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"The power of the courts ought never to be used in enabling railroad mortgagees to protect their securities by borrowing money to complete unfinished roads, except under extraordinary circumstances. It is always better to do what was done here whenever it can be done; that is to say, reorganize the enterprise on the basis of existing mortgages as stock, or something which is equivalent, and by a new mortgage, with a lien superior to the old, raise the money which is required, without asking the courts to engage in the business of railroad building. The result, so far as incumbering the mortgage security is concerned, is the same substantially in both cases, while the reorganization places the whole enterprise in the hands of those immediately interested in its successful prosecution." In all the cases cited the trust fund consisted of railroad property which the public convenience and necessities, and not merely the private interests of stockholders and bondholders, required should be kept up as a going concern. The principle on which the doctrine rests is that railroad companies are considered public corporations which are not controlled and managed alone for the personal benefit of the individual stockholders. A railroad is an enterprise in which all the people living in the territory through which it runs have an interest. It is created by the will of all the people of the state, as expressed through their representatives, and it exercises its powers and franchises only by their permission. Its extensive uses, and the vast benefits it is intended to confer on the people of the state by whose laws it is created, make it indispensable to the welfare and comfort of the general public that it be preserved and kept in continuous operation. It would be a serious calamity to the people of any section of the country to allow a railroad of any importance, constructed for their benefit, to be stopped in its operations for lack of means to keep it alive and pay its running expenses. We cannot deduce from these reasons for exercising this extraordinary power of a court of equity in dealing with the interests of a railroad company any authority for the court to deal in the same way with a private corporation. The latter is created solely with reference to the pecuniary advantage of the individuals who take part in its creation and enjoy the benefits to accrue from the profits arising out of its operations. The public has no interest in its existence or continuance, other than what may accrue to the people of the particular locality in which a mill, factory, or furnace may be established. This is too vague and indefinite to be the subject of the care and protection of a court of equity. This question has yet to come before the supreme court of the United States for direct and final decision. Counsel for the receiver have cited in argument High, Rec. § 312, which says, in substance, that the question of the power of a court of equity in administering the assets of an insolvent corporation, other than a railway company, by the appointment of a receiver to issue receiver's certificates, creating a lien thereon to have priority of mortgage indebtedness, has given rise to some conflict of authority, and is not yet so definitely determined as to be free from doubt. The other authorities quoted, Jerome v. McCarter, 94 U. S. 734, and Kent v. Iron Co., 144 U. S. 75, 12 Sup. v.68F.no.6-40
Ct. 650, both cases growing out of the same conditions, so far as concerns the question before the court, do not sustain the position contended for. In Jerome v. McCarter, 94 U. S. 734, the receiver's certificates were issued for the distinct purpose of preserving the property and franchises of the company. The lands, granted by an act of congress and covered by the mortgage, reverted to the United States, unless the ship canal should be finished within a fixed period, and the period was passing away, and the certificates were issued in order to complete the canal and save the property. So imperative was the necessity that the lien creditors, all of whom were in court, made no objection to the issuing of the certificates. Nor did they contest their right of priority in the court below or in the supreme court. The question was raised by the assignees in bankruptcy of the insolvent company, who had no interest in the property other than what should remain after satisfying all the lien debts, including the receiver's certificates. The same position is taken by the court in Kent v. Iron Co., 144 U. S. 75, 12 Sup. Ct. 650. The distinction between railroad and private corporations has been considered and passed upon by several of the circuit courts of the United States. In Bound v. Railway Co., 50 Fed. 312, Simonton, J., said: "Railroads are of public concern not simply because they benefit the public. The sovereign power has contributed to their construction in a way in which none but the sovereign can contribute, and they are devoted to a public use. It does not follow, because other kinds of property are of great benefit to the public and are devoted to a public use, that they also come within this category, and as such that the courts will see that they are maintained." same view was held by this court in Seventh Nat. Bank v. Shenandoah Iron Co., 35 Fed. 436. In Farmer's Loan & Trust Co. v. Grape Creek Coal Co., 50 Fed. 481, it was held that: "In a suit to foreclose a mortgage on the property of a coal-mining company, the court has no power, as against the objections of even a small minority of the bondholders of the mortgage bonds, to authorize a receiver appointed in the suit to issue certificates which shall be a first lien on the mortgaged property, in order to enable him to continue the operation of the mines.' Syllabus. In this case, Gresham, J., after quoting from Kneeland v. Trust Co., 136 U. S. 89, 10 Sup. Ct. 950, says: "In the language above quoted, there is a plain implication that the limited power which courts may exercise in displacing the liens of railroad mortgages should not and cannot be extended to mortgages executed by private corporations. * Exten
sive as are the powers of courts of equity, they do not authorize a chancellor to thus impair the force of solemn obligations and destroy vested rights. Instead of displacing mortgages and other liens upon the property of private corporations and natural persons, it is the duty of courts to uphold and enforce them against all subsequent incumbrances." The court has given the question careful consideration; and in view of the principles on which the authority of courts of equity to order the issuance of receiver's certificates in any case rests, and in view of the weight of the authorities cited, the court is clearly of opinion that it has no power to authorize a re
ceiver of a private corporation to issue certificates to be a paramount lien for the purpose of carrying on the business of an insolvent corporation, when all the lien creditors do not consent thereto, unless it be necessary to do so in order to preserve the existence of the corporate property and its franchises. Such is not the condition in this case, and the prayer of the petition is denied.
KEIPER et al. v. MILLER.
(Circuit Court, E. D. Pennsylvania. June 12, 1895.)
Upon the trial of a suit for infringement of a patent, it appeared that the suit was brought by an assignee, to whom the patent had been assigned, 14 years after its issue, and when it was known to have been infringed, under an agreement that such assignee should prosecute suits against infringers, at his own expense, and divide the recoveries with the patentee. Held, that such agreement constituted champerty, and that the bill should be dismissed.
This was a suit by Henry B. Keiper and Lanious B. Keiper against
Jerome Carty and R. A. Parker, for complainants.
DALLAS, Circuit Judge. The complainants base their claim of title to the patent in suit upon an assignment by the patentee, Samuel M. Brua, expressed to be for a nominal consideration, and made about 14 years after the patent had been issued. This assignment does not disclose the actual transaction to which it relates. not made in execution of a sale of the patent, but under an agreement that the legal title thereto should be vested in the assignee for the purpose of enabling him to settle with, or to proceed against, infringers, for the benefit of the patentee, as well as of the assignee, but wholly at the expense of the latter. This suit is prosecuted in pursuance of that agreement. The testimony of Mr. Brua himself satisfies me of this. He admits that he has "an interest in the result of this case, dependent upon the success of the complainants." Being repeatedly asked to state what that interest is, he declined! to answer, upon the objection and instruction of complainants' counsel that the question was "incompetent, irrelevant, and immaterial." I do not think that this objection was well taken; but whether it was or was not is not very important, inasmuch as, in my opinion, enough has been shown to require the conclusion that "the suit in the present case has been instituted by a volunteer, on speculation," or, at least, to cast upon the complainants the burden of proving the contrary. The facts are peculiarly within their knowledge, and the evidence under their control, yet they not only failed to show them, but interposed to prevent their disclosure by the defendant's examination of their own witness. It would be difficult to
point out every particular portion of the testimony of this unwilling witness which has led me to the conclusion that I have reached; but the effect of it as a whole is very clear to me, and I have given it the most minute and thoughtful attention. Mr. Brua was asked one question which it is to be much regretted he did not answer, for it covered the whole matter, and a reply to it would have avoided the necessity of exploring a long and tedious examination for the discovery of a single fact which he might have stated, either way, in a single word. That question was, "You have some arrangement, have you not, with the complainants, by which they took an assignment of the patent, and bring suit, and defray the expense, and give you a certain per cent. if anything is recovered?" This he refused to answer, in consequence of the objection and instruction of the complainants' counsel; but he had previously said that it was his presentation of his patent (infringements of which had been long known to him) to Mr. Keiper (the assignee) that started the matter; meaning by this "that he (Keiper) brought this matter before the public by offering to settle if they desired to do so. If not, he would bring suit against the millers to test the validity of the patent." Mr. Keiper "started the matter,"-brought this dormant patent into active and aggressive notice, and the question is: Upon what agreement with the patentee did he do this? Keiper, not Brua, was to settle or to bring suits. That is plain. Still, it does not appear that Brua was to part with his patent, except to enable Keiper to do this, and to give him the control of settlements and suits. The proportion of the "collections" which Brua was to receive he has refused to tell, but that he was to receive some proportion of them he has distinctly avowed; and that he was to be considered a substantial party to all proceedings instituted by Keiper appears upon a fair scrutiny of the answers made by Mr. Brua on cross-examination, of which I extract the following:
"XQ. 201. Is your agreement with the complainants as to the amount you are entitled to receive, whatever it is, in writing, or is it merely in parol, or verbal? A. I decline to answer this question. XQ. 202. Whatever bargain you had in that behalf was entered into at or before you assigned the patent, and before these suits were brought. Am I right about that? A. Whatever was done was done before suit was brought. XQ. 203. Have you any views or say as to the terms upon which alleged infringers may settle? A. That don't belong to my part of the matter. I am never consulted in that matter; not as a general thing. XQ. 204. But you do have a say as to the terms upon which alleged infringers may settle, do you not? A. I am at liberty to give my opinion in that matter. XQ. 205. That is, under the terms of your agreement with the complainants, you have this privilege? A. No; I don't know that I would have that privilege. XQ. 206. You stated above that you are not consulted, as a general thing, as to the terms upon which alleged infringers may settle. Do you mean to say now that you have nothing to say regarding settlements with alleged infringers? A. I would say that the parties making collections are not under any obligations to consult me about what infringers should pay. XQ. 207. Have you not told one or more parties that Mr. Keiper's signature alone is not sufficient to effect a settlement, but that your signature is required to all such papers? (Objected to, unless counsel embodies in the question, and calls to the attention of the witness, the specific times and the names of parties to whom such assertions were made, together with all attending circumstances.) A. I may have had a conversation with a member of the association (the Cumberland Valley Millers' Protective Asso
ciation). He seemed to signify that the parties would not prosecute only certain people. I told him that we were obliged to prosecute every one, unless they would settle satisfactorily."
It is unnecessary to exhaustively discuss the evidence bearing upon this matter, or to refer at all to certain other facts to which the defendant's counsel have, not without pertinence, adverted in this connection. It is enough to say that, upon all the proofs, I am unable to escape the conviction that this suit has been brought in pursuance of a bargain between the complainants and Brua, the patentee, to divide the recovery between them, if they should prevail, and the former to carry on the suit at their own expense. Such a bargain constitutes champerty (Kent, Comm. p. 485, note d); and the following observations of Judge Shipman in Gregerson v. Imlay, 4 Blatchf. 504, Fed. Cas. No. 5,795, are directly in point:
"This is not the case of an assignment of an interest in an individual claim, or a sale of property in esse which is involved in a legal controversy, but it is an attempted transfer of an interest in indefinite litigious rights, and in claims for unliquidated damages, arising out of torts, indefinite in number and amount, and limited only by territorial boundaries, covering nearly the entire country. Passing by other grave questions that suggest doubts as to the validity of such a contract, it is sufficient to say that it is one that no court of equity should countenance, inasmuch as it is tainted with champerty and maintenance. This view of the duty of courts of equity is fully supported by the chief baron of the exchequer in the case of Prosser v. Edmonds, 1 Younge & C. Exch. 481, where he remarks that such courts should lend no countenance to agreements which partake in any manner of champerty, although they might be barely valid at law. *** To arm one individual with exclusive and unlimited power over the claims of another for unliquidated damages arising out of numerous torts, with power to sue and press the claims to judgment in all courts, in the name of the injured party, not for a fixed or a reasonable compensation to be determined by the amount of labor performed and the expense incurred, but for what might prove an enormous bounty proportioned to the amount that might be recovered, while at the same time the other party is stripped of all power to adjust, settle, or discharge those claims, of the justice of which he ought to be the better judge, would be detrimental of the peace of society and the safety of individuals, and against public policy."
It is true that, in the case in which this language was used, the question arose upon an application by one of the parties to the champertous agreement for a provisional injunction to restrain the violation of that agreement by the other party thereto; whereas, in the present case, the unlawfulness of the agreement is set up by a third party, to defeat a suit which is prosecuted in accordance with its terms, and with the acquiescence of both parties to it. This, however, makes no difference. The views expressed by Judge Shipman, in which I fully concur, are, in my opinion, equally applicable to the present case as to that which was before him. It may be conceded that, as argued for complainants, an arrangement that counsel shall receive part of the proceeds of a suit in which he is professionally employed will not prevent a recovery therein; but where the title which the plaintiff relies upon, and upon which his right to sue is dependent, is tainted with champerty, the case presented is a very different one, for there the court is quite as plainly asked to uphold the obnoxious contract as upon a motion (as in Gregerson v. Imlay) to restrain its violation.