State of Alabama v. Burr/Opinion of the Court

by Morrison Waite

United States Supreme Court

115 U.S. 413

State of Alabama  v.  Burr

 Argued: November 16, 1885. ---

The demurrer presents the question whether the facts stated in the declaration are sufficient to support the action. The liability of the officers and stockholders of the company to the state is statutory only, and there can be no recovery unless the facts stated in the declaration are such as to bring the defendants within the operation of the liability clause in one or the other of the statutes.

1. As to the act of 1867. Under this act guilty stockholders are made liable (1) for the payment of all bonds, the indorsement of which was fraudulently obtained by the company, or which were sold at less than 90 cents on the dollar; and (2) for all other losses that fell on the state in consequence of any other fraud of the company. For frauds in obtaining indorsements the obligation is to pay the bonds indorsed; for all other frauds, to pay the losses of the state in consequence thereof.

This suit is not brought to enforce a liability of the defendants for the payment of the bonds. That was conceded in argument. With the alleged frauds in obtaining indorsements, therefore, we have nothing to do, because the liability of stockholders for the payment of losses depends entirely on other frauds than these. The office of a declaration is to state the essential facts on which the liability of the defendant in the action depends. In this case it must show (1) the particular fraud of which the company has been guilty; and (2) that the loss which has fallen on the state resulted directly therefrom. The frauds alleged are (1) misrepresentations by reason of which the indorsement of an overissue of bonds was obtained; (2) misrepresentations by reason of which indorsements were obtained before the several sections of the road were fully 'finished, completed, and equipped;' and (3) the unlawful and improper use of some of the bonds, or their proceeds, after they got into the hands of the company.

As to the first and second of these classes of allegations, it is sufficient to say that they relate only to the manner in which the indorsements were obtained, and for frauds of that character the liability is, as has been seen, only for the payment of the bonds the indorsement of which was got in that way. The other allegations are, in effect, that at different times the company used indorsed bonds or their proceeds for dishonest purposes, and paid them out without consideration and in fraud of the rights of innocent stockholders. In some instances they were given to the defendants without consideration or for an unauthorized purpose, and in others to other persons who were not entitled to them. If the averments are true, they show gross frauds by the company and the defendants, as its officers and agents, upon innocent stockholders; but they fail entirely to connect the losses which have since fallen on the state with what was thus wrongfully done. Upon such allegations, if proven, the company might, perhaps, recover from the defendants and others the bonds and moneys they had fraudulently obtained; but it by no means follows that the state has also a right of action against the defendants on the same grounds. The declaration does, indeed, allege that 'by reason of the aforesaid wrongful, illegal, and fraudulent acts of the said * * * company, permitted and participated in by the defendants,' the corporation became bankrupt, and was rendered wholly unable to pay its debts, and especially the interest on its bonds; and that the state had been compelled to make certain payments on that account, 'which she would not have been compelled to pay but for the wrongful, illegal, and fraudulent acts of the defendants and the said corporation;' and that, 'by reason of the aforesaid wrongful, illegal, and fraudulent acts of the said * * * company and of the defendants, the said plaintiff has been further damnified and injured to the additional extent of one million of dollars in settling her liability created and evidenced by her aforesaid indorsement of said indorsed bonds.' But this is not enough unless the facts from which this conclusion is drawn are such as to show that the loss was both the natural and immediate consequence of the wrongful and fraudulent acts referred to. Pleadings must state facts, and not conclusions of law merely, and the allegation in this case that the loss arose from the fraud is only a conclusion of law. If the facts from which the conclusion is drawn are not sufficient to show that in law the loss was attributable to the fraud, the declaration is bad.

The facts are that the state was to indorse certain bonds of the company upon certain security. It made the indorsement and got the security. The obligation of the company to use the bonds to build and equip the road was satisfied if the road was actually completed and equipped in accordance with the requirements of the statute at a bona fide cost to the company of more than the amount of the bonds. The object of this requirement was to insure the creation of the security which the state was entitled to have. If the security was actually perfected, all claim of the state upon the indorsed bonds was satisfied. There is no pretense that the road cost less than the value of the bonds. Consequently, if the bonds were not used to build the road, other funds belonging to the company must have been, and it was proper to treat the bonds as a substitute for the other funds in the treasury of the company. This being so, it was not a fraud on the state for the company to do with the bonds as it might have done with the other funds if they had not been used in building the road. As the state had no direct lien on the bonds for its security, a fraudulent use of the bonds was not a fraudulent diversion of the state's securities. The loss of the state is directly attributable to the deficiency in the value of its original security, and the fraudulent use of the bonds had no effect on that. The company, if the allegations are true, has wasted its property and made itself insolvent; but it has not in this way increased its obligations to, or changed its relations with, the state. Both the debt to and the security held by the state were the same after the frauds as before. The injury to innocent stockholders by the wrongful acts of the company and the defendants was direct and immediate, because their property was taken and fraudulently converted to the use of the defendants or the other wrong-doers. To the state, however, the injury, if any, was both indirect and remote, because the state had no direct claim upon or interest in the property which was misappropriated. The law will not imply that if the company had kept the bonds, the same loss would not have fallen on the state. There was no imperative obligation on the company to use the bonds to pay the debts for which the state was liable rather than others; and consequently it cannot be said that, as a matter of law, if the misappropriations had not been made, the state would have suffered no loss. To our minds it is clear, therefore, that, upon the facts as they are set forth in the declaration, there is no liability on the part of the defendants for the alleged frauds of the company other than those connected with overissues or sales of the bonds at less than 90 cents on the dollar, and for these the suit is not brought.

2. As to the act of 1870. Under this act all officers and stockholders who knowingly violate, or permit without objection the violation of, any of its provisions, or the provisions of the act of 1867, are made personally liable to the state for any loss incurred thereby. There is also a prohibition against a sale of the state bonds, the issue of which to the company was authorized, at less than 90 cents on the dollar; but there is no provision for the liability of the stockholders for the payment of the bonds in case they are so sold, as there is in the act of 1867. The only liability under this act for such a violation of its provisions is for the losses which the state sustains on that account. The declaration alleges that 771 of these bonds were sold at less than 90 cents on the dollar, but it fails entirely to show how the state was injured thereby. Stockholders are liable under this act for violations of the act of 1867 only when such violations occur after this act took effect, which was February 11, 1870, and it nowhere affirmatively appears that any of the wrongs complained of were committed after that date, except in the sale of the state bonds at less than 90 cents on the dollar. It is also as much incumbent on the state to show, under this act, that the losses for which it seeks to recover were the direct and immediate consequence of the wrongful conduct complained of, as it was under the act of 1867. What has been said, therefore, as to the insufficiency of the allegations to charge the defendants under that act is equally applicable to this.

It was contended in argument that the remedy of the state to enforce the liability of the defendants under the statute was exclusively in equity. This question we do not decide, as there is not entire unanimity of opinion among us in reference to it. There were other objections to the declaration also mentioned in the argument, but we deem it unnecessary to refer to them, as what has already been said is sufficient to dispose of the case. Being unanimously of opinion that the facts stated in the declaration are not sufficient to constitute a cause of action against the defendants, we sustain the demurrer.

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