State v. Brown

Bryan, J., delivered the following opinion, in which Judge Yellott concurred : We have heretofore decided a cause between the parties to this record. The State of Maryland filed a bill in equity, in which it was maintained that it had a lien on all the property and franchises of the Annapolis and Elk-ridge Railroad Company., and that said lien was prior to that created by the deed of trust in question, even if the deed were valid; and it was further maintained by the State that the deed of trust was wholly invalid, or else was valid only to the extent of creating a lien for such of ²⁰² the bonds secured by it, as were used for the particular purposes expressed in the first section of the Act of 1872, ch. 425. The prayer of the bill was for an injunction to restrain the trustees from making sale of all or any part of the property of the railroad, and alternatively to restrain them from making sale until they had ascertained by proper proceedings the parts or proportions of these bonds which had in fact been used for the purposes expressed in the first section of the Act of 1872. There were other prayers for relief adapted to the different aspects of the case.

The defendants in the cause were the Annapolis and Elkridge Railroad Company, and the trustees, Stewart Brown and Arthur George Brown. The answer of the trustees controverted the case made by the bill, and maintained the validity of the deed of trust, and its priority to the rights and claims of the State. It also alleged that more than $150,000 of these bonds which had been duly issued, under and in accordance with the terms of the deed of trust, had been negotiated through Alexander Brown & Sons, and were outstanding in the hands of bona fide purchasers for value; and that others of these bonds were outstanding in the hands of persons and corporations, who claimed to be bona fide holders for value. The cause was heard on bill and answer, and this Court decided upon the facts which were shown by the proceedings in the cause, that the deed of trust was valid, and that bonds to an amount exceeding $150,000 had been duly negotiated, and were outstanding in the hands of bona fide purchasers for value ; and that other bonds were in the hands of different persons, who alleged that they also were bona fide holders for value ; and that the State was not entitled to any of the relief prayed.

The bill was therefore dismissed. This case is reported in 62 Md., 489 . In the present case the bill is filed by the same complainant, and the same parties are defendants. It alleges ²⁰³ that the deed of trust is null and void; as a consequence, it is maintained that all the bonds issued under its provisions were invalid, and that the trustees have no power of sale.

Certain of the bonds amounting to $252,000 are specifically charged to have been issued and used in pursuance of a fraudulent agreement, and it is alleged that they are held by persons who had notice of the fraudulent character of the bonds at the time they received them. The relief prayed is, that the deed of trust may be declared null and void, and that the trustees may be restrained by injunction from making sale of any of the property of the railroad. It is manifest that the relief sought in each of these ' '' cases is the same. The present bill repeats the allegations of the former one, and supports and fortifies them by other charges.

The scope and objects of both bills is the same ; all of their averments tend to the same conclusion. The purpose in each case was to strike down, and defeat the power of sale contained in the deed of trust. It rvas entirely competent for the complainant to make in the first bill of complaint every allegation which was made in the/ second. It is not alleged that any of them were unknown at the time the first bill was filed; and in point of fact, all of these additional allegations were contained in the petition for an injunction filed by the Annapolis and Elkridge Railroad in June, 1818; which petition was signed by the Attorney-General of the State, who appeared in the cause by order of the General Assembly of the State and the Board of Public Works.

According to well-settled principles, our decision in the first case finally determined as between the parties to the suit, all matters then adjudicated. As between these parties, no matter then decided, can ever again become the subject of controversy. “ Where every objection urged in the second suit was open to the party within the legitimate scope of the pleadings in the first suit, and might have been presented ²⁰⁴ in that trial, the matter must be considered as having passed in rem judicatam, and the former judgment in such a case is conclusive between the parties.” Aurora City v. West, 7 Wallace’s Reports, (S. C.,) 102. In a subsequent case in the same volume, the Supreme Court of the United States, speaking of the principle of res judicata say: “ It extends not only to the questions of fact and of law, which were decided in the former suit, but also to the grounds of recovery or defence which might have been, but .were not presented.” Beloit v. Morgan, 7 Wallace, 622. And in the same case, the Court quotes with approbation the striking language of the Vice-Chancellor in Henderson vs. Henderson, 3 Hare, 115, as follows: “In trying this question, I believe I state the rule of the Court correctly, that where a given matter becomes the subject of litigation in, and of adjudication by, a Court of competent jurisdiction, the Court requires the parties to bring forward their whole case, and will not, except • under special circumstances permit the same parties to open the same subject of litigation in respect of a matter which might have been brought forward as a part of the subject in contest, but which was not brought forward only because they have from negligence, inadvertence, or even accident, omitted a part of their case.

The pléa of res judicata applies, except in special cases, not only to the points upon which the Court was required by the parties to form an opinion and pronounce a judgment, but to every point which properly belonged to the subject of litigation, and which the parties, exercising reasonable diligence might have brought forward at the time.” It appears to us therefore inevitable, that our decision in the former case must be conclusive between these parties, of every matter which then passed into judgment. We then determined that the deed of trust was valid; that bonds exceeding the amount of $150,000 were in the hands of bona fide holders for value ; that default had ²⁰⁵ been made in tbe payment of the interest; and that the trustees had the power of sale in accordance with the terms of the deed of trust; and we accordingly denied the injunction. We trust that hereafter our opinion may not be misunderstood. Our decision binds the parties to this suit and those represented by them, and no other persons.

We will in the course of this opinion make further explanation on this point. But we may now say that as this, suit sought the general benefit of all the stockholders they are effectually bound by the result of it, and they cannot hereafter be heard to deny the right of the trustees to sell, in accordance with the terms of the deed of trust. Our duty would not be fully discharged without considering some other questions discussed in this case. By the fourth article of the deed of trust, it is provided that in case default is made in the payment of the principal of any of these bonds, or in the payment of the interest under the circumstances therein referred to, it shall be lawful for the trustees to sell and dispose of all the property and franchises of the railroad company.

And in the eighth article, it is made their duty to exercise the power of sale, upon the requirement in writing of a majority in interest of the bondholders. As the parties have by their own agreement provided for the contingency under which a sale may be made, the Courts must give effect to the power of sale thus given. In this respect the proceedings differ from, those in the case of a sale under a mortgage. Where a bill is filed to foreclose a mortgage, the statute authorizes the Court to decree a sale unless the debt and costs are paid at or before the time fixed by the decree ; and it is necessary for the Court to ascertain the amount of the debt, so that the defendant may know how much it is necessary for him to pay in order to prevent the sale.

It. would be contrary to the agreement of the parties as embodied in the deed of trust, to hold that the sale should be delayed until it was ascertained how many of the bonds ²⁰⁶ were justly due. Each bondholder holds his own separately and independently of all others ; and when his interest remains in' arrear under the circumstances mentioned in the deed of trust, he ought not to be delayed by a controversy which should arise about the validity of the bonds held by other persons. We are of opinion that the Drum Point Railroad Company had power to purchase stock in the Annapolis and Elkridge Railroad Company. Booth vs. Robinson, 55 Md., 434 .

It is now too late to question the regularity of the election of the directors who ordered that the deed of trust should be executed. The deed was executed, in June, 1872; and all parties interested had abundant means of knowing every detail connected with the transaction. No reason has been shown why so great a delay should have occurred in asserting any objections which they desired to urge against the deed. And in the meantime very valuable interests have vested on the faith of the deed.

We must say, moreover, that the evidence in the cause shews that the election of. the directors was not contrary to the charter of the company. The entries in the book of the proceedings of the company are' not evidence against third persons. The efficient proof in the case is derived from the testimony of a witness who had personal knowledge of the transaction. The sale of the shares of stock by Brown and Wells to the Drum Point Railroad Company was evidently for the purpose of giving to it the control of the Annapolis and Elkridge Company.

It is unnecessary to comment upon this proceeding. The Drum Point Company had the right to acquire this stock, but it had no right to use its controlling influence in the Board of Directors so as to sacrifice the interest of the Annapolis and Elkridge R. R. Company. We think that the title which Wells and Brown acquired to the bonds issued to them, could not have been maintained against the stockholders of the Annapolis and Elk- ²⁰⁷ ridge R. R. Company; nor could the title of the Drum Point Company have been maintained to the bonds which it acquired under the agreement in the record. We do not impeach the motives of the directors who authorized this disposition of the bonds.

They were gentlemen of high character and responsibility ; but we think that they fell into a very great error in this matter. Although the original title to these bonds was defective, yet such of them must be protected as are now in the hands of bona fide holders for value without notice of the objection to their validity. The evidence which we have been considering, was given on the motion to dissolve the injunction, and any conclusion formed upon it by the Court could be used only at the hearing of that motion; nevertheless for the purpose of diminishing as much as possible unnecessary litigation, we have thought it best to state our views on important questions which must arise hereafter in this controversy. If the property of this railroad should be sold, when the proceeds are brought into Court for distribution, it will be competent for any party in interest to except to the claim of any bondholder.

If the proceeds are not sufficient to pay all the bondholders, they may except to the claims of each other. The matters adjudicated in this case and the former one between the same parties, will not be available for or against the bondholders, except as establishing the right of the trustees to make the sale. The trustees represent the bondholders for this purpose; but not in the matter of distribution. After the sale the bondholders must stand on their own footing, and must maintain their own claims by evidence.

Our finding that more than $150,000 of the bonds were in the hands of bona fide holders for value, established that fact conclusively in favor of the trustees, so as to enable them to make the sale, but will not be evidence for the bondholder when he claims distribution. On that issue it will be res inter alios acta. ²⁰⁸ It is fully settled that bonds of this description are negotiable instruments, and are good in the hands of bona fide holders for value, without notice of any equities or defences against the first holders. The Supreme Court of the United States speaking of such bonds has said: “They are placed by numerous decisions of this Court on the footing of negotiable paper. They are transferable by delivery, and, when issued by competent authority, pass into the hands of a bona fide purchaser for value before maturity, freed from any infirmity in their origin.

Whatever fraud the officers authorized to issue them may have committed in disposing of them, or however entire may have been the failure of the consideration promised by parties receiving them, these circumstances will not affect the title of subsequent bona fide purchasers for valué before maturity, or the liability of the municipalities (the makers of the bonds.) As with other negotiable paper, mere suspicion that there may be a defect of title in its holder, or knowledge of circumstances which would excite suspicion as to his title in the mind of a prudent man, is not sufficient to impair the title of the purchaser. That result will only follow where there has heen bad faith on his part.” Cromwell vs. County of Sac, 96 U. S., 57. In the same case they say; “ The simple fact that an instalment of interest is overdue and unpaid, disconnected from other facts, is not sufficient to affect the position of one taking the bonds and subsequent coupons before their maturity for value as a bona fide purchaser.” Vide also, Railway Company vs. Sprague, 103 U. S. Reports, 756. We accept these decisions as conclusive of the questions involved in them.

It seems necessary to consider only one other question. We think that the amendment of the pleadings is within the discretion of the Court, and that no appeal lies from their decision. The appeal of the State must be dismissed. As the. defence of res adjudicata must settle this contro ²⁰⁹ versy at the final hearing, further litigation is needless.

We will therefore reverse ,the order of the Circuit Court, and dismiss the bill. (Decided 22nd July, 1885.) Order reversed, and hill dismissed. Stone, J., delivered the following opinion : The pressing question in this case is whether an injunction to prevent the sale of mortgaged property, should be continued because