonds; 2d, to pay $5,000 annually to the creditors of the Potomac Company ; and 3d, to provide the sinking fund before mentioned. By a fair and just construction of this Act, the State has, to this extent, waived its liens in favor of these creditors, and by operation of this law and the mortgage referred to, they have a valid lien upon the tolls and revenues of the canal to the extent of $5,000 per annum, prior to the liens of the State, but subsequent to the interest due and in arrear on the Preferred construction bonds. In our opinion, this is their true position in the order of priority, and this is the extent of their lien, and we accordingly so decide and adjudge. 2d.

The rights of the holders of the $200,000 Repair bonds are next to be considered and determined. The history and purpose of this loan are fully set forth in the record. ⁵³³ It is sufficient to state here, that it appears to have been effected for the purpose of repairing and fitting for transportation that portion of the canal which lies between Dam Ho. 6 and Georgetown; that these repairs were absolutely essential to make that portion of the work westward from Dam Ho. 6 to Cumberland, for the construction of which the Preferred bonds issued under the Act of 1844, ch. 281, were applied, of any practical value whatever. In fact, the repair of this part of the canal seems to have been indispensable to the successful operation, if not to the very existence of the work, and the receipt of any revenue to be applied to the payment of any creditor. At all events, it is perfectly clear, that without these repairs, the security of the preferred bondholders, dependent upon tolls and revenue, would have been utterly worthless.

The revenues actually received and in hand were wholly insufficient for the purpose. The loan was' effected upon the guaranty of the State of Virginia. This guaranty was obtained upon the faith of a pledge by the company, of its revenues for their payment, and not until an opinion had been expressed by the Attorney General of Maryland, upon the question being submitted for his opinion by the Governor of the State, that the company had power to issue their bonds and pledge the tolls and revenue of the work for the purpose of raising money to put and keep the canal in good condition and repair, and that this pledge would make such bonds superior and prior, not only to the liens of the State, but also to the bonds issued under the Act of 1844, ch. 281. The bonds thus guaranteed were issued in 1849, were sold for a premium, and, as the record sufficiently discloses, the proceeds were applied to the contemplated repairs, and for purposes clearly covered by the terms of the last proviso to the second section of the law of 1844.

Is the debt thus created entitled to priority over all existing liens ? The counsel for the prer ferred bondholders deny the power of the company to effect such a loan, to issue such bonds, or to anticipate its revenues, by any borrowing of money for the purpose of repair on any ⁵³⁴ pledge of the same, so as to create thereby any priority over their lien. Their argument is, and of necessity must be, that the only power which the company had over this mattei’, was to use and apply from time to time, as revenues were actually received and in hand, so much thereof as might be needed for the purpose of repair. Is this position sound ?

By the Act of 1843, ch. 124, amending its charter, power was conferred upon the Canal Company, in express terms, to borrow money from time to time, to carry into effect the object of its charter, (chief among which was the construction of the canal and repairing and keeping it in order,) to issue bonds and and other evidences of such loans, and to pledge its property and revenues for the payment of the same, ánd the interest to accrue thereon, in such form and to such extent as its President and Directors, or a majority of them, may deem expedient; provided the prior rights and liens of the State of Maryland under the mortgages theretofore made to it, should not be impaired, and such mortgages should be held binding, except in so far as the same should thereafter be waived, deferred or postponed by the Legislature of the State. By the Act of 1844, ch. 281, the State waived its lien in favor of the Construction bonds, to be issued for the completion of the canal from Dam No. 6 to Cumberland, and declared them to be preferred liens on its tolls and revenues, which were pledged for payment of the same and the interest-to accrue thereon; provided, however, “ that the President and Directors of said company shall, from time to time, and at all times hereafter; have the privilege and authority to use and apply such portion of said revenues and tolls as, in their opinion, may be necessary to put and heep the said canal in good condition and repair for transportation, provide the requisite supply of water, and pay the salaries of officers and agents and the current expenses of the said company.” It is too plain to admit of doubt, that by this Act the State waived her liens upon the tolls and revenues in favor of the application of so much thereof as might be necessary for repairs and ⁵³⁵ other purposes mentioned in this proviso. This reservation was inserted in the law for the very purpose of preserving the life of the corporation, by preventing, and, in effect, prohibiting alienation or suspension of vital powers by a stringent pledge of all its revenues and resources in favor of the Construction bonds about to be issued. To those about to purchase these bonds, the State, by this law, said, in effect, you shall have a lien on the tolls and revenues for payment of the principal and interest of your investments, hut only on so much of them as shall remain after the objects mentioned in this proviso shall have been secured; in other words, the liens of the State are postponed to that of the bondholders, but before either shall be paid, the company shall have power to use and apply its revenues in such way as to preserve the existence of the canal, and keep it a living operative work, capable of earning tolls and revenues, and sub-serving the great public purposes for which its charter was granted.

If, then, an emergency for repairs arises, to meet which the receipts from tolls and revenues are insufficient, can the company anticipate them and l'esort to the power granted by its charter, and issue bonds for the purpose, upon the faith and pledge of its after-accruing revenues, in preference to any other lien or claim thereon ? Why not ? It is very clear, that but for the exercise of the power to borrow money on such faith and pledge, the canal would long since have ceased to exist, and if the company has no such power now, the work may become useless and dead at any time. The proviso referred to certainly does not, in express terms, restrict the use and application thereby authorized, to receipts from tolls actually in hand when there is occasion for repairs, and it would be a nari’ow and illiberal construction so to confine it.

Tliei’e is nothing in the nature of this corporation, or the purposes intended to be subserved by it, that would warrant such a construction. On the contrary, our predecessors have said that though “it is a private corporation, as distinguished from a public municipal body, it is not of that ordinary kind ⁵³⁶ which is created merely for the pecuniary benefit of its stockholders, but like that of the Baltimore and Ohio Railroad Company, it was designed to promote great public interests, which were its chief objects, and to the accomplishment of which more than ordinary powers were granted, and liberal rules of interpretation for its benefit ought to be adopted in expounding its privileges and rights, for effectuating the designs of the Legislature, and securing the rights of the State in a work of such magnitude, and involving such vast public interests.” Brady vs. The State, 26 Md., 303. The sovereignties that created this corporation, exerting in its behalf the right of eminent domain, taking from citizens their private property for its use, designed the construction and perpetual maintenance of a great public channel of internal and inter-State commerce, which they declared should be forever “ esteemed and taken to be navigable as a public highway, free for the transportation of all goods, commodities and produce whatever, on payment of tolls to be imposed,” and it would be strange if there could be found in any law passed for the express purpose of' aiding its construction and maintenance, any provision restraining its power to avail itself Df its revenues and resources in such a way as to secure its existence, or if by any law, any authority had been conferred or permission granted, so to bind itself by pledges of its tolls and revenues in favor of any class of creditors, as to disable it from doing what was essential to self-preservation, and thereby work its own destruction. Indeed, it has been argued with great force and upon high authority, that the Legislature could not authorize this corporation so to manacle itself, by any contracts, mortgages or pledges that it could not fulfil its duty to the public for the purpose of its creation, and that quite independently of any legislation, power must be deemed to be reserved for the purpose of keeping it a “ living, going concern;” that like bottomry bonds, which avail for the benefit of all in interest; owners and mortgagees, and take precedence of all other claims, so .loans for repairs vital to the ⁵³⁷ existence of an enterprise like this, likewise availing for the benefit of all interested, must also take precedence of all liens and incumbrances of every kind whatever; that the imperative necessity to keep in repair, as a -claim above all other claims, makes it the duty of this corporation, first, to apply its tolls for that purpose, and if tolls in hand do not suffice, then it is equally its duty to anticipate them by pledge, and to pledges so given for such purposes, all other pledges and mortgages are of necessity subordinate and must yield.

But without either assenting to or denying the correctness of the position thus broadly stated, the preference of these Repair bonds ma.y, we think, be safely rested on the narrower ground of granted power. For, adopting those liberal rules of interpretation we are bound 'to apply, in construing for its benefit grants of powers and privileges to this company, we are of opinion the power to effect this loan, to issue these bonds and pledge the future accruing tolls and revenue for their payment in priority over the Preferred bonds and the liens of the State, is contained in the amended charter (Act of 1843, ch. 124,) and in the last proviso to the second section of the Act of 1844, ch. 281. It is said in behalf of the preferred bondholders, that this construction will defeat the objects of this Act of 1844, and the intent of all parties at the time of its passage, with whose rights that law professes to deal; that absolute preference was by that law given to the Preferred bonds, and the State waived its lien for their benefit only and for the specific amount, of bonds thereby authorized to be issued; that every one supposed ample security was provided by this Act, for payment of the interest on the bonds thus preferred, and the ultimate payment of the principal protected ; that the bonds profess upon their face to be preferred liens on the revenues of the company, and no one would have invested his money in them if he had supposed their security and priority could he impaired and superseded by a loan for repairs; that if this construction is to prevail, there is no limit to the power to effect loans for the same purpose, whenever ⁵³⁸ the company may deem it expedient to make them, which will supersede even the present Repair bonds themselves, and thus the security.of the Preferred bonds, as well as the liens of the State, will be completely destroyed and all hope of ultimate payment of these debts will be lost. In answer to this, it may well be retorted, of what value would these Preferred bonds now be, or will they be hereafter, if the power to raise money by loan on the pledge of its revenues for the purpose of repair does not exist in the company ?

It cannot be doubted the only value they now bear, arises from the fact that the proceeds of the Repair bonds were expended in making repairs for their benefit, as well as of every other lien creditor, and from the fact, that since that period money has from time to time been borrowed on similar pledges and used for similar purposes. No doubt all parties, at the time the law of 1844 was passed, supposed the revenues of the canal, under the contracts which that Act required to be made, would be sufficient to subserve all the ends that law professed to accomplish, and that all regarded the security as ample; but here, as in a thousand other instances where investments have been made in enterprises of like character, the most confident expectations have been frustrated and the best founded hopes disappointed. All that in reason can be said, is that those who loaned their money on these bonds relied upon a security which they thought was sufficient, which they were willing to accept, but which has hitherto failed them. They took security only upon expected tolls and revenues, and only on so much of them as might remain after repairs and other expenses were first provided for.

There is certainly no equity in the pretensions they now assert. But the conclusive answer to their whole complaint is, that by the face of their bonds they were referred to the Act of Assembly, a public statute of a State, under which they professed to be issued, and are in law chargeable with knowledge of all its provisions and of the true construction to be placed upon them by the Courts, And besides this, the mortgage taken for their ⁵³⁹ benefit, recites the proviso in the second section of this Act, as well as all its other provisions, and devotes the mortgaged tolls and revenues to their security only, “after payment of the debts now existing and that may hereafter be contracted and in arrear for repairs on the canal and officers’ salaries.” It is true, if an emergency shall arise for another loan, for the same purpose of repair, the power to effect it can be exercised, and, upon the construction we have given to the law, the debt thus created will have priority over all other liens, including that of the present Repair bonds, but it is not to be assumed this power will be abused, and, from the present condition of the work, it is reasonable to expect the receipts in hand from time to time will always more than suffice for everything needed for repair or contemplated by the proviso referred to. If, however, some unexpected calamity should again unfortunately befall the canal, the exercise of the power is confided to the good faith and sound discretion of those to whom the law has entrusted the management of the -work, and clothed with the duty of protecting the interests of all who have invested