author: Mr. Justice Mulket Mr. Justice .Walker :

text:
    The Peoria and Springfield Railroad Company v. S. H. Thompson.

      Filed at Springfield March 28, 1882

      Rehearing denied June Term, 1882.

    1. Railroads—constitutional prohibition against issue of bonds or stock, except for money, labor or property received. The object of sec. 13, art. 11, of the present constitution, in providing that “no railroad, corporation shall issue any stock or bonds, except for money, labor or property actually received and applied to the purposes for which such corporation was created,” and that “all stocks, dividends, and other fictitious increase of the capital stock or indebtedness of such corporation shall be void,” was to prevent reckless and unscrupulous speculators, under the guise or pretense of building a railroad or of accomplishing some other legitimate corporate purpose, from fraudulently issuing and putting upon the market bonds or stocks that do not, and are not intended to, represent money or property of any kind, either in possession or in expectancy, the stock or bonds in such case being entirely fictitious.
    2. Same—and herein, of the rights of innocent holders of railroad bonds. But it was not intended by that provision to interfere with the usual and customary methods of raising funds by railroad companies, by the issue of its stocks or bonds, for the purpose of building their roads, or of accomplishing other legitimate corporate purposes. Under that provision of the constitution, railroad companies have no right to lend, give away, or sell on credit, their bonds or stock, nor have they the right to dispose of either, ( except for a present consideration, and for a corporate purpose. But if, upon 1 a sale of its stocks or bonds by a railroad company for a present consideration, it should subsequently divert the proceeds to other than corporate purposes, the purchaser of such stock or bonds, who has acted in good faith in the matter, or his assignee, can not be affected by the subsequent misappropriation by the company.
    3. In short, where one, for a present consideration, in good faith purchases bonds or stocks in the regular course of business from a railroad company, and such consideration is accepted by the proper officer of the company, and nothing appears to show that it is to be used or applied to other than legitimate corporate purposes, such bonds or stocks, when thus issued, will be regarded as having been issued for money, labor or property “actually received and applied,” within the meaning of the constitutional provision.
    4. Equitable defences—as against a holder of negotiable paper secured by mortgage—former decisions. It was held in Olds. v. Cummings, 31 Ill. 188, that the holder of commercial paper, seeking to enforce in equity a mortgage security therefor, was subject to any defence which would have been good against the mortgage in the hands of the mortgagee himself, although such holder may have purchased the paper in good faith, and before its maturity.
    5. But this doctrine has no application to deeds of trust given to secure railroad coupon bonds intended to be thrown upon the market and circulated as commercial paper, and to be used as securities for permanent investments.
    6. So where such railroad bonds, secured by deed of trust for the benefit of the holders thereof, had been issued, and delivered to contractors engaged in the construction of the road, and by them disposed of in the market to innocent purchasers, on bill by the trustee to foreclose the deed of trust for the benefit of the bondholders, it was held, the unsettled equities and matters of account between the company and the contractors could not be interposed in defence against the bill.
    7. A part of the reasoning of the court in Chicago, Danville and Vincennes Ry. Co. v. Loewenthal, 93 Ill. 433, is not to be reconciled with the rule here announced. But what appears in the opinion relating to the question here mentioned was said in arguendo, and after the case had been decided upon another distinct ground, and without any argument of the question except upon one side. Under these circumstances, it is considered that what was there said ought not to be, and is not, regarded as conclusive of the question, and the court is satisfied the view now presented is the correct one.
    8. Corpobations—acts ultra vires—estoppel. While it is the general principle that negotiable securities issued by a corporation without authority of law, or in express violation of a statute, are inoperative and void even in the hands of innocent holders, yet there is another rule of law equally well settled—that although a contract entered into by the agents or officers of a private corporation is ultra vires, and therefore not binding on the company so long as it remains executory, yet if the company in such case knowingly permits the other contracting party, without objection, to go on and perform the contract on his part, and thereby obtains and appropriates to its own use money, property or labor in furtherance of some legitimate corporate purpose, it will be estopped from denying its liability on such contract.
    9. Redemption—of railroad property sold on foreclosure. Where a railroad, its appurtenances and franchises, are mortgaged as a whole, there is no power or authority to sell them separately, and such property, taken as a whole, not being, strictly speaking, either real or personal estate, when sold on a decree of foreclosure is properly sold without any right of redemption. The rule is founded partly upon considerations of public policy.
    Appeal from the Appellate Court for the Second District ;—heard in that court on appeal from the Circuit Court of Peoria county; the Hon. D. McCulloch, Judge, presiding.

      The Peoria and Springfield Railroad Company, a corporation duly organized under the laws of this State, on the 31st day of October, 1871, entered into a written contract with B. S. Prettyman, D. T. Thompson, Thos. Edes, A. J. Ware, B. E. Smith, C. B. Griggs and W. Dennison, by which the latter covenanted and agreed to furnish the materials, build and complete in a good, workmanlike manner, a single track railway, with necessary sidings and passing places, from the city of Peoria, in Peoria county, via the city of Pekin, in Tazewell county, to the- city of Springfield, in Sangamon county, this State, in consideration of which, among other things, the railroad company agreed to pay the above named contractors the sum of $20,000 per mile in first mortgage seven per cent bonds of the company, which were to be made the first “and exclusive hen on said railroad, its franchises, property and equipments of every kind.” Said bonds, or so many of them as might be required, were to be delivered by the company to the contractors, or their agents, at any time, on demand, to be used by them “to pay for iron, materials or labor for the construction of said road, or to be sold for money,” upon satisfactory evidence being produced that the materials were purchased for the use of the road, or the work and labor were done according to the terms of the contract. The company also agreed to pay the contractors in the paid up capital stock of the company the additional sum of $12,-000 per mile for said railway, to be issued whenever required for the construction of the road.
    Subsequent to this contract, and before the 13th of February, 1872, by some arrangement between the contracting parties, Edes and Prettyman withdrew from the undertaking, and Smith,. Griggs, Dennison, Ware and Thompson, the remaining contractors, assumed the performance of the contract with the railroad company. Upon this change in the parties to the enterprise, it was agreed that the business should thereafter be conducted under the name and style of Thompson, Griggs & Co.; that Ware and Thompson should receive nothing for their services, and that Smith, Griggs and Dennison should furnish the money, and that Smith alone should have exclusive charge of the financial matters of the company. This arrangement seems to have been acquiesced in by appellant, for on the day last mentioned a supplementary agreement was entered into between the railroad company and the members of the firm of Thompson, Griggs & Co., in which the making of the former agreement is recited, and by the terms of which the contractors bound themselves to furnish the necessary material and build a bridge, of a specified character, on the line of the company’s road across the Illinois river, for which the company agreed to pay them in said first mortgage bonds, at par value, the additional sum of $200,000.
    In pursuance of these contracts, on the 11th of April following, the railroad company j through its board of directors, adopted certain resolutions, wherein it ordered and directed “that a series of one thousand five hundred of the company’s bonds, each for the sum of $1000, to be numbered consecutively from one to fifteen hundred, inclusive, be prepared for issue and delivery, signed by the president and secretary, the corporate seal of the company to be affixed thereto, and authenticated, when so signed and sealed, by the certificate of a trustee, bearing date the first day of April, 1872, and payable to I. E. Leonard, or bearer, in the city of New York, at such place therein as such company shall from time to time appoint, on the first day of April, * * * 1902, with interest warrants thereto attached, signed by the secretary, for the payment of interest thereon, at the rate of seven per cent per annum, free from government tax, payable at the same place on the successive days of October and April of each year, both the principal and interest of such bonds to be payable in gold.” It was further ordered and directed in and by said resolutions, that a deed of trust be prepared and executed by the president and secretary of the company conveying the road of the company, its appurtenances, appendages, franchises, equipments, tolls, income, assets and property, then possessed or thereafter acquired, to William A. Dennison, trustee, to secure the payment of said bonds and interest warrants.
    The bonds and trust deed were prepared and duly executed in conformity with the directions of the company as expressed in the above resolutions, as of the date of April the 1st, 1872. The bonds, when so executed by the company, were sent to Smith, at Columbus, Ohio, for the purpose of having them certified by Dennison, as in the trust deed provided. Six hundred of these bonds were, on presentation, accordingly certified by Dennison, and left by him with Smith in the latter’s office, in Columbus, Ohio, where Dennison and Smith both resided, and where the latter kept his office. The remaining nine hundred bonds were never so certified or used for any purpose.
    About the time of the preparation of these bonds and the trust deed, or perhaps a short time before, Thompson, Griggs & Co. commenced active operations in the building and construction of the road and bridge, under the contracts above-mentioned, and so continued until in January, 1873, when the work was suspended, and has never since been resumed. Before the abandonment of the work the contractors had already completed the bridge, and substantially finished as much of the road as lies .between Peoria and Pekin, a distance of twelve miles. On the 8th of April following the suspension of the work in January, the railroad company leased the completed portion of its road lying between Pekin and Peoria to the Indianapolis, Bloomington and Western Bail-way Company, for ninety-nine years from the 1st day of February, 1873, with a covenant of renewal forever, at an annual rental of $50,000, a part of which was to be applied by the lessee to the payment of the semi-annual interest on six hundred of the above mentioned bonds, and the balance of the rental to be paid to the railroad company. Upon the execution of this lease a certificate was endorsed upon the six hundred bonds above mentioned, showing the payment of the interest was assumed by the Indianapolis, Bloomington and Western Railway Company. Five hundred and ninety of these bonds being thus executed by the company, certified by the trustee', and the interest assumed by the lessee of the road, in the manner stated, were from time to time negotiated and transferred, in the regular course of business, by Thompson, Griggs & Co., and have passed into the hands of the present holders for value, without notice of any supposed infirmity in them, being the same bonds now in controversy. The remaining ten of the six hundred, after having been used for some time as collateral security, have since been brought into court and surrendered up, and are therefore eliminated from the present controversy.
    The trust deed above mentioned expressly provided that in case the company should, for the term of six months, make default in the payment of the interest on its bonds, the principal should also become due and payable at the option of the holders of the bonds. Default having been made in the payment of the interest on a part of these bonds, Samuel H. Thompson, on the 22d of May, 1875, filed in the Peoria county circuit court the original bill in this case, against the railroad company, Dennison, the trustee, and various other parties in interest, alleging that he was owner of five of the bonds in question; that default. had been made in payment of the interest thereon for more than six months; that the company had become insolvent; that its property was depreciating, and that it had ceased to apply the earnings of the road to the payment of the interest on its bonded indebtedness, whereby the complainant and other bondholders were in danger of losing their claims, etc., and prayed a foreclosure of the deed of trust, and that a receiver might be appointed to take immediate charge of the road and assets of the company. Upon the filing of this bill, the court, on the same day, appointed James Haines receiver, who thereupon qualified, and entered upon the duties of his appointment.
    Dennison, the trustee, on the 2d of January, 1877, filed an answer and also a cross-bill, setting up the making of the bonds and trust deed, as heretofore stated; the leasing of the road to the Indianapolis, Bloomington and Western Railway Company; the insolvency of the latter company; the default in payment of interest on all the bonds; the insolvency of the Peoria and Springfield Railroad Company, and the sale and transfer by it of the six hundred bonds in question about the time of their date, and prayed for a foreclosure of the trust deed.
    The company, by its answers to the original bill and cross-bill of Dennison, admits the making of the trust deed and bonds by the company, but denies they were ever negotiated or delivered by it. It at the same time filed a cross-bill, in which the same facts are reiterated. It is also charged in the cross-bill that Thompson, Griggs & Co. entered into a conspiracy to wrongfully and fraudulently appropriate the bonds in controversy to themselves; that they have failed to perform their contract with the company for the building of the road, and procuring the right of way, by reason of which, it is claimed, the company has sustained large damages, which it asks to be recouped or set off against the claims sought to be enforced against the road.
    Numerous other pleadings were filed and orders entered in the cause, whereby the issues were finally made up, which are not necessary to be particularly noticed in order to a proper understanding of the case.
    Dennison having resigned as trustee pending the suit, William F. Bryan was appointed trustee in his stead, who filed a supplemental cross-bill on behalf of the bondholders. The circuit court found the equities with the bondholders as against the company, ascertained the amount of its indebtedness, and ordered the same paid within a specified time, and in default of such payment ordered a sale of the mortgagedx property, and directed the proceeds, after the payment of the expenses of the trust, including costs and certain preferred claims against the company specified in the decree, to be applied to the payment of its bonded indebtedness, and the residue, if any, after the payment of all claims, to be paid over to the company. From this decree the company appealed to the Appellate Court for the Second District, where the same was affirmed, and the cause is brought here by further appeal from the Appellate Court.
    Such facts not appearing in the foregoing statement as are necessary to an understanding of the controverted questions in the ease, sufficiently appear in the opinion of the court.
    Messrs. Prettyman & Hughes, for the appellant :
    The bonds in question are void, the company, under the constitution and law, having no power to issue them except for “money, labor or property actually received and applied to the purpose for which the corporation was created. ” Const. 1870, art. 11, sec. 13; Rev. Stat. 1874, chap. 114, sec. 22.

    When the legislature prohibits an act, or declares it shall be unlawful to do it, the courts must hold such act void. Mutual Ins. Co. v. Rosenthal, 55 Ill. 91; Munsell v. Trumble, 3 Gilm. 93; People v. Chicago, 51 Ill. 34; Bank v. Owens, 2 Pet. 527; Bester et al. v. Wathen et al. 60 Ill. 138; Linder v. Carpenter, 62 id. 309; St. Louis, Jacksonville and Chicago R. R. Co. v. Mather, 71 id. 592; Wheeler v. Russell, 17 Mass. 281; Insurance Co. v. Kipp, 8 Cow. 20; White v. F. Bank, 22 Pick. 184; Bailey v. Tabor, 5 Mass. 292; Mitchell v. Smith, 1 Binn. 110.
    When the constitution forbids issuing such bonds without such payment, they can have, when so issued, no more validity than the bonds of a county issued without an election. Law
      v. People, 87 Ill. 385; Fuller v. Chicago, 89 id. 282; County of Hardin v. McFarlin, 82 id. 138; Jackson County v. Bush, 77 id. 66; Town of Elmwood v. Marcy, 2 Otto, 289; Aspinwall County v. Davis, 22 How. 365; Concord v. State Bank, 92 U. S. 625; Greencastle v. Black, 5 Ind. 569; Lockport v. Gaylord, 61 Ill. 276; Hills v. Chicago, 60 id. 91; Chance v. Marion County, 64 id. 66; Buchanan v. Litchfield, 12 Otto, 292; Town of Pana v. Lloyd, 97 Ill. 191; Force v. Town of Batavia, 61 id. 100; Williams v. Roberts, 88 id. 13; Lippincott v. Pana, 92 id. 34; Marshall County v. Cook, 38 id. 48; Lewis v. Shreveport, 3 Wood, 213.
    A bona fide holder is not protected when the maker has no power to make or issue such paper. Such bonds have not the quality of commercial paper. The law is notice of the want of power to issue. Marsh v. Fulton County, 10 Wall. 676; Loan Association v. Topeka, 20 id. 655; Town of Elmwood v. Marcy, 92 U. S. 289; Town of Oakland v. Skinner, 94 id. 258; Town of Ottawa v. Perkins, 94 id. 260; McClure v. Oxford, 94 id. 429; Antony v. Jasper County, 101 id. 101; Wadsworth v. Eu Clare County, 102 id. 536; Aspinwall v. Comrs. D. Co. 22 How. 364; Lewis v. Barber County, 3 Fed. Rep. 191; Chisholm v. County of Montgomery, 2 Wood, 595; M. S. I. and T. Co. v. Goodrich, 75 Ill. 559; Gadis v. Richland County, 92 id. 120; Marsh v. Fairbury, Pontiac and Northwestern R. R. Co. 64 id. 414; Bates County v. Winters, 97 U. S. 91; Railway Co. v. Allison, 18 Wall. 233; Willis v. Supervisors, 12 Otto, 625.
    The original payee of bonds secured by mortgage or deed of trust holds the same subject to all defences in equity, and his assignee, or the subsequent holder, takes, in equity, subject to the same defences. Olds v. Cummings, 31 Ill. 188 ; Haskell v. Brown, 65 id. 29; Thompson v. Shoemaker, 68 id. 256; Bryant v. Vix, 83 id. 14; Sargent v. Howe, 21 id. 148; Kleeman v. Frisby, 63 id. 482; Chicago, Danville and Vincennes R. R. Co. v. Loewenthal, 93 id. 433; Pettilon v. Noble,
      73 id. 567; Foster v. King, 5 Bradw. 223; Belohradsky v. Kuhn, 69 Ill. 547.
    The court erred in ordering a sale of the entire road, with tools, accounts, claims and personal assets, without redemption. The right to redeem real estate sold on decree of foreclosure is a statutory right, and can not be taken away by decree. Palmer v. Forbes, 23 Ill. 301; Tytus v. Mabee, 25 id. 257; Fisher v. Palmer, 50 id. 226; Wolf v. Hogan, 24 id. 525; Warner v. D. C. N. Bank, 4 Bradw. 305; Karnes v. Lloyd, 52 Ill. 116.
    Mr. H. B. Hopkins, and Mr. John B. Cohrs, for the appellee :
    The bonds in question are no infraction of sec. 13, art. 11, of the constitution, as they represent no 'fictitious indebtedness. The entire road was built from the proceeds of these bonds. But the company, by securing and applying to its use the proceeds of the bonds, is estopped from making the objection that they were issued in violation of the constitution. Aurora Agricultural and Horticultural Society v. Paddock, 80 Ill. 266; Whiting Arms Co. v. Barlow, 63 N. Y. 62; Zabrieski v. C. C. and C. R. R. Co. 23 How. 381; 2 Kent’s Com. (11th ed.) 381, note; Darst v. Gale, 83 Ill. 136; Bradley v. Ballard, 55 id. 413; West et al. v. Madison County Agricultural Board, 82 id. 205; Chicago Building Society v. Crowell, 65 id. 453; McCarthy v. Lavasche, 89 id. 270; Bissell v. M. S. and N. I. R. R. Co. 22 N. Y. 258; Argenti v. San Francisco, 16 Cal. 255; McClure v. Manchester and L. R. R. Co. 13 Gray, 124.
    We maintain that the bonds are not affected by equities, if any exist, between the Peoria and Springfield Railroad Company and the firm of Thompson, Griggs & Co. The rule on this point adopted in this State is opposed to the settled doctrine of the other courts of the country generally, including both State and Federal courts. 1 Daniell on Negotiable Inst, secs. 834-836; 2 Jones on Mortgages, secs. 1485-1487, sec. 834, note 1; Carpenter v. Logan, 16 Wall. 271; Endicott v. Supervisors, 16 id. 468; Taylor v. Perry, 6 Allen, 86; Pierce v. Force, 47 Me. 507; Reeves v. Smiley, Walker’s Ch. 248; Bloomer v. Henderson, 8 Mich. 395; Fisher v. Otis, 3 Chand. 83; Martin v. McCullom, 4 id. 153 ; Croft v. Brewster, 9 Wis. 503; Cornell v. Hutchins, 11 id. 353.
    The bonds being made payable to the holder, and transferable by delivery, the company has contracted itself out of its right to set up equities. Higgs v. A. T. Co. (Law R.) 4 Exch. 387; In re Blakesly, id. 3 Ch. 154; Green’s Brice on Ultra Vires, 163—167; McElrath v. P. and S. R. R. Co. 55 Pa. St. 206; Sappington v. Pulliam, 3 Scam. 385; Cranch v. Credit Foncier, 6 Eng. 117; Rumbel v. Metropolitan Bank, 20 id. 276; Moore v. Met. 55 N. Y. 41; Johnson v. Stark County, 24 Ill. 75; City of Pekin v. Reynolds, 31 id. 529; Jones v. Nellis, 41 id. 482; Garvin v. Wiswell, 83 id. 218; Smith v. Johnson, Breese, 18; Town of Eagle v. Cohn, 84 Ill. 218.
    There was no error in the decree touching redemption of the mortgaged property. There is no statute authorizing redemption of the class of property in question. The mortgaged property, in its integrity as a unit, is made up of three inseparable constituent parts: First, intangible personal property, such as franchises, charter rights, right to levy tolls* etc.; second, tangible personal property, embracing rolling stock and all other movable property, incomes, profits, tolls, contracts, good will, etc.; third, qualified interest in lands, being an easement or right of way.
   Mr. Justice Mulket

delivered the opinion of the Court:

Some of the questions presented by this record are of unusual interest, and have been discussed by counsel on both sides with marked ability; and after a careful consideration of all that has been urged both pro and con, and a laborious and patient examination of the vast amount of testimony which has been taken in the cause, with a view of obtaining an accurate knowledge of the material facts upon which the controversy depends, it remains for ns to present our own conclusions upon the more important of these questions, together with some of the considerations which have led to the results reached.

Perhaps the most important of all the questions presented-for our determination is the one first discussed in appellant’s brief. It is earnestly insisted that the bonds in question are absolutely void, bn the ground they were. issued and put in circulation in contravention of section 13 of article 11. of the present constitution, and also of section 22, chapter 114, Eevised Statutes. The section of the constitution relied on provides, that “no railroad corporation shall issue any stock or bonds except for money, labor or property actually received and applied to the purposes for which such corporation was created; and all stocks, dividends, and other fictitious increase of the capital stock or indebtedness of any such corporation, shall be void.” The section of the statute cited is almost a literal copy of the above provision of the constitution.

It is claimed that the evidence shows that the bonds in question, after having been prepared and executed by the company, were placed in the hands of Smith for the purpose of having them certified by Dennison, the trustee, as required by the provisions of the trust deed, and when thus certified to be returned to the company, and for no other purpose, and that the subsequent appropriation of them by Thompson, Griggs & Co. was without any warrant or authority from the company, but that, conceding the company’s officers and agents assented to such appropriation, it affirmatively appears that the bonds, at the time of their delivery to them, were not given for either money, labor or property which0 had theretofore been actually received or applied to the purposes for which the company was created, wherefore it is concluded that the bonds are absolutely void, even in the hands of innocent holders.

Assuming, for the purposes of the argument, the facts to he as claimed by appellant’s counsel, is the construction which they place upon this provision of the constitution the true one ? It could hardly have been the intention of the framers of the constitution by this provision to prohibit the building of railroads altogether with means to be realized from the sale of bonds and stocks, and yet such would undoubtedly be its practical effect if the construction contended for is correct, for. it is hardly reasonable to suppose that capitalists would advance money to build a railway upon the mere promise of the company at some future day, after the completion of the road, to issue bonds or stock for the money thus advanced. Nor is it at all probable, on the other hand, that promoters of railroad enterprises would undertake to build railways without present means to defray current expenses. This could not be done. Laborers, mechanics and material-men have to be paid in ready money, and this must1 be raised either by negotiating the bonds or stock of the company at the outset, or the contractors or promoters must advance it out of their own pockets, upon the faith of the company’s being able, at some future day, to negotiate its bonds for the purpose of reimbursing them. This course would be so hazardous that no one would be safe in adopting it, and few, if any, prudent business men would be likely to do so. The negotiation of railway bonds depends so much upon the temper of the times and the state of the money market when they are offered, that none but men of unlimited means could safely commence the construction of a railroad under such circumstances. Men of moderate means, relying upon such resources, would, in cases of this kind, be exposed to the danger of being forced to abandon the enterprise altogether, after having exhausted their own private funds in the prosecution of the work, by reason of being unable to negotiate bonds for the work actually done.

Every railway company, when first organized, has neither money nor property of any description, outside of its stock, with which to build its road, hence, if it builds it at all, it must of necessity build it on a credit, unless it is built exclusively out of the proceeds of its stock; but even this could not be done under the construction contended for, because if that be the true construction, the company would be as powerless to negotiate its stock in advance of the work actually performed as it would its bonds. Both stock and bonds, it will be perceived, stand upon the same footing in this respect. Uniform experience shows that public and private interests alike demand that in the building of a railroad the means for that purpose should be fully and definitely provided before the commencement of the work, and this is especially necessary when the sale of the company’s bonds or stock is relied on for that purpose, which, we may add, is almost universally the case.

But it is quite manifest that means to build a railway could not be thus raised in advance if the position of appellant is correct. Upon the hypothesis the construction in question is the proper one, the result would be this: Every share of stock and every bond issued by a railroad company in this State since the adoption of the constitution, is absolutely void in the hands even of an innocent holder, unless the same was issued in satisfaction of an existing liability of the company on account of money, labor or property previously received and applied to some corporate purpose. It is difficult, if not impossible, to fully estimate the consequences of such a holding. It is a matter of general notoriety, within the range of every man’s knowledge of ordinary information, that a large proportion of the railroad bonds that are now upon the market in the hands of innocent holders, whose proceeds have been applied in establishing and building up the magnificent railway system in our State, were originally issued and sold upon the market before any considerable amount of money, labor or property was expended in building the roads, or for other corporate purpose, and yet, if the construction contended for is to prevail, it^ would defeat all these bonds. Who has ever supposed that a dealer in railroad stocks, by virtue of the provision in question, can not with safety buy a single share of stock in any of the railroad companies of the State without first ascertaining and satisfying himself it was originally issued by the company in discharge of some existing liability on account of money, property or labor having been previously received and actually applied by the company to some corporate purpose? And yet such precaution would be necessary under the rule insisted on.

The very statement of the proposition affords ample evidence - that such could not have been the intention of the framers of the constitution. The latter part of the clause of the constitution in question, which declares that “all stocks, dividends and other fictitious increase of the capital stock or indebtedness of such corporation shall be void, ” we think clearly points out the chief object which the constitutional convention sought to accomplish in adopting it, and to this we must look, in a large degree, for a solution of the language which precedes it. The object was doubtless to prevent reckless and unscrupulous speculators, under the guise or pretense of building a railroad, or of accomplishing some other legitimate corporate purpose, from fraudulently issuing and putting upon the market bonds or stocks that do not and are not intended to represent money or property of any kind, either in possession or expectancy, the stock or bonds in such case being entirely fictitious.

We can not believe it was intended by the provision in question to interfere with the usual and' customary methods Of raising funds by railroad companies for the purpose of building their roads, or of accomplishing other legitimate corporate purposes. To hold that such a company can not, in good faith, issue its stocks or bonds for ready money to build its road, or to effectuate other lawful objects, is, in effect, to deprive it of the only means Repossesses of carrying into effect the purposes of its creation. Under this provision of the constitution, railroad companies have no right to lend, give away, or sell on credit, their bonds or stock, nor have they the right to dispose of either, except for a present consideration, and for a corporate purpose. But in such case, if the company should subsequently divert the proceeds to other than corporate purposes, the purchaser of such stock or bonds, who has acted in good faith in the matter, can not be affected by the subsequent misappropriation by the company. To hold him or his assignee'responsible for the application of the proceeds, would be to effectually destroy the usefulness and value of such securities. In short, we-are of opinion that when one, for a present consideration, in good faith purchases bonds or stocks in the regular course of business from a,railroad company, and such consideration is accepted by the proper officer of the company, and nothing appears to show that it is to be used or applied to other than legitimate corporate purposes, such bonds or stocks, when thus issued, will be regarded as having been issued for money, labor or property (as the case may be) “actually received, and applied, ” within the meaning of the constitutional provision in question. Any other construction would lead to consequences of the most serious character, which could not have been intended by the framers of the constitution.

We do not at all question the general principle contended for by appellant’s counsel, that negotiable securities issued without authority of law, or in express violation of a statute, are inoperative and void in the hands of even innocent holders ; yet there is another rule of law equally well settled, namely, that although a contract entered into by the agents or officers of a private corporation is ultra vires, and therefore not binding on the company so long as it remains executory, yet if the company in such case knowingly permits the other contracting party, without objection, to" go on and perform the contract on his part, and thereby obtains and appropriates to its own use money, property or labor in furtherance of some legitimate corporate purpose, it will be estopped from denying its liability on such contract. Bradley v. Ballard, 55 Ill. 413; Chicago Building Society v. Crowell, 65 id. 453; City of East St. Louis v. East St. Louis Gas Light and Coke Co. 98 id. 415; Darst v. Gale, 83 id. 140.

The claim of appellant that the fifteen hundred bonds were simply sent to Smith for the purpose of having them certified by Dennison, and at once returned to the company, and that it was intended they should all be so certified and returned at the same time, and that Dennison had no right to certify six hundred of them and not the others, and that this was done without the knowledge or consent of the company, is inconsistent with the uncontroverted facts in this case. The claim, also, that the company was ignorant of the fact that these six hundred certified bonds were being used by Thompson, Griggs & Co., during the year 1873, after the interest had been guaranteed by the Indianapolis, Bloomington and Western Railway Company, is also inconsistent with admitted facts. The undisputed fact is, that more than a year after these bonds had been delivered to Smith, a member and the financial agent of the firm of Thompson, Griggs & Co., and after the work on the road had been entirely suspended, the company executed a perpetual leas# of the completed portion of the road lying between Pekin and Peoria, to the Indianapolis, Bloomington and Western Railway Company, in which the latter company, as a part of the consideration of the lease, expressly undertook the payment of the interest on the six hundred bonds in question.

If these bonds were not regarded by the company as standing on a different footing from the remaining nine hundred not certified by Dennison, how did it happen that the interest on them was provided for, and not on th'e others ? No one connected with the railroad company could have been ignorant of the fact that Thompson, Griggs & Co. had already at that time expended of their own means in procuring the right of way, building the bridge and so much of the road as was then completed, an amount nearly, if not quite, equal to the full value of these bonds, and that they were then in the hands of that firm, and in justice belonged to them, even if there had never been any formal delivery of them. Under these circumstances we can not but regard the provision in the lease by which the lessee assumed the payment of the interest, as an official recognition on the part of the company of the fact that these bonds then represented an outstanding indebtedness against it. This being so, would it not be wholly inconsistent with every conception of equity to permit the company to now come into court and defeat a recovery on them, on the ground that there are some unadjusted equities between it and Thompson, Griggs & Co., or that there was never any formal delivery of them to that firm ?

The fact is patent and uncontroverted that the road, including the bridge, was built, so far as it was built at all, exclusively with means advanced by Thompson, Griggs & Co., which are represented by the bonds now in suit. If the railroad company succeeds in defeating a recovery on the bonds, what is the result? Thompson, Griggs & Co. will have no claim upon the road, for they have already reimbursed themselves by a sale of the bonds to the present holders, and if the latter can not recover there can be no recovery at all, and the consequence is, the railroad company finds itself the absolute owner of an unincumbered railway, supposed to be worth about $50,000 a year, which has cost it comparatively nothing, while the bondholders, who ultimately furnished the money that built it, are turned out of court without a cent. If such is to be the result, it is certainly a piece of model financiering on the part of the company, if we leave out of view the manifest injustice of the thing.

The company insists that it has sustained large damages by reason of the contractors’ failure to complete the road to Springfield, and from other breaches of the construction contract, and it is earnestly contended, that even admitting these bonds were delivered by the company to Thompson, Griggs & Co., as claimed by appellee, still, under the rule of Olds v. Cummings, 31 Ill. 188, the holders of the bonds, so far as the deed of trust is concerned, took them subject to all equities the company may have against the contractors. The rule in that case rests, at least in part, on technical grounds, which have lost much of their force in more recent times by reason of the manifest tendency of judicial thought to an equitable standard, and while it is not intended to question the authority of that case, yet, for the reasons suggested, we do not think the principle should be extended to cases that are not clearly shown to be within the rule there announced. In the case of an ordinary mortgage or deed of trust to secure a temporary loan from one individual to another, the note or evidence of the indebtedness taken at the time, although it may be negotiable, is not given for the express purpose of being put upon the market and used as a permanent investment of capital, as in the case of railroad securities, nor does the mortgagee in such case, as a general rule, rely wholly on the security which the mortgage affords, as is always done in the case of railroad mortgage bonds.

In ordinary cases of the kind suggested, the mortgage is uniformly made for the benefit of some one specifically mentioned (usually the payee of the note), and the legal interest in such note is by operation of law vested in him, and can only be transferred to another by his indorsement, and the mortgage passes in equity, as an incident of the debt, by virtue of such indorsement. The case before us is unlike the ordinary one suggested, in several essential particulars. The bonds in question are not payable to Thompson, Griggs & Co., nor is the trust deed, so far as anything appears on the face of it, made to them or for their benefit. Indeed, they are not so much as mentioned either in the bonds or the trust deed. On the contrary, the bonds are in exprése terms made payable to “the holder” of the bonds, and the deed of trust is expressly declared to be “for the benefit, protection and security of the persons or corporations toho shall hold the bonds about to be assured, ” etc. Thus it clearly appears that, so far as the record shows, Thompson, Griggs. & Co. were total , strangers to the transaction, and upon what principle any i equities the company may have against them can be interj posed so as to defeat the title of the present holders, is not 1 perceived. It clearly can not be done. In short, we hold the doctrine of Olds v. Cummings has no application to deeds of trust given to secure railroad coupon bonds intended to be thrown upon the market and circulated as commercial paper, and to be used as securities for permanent investments. To hold otherwise would be doing violence to the manifest intention of the parties to such instruments, and would unquestionably lead to very disastrous consequences. It is true that a part of the reasoning by which our conclusion upon this question is reached in the present case, applies to some of the cases following Olds v. Cummings, but a review of those eases will clearly show that the present case may be distinguished from all of them in this, that both the deed of trust and the bonds, as we have already seen, show expressly upon their face that they were executed for the benefit of the holders of the bonds, whoever they might be.

The case of Chicago, Danville and Vincennes Ry. Co. v. Loewenthal, 93 Ill. 433, is cited as announcing a different view from that here presented. It is true that a part of the reasoning of the court in that case is not to be reconciled with what we have here said. It is sufficient, however, to say, with reference to that case, that what appears in the opinion relating to this question was said in arguendo, and after the case had been decided upon another distinct ground, and without any argument of the question except upon one side. Under these circumstances, what was there said ought . not to be, and is not, regarded as conclusive of the question, and upon more mature consideration of the subject we are fully satisfied the view now presented is the correct one.

The conclusions reached upon the questions already discussed render it unnecessary to consider the state of accounts between appellant and Thompson, Griggs & Co. Whether, upon a fair adjustment of their claims, there is anything due either way, is a matter in which the bondholders have no concern, since they can not be affected, as we have already seen, by any equities between them. For the same reason it is also unnecessary to consider other matters discussed by counsel in their briefs.

The decree orders a sale of the whole of the mortgaged property, both real and personal, tangible and intangible, absolutely and without redemption, and in this it is claimed there is error. This question is one of unusual importance and interest, and while it has frequently arisen in and been passed upon by the Federal courts of this State, yet, so far as we are advised, it has never before been directly presented to this court.

The right of redemption in any case is purely statutory, and whoever claims such right is bound to bring himself clearly within the provisions of the statute. The act of 1845 relating,to this subject was in force at the time of the execution of the trust deed, and the rights of the parties, so far as this question is concerned, must be controlled by it. By the 15th section of chapter 57, of the Bevised Statutes of 1845, it is provided, that when lands and tenements shall be sold on judgments at law, the defendants or others interested may, “within twelve months of such sale, redeem such lands or tenements by paying, ” etc., and by the 24th section of the same chapter it is further provided, that “when lands shall be sold under and by virtue of any decree of a court of equity for the sale of mortgaged lands, it shall be lawful for the defendant or parties in interest to redeem the same in the manner prescribed for redemption of lands sold under judgments at law. ”

While it can not be seriously questioned that a railway track, considered without regard to its public character and the franchises usually connected with it, is “lands, ” or “lands and tenements, ” within the meaning of the above sections, yet the question here presented is, is a railway, its appurtenances and franchises, when legally mortgaged and ordered to be sold as an entirety, under a decree of foreclosure, lands or tenements, within the meaning of those sections ? A number of reasons suggest themselves to us why they should not be so considered. In the first place, when a railway, its appurtenances, privileges and franchises are mortgaged as a whole, there is, in our opinion, no power or authority to sell them separately. From the very nature of the property one would be useless without the other. The franchise could not be used at all without the road, and the road could not lawfully be used, as against the State, without the franchise. ' Under such circumstances, to avoid the possibility of conflicting ownerships, the law has wisely determined that both must be sold as an entirety. Chicago, Danville ancl Vincennes Ry. Co. v. Loewenthal, supra.

While the franchise to construct and operate a railway is generally regarded as a grant of a part of the sovereign power of the State, partaking of the nature of a quasi public trust, yet it is also treated, particularly at the present time, as a species of intangible personal property, and by the 84th section of the Eevenue act it is expressly required to be listed as such for the purposes of taxation. Now, while a railroad franchise, when considered by itself, will be treated as personal property, and the road itself, when so viewed, will be treated as realty, yet when considered as an entirety, as they must be when so mortgaged and sold, they are, strictly speaking, neither the one nor the other, within the meaning of the law pertaining to redemptions. From a sale of land a redemption is allowed,—from a sale of personal property no such redemption is permitted; and since the two are indissolubly combined, by virtue of the mortgage, decree and sale, there is just as much reason, so far as the question depends upon the two kinds of property when separately considered, for contending the right of redemption is denied, as there is that it is given. And since it devolves on the party alleging such right to show a clear ease within the statute, it follows that under the circumstances stated there would be no right of redemption.

But there are other considerations bearing on this question that should not be overlooked. In view of the public character of the road, it will not be questioned that the public generally have a direct interest in keeping it continuously open, without any material diminution of its capacity, to meet all the legitimate wants of the- public. It is, therefore, but just and proper that the foreclosure proceedings should be conducted in such a manner, having due regard to the private interests of all parties concerned, as to cause the least possible injury- or inconvenience to the public, and we are of opinion this will be more effectually accomplished by the method adopted than it can be in any other way. To have ordered a sale of the personal property separately, from which it is conceded there would be no redemption, and a sale of the realty with the right of redemption, as is claimed should have been done, it would most likely have resulted either in a sacrifice of the property, or some portion of it, or in embarrassing complications seriously affecting, at least for a while, the public interests. Moreover, it is difficult for us to believe that the wrecking of the property of a railroad company, and selling it out by piecemeal, would in any case be for the best interests either of the public or those having an interest in its assets. It is also equally difficult for us to see how any one would be likely to pay anything like the present value of the property of a railroad company, even when sold as an entirety, where the right of redemption is reserved. However necessary, the purchaser in such case would not be safe in making anything like expensive repairs, or in increasing the carrying capacity of the road to meet the demands of business and travel, until after the time of redemption had expired. Besides, being out of possession during the fifteen months allowed to redeem, he would have no right even to make such repairs and improvements without the consent of those having the road in charge, and it is quite reasonable to assume if the railroad company saw it could not redeem, or if it had no intention of redeeming, it would make no such repairs, and the public might thereby suffer great inconvenience, and the road be seriously injured. But as before stated, this question has frequently been before the Federal courts in this State, and so far as we are advised. those courts have uniformly held there is no redemption from a sale of this kind. So, whether the question is to be determined upon authority or upon grounds of public policy and convenience, we are of opinion the circuit court properly held there is no redemption from a sale of this kind.

Decree affirmed.

Mr. Justice .Walker :

I am unable to concur in holding the road could be sold without redemption. The opinion concedes that a large portion of the property was real estate, and the statute expressly declares such property shall be sold subject to redemption. That right was cut off by this decree, and it is therefore erroneous. It is true a Federal court in this State long held that on a foreclosure of a mortgage, in that court, the mortgagor was not entitled to redemption, but the doctrine was repudiated by the Federal Supreme Court, and it required conformity to our statutes and our decisions. Again, I am unable to concur in overruling anything decided in Chicago, Danville and Vincennes Ry. Co. v. Loewenthal, supra, although it may he in the way of sustaining this decree. That case was deliberately decided, and I think was correct. The opinion is, in my judgment, opposed to the doctrine of Peck v. Bligh, 37 Ill. 317, Melendy v. Keen, 89 id. 395. Mellendy v. Austin, 69 id. 15, and Olds v. Cummings, 31 id. 188, and other cases following this last named decision, and I can see no reason for ignoring the doctrine they announce.


source: Caselaw Access Project

author: Mr. Justice Scholfield Per Curiam :

license: Public Domain

text:
    Asahel Gridley v. Alfred S. Barnes et al. and Thomas J. Cox v. John A. Jameson.

      Filed at Springfield March 28, 1882

      Rehearing denied June Term, 1882.

    1. Limitations—action for statutory penalty—as, to enforce the liability of trustees and corporators of insurance companies. The 14th section of the Statute of Limitations provides: “Actions for a statutory penalty shall be commenced within two years next after the cause of action accrued. ”
    2. The liability of the trustees and corporators of insurance companies, arising under the 16th section of the general law in relation to insurance, approved March 11, 1869, is imposed, not as upon contract, but by way of a statutory penalty only. So a cause of action arising under that section is within the 14th section of the Limitation law, and will be barred after two years from the time it accrued, if suit be not brought within that time.
    3. Same—effect of saving clause in acts repealing certain statutes of limitation^—former decision. The 14th section of the Statute of Limitations referred to is a part of the act approved April 4, 1872, and the 24th section of the same act (which repeals certain former acts of limitation) contains a saving clause, that “this section shall not be construed so as to affect any rights or liabilities or any causes of action that may have accrued before this act shall take effect.” A cause of action arising under section 16 of the general Insurance law was not embraced in any of the statutes repealed by the 24th section. Prior to 1872 there was no general Limitation law in cases of actions for statutory penalties. So such causes of action are in no way affected by that saving clause.
    4. In the case of Dickson v. Chicago, Burlington and Quincy R. R. Co. 77 Ill. 331, the saving clause in section 24 of the Limitation act of 1872 was construed as if the words “this act” had been used instead of the words “this section.” This construction was given in respect to a cause of action embraced in the Limitation act of 1849, but the saving clause so construed does not affect causes of action not embraced in the statutes repealed by the 24th section. The 14th section will still be given effect as to preexisting causes of action for a statutory penalty.

      5. Stockholders in insurance companies—liability for corporate debts—under what law arising. The 25th section of the charter of the Lamar Insurance Company, on the subject of the individual liability of stockholders in that company for debts of the corporation, is not to be understood as fixing any liability at all, but the entire section is one of limitation or restriction only,—that is, that the liability of the stockholder can not be extended by subsequent legislation beyond the limit therein prescribed. The liability of the stockholders in that company arises under the 16th section of the general law relating to insurance.
    6. Same—former decision. Nor is the case of Arens v. Wevr, 89 Ill. 25, to be understood as laying down any different rule. In that case the question whether section 25 of the charter imposed any such liability was not before the court. That section, together with art. 10 of the constitution of 1818, and the amendment of the charter of 1869, was referred to merely as showing that the legislature retained the constitutional right to impose upon the stockholders the liability as fixed by the 16th section of the general Insurance law.
    Appeals from the Appellate Court for the Third District; —heard in that court on appeals from the Circuit Court of McLean county; the Hon. Owen T. Beeves, Judge, presiding.
    . Messrs. Williams, Burr & Capen, Mr. Ira J. Bloomfield, and Messrs. Weldon & McNulta, for the appellants:
    The Lamar Insurance Company having been in existence and doing business before the general Insurance law of 1869 was passed, the 16th section of that act can only be held applicable to a shareholder as a penalty for permitting the corporation to continue to do business, after the passage of that act, in contravention of its terms. Weidenger v. Spruance, 101 Ill. 287; Diversy v. Smith, 9 Bradw. 437; Gulliver v. Roelle, 100 Ill. 141; Cable v. McCune, 26 Mo. 380; Halsey v. McLean, 12 Allen, 438; Merchants’ Bank v. Bliss, 35 N. Y. 412; Steam Engine Co. v. Hubbard, 101 U. S. 108; Thompson’s Liability of Stockholders, sec. 84; Sedgwick on Construction of Stat. and Const. Law, 32.
    All actions for penalties are barred in two years. Rev. Stat. 1874, p. 675, sec. 14.
    That the cause of action under section 16 of the general Insurance law, and that under section 25 of the company’s charter, are different, one being on a contract and the other on a penalty, and are barred by different statutes of limitations, see Corning v. McCullough, 1 Comst. 47.
    The Statute of Limitations continues to run against a new cause of action set up by way of an additional count, until such count is filed. Illinois Central R. R. Co. v. Cobb, 64 Ill. 128; Illinois Central R. R. Co. v. Phelps, 94 id. 548; Showkegan Bank v. Cutler, 49 Maine, 319; German v. Judge, 27 Mich. 139; Hawthorn v. State, 57 Ind. 286.
    Mr. Hamilton Spencer, and Mr. W. S. Coy, for the appellees :
    We make no question as to the limitation in respect to statutory penalties. We are suing for no such penalty. The stockholder’s liability is original, and is created by section 25 of the charter. The declaration was not framed upon section 16 of the general Insurance law.
   Mr. Justice Scholfield

delivered the opinion of the Court:

In these cases actions of debt were brought by the plaintiffs, against the defendants, as stockholders of the Lamar Insurance Company, to recover certain specified indebtedness of that company to the plaintiffs, respectively. So far as the questions to be considered are concerned, there is no substantial difference between the cases. In both, the causes of action accrued more than two years before the bringing of suit, .and under the stipulations of the parties the defence of limitation is properly before the court.

If we shall regard the liability of the defendants as resting on the 16th section of the general law in relation to insurance, which was approved March 11, 1869, and in force July 1, of that year, the causes of action are, as we think, clearly covered by the 14th section of the Statute of Limitations. Rev. Stat. 1874, p. 675. The 16th section of the general law in relation to insurance imposes a liability on the trustees and corporators of insurance companies, severally, for all debts or responsibilities of such companies, to the amount by him or them subscribed, until the whole amount of the capital of such company shall have been paid in, and a certificate thereof recorded, as provided in that act. In Weidenger v. Spruance, 101 Ill. 287, we held this liability upon the stockholders is imposed by way of penalty only; and the 14th section of the Statute of Limitations provides: “Actions for * * *' a statutory penalty * * * shall be commenced within two years next after the cause of action accrued.”

But counsel-for the plaintiffs deny this suit is brought for a penalty, and say that it is brought under the 25th section of the charter of the Lamar Insurance Company. That section is as follows: “That ho stockholder of the corporation hereby created shall be liable, in his individual capacity, for any debt or liability of said company beyond the amount of stock held by him, and it is hereby provided, that if the corporation hereby contemplated is not fully organized, according to the provisions hereof, within one year from and after the passage of this act, then this act shall be void. ” This plainly prevents the individual liability of the shareholder exceeding the amount of stock held by him, but it is quite as plain that it does not fix his liability to that amount. It certainly contemplates that he may he made liable to that amount, but there is no attempt by this section to fix any liability whatever. The entire section is one of limitation or restriction only. A fair construction, undoubtedly, is, the stockholder may be made liable (not that he thereby is) to the amount indicated, and so he could not claim that a subsequent law fixing his liability to that amount, and prescribing a mode of enforcing it, impaired the obligation of his contract; and this was the view that obtained with the court in Arenz v. Weir, 89 Ill. 25.

But counsel contend that case is an authority for holding that this section imposes an absolute individual liability upon the stockholder, to the extent of the stock held by him, for any debt or liability of the company, and there is, unquestionably, language in the opinion in that case that, considered by itself, authorizes this view. But the language of the opinion must be considered with reference to the question under discussion. The question whether that section imposed such liability, was not before the court. The question was, whether the declaration was sufficient on demurrer, and it stated what was held to be a sufficient cause of action under the 16th section of the general law in relation to insurance. It was, on behalf of the stockholder, contended, that to apply the 16th section of the general Insurance law to him, was to impair the obligation of his contract on becoming a stockholder; and in answer to this, the 25th section of the charter, art. 10 of the constitution of 1848, and the amendment of the charter of 1869, were all referred to as showing that the legislature retained the constitutional right to impose upon the stockholders the liability prescribed by the 16th. section of the general law, and all this is manifest by a careful reading of the opinion.

There being no other section of the charter of the insurance company, nor of the general law relating to insurance, under which a liability on the part of the defendants is claimed, it follows the judgments below must be reversed and the causes remanded.

Judgments reversed.

Subsequently, upon an application for a rehearing, the following additional opinion was filed:

Per Curiam :

We have patiently, and with such care as we could bestow, reconsidered the questions presented by this record, and having done so, perceive no cause to depart' from the conclusion announced in the opinion heretofore filed.

In Diversey v. Smith, and Burkett v. Plankinton, considered as one case at March term, 1882, (post, 378,) we have again considered the question of whether the liability under the 16th section of the general Insurance law of 1869 is on contract or for a statutory penalty, and reference may be made to those cases for a further and more elaborate expression of our views on that question.

It is insisted that the 14th section of the act in regard to limitations, approved April 4, 1872, has no application to this cause of action, because in the 24th section (which repeals certain former acts of limitation) a saving clause is added, saying: “But this section shall not be construed so as to affect any rights or liabilities or any causes of action that may have accrued before this act shall take effect. ”

In the opinion of this court in the case of Dickson v. Chicago, Burlington and Quincy R. R. Co. 77 Ill. 331, it was said, in relation to this section: “The legislature saw proper to expressly repeal the act of February 10, 1849, and not leave it to be repealed by implication, and to expressly apply a saving clause to the repeal.” And it was added: “We are of opinion the construction is to be the same as if the words ‘this act’ instead of ‘this section’ had been used. ”

Counsel lay great stress on this last remark, but it must be observed that these words were used in relation to a cause of action embraced in the act of 1849, and governed by this statute, and as to such causes of action already accrued the remark is strictly accurate. The words must be limited to that class of cases. The substance of what is there said is, that the express repeal of the old statutes of limitation repels the idea of repeal by implication, and the saving clause means causes of action already accrued shall continue to be controlled by the former statutes, and this, notwithstanding the express repeal. And so, as to such causes of action, the legal effect of the saving clause is the same as if the words “this act” had been used instead of the words “this section.” Such, however, is not the legal effect of that saving clause upon causes of action not embraced in the statutes repealed by that section. The cause of action in the case at bar is not embraced in the statutes repealed by section 24, and is in no way affected thereby, but it is within the terms of section 14 of that act, and is controlled thereby.

Again, in the revision of 1874, section 14 is remodeled, and section 24 of the act of 1872 is omitted entirely, (Rev. Stat. 1874, p. 675,) and in chap. 131, sec. 5, the former statutes of limitations are repealed with a saving clause saying: “When any limitation law has been revised by this or the Twenty-seventh General Assembly, and the former limitation law repealed, such repeal shall not be construed so as to stop the running of any statute, but the time shall be construed as if such repeal had not been'made.” This is the law in force from that time until now. It is thus seen that the repeal of old statutes and the saving clause relating thereto have no relation to the case at bar, inasmuch as prior to 1872 there was no general Limitation law in cases of actions for statutory penalties.

This view does not give the statute a retroactive effect, for more than two years had elapsed after the passage of the statute before the bringing of either suit.

Rehearing denied.


author: Mr. Justice Craig

text:
    Benjamin H. Brainard et al. v. E. G. Hudson et al.

      Filed at Springfield March 22, 1881

      Rehearing denied June Term, 1881.

    1. Rents and profits—as between mortgagor and mortgagee—in case of joint occupancy. A mortgagor and mortgagee farmed the mortgaged premises upon shares,—the mortgagee being in possession, and the mortgagor, the son of the mortgagee, residing with his father. The latter, in the cultivation of the farm, furnished most of the teams, boarded the hands, and the crops were equally divided. Upon bill to foreclose the mortgage, it was held, that during the time the mortgaged premises were cultivated upon the joint account of the mortgagor and mortgagee, the latter ought not to be charged with rents.
    2. Practice—time to object to master’s report. Upon reference to the master to state the account, in a suit to foreclose a mortgage, if the action of the master is not satisfactory, the party objecting should appear before the master and file exceptions to the report, and, if overruled by the master, the exceptions disallowed, together with the evidence bearing on the same, will be filed by the master in the court in which the suit is pending, where a hearing can be had before the court, and the decision of the court may be questioned upon error or appeal. Objection to the master’s report can not be taken, in the first instance, in a court of review.
    3. Possession-—as notice of rights under unrecorded deed or mortgage. Where a person is in possession of land under an unrecorded deed, that possession is notice to all subsequent purchasers or incumbrancers of whatever title is held by the person in possession, to the same extent as if his deed were duly recorded, and a subsequently acquired title, although first on record, will be held subject to the title which the person in possession may have to the property. This rule applies as well to possession held under an unrecorded mortgage.
    4. Same—effect of possession by widow and heirs of mortgagee. Where a mortgagee of lands dies while in the actual occupancy of the same, the possession being continued in his widow and heirs, the possession of the latter will afford the same notice to subsequent purchasers and incumbrancers as respects rights existing under the mortgage, as though the mortgagee himself were still living añd in possession.
    6. So where the mortgagor, in such case, made a second mortgage on the same premises, after the death of the prior mortgagee, but while the widow and heirs of the latter were-still in possession, the second mortgagee took subject to the prior mortgage although the same was unrecorded.

      Wbit of Ebbob to the Appellate Court for the Third His- " trict;—heard in that court on writ of error to the Circuit Court of Logan county; the Hon. Cybus Epleb, Judge, presiding.
    Messrs. Beason & Blinn, for the plaintiffs in error.
    Mr. N. M. Broadwell, for the plaintiff in error Brainard.
    Mr. E. Lynch, Messrs. Hoblit & Stokes, and Mr. E. G. Hudson, for the defendants in error.
   Mr. Justice Craig

delivered the opinion of the Court:

On the 11th day of April, 1866, John L. Primm, being the owner of a certain farm in Logan county, consisting of one hundred acres of land, and also thirty acres of timber land near the farm, conveyed the property, by deed of that date, to his son, James H. Primm, for the expressed consideration in the deed of $5000. The deed was recorded April 13, 1866. At the time the deed was executed and delivered, James H. Primm gave John L. Primm a mortgage on the land to-secure the payment of the purchase money, $5000, according to the tenor and effect of five promissory notes, for $1000 each, due in one, two, three, four and five years, with interest after due at ten per cent. This mortgage was not recorded until after the bill was filed. John L. Primm, however, remained in possession of the ' farm until December 2, 1873, when he • died intestate. On the first day of October, 1874, James H. Primm borrowed of Benjamin H. Brainard $2500, and gave a trust deed on the farm to secure the payment thereof, which was placed on record the day it was executed. This bill was filed by the administrator of the estate of John L. Primm, deceased, against James H. Primm, Benjamin H. Brainard, and others, to foreclose the mortgage given to John L. Primm on the 11th day of April, 1866.

Two questions are presented for our consideration by this record. The first arises on the master’s report, to whom the cause was referred, and who stated the account between the parties. The second question presented is, whether the mortgage given to Brainard, although subsequent in date, is entitled to priority over the mortgage given to John L. Primm, for the reason it was first on record.

It appears that the mortgagee, John L. Primm, occupied the premises from the time he conveyed to his son, continuously, to the date of his death. During this time the mortgagor made several payments on the notes, and he also claimed that the rent of the premises should be applied as a payment on the mortgage. Four hundred and twenty dollars of the money loaned by Brainard to James H. Primm was used to pay off a mortgage on the premises which had been executed by both the Primms to one Lucy Wright, after James H. Primm had obtained a deed from his father. In stating the account Brainard claims that the $420 should not be applied as a payment on the Primm mortgage, but as he advanced the money to relieve the premises from a mortgage lien, in equity he should be subrogated to the rights of Lucy Wright in the mortgage which she held, and which his money paid off. The court, in order to adjust the account between the parties, referred the cause to the master to state an account between them. The master, after taking the proofs of the respective parties, stated an account, and after allowing various payments in rents and moneys on complainant’s mortgage, found there was still due thereon $3442.76, February 6, 1879. The $420 paid by James H. Primm to Lucy Wright, to discharge her mortgage, was allowed by the master as a payment on complainant’s mortgage of date October 3, 1874, the time when the money was paid. In stating the account the master allowed no interest on complainant’s notes until April 11, 1869, nor did he charge complainant with the rents until that time, and no rents were allowed after the death of John L. Primm. The report of the master, after having been examined by the court, was approved, and this decision of the court is relied upon as error.

It is contended that the master ought to have charged complainant with the rent of the land from 1886 to 1869, and that the sum of $420, paid Lucy Wright in satisfaction of her mortgage out of the money Brainard loaned, should not have been credited on complainant’s mortgage, as was done by the master, but that Brainard should, in any event, have been subrogated to the rights of Mrs. Wright in the premises to the extent of $420, and decreed a prior lien for that amount. While the mortgagee occupied the premises from 1864 to 1869, yet we do not think he should in this proceeding be charged with rents during that period, as it is apparent from the evidence that during those years James H. Primm lived with his father, and the farm was cultivated on shares. The father furnished most of the teams, boarded the hands, and the crops were equally divided. We shall not, however, stop to determine, whether the statement of the account by the master was correct or incorrect. The plaintiff^ in error filed no exceptions to the master’s report, either before the master or in the circuit court. So far as appears, no objection whatever has ever been made to the report Until the case reached the Appellate Court. The objections now made to the statement of the account by the master come too late. If the account was not properly stated, plaintiffs in error ought to have appeared before the master' and filed exceptions to the report, and if they were overruled by the master, the exceptions disallowed, together with the evidence bearing upon the same, would have been filed by the master in the circuit court, where a hearing could have been had before the court, and if disallowed there, the decision of the court could be assigned for error on appeal. Brockman v. Aulger, 12 Ill. 277; Reigard v. McNeil, 38 id. 400; Pennell v. Lamar Ins. Co. 73 id. 303.

We now come to the other question in the case. The court, in the decree, made the mortgage given to Brainard subject to the one given to John L. Primm. If Brainard had no notice of the existence of the Primm mortgage, or no notice of any fact which would be sufficient to put a prudent person upon inquiry, he would he entitled to protection, although his mortgage was executed some years after the one given to John L. Primm. Where a person is in the possession of a tract of land under an unrecorded deed, that possession is notice to all subsequent purchasers or incumbrancers of whatever title is held by the person in possession, and a.subsequently acquired title, although first on record, will he held subject to the title which the person in possession may have to the property. Here, from 1866, when the land was conveyed to James H. Primm, John L. Primm was in the open and notorious possession of the property until his death, December 2,1873, and after his death the possession was continued by his widow and minor children until long after the mortgage was made to Brainard. From 1864 to 1869 James H. Primm lived with his father on the farm, and cultivated it on shares. In 1869 James left the farm and moved on another place. At this time James had paid little or nothing on the farm, and what arrangement was made between him and his father in regard to the terms under which the land was to be occupied, is not very clear from the evidence. This much, however, is apparent, that John L. Primm held the possession from 1869 under the mortgage executed to him by James, and it seems to have been understood that the rent of the farm should he applied on the mortgage debt. • While John L. Primm occupied the farm under his mortgage, whether the mortgage was on record or not, a subsequent purchaser or mortgagee from James would take with notice. Had he been in possession under an unrecorded deed, his possession would have been notice of whatever title he held under such deed, and we perceive no substantial distinction between a possession held under an unrecorded deed and a possession held under an unrecorded mortgage. The same principle which would protect the person in possession under one would afford protection under the other.

We had occasion in Coari v. Olsen, 91 Ill. 273, to discuss somewhat the effect of a possession of real property held under an unrecorded instrument as against a subsequent purchaser, and it was there said: “Although other courts have held the doctrine of notice by possession as subject to being materially modified by circumstances, this court has uniformly held that actual occupancy is equal to the record of the deed or other instrument under which the occupant claims, and a purchaser is bound to inquire by what right or title he holds. The purchaser takes the premises subject to that title or interest, whatever it may be. ”

Had Brainard obtained his mortgage while John L. Primm was in possession of the land, and before his death, it seems clear that such mortgage could not be held to have priority over the unrecorded mortgage held by Primm. Brainard’s mortgage was not, however, executed until after the death of Primm, but we do not think this fact bettered Brainard’s condition. The character of the possession of the property was in no manner changed by the death of Primm. The widow and children of the deceased continued to occupy the premises after his death in the same manner that he had done before, the widow, as she testified, holding the notes and mortgage in her possession. The legal representatives of John L. Primm, the mortgagee, had the right to hold the possession of and occupy the farm until the mortgage debt was paid, however long that might be; and while the premises were thus occupied under the mortgage, a subsequent grantee of the mortgagor could take subject only to such prior mortgage. It is doubtless true that the title to the notes secured by the mortgage upon the death of Primm passed to his administrator, but that does not materially affect the question. Under the mortgage the legal title to the premises, upon the execution and delivery of the mortgage, passed to John L. Primm, the mortgagee, and upon his death this title would at law pass to his widow and heirs, and as their possession of the premises was notice of whatever title they had, when Brainard took a mortgage he took with notice of the unrecorded mortgage, and whatever rights he acquired in the premises must be held subject to the prior mortgage.

We are of opinion that the decree of the circuit court was right. The judgment of the Appellate Court will therefore be affirmed.

Judgment affirmed.


author: Mr. Justice Walker

text:
    Sanders A. Osborn v. The People ex rel. Thomas A. Lewis, for use, etc.

      Filed at Springfield May 12, 1882.

    1. Evidence—to show title or want of title. The want of title in a person can not be proved by verbal testimony. To prove title, or the want of title, the best evidence must be produced, or its absence properly accounted for to admit secondary evidence. The opinions of witnesses are not competent to prove that a person is not a land owner.
    2. Corporation—organization can not he attached collaterally. The legality of the organization of a corporation can be attacked and judicially examined only in a direct proceeding by quo warranto. It can not be inquired into in a collateral proceeding, such as a suit by the corporation.
    3. Pleading and evidence—proof necessary on plea of nul tiel corporation. The plea of nul tiel corporation is a proper plea in a suit by a corporate body, when it is denied there is any such body, hut under that plea it is sufficient for the corporation to prove that it is .known and transacts business under the corporate name in which the suit is assumed to be brought, or is a corporation de facto. It is not necessary under such plea in such suit to show that the plaintiff is a corporation de jure, as in case of a quo warranto.

      Appeal from the County Court of Champaign county; the Hon. J. W. Langley, Judge, presiding.
    Mr. J. O. Cunningham, for the appellant :
    There was no legal organization of a drainage district, for the reason that a majority of the adult owners of land did not sign the petition. The statute evidently requires that the legal owners shall sign the petition. Hurd’s Stat. 1881, pp. 458, 467.
    The assent of a majority of the owners of the land in the proposed district to the formation of a corporation with unlimited powers of assessment, was intended to he fundamental and jurisdictional. Bostwick v. Skinner, 80 Ill. 147; Iverson v. Loberg, 26 id. 179.
    The assent, in the form prescribed by the statute, of those to be assessed, is to be regarded as a condition precedent, which can not be dispensed with, and a want of compliance with this requirement is fatal at any stage of the proceedings. People v. Mayor, 51 Ill. 17; Cooley on Taxation, 464.
    It has always been held that this power in the legislature is subject to the limitation that a local burden can not be imposed without the consent of the people to be affected. Directors v. Houston, 71 Ill. 323; Updike v. Wright, 81 id. 50.
    The finding of the commissioners that a majority of the land owners had united in the petition, is only prima facie, and may be disproved. Cooley on Taxation, 465. See, also, sec. 5 of the act.
    It is a familiar principle that in summary proceedings, which may result in divesting title, the law is to be strictly construed, and nothing is to be taken by intendment. People ex rel. Miller v. Otis, 74 Ill. 384; Mix v. People ex rel. Pierpont, 72 id. 241; National Bank v. Cook, 77 id. 623; City of Chicago v. Rock Island R. R. Co. 20 id. 290; Chicago v. Wright, 32 id. 192.

      To constitute an officer de facto, there must be some color of right to the office. Pritchett v. People, 1 Gilm. 529.
    And there must be a de facto public office, and not a private affair, as in this case. There is a marked distinction between a de facto public officer whose acts concern the public, and a mere usurper of the office of a private corporation. F. R. Co. v. G. J. R. & D. Co. 1 Allen, 562.
    Mr. William B. Webber, for the appellees :
    The legal existence of a corporation, and the acts of its officers, when they concern the public or the rights of third persons, can not be inquired into in a collateral proceeding. Alderman v. School Directors, 91 Ill. 199; Trumbo v. People, 75 id. 562; Village of Nunda v. Village of Chrystal Lake, 79 id. 311; Baker v. Backus, 32 id. 79; Renwick v. Hall, 84 id. 162; President and Trustees v. Thompson, 20 id. 199; Kettering v. City of Jacksonville, 50 id. 39; Town of Geneva v. Lake, 61 id. 397; Village of Hyde Park v. Boyden, 94 id. 26.
    The remedy for an over-valuation is by an application to the assessor, and not to the courts, where there is no fraud. Howe v. City of Boston, 7 Cush. 273; Osborn v. Danvers, 6 Pick. 98; Boston Water Co. v. Boston, 9 Metc. 199; Bank of Shawneetown v. Cook, 77 Ill. 622; Adsit v. Cook, 76 id. 198.
   Mr. Justice Walker

delivered the opinion of the Court:

This was a proceeding for the collection of an assessment for drainage purposes, commenced to the May term, 1881, of the Champaign county court, against the land of appellant.

On the 24th of December, 1879, William B. Sullivan and nineteen others filed with the town clerk of St. Joseph township a petition, addressed to him, representing themselves as a majority of the adult land owners of a proposed drainage district, described by metes and bounds. The steps required by the statute for the organization of drainage districts were pursued and the district formed, the assessment made, and not having been paid, application was made to the county-court for judgment, which was rendered for the sale of appellant’s lands for payment of the assessment.

It is not claimed that any of the forms required by the statute for organizing such districts have been omitted. It is, however, sought tcj show that a number^)! the petitioners are not owners of lands, as required by the statute,—that if their names were rejected there would not be the number of petitioners required by the statute,—and the district was never organized as required by the statute, and the assessment was therefore unauthorized and void; that there is no such organization as the drainage district, and it is incapable of exercising corporate powers.

Even if the validity of the organization of a corporation could be attacked in a collateral proceeding, the rules of evidence do not permit the proof of the want of title to land by verbal testimony. The title to real estate is required to be in writing, under seal, and all know that the contents of such instruments can not be proved by verbal testimony unless the original is lost or destroyed. The best evidence must be produced, and secondary evidence can not be admitted unless the best is not attainable. Title, or the absence of title, can not be proved by verbal testimony so long as there is written evidence. Here there was an attempt to prove the want of title by persons that may be wholly unqualified to determine what constitutes title. In many cases the best land lawyers and most skillful conveyancers are perplexed to determine whether a title is or is not perfect. This illustrates the wisdom of the law in requiring the evidence of title to rest in writing, and all questions as to the validity of the title to be determined by courts when contested, and not by persons unskilled as to what constitutes title. -Men would be insecure in their possessions if their title depended on the opinions of their neighbors, whether educated or illiterate. The rules of evidence were violated in this case by admitting the mere opinions of witnesses to prove title in this ease. This is the general rule, and it was not complied with, nor was there any effort to bring the case within any exception to that rule.

But aside from all of this there is an absolute want of power in the court to hear evidence in a collateral proceeding like this, for the purpose of determining whether a corporation is legally organized. That can only be done by quo warranto, which is a direct proceeding to determine its validity. This, from the nature of things, must be so, otherwise no question could ever be adjudicated. Every proceeding before tribunals and officers, if permitted, would lead to an inquiry whether they were legally acting. If it were permitted, in every suit before all courts, from the highest to the lowest, the defendant might question the election of the judge and enter into a contest of his election. In all suits by the State its organization might be reviewed and decided. In suits by counties it might be claimed that the law authorizing their organization had not been complied with, and efforts made to show a want of compliance with the law. It would lead to an inquiry whether the territory comprising a county had the requisite population to organize; whether the proper notices for elections had been given, and other statutory requirements performed; and the same would follow as to every municipal corporation, and the election of every officer, before his acts would be regarded as legal. If this was allowed, in every constitutional question for determination, the courts would, if insisted upon, be compelled to hear evidence and determine whether all of the required steps were taken in calling the convention that framed it, or in giving notice and conducting the election that adopted it, and canvass the vote, purge the polls, and recount the votes, to determine whether all of the requirements of the law were satisfied. Thus it is seen that the highest considerations of public policy forbid the inquiry whether a corporation is legally organized in any but a direct proceeding.

It is true that the plea of nul iiel corporation is a proper plea, when a suit is brought by a corporate body, when it is denied there is such a body. But under that plea it is overcome when the corporation proves it is known and transacts business under that name. That plea does not question the legality of its organization, and require it to prove the same facts it would be required to do in a proceeding by quo warranto. Whether it is a corporation cle facto ox de jure, does not matter when it sues to enforce a right.

The legality of the assessment not being otherwise questioned, and the questions urged having no force, the judgment of the court below is affirmed.

Judgment affirmed.