Statement of the Case.

for the purposes of hypothecation, until said canal shall be completed as therein provided;" and that July 1, 1865, the company executed a deed of trust conveying to C. C. Douglas and his successors its canal and franchises and the two hundred thousand acres of land to secure the payment of one thousand bonds of five hundred dollars each, John L. Sutherland being thereafter substituted as trustee.

The bill further averred that by act of Congress, approved July 3, 1866, a second two hundred thousand acres of land were granted to the State of Michigan for the above purposes, and it was provided by the act that this second grant should enure to the use and benefit of the company in accordance with the act of the Michigan legislature of March 16, 1865; that July 1, 1868, the company executed a deed of trust of the second land grant, together with the equity in the canal and other property already conveyed to Douglas in trust, to Martin and Davis, to whom Lucien Birdseye subsequently succeeded as trustee, to secure one thousand other bonds of five hundred dollars each; and that Jonathan T. Wells purchased eighty of these last-named bonds, and paid cash therefor, which money was applied by the company in the construction of the harbor and canal. It was further alleged that July 1, 1870, the company made its third deed of trust, conveying its canal and the two land grants to Charles L. Frost, to secure twelve hundred and fifty bonds of one thousand dollars each, two hundred and fifty of which were paid, redeemed and cancelled by the company by bonds of a subsequent issue, known as the "Union Trust bonds;" that Thomas N. McCarter succeeded Frost as trustee, July 1, 1872; and that Wells became the holder and owner of forty of the bonds secured by this third trust deed. The bill continued that on or about April 29, 1871, the name of the company was changed to "The Lake Superior Ship Canal, Railroad and Iron Company," which on May 1, 1871, became seized and possessed by purchase of the entrance canal by way of Portage River into Portage Lake with the franchises appertaining thereto, and also acquired title to two hundred thousand acres of land or thereabouts, situated in the State of Michigan, and known as the "Wagon

Statement of the Case.

Road Lands;" that May 1, 1871, the company executed a deed of trust to the Union Trust Company of New York as trustee, conveying the canal with all rights and franchises thereunto appertaining, and the six hundred thousand acres of land, to secure the payment of bonds which the company proposed to issue to the number of thirty-five hundred at one thousand dollars each, of which there were afterwards issued and negotiated thirteen hundred and no more.

It was further averred that between 1865 and 1872 the company hypothecated certain of the bonds issued under the first three deeds of trust, and during the years 1871 and 1872 hypothecated certain of the bonds issued under the fourth deed of trust, and only a small proportion of the bonds of each issue was ever sold outright by the company; that in November, 1871, and on January 18, 1872, the company defaulted in the payment of the interest then due upon these bonds; and that at that time large amounts of them were held by the Ocean National Bank, Johnston & Co. and Ayer & Co. as collateral to certain loans, which plaintiff charges were of doubtful legality, made by the parties to the canal company at different times before the default, and it was claimed by the company that the bonds pledged as security for the loans were issued unlawfully, and in violation of the law of Michigan.

That in December, 1871, the Ocean National Bank failed, and T. M. Davis was appointed its receiver; and among the assets of the bank were bonds under all the aforesaid deeds of trust, but most of them were under the McCarter and Union Trust Company deeds; and that some of the bonds in the possession of the bank were owned by it, but by far the larger part were held as collateral.

That prior to the default the company had selected with care and at much expense the lands it was entitled to, and they were regarded as of great prospective value, and those selected under the act of Congress of July 3, 1866, were especially valuable.

That early in 1872, Davis, receiver, Johnston & Co. and Ayer & Co. retained an attorney at Detroit to protect their interests as creditors and bondholders of the company, and to act for and represent them in prospective legal proceedings in

Statement of the Case.

the United States courts for the Eastern District of Michigan for the foreclosure of the deeds of trust, who was afterwards retained and employed by Sutherland, Birdseye and McCarter, and the Union Trust Company, trustees, as their solicitor to foreclose the several trust deeds, which employment was by Davis, receiver, Johnston & Co. and Ayer & Co., and upon their retainer and in their interest, without reference to the interests of the other bondholders; and it was agreed between them and the trustees that the foreclosure suits were to be prosecuted under their direction and for their special benefit; and to this end they indemnified the trustees against all loss and damage by reason of anything which Davis, Johnston and Ayer might do in the premises.

That on or about May 25, 1872, a bill was filed in the Circuit Court of the United States for the Eastern District of Michigan in the name of Sutherland, trustee, by said solicitor, to foreclose the trust deed of July 1, 1865, and the company, Birdseye, Frost and the Union Trust Company, as trustees, were made parties defendant. As Birdseye was a citizen of New York, it was alleged that Sutherland, who was also a citizen of New York, was a citizen of New Jersey; that on or about June 13, 1872, one Knox was appointed receiver, and it was admitted by Birdseye's solicitors that Sutherland was a citizen and resident of New Jersey, though plaintiff charges that the admission extended only to the order appointing the receiver, and that the Circuit Court was afterwards shown by the pleadings and proofs to have no jurisdiction therein, and had none in fact; that on June 17, 1872, an order was made empowering the receiver to execute an instrument to F. D. Tappan, as trustee, to secure certificates of indebtedness authorized to be issued for the purpose of completing the construction of the canal, and certificates were issued to the amount of about $640,000, which were purchased by Johnston & Co. and Ayer & Co., $500,000 of the issue being sold at the rate of seventy-five cents on the dollar, and the remainder at the rate of sixty cents on the dollar, though twentyfive per cent discount was the limitation prescribed; and that all this was in the interest of Davis, Johnston and Ayer.

Statement of the Case.

The bill further averred that on August 27, 1872, the company was adjudicated a bankrupt by the Michigan District Court, and Jerome and Beaman were appointed assignees, who on January 3, 1873, by supplemental bill, were made parties to the Sutherland suit, as was McCarter, trustee. It was further stated that on July 3, 1872, a bill was filed in the Circuit Court in the name of McCarter, trustee, by the same solicitor, to foreclose the trust deed of July 1, 1870, and the company and the Union Trust Company were made parties defendant, as were the assignees, January 13, 1873.

The bill also alleged that on July 5, 1872, a bill was filed in the Circuit Court in the name of Birdseye, trustee, by the same solicitor, to foreclose the trust deed of July 1, 1868, and the company, McCarter, trustee, and the Union Trust Company were made parties defendant. This bill set up the appointment of Knox as receiver, his taking possession of the property, the issue by him of certificates of indebtedness to the amount of $500,000, and that the certificates were made, by order of court, a paramount lien upon the canal and all the property of the company; and prayed that the certificates might first be ratably paid from the proceeds of the sales of the lands acquired by the Sutherland and Birdseye deeds of trust; and plaintiff charged that this recognition of the certificates was entirely unauthorized and never ratified by Wells.

It was further alleged that on August 5, 1872, Birdseye, trustee, filed an answer in the Sutherland suit in which he set up the defence of want of jurisdiction, in that Sutherland was not a citizen of New Jersey, but of New York, and it was stated that this was shown in 1874 by the testimony of Sutherland.

The bill then charged that the Circuit Court did not obtain jurisdiction or power over the Birdseye lands or the bondholders secured thereby, so as to enable the court to extend the lien of the receiver's certificates over those lands, or make them a prior or paramount lien thereon; that neither Wells nor any other of the Birdseye bondholders, except those represented by the aforesaid solicitor, were parties to the Sutherland suit, and Birdseye was not authorized nor empowered to represent them in respect thereto; that Birdseye allowed the

Statement of the Case.

paramouut lien to be apparently imposed upon the lands he represented, but failed to apprise the bondholders of the action of the court, although he knew such action was to be brought about in the interest of some bondholders to the sacrifice of that of the others; and that the nominal amount of the certificates was illegally increased for the purpose of making the indebtedness as large as possible, so as to obtain the entire property of the company and destroy the interest of the other bondholders; and that, although the accounts of the receiver were afterwards audited and confirmed by the court, Wells was not bound thereby.

That the Birdseye and McCarter trust deeds provided for the release of lands upon the delivery of bonds for cancellation at the rate of five dollars per acre; that on or about August 11, 1873, Wells deposited forty bonds secured by the McCarter trust deed for one thousand dollars each, with Birdseye, as trustee, and at the same time tendered to him for cancellation eighty bonds for five hundred dollars each, secured by the Birdseye trust deed, and received from him a release of eight thousand acres of land from the incumbrance and operation of that trust deed, except only a lien to the amount of the bonds tendered, or that the amount of said bonds became immediately due and payable; and that eight thousand acres became released from the lien of any other of the deeds of trust, and the remainder of the property became discharged from any lien for the eighty thousand dollars.

It was further alleged that in September, 1873, the assignees in bankruptcy filed a bill in the Circuit Court against Sutherland, Birdseye, trustee, McCarter and the Union Trust Company, as trustees, Wells, F. D. Tappan and others, which set forth in detail the matters relating to the release of August 11, 1873, and prayed that it might be declared valid and of the legal effect charged in the bill; that the proceedings in the foreclosure suits might be stayed; and that the Sutherland suit, with this bill treated as a supplemental bill or cross-bill, might proceed regularly to a decree, containing the manner in which the property covered by the several trust deeds should be offered for sale, etc.

VOL. CXLIV-6