228 U. S.

Argument for Appellant.

might have been obtained then. Not only is there a total failure of evidence in this regard, but it is not even alleged that a higher price could have been obtained.

This very question as to the fraudulent character of the reorganization had been passed on by the court before it rendered the decrees of foreclosure and sale; its decision in the Paton Case, whether or not a bar, must be regarded by every other court. Fauntleroy v. Lum, 210 U. S. 230, 237; 2 Freeman on Judgments, § 486.

Boyd was a party to the Paton proceeding in the only possible way in which he could have been one except by his own direct intervention, for not until after judgment was rendered in the foreclosure suits was he a judgment creditor even of the Coeur D'Alene Company; and not until later did he even assert himself to be a creditor of the Northern Pacific Railroad Company. 1 Daniel's Chanc. Pl. & Pr. 280, 5th Amer. ed.; Story Eq. Pl., S$ 156, 351.

The doctrine of lis pendens is an ancient one. It was laid down by Lord Bacon in one of his ordinances. Murray v. Ballau, 1 Johns. Ch. 577. See also Tilton v. Cofield, 93 U. S. 163; Ex parte Railroad Co., 95 U. S. 221; Stout v. Lye, 103 U. S. 66; Hollins v. Brierfield Coal Co., 150 U. S. 371; Herring v. Railway Co., 105 N. Y. 340; Bronson v. Railroad Co., 2 Black, 524.

Complainant has been guilty of such laches as deprives him of any right now to call upon a court of equity to enforce a claim matured in 1886 and now more than quadrupled by interest charges.

This case fairly illustrates the gross injustice of permitting a suitor to assert a liability against a defendant many years after the event, when the imputation rests upon conjecture and when the lapse of time has impaired recollection of the transactions and obscured the details. Under such circumstances it has been consistently held by courts of equity, and by none more forcibly than by this VOL. CCXXVIII-32

court, that the welfare of society demands the rigid enforcement of the equitable rule of diligence. Hammond v. Hopkins, 143 U. S. 224, 274; Foster v. Mansfield &c. R. R., 146 U. S. 88, 99.

Such rule of diligence will rigidly be enforced in equity against a bondholder who fails promptly to prosecute a claim to share in the proceeds of a corporate reorganization from which he has been excluded, even though otherwise he would be entitled to relief. Alsop v. Riker, 155 U. S. 448, 459; Felix v. Patrick, 145 U. S. 317, 329.

As to the applicability of laches when the property is of a speculative character, see Starkweather v. Jenner, 216 U. S. 524; Rothschild v. Memphis & Co. R. Co., 113 Fed. Rep. 476; Leavenworth v. Chicago Ry. Co., 134 U. S. 688, 709; Graham v. Boston, H. & E. R. R. Co., 118 U. S. 161.

Mr. George Turner and Mr. R. L. Edmiston, for appellee.

Mr. Samuel W. Moore, by leave of the court, filed a brief as amicus curiæ.

MR. JUSTICE LAMAR, after making the foregoing statement, delivered the opinion of the court.

Boyd's judgment against the Cœur D'Alene Railway & Navigation Company was rendered in 1896 in an action begun in 1887 in a court of the Territory of Idaho. After he had established his title to the judgment and revived it in 1906 for $71,278 there was nothing on which an execution could be levied because, in tue meantime, all of the property of the Coeur D'Alene had been sold under foreclosure. He thereupon brought this suit, claiming that the Northern Pacific R. R. Co. was liable in equity as for a diversion of $465,000 of bonds, belonging to the Cœur D'Alene but used by the Northern Pacific in payment of 5,100 shares of stock bought from Corbin in 1888.

At that time the Coeur D'Alene was solvent, owning

and operating at a profit a narrow gauge railroad, 33 miles in length, constructed at a cost of about $12,000 a mile and paid for mainly out of the proceeds of $360,000 of first mortgage bonds. The original capital stock of $500,000, increased to $1,000,000, had been issued, but the subscriptions were unpaid. A majority of this stock was controlled by Corbin, the president.

On August 1, 1888, he, in his individual capacity, entered into a written contract with the Northern Pacific, in which he undertook to have the Coeur D'Alene issue $825,000 of bonds, $360,000 of which were to be retained to retire those then outstanding. He also agreed to cause the Cœur D'Alene to lease its property for 999 years to the Northern Pacific, which, in turn, was to guarantee the payment of the principal and interest of the bonds. The contract further recited that in consideration of the execution of the lease and guaranty Corbin would transfer to the Northern Pacific 5,100 fully paid and non-assessable shares of the capital stock of the Coeur D'Alene. The agreement was promptly carried into effect. A resolution was passed by the directors of the Coeur D'Alene authorizing the issue of $825,000 of bonds for properly constructing, completing and equipping the road; the 999-year lease was made and Corbin transferred his stock. Shortly afterwards the Trust Company, named in the mortgage, issued to Corbin, president, or order, $465,000 of the new bonds. They were not used for completing or equipping the road, paying the debts or other corporate purpose, and although the Northern Pacific was the then holder of a majority of the stock and in charge of the business and litigation of the Cœur D'Alene, no steps were taken to trace or recover them. Corbin testified that he was paid for the stock, in cash, about the par value of the bonds; that he had never received them, or if so, that they only passed through his hands "with an agreement that somebody was to take them off of our hands and pay us the money."

1. The buyer would naturally have been the person to make arrangement for the payment. But the Railway insists that the payment was not made in cash but that, as recited in the written contract, the stock was transferred by Corbin in consideration of the Northern Pacific guaranteeing the bonds and entering into the lease. But even if Corbin sold his 5,100 shares for a consideration nominally moving to the Cœur D'Alene, that would not change the character of the transaction if, in fact, Corbin made the transfer with the further understanding that he was to have the proceeds of the guaranteed bonds. In that event the purchaser would be as much liable for the diversion of the $465,000 as the seller. Chicago, M. & St. P. Ry. v. Third Nat. Bank, 134 U. S. 276. The terms of the contract; Corbin's control of the Cœur D'Alene; the failure to produce or account for the absence of the agent who represented the Northern Pacific Railroad in the purchase, together with Corbin's testimony that the stock was paid for out of the cash proceeds of the bonds, support the concurrent findings of the two courts that the Northern Pacific combined with him to divert $465,000 of the assets of the Coeur D'Alene. And even if, as claimed, liability for a diversion of trust funds was dependent upon the insolvency of the Coeur D'Alene, that insolvency was brought about in the very act of carrying the illegal contract into effect; for thereby the Cœur D'Alene was encumbered with a mortgage for twice its value, and the lease for 999 years, with rental payable only from net profits, left nothing out of which debts could be made by levy and sale. 134 U. S. 277.

2. Being liable for this diversion of $465,000, the Northern Pacific Railroad remained so liable until the funds were restored to the true owner. Chicago, M. & St. P. Ry. v. Third Nat. Bank, 134 U. S. 277. The obligation was not lessened by set-offs, nor discharged in whole, because the Northern Pacific spent $500,000 of its own

money in broadening the gauge, extending the line, equipping the road, or for other purposes which may have been thought by it advantageous to the Coeur D'Alene. Such disbursement was not a restoration of what had been taken, but an expenditure by the Northern Pacific, for its own benefit, in improving a road which it practically owned by virtue of the 999-year lease.

3. Although this diversion of $465,000 of bonds in 1888 made the Northern Pacific liable, in equity, for the payment of Boyd's judgment for $71,278, recovered in 1896 and revived in 1906, yet his right was apparently not enforcible because, in 1896, all of the property of the Northern Pacific Railroad had been sold under foreclosure to the newly created Northern Pacific Railway Company. He thereupon brought this suit against the mortgagor and purchaser, seeking to subject the property bought to the payment of this liability. He claimed that the foreclosure sale was void because made in pursuance of an illegal plan of reorganization, between bondholders and stockholders of the Railroad, in which, though no provision was made for the payment of unsecured creditors, the stockholders retained their interest by receiving an equal number of shares in the new Railway. There was no question as to parties and no demurrer to the bill. The Railway answered and on the trial of the merits offered evidence tending to support its contention that the decree was regular in form, free from fraud and that the property brought a fair price at public outcry. Both courts found against this contention and entered a decree making Boyd's claim a lien upon the property of the Railroad in the hands of the Railway, but subject to the mortgages placed thereon at the time of the reorganization.

The appellants attack the ruling from various standpoints based upon many facts in the voluminous record. But, having been summarized in the statement, they will not be discussed in detail, inasmuch as the case, though