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Vol. I.]

HYDE v. Woods.

(No. 8.

and applied to the satisfaction of a portion of the said indebtedness to themselves, being upon said pro-rata division the sum of $2,973.30, and no more, the remainder of said sum of $10,000 having been paid on the said claims of said other creditors in said Stock and Exchange Board.

At the time of the commencement of said proceedings in bankruptcy, the said funds had all been paid over and applied as aforesaid. There were not at that time any funds of said Fenn in the hands of said defendants, nor had there been any funds of his in their hands at any time other than as aforesaid.

The San Francisco Stock and Exchange Board is a voluntary association. The members had a right to associate themselves upon such terms as they thought fit to prescribe, so long as there was nothing immoral, or contrary to public policy, or in contravention of the law of the land, in the terms and conditions adopted. No man was under any obligation to become a member, unless he saw fit to do so, and when he did, and subscribed the constitution and by-laws, thereby accepting and assenting to the conditions prescribed, he acquired just such rights with such limitations, and no others, as the articles of association provided for. I find nothing in the articles, constitution and by-laws of this association in contravention of the law of the land. The rights acquired by a party entering the association with the assent of the other members, are clearly prescribed in these articles. Under their provisions there is in a member no absolute unlimited right of disposition of his seat or the privileges of membership. Each member holds his seat and exercises the privileges conferred subject to certain prescribed rights of the association, and of the other members in his seat, in case he fails to perform his duty towards the association, or to his fellowmembers. And the rights accorded to the association or his fellow-members by the terms upon which a member is admitted, cannot be abrogated or limited by any subsequent act of his. A member cannot dispose of his right of membership to another, unless the association shall accept that other in his stead, in the mode and upon the terms prescribed. If he fails to meet his liabilities to his fellow-members, incurred in the course of the proper business transactions of the board, he is suspended, and if his obligations are not met, and he is not restored within the time prescribed, his rights and privileges as a member become the property of the association, and are disposed of for the benefit of his creditors in the board to the exclusion of all others. He cannot, himself, by any act or disposition of his own, prevent this result. His general creditors can obtain through him no greater rights of property than he himself possesses. His privileges as a member of the Stock Board could not be seized and sold on execution, and transferred to another in violation of the rights secured by the contract of association, nor could a court of bankruptcy override the rights of the association or its members, secured to them by the terms of the contract under which he acquires any rights at all as a member by disposing of a greater interest than he himself possesses. The only property of a pecuniary nature in Fenn after his default in the board, would be the residue left after disposing of his seat by the board, in accordance with its prescribed usages, or with the assent of the board, and payment of his indebtedness to the members of the board, incurred in the transaction of its business. This is all, that, under any circumstances, would be available

Vol. I.)

HYDE v. Woods.

(No. 8.

to the general creditor, or with which the court of bankruptcy has any concern. The rest is the property of the board and its members, not Fenn's. In this case there was a delinquency of Fenn in his transactions in the board. He was indebted in large sums to the members upon transactions occurring in the board, for which his seat and privileges, as a member, were first liable under the rules of the association. It is true that he did not insist upon waiting six months under the rules, as he might have done, before his seat became absolutely forfeited. He merely waived this right, and allowed his seat to be disposed of at once, and applied to the purposes provided for in the articles of association. His assignment to defendants only enabled them to close up without delay his connection with the board, and distribute the avails to the proper parties instead of waiting six months. There is no claim set up that the privileges of Fenn did not sell for all they were worth ; and the money realized did not satisfy the just claims of the other members. Nor is there any claim that this proceeding was in fact more disadvantageous to creditors, than if the proceedings had taken a different course. There was nothing left which, under any circumstances, could be available to the general creditors. Fenn transferred nothing to defendants that a court of bankruptcy could take hold of.

There was no residuum. His estate being subordinate to the claims of his associates, under the articles of association, and consisting only of such residuum, there was nothing of it of value. Defendants only received and distributed to the proper parties that part of the proceeds of Fenn's seat, which belonged to the other members, as they had a right to do under the articles of association.

The error of the plaintiff consists in regarding the seat of Fenn and its proceeds as wholly his property, subject to his absolute disposition, whereas he only had a qualified and limited property in it - an interest subordinate to that of his associates. His estate is what is left after other par

punt claims are satisfied out of it, and there appears to be nothing left. The prior rights of his co-members accrued by virtue of the very act by which Fenn acquired any rights at all, as a member of the board, and they cannot be divested. The articles of association do not authorize Fenn, or anybody else, to dispose of Fenn's property contrary to the provisions of the Bankrupt Act, as claimed by the plaintiff. They only determine what the extent of his rights of property under the articles of association are, and authorize the board to administer its own affairs, and protect the rights of its own members in matters pertaining to the transactions of the board, in its own way.

There must be judgment for the defendants with costs.

Vol. I.)


(No. 8.



[JUNE, 1874.]




The courts of the United States may take jurisdiction of causes affecting the prop

erty of a State in the hands of its agents without making the State a party when the property or agent is within the jurisdiction. The company in this case holds the share of its property represented by the stock sub

scribed by the State, in trust, as well for the bondholders as for the State. The charter made the company the depository of the pledge to hold it for both parties. Consequently a suit which seeks to charge the stock as security, and brings the corporation in to represent it, may be maintained, in the absence of the State as a party. It appearing to the court that the stock had been deposited with the company to secure the payment of interest in which default had been made, a sale of the stock was directed to be made unless the State should provide by taxation for the amount due within a reasonable time.

THE opinion states the facts.
The opinion of the court was delivered by

WAITE, C. J. The North Carolina Railroad Company was incorporated by an act of the General Assembly, passed January 27, 1849, to construct a railroad to commence at the Wilmington & Raleigh Railroad, and proceed to Charlotte. To aid in building the road, the Board of Improvement was, by the act of incorporation, authorized to subscribe, on behalf of the State, $2,000,000 to the capital stock of the company.

Sections 38 and 41 of the act are as follows:

“ SEC. 38. That in case it shall become necessary to borrow the money, by this act authorized, the public treasurer shall issue the necessary certificates, signed by himself and countersigned by the comptroller, in sums not less than one thousand dollars each, and pledging the State for the payment of the sum therein mentioned, with interest thereon at the rate of interest, not exceeding six per cent. per annum, payable semi-annually at such times and places as the treasurer may appoint; the principal of which certificates shall be redeemable at the end of 30 years from the time the same are issued, but no greater amount of such certificates shall be issued at any one time than may be sufficient to meet the instalment required to be paid at that time.”

SEC. 41. That as security for the redemption of said certificates of debt, the public faith of the State of North Carolina is hereby pledged to the holders thereof, and in addition thereto, all the stock held by the State in the N. C. R. R. Co. hereby created, shall be and the same is hereby pledged for that purpose, and any dividends of profits which may from time to time be declared on the stock so held by the State as aforesaid,

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shall be applied to the payment of interest accruing on said certificates ; but until such dividend of profit may be declared, it shall be the duty of the treasurer, and he is hereby authorized and directed to pay all such interest, as the same may accrue out of any moneys in the treasury not otherwise appropriated.

The authorized subscription was made and certificates of debt issued to the amount of $1,858,000, on which the money was borrowed to meet the payments. By these certificates it was "certified that the State of North Carolina justly owes

or bearer, $1,000, redeemable in good and lawful money of the United States, at, &c., on the 1st day of July, 1884, with interest thereon at the rate of 6 per cent. per annum, payable half yearly at, &c., on, &c., until the principal be paid, on surrendering the proper coupon hereto annexed.” On the 14th of February, 1855, the General Assembly passed another act, entitled “ an act for the completion of the North Carolina Railroad," by the terms of which the public treasurer was authorized and instructed to subscribe $1,000,000 more to the capital stock of the company, and to make payment thereof by issuing and making sale of the bonds of the State, under the same provisions, regulations, and restrictions prescribed for the sale of the bonds theretofore issued and sold to pay the State's original subscription, and the same pledges and securities were thereby given for the faithful payment and redemption of the certificates of debt then authorized, as were given for those issued under the direction of the first act.

This stock was by the terms of the act to be a preferred stock. The subscription was made and certificates of debt, in the same general form as the first, issued to provide the means of payment.

The plaintiff is the owner of five certificates of the first issue and two of the second. The interest on the first issue, payable January 1st, 1869, and after, and on the second, payable April 1st, of the same year and after, was unpaid, when this suit was commenced.

This action is prosecuted for the benefit of all bondholders, who may come in and make themselves parties. About $1,800,000 of the indebtedness is now represented. No certificate for the stock, upon either of the subscriptions, had been issued by the company at the time of the commencement of this action. Since that time, upon the order of the court, the proper certificates have been issued and placed in the hands of a receiver appointed in this cause, who has collected the dividends thereon as they have from time to time been declared and paid. These dividends as far as received, have been applied to the payment of interest, but there is still a large amount in arrear, and the plaintiff now asks that a sufficient amount of the stock may be sold to pay what is past due.

It is first insisted by the defendants, that the State of North Carolina is in fact a party defendant, and consequently that this court cannot entertain jurisdiction of the cause.

The State, although directly interested in the subject matter of the litigation, is not a party to the record. The eleventh amendment to the Constitution of the United States provides, that no suit can be prosecuted in this court against a state, by the citizens of another state, or by citizens or subjects of a foreign state. It has long been held, however, that this amendment applies only to suits in which a state is a party to the record, and not to those in which it has an interest merely.

Vol. I.)


(No. 8.

It is next urged that, if the State is not actually a party to the suit, it is a necessary party, in whose absence the cause cannot proceed, and that as the State cannot be brought into court, no relief should be granted upon the case made.

If the State could be brought into court, it undoubtedly should be made a party before a decree is rendered, but since the case of Osborn v. Bank of the United States, reported in 9th Wheaton, 739, it has been the uniform practice of the courts of the United States to take jurisdiction of causes affecting the property of a state in the hands of its agents, without making the State a party, when the property or the agent is within the jurisdiction. In such cases the courts act through the instrumentality of the property or the agent.

The main question, therefore, presented for our determination is whether the court has jurisdiction of the property which it is sought to charge, or of the agent of the State having it in possession.

The property consists of shares in the capital stock of a corporation. At its inception it became charged as security for the payment of a debt of the State contracted on its account. This was part of the law of its creation. It has always been pledged.

The property of a corporation represents its stock. This property the corporation holds for its stockholders. A stockholder's share of the stock is equal to his share of the corporate property. The railroad company, therefore, in this case holds the share of its property represented by the stock subscribed by the State, in trust, as well for the bondholders as for the State. The charter made the company the depository of the pledge to hold it for both parties according to their respective interests. Consequently a suit which seeks to charge the stock as security, and brings the corporation in to represent it, may be maintained in the absence of the State as a party. This was evidently the understanding of the parties when the pledge was made. It was then the case, as now, that a state could not be sued, but that its agents could, and that property in the hands of its agents could be controlled and disposed of by the courts in proper cases, notwithstanding the ownership by the State. The faith of the State is here pledged. This pledge the courts could not enforce. The stock to be obtained with the money borrowed could not be reached under such a pledge of faith alone, because a suit could not be prosecuted

for that purpose.

Understanding this, a lien was given upon the stock as security, " in addition ” to the pledge of faith. But it was no addition, if the bond holder had no power to make his security available. A lien which cannot be enforced has no value as a security. These parties were engaged in no such vain work. It was clearly their understanding that the State not only should, but that it in fact did, grant to the bondholders the power to use the machinery of the courts to subject this portion of their security, if default should be made in the payment of the debt.

In sustaining this action, then, we are but carrying into effect the manifest intention of the parties at the time the money was borrowed.

The next objection is that the stock was pledged as security for the payment of the principal of the debt alone, and not the interest, and that as the principal is not yet due there can be no decree for a sale.



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