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    GASSER v. GARDEN BAY RAILWAY CO.
    1. Railroads — Carriers—Mortgages—Vested Rights.
    The incorporation, of a private railroad by the owners, and its assumption of the obligation of a common carrier, could not affect vested rights under a prior mortgage.
    2. Same — Franchise—Contracts — Obligation — Municipal Corporations.
    Where a franchise from a township to a lumber company, the owner of a railroad constructed for the purpose of transporting its own products, granting the right to construct, maintain, and operate the same for a period of 30 years, contained no language implying an undertaking on the‘part of the company to construct or operate such road, and in the construction of the road no right or privilege granted by the franchise was exercised, there is no obligation upon defendant railway company, as assignee, to continue its operation during the franchise period.
    3. Same — Equity—Jurisdiction.
    The equity court has jurisdiction to entertain the application of a railroad company to abandon operation and dismantle its line, where its receipts are inadequate to pay operating expenses and pay interest on its mortgage indebtedness.

      4. Same — Abandonment—Public Service Corporations.
    A railroad company, having been incorporated as a common carrier, and having secured permission from the railroad commission to issue stock, and having entered upon the operation of its line under the implied duty to the public to continue its- operation as a public service corporation, could not.thereafter, in less than 18 months after its last hearing before the commission relative to its stock issue, arbitrarily abandon operations, permanently discontinue the assumed service, and dismantle the road without the consent of the State through its constituted authority.
    5. Same — Public Service Corporations.
    The State can, and generally will, when possible, enforce the continuous exercise of such granted corporate powers for public service and benefit, even though unprofitable or at a loss to the corporation, except under special circumstances where peculiarly equitable considerations justly warrant permitting abandonment.
    6. Same — Mortgages—Foreclosure—Receivers—Powers.
    In proceedings to foreclose a mortgage on a railroad, which had assumed the duties of a common carrier, where it was purposed to dismantle and abandon the road, the decree of the court below appointing a receiver to conserve the property is affirmed, but reversed as to giving him authority to borrow money on certificates with which to repair, equip for operation, and operate the road as an experiment to determine whether it could be operated at a profit.
    7. Same — Equity—Rights of Interveners.
    Intervening petitioners, residents of the village and township through which the road ran and others,- are equitably entitled to have all of the property of the railroad offered for sale as an entirety on condition that the purchaser operate said road as a common carrier.
    8. Same — Decree—Conditional Sale — Rights of Creditors.
    The decree of the court below providing that the bid for such conditional sale should be sufficient to pay a certain judgment, and the amount due on the mortgage, with interest, and costs of suit, is amended in this court to include also the proven indebtedness of intervening creditors for fuel and rent of rolling stock used in operating said road.

      9. Same — Decree—Abandonment.
    The decree providing that if no sufficient bid for the conditional sale is received, after waiting one hour, the property is to be offered in separate parcels, is affirmed.
    Appeal from Delta; Flannigan, J.
    Submitted January 22, 1919.
    (Docket No. 82.)
    Decided April 3, 1919.
    Bill by Wilbert W. Gasser against the Garden Bay Railway Company and others for the foreclosure of a mortgage and the discontinuance of defendant railway as a common carrier. The people of the State of Michigan and others intervened relative to the discontinuance. From the decree rendered, defendants appeal.
    Modified, and affirmed.

      Alex. J. Groesbeek, Attorney General, and Lela/nd W. Carr, Assistant Attorney General, for the people.

      Joseph F. Cuddy, for defendant township of Garden.

      James C. Wood and H. J. Rushton (G. R. Empson, of counsel), for appellants.
   Steere, J.

The vital proposition presented in this case involves the further existence and continuance for public service of the Garden Bay railway which is about 13 miles in length, extending northerly from a small hamlet called Garden, on Big Bay de Noc in Delta county at the north end of Green Bay, and a junction point on the Soo Line railroad called Cook’s Mill.

The following findings by the learned circuit judge who heard the case well outlines the essentials for a general understanding of the nature of the controversy and the salient questions of fact and law involved, with the attitudes of the parties litigant in relation thereto:

“For the transportation of logs from its lumber lands to its sawmill, located at Vans Harbor, Delta county, the Vans Harbor Land & Lumber Company, a manufacturing corporation, under the laws of Michigan, constructed a logging road, which extended in a general northeasterly direction from Vans Harbor.
“Subsequently the lumber company, acting through certain of its stockholders, applied for and obtained, from the township of Garden, which is an organized township of the county of Delta, a franchise to construct a railroad with all necessary sidetracks, switches and terminals, ‘on, over, across or alongside of, public highways, streets, alleys and public places of Garden township, and, for the period of thirty years to maintain and operate the same, employing in the movement of cars or trains thereon, steam engines, gas engines, electricity or other motive power.’
“After the franchise was obtained, the logging road was further extended in Garden township and over a portion of the township of Inwood, Schoolcraft county, to a junction with the Minneapolis, St. Paul & Sault Ste. Marie Railway, at a station on the latter road known as Cook’s Mill.
“Following the extension of the road to Cook’s Mill, the lumber company continued its operation for some years, but the time came when, finding itself without a timber supply sufficient to warrant further operation of the sawmill, they wound up their lumbering operations and offered the railroad property for sale.
“In February or March, 1914, the defendant, Ewald, who, at the time, was cashier of a bank at Garden, procured an option for the purchase of the railroad property at $35,000, He was given possession with the right to operate upon paying a stipulated rental until the option was accepted or surrendered. After operating alone for a short time, he formed a partnership with the defendants Wood, Bourke and Begole. The partnership, to which the option was transferred, continued the operation of the road under the option until May, 1915, when they purchased.
“In conflict with the claim of Ewald, that a somewhat larger price was paid, it was asserted during the arguments, and conceded, that the actual price paid was $30,500, of which $500 was paid in cash then or previously and the balance of $30,000 by the seven notes of the copartners for two, three, four, five, six, seven and eight thousand dollars, payable in one, two, three, four, five, six, seven and eight years, with interest at six per cent, per annum, payable annually, secured by a mortgage of all the property acquired by the copartnership from the lumber company.
“The partnership’ continued the operation of the road until October 27, 1915, when they organized the defendant, the Garden Bay Railway Company, under the provisions of Act No. 35, Laws 1867, as amended, known as the street railway act.
“The object of the railway company, according to its articles, was to acquire and operate a railroad in the counties of Delta and Schoolcraft, for the carriage for hire, of passengers, freight, mail and express. Its authorized capital was $25,000, divided into 250 shares of $100 each. The entire capital was subscribed by the members of the copartnership, each taking 62% shares.
“The defendant, the Garden Produce Company, a Michigan mercantile corporation, was also organized by the members of the copartnership, who subscribed all_ of its stock, each taking an equal amount. The object of the produce company, not as stated in its articles, but by its organizers, was to create business for the railway by purchasing and shipping on the railroad, property which otherwise would go out by water. While kept separate on their books, the business of both companies, as a practical matter, was handled together as a single business.
“In addition to the right of way, tracks and appurtenances, the conveyance of the lumber company to the partnership embraced a tract of land in Garden, comprising twelve acres, which abuts on Bay de Noc, and on which is located a dock, certain warehouses and other valuable buildings, and also another tract of land in Garden of about seventeen acres along one side of which the railroad runs.
“The copartners deeded these lands, the dock and various buildings thereon and the water privileges thereof to the Garden Produce Company and the balance of the property acquired by them from the lumber company to the railway company.
“During the time the road was operated by the partners, the only rolling stock owned by them consisted of one flat car, one gasoline track repair car and five hand cars. Its remaining rolling stock equipment was a steam locomotive and combination passenger and baggage car, rented from the Soo Railway. For the transportation of forest products and freight, generally, of which there was considerable, Soo line cars were brought in.
“Upon its organization the railway company continued the operation of the road without addition to its rolling stock equipment until about June 15, 1917, when it petitioned the railway commission for leave to cease operations and to take up and dispose of the material in the roadbed. An order was entered by the commission, denying the petition not as it would appear on the merits, but on the ground as a member of the commission wrote the officers of the railway, that the application should' have been addressed to the courts and not to the commission on the advice of the attorney general, who, it turns out, supposed the railway company to have received a bonus for construction which it had not. Soon after receiving notice of the denial of its petition, the railway company ceased operation of the road and has not since resumed.
“The first installment of principal of the mortgage, amounting to $2,000, due May 14, 1916, and the semiannual interest due November 15, 1915, May 14, 1916, and November 14,1916, amounting to $2,640 was paid as it became due. .No further payment of principal or interest has been made.
“April 20, 1917, the plaintiff (who previously had become a stockholder of the railway company and of the produce company by purchase from the defendants Ewald and Begole), bought the mortgage from the lumber company and received an assignment thereof and of the indebtedness secured thereby, in due form, Which he placed on record.
“To secure an indebtedness of the plaintiff to one Leslie French, of Escanaba, the plaintiff, on April 27, 1917, assigned the mortgage to French.
“The mortgage provided that upon continuation for thirty days of any default in the payment of any installment of principal or interest, or of any taxes, the mortgagee would have the right to declare the entire amount secured by the mortgage and remaining unpaid, immediately due and payable. The installment of principal, amounting to $2,000, and the semiannual interest, amounting to $840, due May 14,1917, was not paid. Upon the default running over 30 days, the plaintiff elected to and did declare the whole amount due and on June 29, 1917, he filed his bill to foreclose the mortgage, making Ewald, Begole, Bourke, Wood and their respective wives and the Garden Bay Railway Company, defendants. The produce company was not made a defendant.
“The mortgage provides that in case of foreclosure the material in the tracks might be taken up and sold as personal property on six days’ notice, posted in three public places in Garden township, and the plaintiff prays for a decree, permitting disposition of the material in the tracks in that way and on that notice.
“The defendants Begole, Bourke, Wood and the Garden Bay Railway Company joined in an answer, admitting the allegations of the bill of complaint and that the plaintiff is entitled to the relief prayed for by him, and then, acting on the suggestion of the railway commission that application for leave to abandon be made to the courts, they allege that for want of repairs, the track is positively unsafe for the movement of trains; that the company is without equipment of any sort for the transportation of passengers or freight; that it has no money and is unable to borrow money for the making of repairs or purchase of equipment; that the forest product which comprised the major part of the traffic in the past, is practically gone and the future is without prospect; that the revenues of the road will not equal the cost of maintenance and operation; that it incurred debts in the' operation of the road which it has been and is unable to pay and its creditors are threatening legal proceedings for the collection of their claims; that it is impossible to dispose of the property as a going concern and realize enough to pay the mortgage and its creditors; that the steel rails in the track is the only salable asset possessed by the company which, if sold with right in the purchaser to take up and remove the same, will bring sufficient to pay off the mortgage and all creditors of the company. They pray for a decree authorizing the company to cease operating the road; to take up and sell the material in the track as personal property, to dispose of its other property and to dissolve the company.
“For the payment of the notes secured by the mortgage, the defendant Ewald, as well as the other members of the partnership, was personally liable and subject to a decree for any deficiency. The bill prayed in the event of a deficiency, that Ewald and his co-partners be decreed to pay the same, but, by the underwriting of the subpoena served on him, he was advised a personal decree against him was not sought. The plaintiff’s explanation is that when Ewald sold his holdings in the railway and produce company, it was contemplated he would be relieved from liability upon the mortgage, while Ewald claims the underwriting of the subpoena was framed as indicated as an inducement to him not to oppose but to join with the others in their effort to dismantle and abandon the railroad. Be that as it may, Ewald filed a separate answer. From the date of the option, he managed the road until April 29, 1916, when, owing to friction which grew up between him and the other stockholders, he was deposed, and the defendant Begole was installed as manager.
“Ewald asserts that during his term as manager, the revenues of the road were ample to meet the cost of maintenance and operation and the installments of principal and interest of the mortgage as they matured and he insists, in his answer, that under an efficient management of the property in the future, the upkeep and operating expenses and the mortgage can be met out of the revenues of the road, and that the shrinkage of revenue of which the stockholders’ complain, is the result of the inefficiency of management. He prayed for the appointment of a receiver with power to borrow money sufficient to discharge the matured obligations of the company, and to put the road in shape to operate and to operate the same for the benefit of the public.
“The defendant French answered, setting up the assignment of the mortgage as security for the indebtedness of the plaintiff to him, and asking that, should a sale of the property be ordered and be made, the proceeds thereof be first applied in discharge of the plaintiff’s indebtedness to him.
“The township and village of Garden and certain residents thereof, in behalf of themselves and all others similarly situated, and the attorney general on behalf of the people of the State, petitioned in due form for, and were granted, leave to intervene and answer.
“The Garden Bay interveners did not file an answer, but the matters alleged in their petition for leave to intervene was treated as if repeated in a formal answer. Among other things their petition alleges the granting by the township of the railroad franchise to certain of the stockholders of the lumber company on their representation the road would be operated during the franchise period of thirty years; that its continued existence and-operation is a public necessity; that the township of Garden is growing and thriving and will, if the operation of the road is resumed and continued, furnish it with business ample for its financial necessities and that the shortage of funds to meet the company’s obligations is due to inefficient management and not to lack of profitable business.
“The answer of the attorney general alleges, on information and belief, that under proper management, the railroad should be a paying proposition, and that, by the expenditure of a reasonable amount, the road can be placed in a condition safe and suitable for the traffic it will be called upon to bear. He denies that under proper management the operation of the road would be likely to result in injury to passengers or employees; or that it will be necessary to take up and sell the material of the tracks as personal property in order to pay the amount due on the mortgage and avers that discontinuance of service over the road would result in a great injury to the people of the State and that such action is not a proper or lawful one.
“At the conclusion of the proofs, which were taken in open court, the plaintiff asked, and was granted, leave to amend his bill so as to make the produce company a defendant. The produce company immediately appeared and adopted as its answer the answer of Begole, Bourke, Wood and the railway company, and entered into a stipulation that the case as to it might be disposed of on the proofs already introduced.
“The present indebtedness of the railway company to general creditors aggregates $8,600. Going to make up- this total is a judgment for $1,750 arising out of the personal injury of an employee. Intervention on the part and behalf of the general creditors was applied for and granted, but excepting the owner of the judgment, no creditor has filed an answer or made any representation to the court respecting the amount or nature of his claim. The judgment creditor asks that his judgment be given priority over the plaintiff’s mortgage as well as over all obligations of the railway.
“Assuming the judgment creditor would be entitled to priority over any mortgage placed on the property by the railway subsequent to the entry of his judgment he would not be entitled to priority over a mortgage which was on the property when the judgment was entered, much less over a mortgage on the property when the railway acquired it. But the plaintiff, as well as all other parties to the action having as they have advised the court, stipulated that the judgment be given priority over the mortgage, it will be done.
“The questions presented are:
“1. Whether the court has original or only appellate jurisdiction to entertain the application of the defendant railway to abandon the road.
“2. Whether the situation of the road and its future prospects justify abandonment, and,
“3. Assuming the road, if sold as a going' concern, will not bring sufficient to pay the mortgage, whether the plaintiff is entitled to a decree permitting a sale of the track material separate from the other property with right in the purchaser to take up the tracks and thereby destroy the road.”

This suit was begun on June 29, 1917, by plaintiff filing in the chancery court of Delta county a bill to foreclose the purchase price mortgage given by the four partners to the lumber company in 1915 covering all the property they then purchased. These purchasing partners, Ewald, Begole, Bourke, Wood, their respective wives, and the Garden Bay Railway Co. were made defendants. The bill followed in general form an ordinary real estate mortgage foreclosure bill, reciting also and asking relief under a provision in the mortgage which authorizes the mortgagee in case of 30 days’ default to enter the premises, take possession thereof and sell all the steel rails, ties, fish-plates, switches, etc., covered by the mortgage as personal property, on six days’ notice duly posted in three or more designated public places.' No attempt was made by plaintiff to pursue this summary method of chattel mortgage foreclosure, but apparently recognizing that the security was in its legal aspect primarily a real estate mortgage, because covéring a railroad, plaintiff applied to the chancery court for a decree of foreclosure under the regular chancery practice in real estate mortgage foreclosures, thus conferring jurisdiction in that particular. But the appellants Begole, Bourke, Wood and the Garden Bay Railway Company by their answer especially ask the court to authorize abandonment of the railroad, and a decree that it may be dismantled and its steel sold as personal property.

We do not discover that counsel now question the decision of the trial court that it had in this proceeding jurisdiction to entertain the application of the defendant railway to abandon operating and dismantle its line under the peculiar circumstances of the case where, in the language of the trial court,—

“the question of abandonment is interlaced with other important questions which only a court of equity is authorized to entertain and which must or should be disposed of in order to settle the rights and equities of all persons concerned.”

At the time the mortgage was given the Garden Bay railroad was a private, unincorporated logging road held to no legal obligations as a common carrier and the mortgagee, or its assignee, was in case of default entitled by the terms of the mortgage to enforce collection on the indebtedness, even by dismántling the road if necessary to that end. The subsequent incorporation of the road by the partner mortgagors and its assumption of the obligation of a common carrier could not affect vested rights under the prior mortgage. Recognizing plaintiff was. entitled to full protection of his right's and relief by decree of foreclosure sale under his bill, the trial court also found under the evidence that the public interest and needs required operation of the railroad to.be continued; that under the facts shown the lands, dock and various buildings thereon, with water privilege, etc., which the partners had deeded to the Garden Produce Co. on the same day the rest of the property was deeded to the Garden Bay Railway Co. rightfully belonged and should have , been deeded to the latter, which, if put in proper condition and properly managed could, and in the public interest should, be operated without loss.

On July 12, 1918, a lengthy decree was filed which, in brief and sufficient to indicate the subjects presented for review, orders that the produce company deed to the railway company the mortgaged realty standing in its name found held equitably belonging to the latter; that a receiver be appointed to take possession of the property described in the mortgage with power to borrow on receiver’s certificate sufficient money to lease or purchase adequate equipment to operate the railroad as a common carrier and to pay the cost of operation for a specified time, said certificates to be a lien on the mortgaged property second only to plaintiff’s claim under his mortgage, and that—

“all the property described in paragraph one (1) hereof and also all additions thereto of whatsoever name, nature or description, made by the receiver, shall be sold by or under the direction of said receiver at any time after the said thirtieth day of July, 1918, and not later than the thirtieth day of April, 1919, upon the notice usual in sales on foreclosure in chancery, at the front door of the court house in the city of Escanaba, in said county of Delta. At such sale all said railroad property shall be first offered as an entirety on condition and with the obligation on the purchaser to operate said property as a common carrier of passengers and freight, and shall be sold to the highest bidder, provided there shall be bid therefor with said operation obligation and condition attached, a sum sufficient to pay said Foster judgment and the amount now due on said mortgage with the interest and costs of suit. If, after waiting one hour, no bid for said property as an entirety with said operating condition and obligation attached, equal to said Foster judgment and the amount now due on said mortgage, with interest and costs of suit, shall be received, then the said receiver shall immediately offer said property separately as follows:
“1st. All rails, fish-plates, switches, bolts, spikes, railroad ties, tools, handcars, and all other removable improvements, materials, and equipment used for railroad purposes and in connection with the operation of the railroad of the Garden Bay Railway Company, owned by it or acquired by the receiver, as one parcel, with the right in the purchaser or purchasers, to take up and remove from the roadbed of the said railroad and dispose of as he or they see fit.
“2d. The entire right of way of the Garden Bay Railway Company, including all fencing, as one parcel.
“3d. All other real estate of said Garden Bay Railway Company and described in paragraph one (1) hereof, in separate parcels, all contiguous property being considered as one parcel.
“4th. All other personal property of said defendant railway company.”

Out of the proceeds of such sale the expenses of making the same are to be first paid and then, conseculively, the Foster personal injury judgment, mortgage indebtedness and costs of foreclosure suit, the receiver’s certificates, pro rata the unsecured claims, of creditors, and the balance, if any, to the treasurer of the Garden Bay Railway Co.

Of the status of parties to this, suit, the appellant defendants are the Garden Bay Railway Co., the Garden Produce Co., Bourke, Begole, Wood, and their wives, with the Pittsburg Coal Co. and Minneapolis, St. Paul & Sault Ste. Marie Railway Co., creditors and intervening defendants. Defendants-Begole and Ewald, who were formerly active partners and stockholders in the enterprise, had dropped out and their subsequent interest was largely reminiscent. Begole, who testified he had sold his stock because he “wanted to quit,” named plaintiff Gasser and a Mr. Stephenson as the heaviest stockholders in the road and said, “Mr. Gasser has everything I had. He also acquired part of Mr. Ewald’s stock.” Ewald testified that he had sold his stock to Gasser and Stephenson, saying, “I realized from the sale of my stock, a quarter interest in the corporation, $710. After that transaction I severed my connection with Garden Bay Railway Company.” He also admitted on cross-examination to an unfriendly feeling and replied to an inquiry in that connection, “I know of an attempt being made after I left the road to divert business from the road. I attempted myself.” He was a strong and willing witness for the intervening defendants who opposed abandonment, as was Begole for the defendants who also “wanted to quit” and advocated dismantling the road. The plaintiff, Gasser, has not appealed and was not a witness in the case. Bourke, president of the road, testified that in November, 1916, he interviewed Mr. Lowe, then owner of the mortgage, who offered to discount it $2,000; that he so advised Mr. Gasser and “everybody interested at that time with me.” Gasser, who is a heavy stockholder in the appealing railway company, bought the mortgage and, after the contract made by the railroad in April, 1917, to sell its rails, and other steel for $33 per ton delivered to the purchaser F. O. B. at Cook’s siding fell through, filed this bill. He appears to be on safe ground in this litigation and has not personally appealed. Defendant French testified that he held an assignment of the mortgage as security for a loan and indicated his indifference as to results by replying, “I have other security.” He also testified that the railway company did business with the Escanaba bank of which he was cashier while Ewald was acting as its manager, and its account was not very satisfactory owing to numerous overdrafts; that Ewald during that time stated the railroad did not pay and he used, or needed, the profits from the produce company to bolster it up. The people of the township of Garden and, in their behalf, the people of the State by the attorney general, as intervening defendants, contend against abandonment, claiming the road as an entirety should be sold to a purchaser obligated to operate it as a common carrier, or at least first so offered at public sale.

It is. urged in behalf of the people of Garden township that because the township granted a franchise as described in the court’s findings to the lumber company which constructed the road, the defendant railway company as assignee is thereby obligated to continue its operation during the franchise period. The conclusions of the trial court in rejecting this, contention are supported in facts by the record and the reasons therefor well stated as follows:

“There is no language in the franchise from which an undertaking on the part of the grantees thereof to construct or to operate such railroad can be found expressly or by implication. In the construction of the road, no right or privilege granted by the franchise was exercised. ’ Except where it crosses certain highways, the road was not laid on or in any highway, street, alley, or public place of Garden township, and the highway crossings were not, it is claimed, made under the terms of the franchise but under arrangements between the lumber company and the township outside the franchise.”

The Garden Bay Railway Co. having been incorporated under the laws of the State as a common carrier, secured permission from the railroad commission to issue stock and entered upon the operation of its line under the implied duty to the public to continue its operation as a public service corporation. It could not thereafter, in less than 18 months after its last hearing before the commission relative to its stock issue, arbitrarily abandon operations,' permanently discontinue the assumed service and dismantle the road without the consent of the State through its constituted authority.

We need not review the many authorities cited or discuss the arguments presented by counsel on the varying phases of that subject, for the law is well recognized that the State can and generally will when possible enforce the continuous exercise of such granted corporate powers for public service and benefit, even though unprofitable or at a loss to the corporation, except under special circumstances where peculiarly equitable considerations justly'warrant permitting abandonment.

Under those general principles the two important propositions involved and most seriously argued by counsel are whether the court in its decree of foreclosure erroneously ordered the railroad into the hands of a receiver to be repaired, equipped, operated and tested at the cost of the mortgaged property, and then to be first offered for sale on the condition that it be continued a going concern as specified; and whether in that connection the court was warranted in requiring that the property standing in the name of the produce company should be deeded to the railroad company and included in the sale. These are largely questions of fact.

The evidence produced in behalf of the railway company and its appealing stockholders was conclusive that the road was not only unprofitable but had been running at a loss, had incurred pressing indebtedness for operating expenses which it could not meet and was without credit to secure further accommodations for necessities vital to continuing operation. Their evidence showed, mostly without dispute, that they had made various unsuccessful efforts to provide funds to finance the railway and put it in condition for further operation, had after repeated efforts been unable to secure financial assistance from the people of Garden township, the Minneapolis, St. Paul & Sault Ste. Marie Railway, with which the Garden Bay Railway connects, or to secure sufficient business for the railway to pay its operating expenses, which they attribute both to insufficient business tributary to the line to support it and failure of many of the business men and others in Garden township who at times required transportation to co-operate with and patronize the road; and to water transportation competition by a boat line from Garden Bay and nearby points.

In view of the proofs and claims of the appealing defendants in that particular the court correctly concluded that—

“To order the officers of the road to resume and continue operation thereof would be idle and futile. They have neither the means or disposition to go on with the property. Before there can be revenue from the road, money must be found to repair it and the necessary equipment purchased or rented and after all that, to prevent eventual dismemberment of the road, the mortgage debt must be provided for.”

Holding the road to be a public necessity, the court said in part:

- — “by proper management the property should produce the revenue necessary to meet the cost of maintenance and 'operation, and repay the cost of the repairs and modest equipment presently required. That the road will produce revenue sufficient to pay also the incumbrance thereon is not so certain but that it will be able, eventually, to do so is within the realm of probability. * ' * * It is, perhaps, not probable that sufficient outside capital can be obtained to put the road on a revenue basis and to refund the mortgage, but the future prosperity of the inhabitants of Garden township depends in a large measure on the continuation of the road. They are alive to this condition, and are disposed to materially assist in financing the proposition.”

The most tangible evidence we discover to sustain the theory that by proper management the property would produce revenue sufficient to repair and equip the road and pay its fixed cost of operation, interest, etc., is the testimony as. to what revenue it produced during Ewald’s management, in derogation of which is not only the testimony of French, an apparently equally credible and less partial witness, that Ewald. had told him during that time that the road did not pay, but also the undisputed evidence of a marked increase in cost of operation and maintenance due to increase in wages of employees, cost of necessary material, fuel, etc. — coal alone' steadily advancing from $8.25 per ton in the early period of operation to $8 in 1917 — and a steady decrease in receipts, both from freight and passengers. This decrease in revenue being attributable, as testified by appellant’s witnesses, to increased use of automobiles for travel, and stock raising by the farmers which resulted in less hay and other farm produce being shipped than formerly. The president of the road testified that he personally made all efforts possible to secure business for the road, and plaintiff’s witness Harrison, receiver of the Wisconsin & Michigan Railroad and a practical railroad man of 30 years’ experience, testified he had examined the road’s statement of expenses and said:

“In my judgment this road cannot be operated at less expense than appears upon that statement. I would consider it had been operated very economir cally.”

The date he was testifying is not given, but after stating items and cost he estimated the expense of running the road at $18,000 a year based “on the cost of wages and supplies today.” F. W. Curtiss, division superintendent of the Soo Line, testified he had made an examination of this railroad and estimated “it would cost from $3,000 to $3,500 a mile to put the track in good shape. The engine and equipment which the Garden Bay Railway Co. used belonged to the Soo Line.”

The testimony shows that Garden township was not settled as a result of the railroad nor the railroad built as a result of the settlement. Before the railroad was built farming communities had developed at certain available points in that region in connection with the lumbering, fishing and other industries located on the east shore of Big Bay de Noc, including the Fayette Furnace formerly operating in Fairbanks township, which constitutes the southern portion of the peninsula. The railroad was built by a lumbering company to serve that industry as a logging road to supply its mill at Garden Bay. Many of defendant’s witnesses had lived in that section long before the road was built. Wesley Gray, an old resident and supervisor of Garden township for a number of years, testified that the voting population of the township had decreased, but was of opinion that the rural population had neither increased nor decreased in the past ten years. The adjoining township of Fairbanks, claimed to be tributary to this railroad, was shown to have approximately 14,000 acres in farms, while Garden township had about 9,000 acres under cultivation. There are estimated to be 150 farmers living within 8 miles of the road. The farming districts do not lie along the railroad, except for a short distance north of Garden Bay, variously stated at from 11/2 to 4 miles, beyond which it runs through an unsettled section consisting of cut-over land, swamp and sand plains.

Touching the prosperous condition, resources and bright prospects of future business development and demand for railroad facilities in that peninsula, it must be admitted as pointed out that the optimistic claims made before the railroad commission when the Garden Bay Railway Co. was incorporated and permission asked to issue stock and prophetic showing here made by the interveners protesting against abandonment, harmonize in marked particulars, and if realized, or probable of realization, would be persuasive of the public necessity contended for; but the established facts are convincing that the one is a regretful memory and the other largely a hopeful anticipation.

We agree with the trial court that the situation presented and duties assumed by the defendant railway under its incorporation entitle the citizens of Garden township, or others interested, to an opportunity to purchase this property in its entirety for continuance as a common carrier, if so disposed; and to that end a receiver may properly be appointed to first take charge of and conserve the property preparatory to making public sale under the decree of foreclosure in manner directed therein, but we do not think the equities of this case or public interest demand that the limited assets of this small railway should be absorbed or incumbered by receiver’s certificates issued to repair, equip for operation and operate the line on the speculative hazard of the receiver being able to secure business sufficient to put it on a sustaining basis and facilitate a possible conditional sale, as proposed. The restoration and operation of railroads by courts through a receiver is at best a doubtful industry, though sometimes imperative under pressing public necessity. In Central Bank & Trust Co. v. Cleveland, 252 Fed. 530, where conditions somewhat analogous to those arising here are discussed, it was held:-

“Where a small branch railway has for some years been running at a loss, and has been unable to pay indebtedness, residents who are neither stockholders nor creditors, cannot require continued operation of such railroad.”

While the people of Garden township may not be legally or equitably entitled to require that operation of this road at a loss be continued, the court may at least for preservation of that public function give them opportunity to bid for the same at the foreclosure sale on such condition, protecting in that connection the mortgagee and creditors for fuel and rental of rolling stock furnished as a favor to keep the road in operation, recognized as especially equitable claims, before authorizing the road to be dismantled and abandoned.

Of the contention that the decree is erroneous because it requires the property standing in the name of the produce company to be included in the offer of conditional sale of the entire assets of the railway company, we think it within the power of the chancery court under the conditions here shown to so decree, whether it be put upon the ground of constructive but unintentional fraud, in the light of subsequent developments, or of mutual mistake. The four purchasing partners bought all this property as an entirety and so mortgaged it. For some time thereafter they held and operated it together as an entirety. When for convenience of operation and to facilitate getting business for the road, or for other reasons satisfactory to them, thqy formed themselves into two corporations and deeded the property to them as stated, each yet held an equal interest in the assets and business. as before. It was yet to them individually and as a practical proposition all one transaction and one enterprise conducted and jointly operated for all practical purposes as previously, the produce company being in effect an instrumentality of the railroad. The deeds to the two corporations were made before they had been incorporated, when delivered does not appear. They were not recorded when hearing before the railroad commission was had in behalf of the railway company and permission granted to issue stock, under a mistaken assumption, as the trial court found, that all this property' of the four partners, bought, owned and operated together by the partnership as an entity was included in their articles of association for the railway incorporation. In reviewing that phase of the case the trial court deprecated any intended implication that in the course then pursued the partners sensed or sought any undue advantage to themselves, and said:

“The situation now confronting both companies was. not contemplated by anyone when the conveyances were made. * * * The deeds which were made before either company was organized and before the attitude of the railroad commission became known, were, no doubt, inadvertently put on record without correction. The produce company being considered and being in fact a subsidiary or instrumentality of the railroad, and the property in the name of the former company being in constant use in furtherance of 'the business of the railroad and both companies having common stockholders, directors and officers, it would be quite natural for them to regard a formal correction of the deeds unnecessary as a practical, matter.”

With these conclusions we agree. In such a case equity may and should look to the substance rather than legal forms, but in adopting the forms by and through which these former partnership owners of the property continued operations they, unwittingly perhaps, burdened the artificial personality of their creation with a public duty they were not at liberty to ignore. We find no occasion to disturb the decision of the trial court that the equitable considerations involved in connection with that assumed public duty require all the property covered by the mortgage to be first offered together for sale on conditions imposed for continued operation of the road, but are of the opinion that the upset price imposed for the conditional offer of all the property should include the proven indebtedness to the intervening creditors for fuel and rent of rolling stock used in the operation of the defendant railway, excluding the item for the engine damaged by fire.

Modified as indicated the decree will stand affirmed, With the case remanded to the trial court for further appropriate proceedings in harmony with this opinion, without costs to either party.

Bird, C. J., and Ostrander, Moore, Brooke, Fel.lows, Stone, and Kuhn, JJ., concurred.


source: Caselaw Access Project

author: Steere, J.

license: Public Domain

text:
    PEOPLE v. WILLSON.
    1. Criminal Law — Fraud—Public Officers — Intent—Burden of Proof.
    In a prosecution, under section 15308, 3 Comp. Laws 1915,. charging defendant, the supervisor of a township, with having falsely and fraudulently reported a wrong valuation of his township to the board of supervisors and its committees of equalization, the burden of proof rested upon the prosecution to prove criminal intent.
    2. Same — Fraud—Evidence—Admissibility.
    Where the principal issue is fraud, or fraudulent intent, a, wide latitude is recognized in receiving evidence of facts tending either to inculpate or exculpate the party accused.
    3. Same — Evidence—Admissibility—Intent.
    Testimony in support of the theory of the prosecution that the township treasurer was a defaulter, which fact was presumably known to defendant because the township board of which hé was a member had audited and certified the treasurer’s records as correct, and that defendant’s false report of valuations was made designedly to-create a surplus fund for the township to replace or cover up the shortage was admissible only to aid in determining the motive or guilty knowledge and intent in the crime charged.
    4. Same — Trial—Reading Statutes — Evidence.
    Reading by the prosecution to the jury certain statutes which were irrelevant and immaterial even for the court to consider, which were no evidence for or against any fact in dispute, and which only tended to bewilder and confuse the jury, held, reversible error.
    5. Same — Trial—Instruction—Evidence—Other Offense.
    An instruction by the court allowing the jury to take into consideration whether or not there were any shortages.in the account of the treasurer of the township which came to defendant’s knowledge, in arriving at a correct conclusion as to whether or not the acts of fraud were actually committed by defendant as charged, held, erroneous.

      6. Same — Fraud—Proof—Gist of Offense.
    To constitute the charged criminal perpetration of fraud against the county under said statute, it is not essential to prove that the municipal corporation, as such, sustained direct pecuniary loss; it being sufficient- to show that defendant knowingly, designedly, and with intent to deceive, falsely reported in his official capacity to the county officers a valuation of his township for assessment purposes less than the true amount, as a result of which excessive and unlawful county taxes were unwittingly imposed upon and collected from that portion of the county outside the township he represented, and which he knew should have been rightfully imposed upon it.
    7. Same — Statutes — Examination — Witnesses — Privilege — Constitutional Law.
    The contention of defendant that a person who is summoned to testify before a court of inquiry or called as a witness in an authorized proceeding for the discovery of crime under Act No. 196, Pub. Acts 1917, and there gives testimony, whatever its nature, is thereafter immune from a prosecution based on information obtained during such inquiry, from whatever source it came, cannot be sustained.
    Exceptions before judgment from Oakland; Rockwell, J.
    Submitted January 16, 1919.
    (Docket No. 114.)
    Decided April 3, 1919.
    Albert W. Willson was convicted of making a false report with intent to cheat and defraud.
    Reversed.

      Pelton & McGee and A. L. Moore, for appellant.

      Glenn C. Gillespie, Prosecuting Attorney, and James H. Lynch, Assistant Prosecuting Attorney, for the people.
   Steere, J.

Respondent brings this case here for review before sentence on his conviction in the circuit court of Oakland county under an information charging him with having as supervisor of the township of Royal Oak falsely and fraudulently reported a wrong valuation of that township to the board of supervisors and its committees of equalization at the June and October, 1916, sessions thereof with intent to defraud and cheat the county of Oakland and its taxpayers.

The township of Royal Oak, containing a village of the same name, lies near and just north of the city of Detroit, and was roused from its previous rural quiet by an invading demand for real estate at greatly enhanced values with a feverish haste to plat the same as suburban property of Detroit to meet the existing or anticipated demand which took place in the environments of that city from 1915 to 1917. Respondent was supervisor of Royal Oak township during that time and as a result of this so-cálled “real estate boom” the assessment roll of Royal Oak township, which consisted of 137 pages in 1912, grew to 1,600 pages in 1917. In 1915, when respondent was elected supervisor of that township, he established his office in his house, hiring a young lady by the name of Dorothy Smith as clerk, assisted at week ends by his own son who was attending school at Ypsilanti. At the January, 1916, session of the board of supervisors he ordered four books of 200 pages each for his 1916 assessment roll and later, discovering it was not sufficient, ordered another book of 250 pages, after the spring election of 1916. During the summer of 1916 the Detroit real estate boom which had spread over that section resulted in such hasty platting of subdivisions that there were upon the assessment roll of that year about 84 more plats than the previous year, with approximately 17,400 more descriptions. The township board consisted of respondent, as supervisor, Mr. Blair, its clerk, and two justices of the peace whose offices would soonest expire, named Grow and Wheeler. Wheeler was’ a paralytic and took little, if any, part in public matters; Grow’s term of office expired in July, 1916, and though re-elected he did not qualify. Respondent and Blair were the only active members of the board looking after the township’s affairs. Blair maintained an office in the township hall where his clerical duties appear to have occupied most of his time. Respondent attempted to look after the general township business, which under existing conditions required investigation of plats, opening of streets, railroad crossings, drains and other matters of like nature involving public interests. The clerical work of his office was apparently given little attention by him and with his scant clerical force fell behind, if not into confusion.

Apparently owing to rumors afloat and confusion •in township affairs, H. E. Miller, the incoming treasurer in 1917, succeeding a treasurer named Mark Halsey, refused to take over the township treasurer’s books and responsibilities until an audit was had, but finally assumed the duties of the office after giving a receipt for the amount of money actually turned over to him. Later the township board by official action procured the services of a trust company of Detroit to conduct an audit of the township books and records. An audit was thereafter made by a certified public accountant in the employ of the trust company who completed his work in September of that year and made a report, three copies of' which respondent directed should be delivered to him. They were mailed to Mr. Blair, the township clerk, from whom respondent secured two copies shortly. thereafter, one of which he retained at his home and the other he delivered to his attorney who was then acting as attorney for the township. Except the respondent claims to have discussed the matter with his counsel the township officials seem to have done nothing further until February 11, 1918, when the prosecuting attorney of Oakland county took the matter up and first endeavored to have something in the nature of an amicable investigation before the township board with a stenographer present, to whom defendant’s counsel, who was in attendance as attorney for the township, objected and the prosecuting attorney withdrew. Having obtained a copy of the auditor’s report the prosecuting attorney then instituted an investigation before a justice of the peace of Pontiac, based chiefly upon the report, the inquisitorial proceedings being taken under Act No. 196 of the Public Acts of 1917. As a result of that investigation criminal proceedings were instituted against respondent for malfeasance in office in various particulars and he was ultimately arraigned in the circuit court upon an information charging fraudulent official misconduct as stated, to which he ref used to plead and a plea of not guilty was entered by the court in his behalf, followed by trial and verdict of conviction.

Defendant’s bill of exceptions presents 47 assignments of error involving numerous dilatory proceedings by motion for change of venue, motions to quash the information, motions for continuance, etc., in which no reversible error is found, while certain others, based on objections raised during the trial, are unfortunately not properly presented because obscured by facts asserted in their support which do not appear in the record and for that reason are not entitled to consideration.

This information is filed under section 15308, 3 Comp. Laws 1915 (being section 27 of chapter 257, entitled “Offenses against Property”), which provides:

“If any officer, clerk or other person, employed in the treasury of this State, or in the treasury of any county, or in any other public office within this State, shall commit any fraud or embezzlement therein, he shall be punished by imprisonment in the State’s prison,” etc.

The specific criminal act with which respondent was charged and for which he was tried under this statute is, concisely stated, perpetrating a fraud upon the county of Oakland in the fall of 1916 while supervisor of Royal Oak township and a member of the board of supervisors of said county by “falsely and fraudulently” reporting and representing to the board of supervisors that the correct valuation of Royal Oak township according to his assessment roll for that year was $9,832,200, “with intent then and there to cheat and defraud the. said county of Oakland and the taxpayers thereof, in that a smaller and lesser proportion of State, county, and county road taxes (for said year 1916) might be apportioned by said board of supervisors to said township of Royal Oak,” etc., whereas in truth and fact the correct valuation of his township for that year as shown by the assessment roll thereof was as prepared by him $12,173,280.

The board of supervisors held a meeting in June of that year for the purpose, amongst other things, of equalizing the valuations of the several townships in the county and determining upon a basis for the State and county tax, and a committee of equalization was appointed which proceeded in the performance of its duties to look over the assessment rolls of the various townships and ascertain each supervisor’s assessed valuation of his township. Respondent had not near finished making the assessment roll for his township at that time, but attended the meeting of the board, held in Pontiac, taking along his incompleted assessment roll consisting of five volumes. Three of these were practically completed, the fourth but partially, with very little done upon the fifth which, when done,' included practically all the property in Royal Oak village and so far as completed but part of the volumes had been footed in lead pencil. No definite statement of valuation could be reached from this uncompleted roll. Respondent testified he stated to the chairman of the board of equalization with whom he advised that he did not know what it would amount to. There were 25 townships in the county and five wards the city of Pontiac to equalize, the assessment of and after talking the matter over, the chairman of the board asked respondent to give him something showing the total valuation of his township for the committee to use. He went home that night and from such totals as he had in his office with estimates from plats, the roll of the preceding year, etc., he, with the assistance of his clerk, Miss Smith, made an attempted computation of the valuation showing about $9,200,-000, a memorandum of which, in her handwriting, he gave to the chairman of the equalization board the following day. This was then taken by the committee as his report and so used in proceeding with its work.

At the annual meeting of the board of supervisors in October, 1916, the committee on equalization completed its work but did not go over the rolls again or ever attempt to total , the Royal Oak township assessment roll. The chairman asked respondent for the total amount of his roll, or whether there was any change in the valuation figures, and he replied there had been an increase and stated an amount. $3,600. was then added to his roll in the equalization. Respondent claimed the amount he stated to the chairman was $36,000 instead of $3,600, and that he did not notice the mistake when the report of the committee was approved.

After the June session of the board certain property previously listed as acreage was platted;, it is claimed to have been discovered that the Burroughs adding machine used in respondent’s office was out of order to such an extent as to sadly bewilder the clerical force for a time, making a large difference (variously stated as $200,000 and $800,000) in the school district valuations alone, and in fine whether through incompetency and unintentionally or with criminal intent to defraud the county, which was the issue involved on the trial, it subsequently developed that respondent’s valuation upon his tax roll exceeded by over $2,000,000 that accepted and acted upon by the board of supervisors as reported by him to the committee on equalization.

It appears that neither the board of supervisors nor its committee on equalization examined all the assessment rolls of the several townships to determine the relative valuations and accuracy of the footings in making up the equalization and apportionment for the county, as required by statute and in respondent’s case at both its meetings simply accepted his memorandum of estimate and oral statements as to valuations. He testified that he tried to get a hearing before the committee to explain the situation ,,but was not given opportunity to do so; but in any event it appears undisputed that acting on the information obtained from him the board as a basis of equalization determined the valuation of Royal Oak*township at $9,832,200; and the rate spread and computed upon the individual valuations of the various parcels of property upon the assessment roll of the township of Royal Oak for that year resulted in a collection of about $12,000 more money in that township than was required to settle for the State and county taxes, which surplus was retained and distributed among the several funds of the township.

It is conceded by the defense that this result is attributable to the discrepancy between the valuation of the township for equalization determined by the board from respondent’s oral report and its actual valuation for assessment purposes as shown by his assessment roll. It is also admitted by the prosecution that respondent is not shown to have embezzled, received or, directly at least, profited by any of this surplus which was distributed to the several township funds. In reply to an inquiry by a member of this court as to whether it was claimed respondent in any manner profited by this transaction, counsel for the prosecution answered in the negative, stating in substance that it was not shown or' claimed respondent had actually received any portion of the money.

With these concessions on the respective sides, which the record fully bears out, the controlling issue in this criminal prosecution centers to a question of criminal intent, or the constructive purpose of the act, incidental to which is that of motive. The same results would follow between the township and county whether this incorrect report by respondent to the board of supervisors was an innocent mistake resulting from incompetency or confusion of accounts and records, or was designedly made incorrect and false with a sinister and criminal intent to deceive and defraud.

It was conceded by the ‘prosecution that the erroneous information communicated by respondent to the chairman of the committee on equalization at the June meeting of the board of supervisors was in the nature of an estimate, and no criminality is charged against him as to that transaction. The charge of fraud perpetrated with criminal intent is directed to his replies and report at the October meeting. Not denying the charged incorrect report it was contended by and for defendant that it was an honest mistake innocently made under the confusing press of rapidly increasing duties and enhancement of values without thought, or realization, of. any resulting benefit to himself. The burden of proof rested upon the prosecution to prove criminal intent and motive, to which end various official books and records of Royal Oak township kept during defendant’s incumbency were put in evidence and his official conduct in township affairs was gone into at length, interspersed with numerous objections and claims of the respective parties which it is not necessary or practical to detail at .this time. . Where the principal issue is fraud, or fraudulent intent, a wide latitude is recognized in receiving evidence of facts tending either to inculpate or exculpate the party accused and many of defendant’s objections seem to ignore that principle.

We are, however, impressed that undue latitude and emphasis was permitted in the range over certain collateral inquiries and issues, to a confusing extent prejudicially tending against a fair and unbiased determination of the one controlling issue of fact for the jury. In the absence of proof of personal profit or benefit, it was the theory of the prosecution that motive and criminal intent were made manifest by proof of a shortage in the accounts of the township treasurer, presumptively known to respondent because the township board of which he was a member had audited and certified as correct the treasurer’s records, and that respondent’s false report of valuations to the board of supervisors was made designedly to create by the actual valuation a surplus fund for the township to replace, or cover up, the treasurer’s shortage. This charge was centered upon the books and records of the treasurer’s account for 1916, one Halsey being then township treasurer. His books as kept showed a shortage .for that year and it was charged he was a defaulter. While it is not shown that respondent had anything to do with keeping these books, and he is not prosecuted for conspiracy in connection with the shortage, this exceptional collateral proof of another offense by another party is permissible only under the wide latitude of inquiry allowed where the issue is fraud, to aid in determining motive, or guilty knowledge and intent in the crime charged, and should be guardedly restricted to that single purpose. The audit of the books and records of the township, made by authority of the township board, was begun in May, 1917, and concluded some time in the fall of that year. On October 6, 1917, the manager of the accounting department of the trust company employed to make the audit wrote respondent' that the report would be ready for delivery in a few days “and we will have three copies for your use.” This report figured conspicuously in the trial, being identified and explained by the accountant of the trust company who conducted the audit and testified that the sources of the information which it contained were the township clerk’s and treasurer’s books and records, tax rolls, county treasurer’s records, etc. This audit showed a book shortage in the accounts of four treasurers of Royal Oak township;, testimony being admitted during the trial along that line, against objection, running back as far as 1910. While it was claimed by the defense that the apparent book shortages were attributable to imperfect bookkeeping and no actual shortage existed, which defendant’s counsel complain they were not allowed to fully go into (failing, however, to point out any definite ruling in the record to that effect), it is sufficient to .note without further discussion of those contentions that the permitted range of inquiry drew into the case several collateral issues of confusing tendency; and the testimony for the jury to consider was further blended and burdened in a somewhat novel manner by counsel for the prosecution, while putting-in their testimony, introducing as evidence and reading to the jury by permission of the court, against defendant’s objection, some ten pages (by the record) of the Michigan statutes prescribing the time and manner of levying, assessing and collecting taxes, and the multitudinous duties of the various township, county and State officers in that connection. No question was raised in the case as to defendant’s duties. It was the province of the court to deal with the law and instruct the jury as to the charge contained in the information, which was filed under a different and distinct statute, and upon their distinct functions in deciding the issues of fact raised by conflicting testimony. These statutes were largely irrelevant, and immaterial in their legal aspect even for the court to consider, and certainly were not evidence for or against any fact in dispute. Reading them to the jury as evidence could serve only to confuse and bewilder.

Various errors are assigned against the charge which is claimed to be argumentative and prejudicial in designated particulars not requiring discussion here, beyond an assignment involving the testimony relative to the township treasurers’ shortages. In one portion of the charge the court told the jury that:

“As bearing on the question of respondent’s good faith in his action in reporting the valuation of his township to the board of supervisors, at their October session, you may take into consideration whether or not there were any shortages in the account of the township treasurer of Royal Oak in 1915 and 1916, which came to respondent’s knowledge.”

And later in the charge instructed the jury that—

“The prior and subsequent circumstances were admitted only for the purpose of aiding you in arriving at a correct conclusion as to whether or not the acts of fraud were actually committed as alleged in the information.”

The question of whether any or all of the township treasurers were short in their accounts constituted in itself an independent collateral matter which at that-time had not been judicially determined. The law is well settled that it would be error for the trial court to instruct the jury they might consider a collateral offense, even by the respondent himself, as evidence of the fact or substantive act of the offense charged. People v. Thacker, 108 Mich. 652; People v. Giddings, 159 Mich. 523 (18 Ann. Cas. 844; People v. MacGregor, 178 Mich. 436). When the court in its last distinct utterance upon the subject told the jury in general that those prior and subsequent matters relative to township affairs could be used by them in arriving at a correct conclusion as to whether or not the nets of fraud were actually committed as charged he, as said in People v. Thacker, supra, “went farther than any of the cases go, and announced a doctrine that would be exceedingly dangerous to follow,” particularly under the condition of the record in this case.

As the verdict must be set aside, and a re-trial granted for the errors noted, it seems advisable to briefly refer to two assignments of error which it is tenaciously insisted entitle respondent to an order of discharge. They are in brief that his counsel’s motion to quash the information and later for a directed verdict in his behalf should have been granted because it is not shown or claimed that the county of Oakland “ever suffered a dollar of loss” by reason of the charged fraudulent report; and that because interrogated in the inquisitorial proceedings under Act No. 196, Pub. Acts 1917, as to matters covered by the information against him his statutory and constitutional rights. preclude this prosecution.

To constitute the charged •criminal perpetration of fraud against the county under the statute it is not essential to prove that the municipal corporation as such sustained direct pecuniary loss. Respondent in .reporting the assessed valuation of his township to the board of supervisors was performing an official duty essential to the correct and valid performance of a governmental duty by the county through its official agents in raising public funds for the State and county by taxation. “Fraud” and “bad faith” are often synonymous, and particularly so as applied to the conduct of a public official. “Fraud” in such connection imports acts, concealments or omissions involving, a breach of legal or official duty, trust or confidence imposed, injurious to another or to the public, or any portion of the public toward whom that duty is owed, which results in undue or unconscionable advantage to the official, or those in whose behalf it is perpetrated. We have no hesitation in concluding that if it was shown respondent knowingly, designedly and with intent to deceive, falsely reported in his official capacity to the county, or its board of supervisors representing it, a valuation of his township for assessment purposes $2,000,000 less than the true amount, on the faith and as a result of which $12,000 excessive and unlawful State and county taxes were unwittingly imposed upon and collected from that portion of, the county outside the township he represented, and which as he knew rightfully should have been imposed upon it, defendant would be guilty of the statutory fraud charged.

On the investigation into the affairs of the township held under Act No. 196 after the prosecuting attorney had obtained a copy of the auditor’s report respondent was one of the many witnesses who were examined. A subpoena was issued for him to appear as a witness and, while a disputed question, it may be assumed was served. Some time before the investigation he was in possession of the auditor’s report upon which his prosecution is chiefly based and had delivered a copy to his attorney, retaining one for himself. While the investigation was in progress and before he was called as a witness he had arranged with his attorney that, as he states, “if anything would happen to me * * * he would take the case” and had asked him if he should produce his books and tax rolls at the investigation without being subpoenaed, which the attorney advised him to do. He was told by the court when on the stand during his trial that he was not obliged to tell what occurred between him and his counsel, but stated he was perfectly willing to, if he could answer in his own way, and was allowed to do so. He produced his books when wanted at the investigation, and when called as a witness made no suggestion that he desired to consult with or have his counsel present, did not suggest to the examiner or presiding justice any objection or desire not to answer the questions asked him, or in any way intimate a reluctance to testify because his answers might tend to incriminate him. In his affidavit filed in the case in support of a motion for continuance respondent stated:

“That during such investigation this deponent had consulted with his attorney, A. L. Moore, who had been his friend, adviser and counsel for years, and who was his trusted friend and adviser.”

On the trial when sworn as. a witness in his own behalf he stated that when examined at the investigation he supposed he had to answer the questions and when counsel for the prosecution asked him if he then intimated that he did not wish to answer any of them, his counsel objected on the ground that having been summoned by subpoena he was compelled to téstify under the provisions of sections 1 and 2 of Act No. 196, irrespective of section 4 of the act. Following this, and in the absence of the jury, respondent’s counsel re-examined him briefly before the court upon that subject and, his rights under Act No. 196 having been discussed the court sustained the objection, ruling in substance that the prosecution could not upon the trial show what respondent’s testimony was in the preliminary investigation, stating that the ruling was made “in view of this new statute” of which respondent should have the benefit. The jury was then called in and his cross-examination resumed upon a different subject. We do not find that the prosecution thereafter was allowed, or attempted, to question him as to his testimony on the'preliminary investigation or to show what he testified to, either by a stenographer’s transcript or otherwise.

Had the prosecution been permitted to prove before the jury incriminating answers given by respondent to questions asked him on the inquisitorial proceedings for discovery under the statute other questions might arise; but what questions were asked respondent when a witness at that investigation or what answers, incriminating or otherwise, he may have made are not disclosed. His counsel’s assumption in that particular would seem to be based either on matters de hors the record, or a presumption that having been a witness at this investigation for discovery of crime, analogous to a grand jury inquiry, and after-wards prosecuted as the result of information discovered, he must have given incriminating testimony against himself. No such presumption obtains in law, or upon the facts in this case. This investigation of the confused accounts and questionable affairs of the township occupied several weeks, involving a protracted examination of numerous books, rolls, records, accounts, vouchers, etc., of the township officials and, many witnesses. As shown by the evidence produced at the trial, the information obtained at the investigation upon which the prosecution was based and the evidence relied upon for conviction was available from other sources and witnesses, which it required no aid or admissions from respondent to secure. Counsel’s claim as to respondent’s constitutional and statutory rights resolves itself upon this record into the proposition that a person who is summoned to testify before a court of inquiry, or called as a witness in an authorized proceeding for the discovery of crime under Act No. 196, and there gives testimony, whatever its nature, is thereafter immune from a prosecution based on information obtained during such inquiry, from whatever source it came. Such construction of the act or the constitutional rights of the accused cannot be entertained. .

For the reasons stated the verdict must be set aside and a re-trial granted.

Bird, ' C. J., and Moore, Brooke, Fellows, Stone, and Kuhn, JJ., concurred. Ostrander, J., did not sit.


text:
    SMITH v. HUBBARD.
    1. Bills and Notes — Certified Checks — PIolder in Due Course —Principal and Agent.
    In an action against a bank on a certified check, where the undisputed testimony shows that plaintiff received the check from the holder’s attorney in payment for 80 acres of land, the court below properly found that the attorney was agent of the holder.
    2. Same — -Fraud—Notice—Holder in Due Course.
    The validity of a -certified check in the hands of a holder in due course would not be affected by the fact that, as between the bank and the drawer, the certification was a nullity and in violation of law.
    3. Banks and Banking — Private Banks — Powers of Cashier— Certified Checks.
    The cashier of a private bank holding itself out to the public as a bank and operating as such, has inherent authority to certify checks and bind the bank thereby to the same extent as though it were duly incorporated.
    4. Bills and Notes — Certified Checks — Presentment—Rules.
    Rules relative to prompt presentment for payment of ordinary checks do not apply to certified checks, since they are not expected to be as promptly returned, but are certified in order that they may be used as a substitute for money.

      See notes in 9 L. R. A. (N. S.) 698; 29 L. R. A. (N. S.) 205.

      5. Same — Holder in- Due Course — Duty to Investigate.
    Where a certified check was, on its face, under the law, an absolute undertaking of the certifying bank to.honor it when presented for payment at any time before barred by the statute of limitations, no obligation rested upon one to whom it was offered in due course of business, to, at his peril, make investigation into the reason for, and circumstances of, its certification.
    Error to St. Clair; Law, J.
    Submitted January 14, 1919.
    (Docket No. 31.)
    Decided April 3, 1919.
    Assumpsit by Charles Smith against Frank W. Hubbard and others, copartners as the Palms Bank of Frank W. Hubbard & Co., for the amount of a certified check. Judgment for plaintiff. Defendants bring error.
    Affirmed.

      W. T. Bope, for appellants.

      Moore & Wilson, for appellee.
   Steere, J.

In this action, commenced in the circuit court of St. Clair county, on October 18, 1917, plaintiff recovered a judgment against defendants in the sum of $1,036.25 upon the following certified check:

“Palms, Mich., July 27, 1915.
“No......
“Palms Bank op Frank W. Hubbard & Co.
“Pay to the order of E. ,W. Mapes........$1,000, one thousand dollars.
“Eli Sawdon.”
Across the*face of this was written the following:
“Good when properly endorsed.
“B. D. Wright,
“Cash. July 27, ’15.”

Indorsed upon the back of said check were the following names, in the following order:' E. W. Mapes, Eli Sawdon, Flavel G. Briggs.

On July 27, 1915, when this check was certified, defendants were and had been for a number of years conducting a g’eneral banking business at Palms, Mich., under the name of the “Palms Bank ,of Frank W. Hubbard & Co.”

Bert D. Wright was and had been cashier of said bank for about 7 years. Eli Sawdon and his father-in-law, E. W. Mapes, were customers of said bank, and partners engaged in taking drainage contracts in different parts of the country. Flavel G. Briggs, one of the indorsers, was and is a resident of Arkansas, to whom Sawdon became indebted and delivered the check as collateral security to notes given therefor. Plaintiff was and is also a resident of Arkansas, who received the check from Briggs’ attorney in payment for an 80 acres of land purchased for Briggs. Briggs and plaintiff, who consecutively acquired this check each testified that he then had no'knowledge of any claim against its validity but took the same in good faith for a valuable consideration on the strength of its being what it purported. Smith testified in part as follows:

“Q. I ask you if you are now the owner of this check?
“A. Yes.
“Q. What did you give in exchange for this check?
“A. Traded 80 acres of land. * * * I have had some experience in dealing with banks and checks. I accepted this check at' face value because it was certified and written out in the usual manner and signed. I had no intimation that there would be any defense to the payment of said check.”

The date of the check, certification and genuineness of signatures are conceded. The authority of Wright to certify the check and the innocence of plaintiff as holder are not admitted, and it is further contended that the delay which intervened between the time of issuance and time of demanding payment estops recovery.

In explanation of how this check, issued at Palms, Michigan, was put afloat in Arkansas, it is shown that Sawdon secured it from Wright to use in bidding at contract lettings for drainage work where certified checks are required to accompany the bid, and first sent it to his partner, Mapes, at Armada, Arkansas, for that purpose. He later went there with a dredge to do some drainage work and at Judsonia rented a house from Briggs, and while his tenant succeeded in borrowing some money from him, turning over to him this certified check for collateral security, as Briggs, and a Dr. Huntley of Judsonia both testify, and the court found, although Sawdon testified it was for safe keeping. Sawdon defaulted in payment, and learning the Palms bank declined to honor the check, Briggs employed counsel and brought suit on the paper in White county, Arkansas, against Sawdon, Mapes, Wright and the bank. Mapes, Wright and the bank avoided the action by a successful motion, before pleading, to quash the proceedings as to them because of defective service. Sawdon pleaded issuably and on trial judgment was rendered against him for $816.39, one of the findings in the judgment being that he had given Briggs the certified check as collateral to secure payment of the debt sued upon. Briggs then directed his attorney, Mr. Rachels, to realize for him upon the certified check as best he could, by either sale, suit or otherwise, and Rachels disposed of it to plaintiff in payment on a farm land purchase which he was negotiating with him for Briggs, assuring him that it was genuine and that if desired he would lend his professional assistance in putting it through the ordinary “due course of collection,” which he did, and payment being refused by defendant this action followed.

The case was tried before the court without a jury, and on request of counsel findings of fact with conclusions of law thereon were filed. The court’s findings of fact, which we have to a degree outlined, are well sustained by the evidence, largely undisputed, and conclude as follows:

“At the. time Smith accepted the check, he did not know that either the bank or Sawdon claimed the check to be invalid, nor did. he have any reason to believe that the check was not good, nor anything to put him on inquiry as to its validity. At this time Attorney Rachels had been advised that Sawdon claimed Briggs had obtained possession of the check by a wrongful act and also that the bank claimed the check to be invalid.”

Holding that under the undisputed evidence Rachels was agent of Briggs, and not plaintiff, when he paid the latter this certified check on the land purchase, the court found that plaintiff then became a bona' fide holder of the check in good faith for full value and the bank was bound by its certification to honor it.

Defendants’ assignments of error are directed against the court’s conclusions of law, refusal to make certain requested findings of proven facts, and certain findings made which are claimed to be contrary to the evidence.

For full consideration of the case defendants were permitted to show, against timely objection by plaintiff, that, needing a certified check for $1,000 to use in his drain bidding and only having $75 in his account at the bank, Sawdon arranged with the cashier, Wright, to issue him this certified check and take his note for that amount; that no record of the cértified check or the $1,000 note Sawdon gave was entered in the books of the bank, nor credit given Sawdon for the note in his account, the note has never been paid and Sawdon is, and then was, financially irresponsible. These facts, though not disputed, were rejected by the trial court as immaterial.

Of defendants’ claim that plaintiff adopted Rachels as his agent in connection with the transfer of the certified check and Rachels’ knowledge is imputable to him, we think the trial court rightly found from undisputed testimony that when plaintiff became owner of the note he was dealing with Rachels as Briggs’ attorney and agent, with no knowledge of any of the facts relative to the issuance of. the check, and find no evidence in the record that any of those facts were known to Rachels. He and Briggs did know that the bank had declined to recognize, the check in Briggs’ hands and that Sawdon was claiming Briggs had no right to it, and they knew that Briggs’ claim to it as collateral to Sawdon’s notes had been determined in his favor in his recent suit with Sawdon. Their testimony is positive that its payment to plaintiff on the land purchase was a bona, fide business transaction, and there is no testimony to the contrary. We think the court’s conclusions that Smith was a good faith, innocent holder for value is sustained by the proofs; anything to the contrary is but surmise, based chiefly on knowledge of facts developed at the trial of which there is no proof that any of the Arkansas parties had actual knowledge.

It may be conceded that under the facts disclosed by defendant’s evidence Wright violated the banking law when he certified this check, and as between the bank, Sawdon and Mapes the certification is a nullity and the note given by Sawdon was, as defendant’s counsel contend, “a fictitious nullity which is prohibited by the statutes,” but the fundamental infirmity of the defense throughout is that plaintiff was not a party to any of those proceedings and knew nothing of them.

That defendant was operating as a private bank under a partnership organization furnishes it no immunity from the well-settled rules of law applicable to certified checks issued in the customary course of banking business. It was operating as a bank and holding itself out to the public as such. Wright was and had been for years its cashier in that business, dealing with the public for it in that capacity. As cashier he had inherent authority to certify checks and bind the bank thereby to the same extent as though it were duly incorporated for conduct of the same line of business. Tripp v. Curtenius, 36 Mich. 494; 1 Morse on Banks and Banking (5th Ed.), § 413. It is undisputed that this instrument as issued and put afloat by defendant was good on its face as a certified check. Certain lines of defense available against other negotiable instruments do not apply to this class of commercial paper. To it The rules relative to prompt presentment for payment have scant application within the statute of limitations. Checks are by custom certified in order that the holders may in their business transactions make use of them as a substitute for money and in their function to that end in the business world they are not expected to be as promptly returned to the bank issuing them for redemption as ordinary checks, notes or similiar negotiable paper. When so certified and issued any holder who has become owner of such paper in good faith for value has a direct claim and right of action against the bank which certified it regardless of its relations with the depositor, or condition of the drawer’s account with the bank, or other circumstances attending its certification. It is good in the hands of a bona fide holder for value although the maker had no funds in the bank when it was certified. Union Trust Co. v. Preston Nat. Bank, 136 Mich. 460 (112 Am. St. Rep. 370); First Nat. Bank v. Union Trust Co., 158 Mich. 95). The opinion in Union Trust Co. v. Preston Nat. Bank, by Justice Carpenter, exhaustively reviews the authorities upon the subject and covers in substance, as we think, the controlling questions involved here.

The practice and principles involved in certifying checks and their import when issued was long ago decisively reviewed by Justice Swayne in Merchants’ Bank v. State Bank, 10 Wall. (U. S.) 604, and has been often cited in later decisions upon the subject. This court cited and quoted from it with approval in First Nat. Bank v. Currie, 147 Mich. 72 (9 L. R. A. [N. S.] 698, 118 Am. St. Rep. 537).

This certified check from a bank in Michigan found its way to and was put afloat by its payor in Arkansas, had apparently passed through several hands and bore the signature of three indorsers, the last being Briggs, a business man in White county in that State, and, in a deal for some land in VanBuren county, was passed by his attorney and agent upon plaintiff with the assurance that it was genuine. Recognizing from his experience in dealing with banks and checks, that it was a certified check in usual form, with “no intimation that there would be any defense to its payment,” as he states, he accepted it in good faith in exchange for 80 acres of land. It was on its face under the law an absolute undertaking of the certifying bank to honor it when presented for payment at any time before barred by the statute of limitations. No obligation rested upon him to, at his peril, make investigation into the reason for and circumstances of its certification. We find nothing in the situation presented here which relieves defendant from'its obligations under the well-settled and somewhat emphatic rules of law established in recognition of the importance of the verity of certified checks as a medium of exchange in the business world under the law merchant.

The judgment is affirmed.

Bird, C. J., and Moore, Brooke, Fellows, Stone, and Kuhn, JJ., concurred. Ostrander, J., did not sit.