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Two— Railroads, Robber Barons, and the Saving of Stanford University
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Railroads, Robber Barons, and the Saving of Stanford University

Stanford's testimony . . . convicts him of having been the most conspicuous criminal of the Century.
Lewis D. McKisick to Holmes Conrad, Dec. 10, 1895

Within five years of its creation, the court was presented in 1895 with a case of enormous and multifaceted dimensions: United States v. Stanford . The holding of the case established the liability of the railroad magnates, or "robber barons," who had reaped enormous profits from United States government subsidies for the unpaid loans of the railroad they owned, the Central Pacific Railroad Company. At a deeper level, the case illuminated the interplay between key government actors and railroad interests in influencing the course of litigation. It also provided a first comprehensive look at the court's internal procedures and the jurisprudence of two Ninth Circuit judges whose views would clash for three decades: William B. Gilbert and Erskine Ross. At the trial and appellate stages, these two jurists decided the case in favor of Mrs. Jane Stanford on grounds her attorneys did not argue. Her victory saved a fledgling university, Leland Stanford Junior University, which would not have survived if the government had prevailed.

Although the case did not have a significant effect on the development of law, it bears detailed attention for several reasons. First, the outcome of the case saved one of the most important institutions in the West, Stanford University. At a social level, the case highlights the importance of judicial decisions even when those decisions do not have long-lasting legal significance. Scholars of legal history often overlook the significance of judicial decisions that do not bear on the evolution of the law but


which nevertheless mark federal judges as important actors in the development of the nation. Indeed, arguably the reason the case had no real precedential value was that the judges who decided it stretched so far to achieve the result they did. Second, the examination of a case as well-documented as this one casts light on how the judicial process operated in the 1890s, from mundane issues of procedure to questions of judicial ethics. Finally, the case illustrates the flexibility in roles performed by federal judges in this era. The assignments of judges that seemed natural in 1895 would have been totally contrary to administrative principles in practice four decades later.

I. Building the Transcontinental Railroad

The Civil War provided the crucial impetus for breaking a decision-making logjam over the construction of a transcontinental railroad. Although Congress had recognized its necessity for over a decade, squabbling between northerners and southerners over the preferred transcontinental route had impeded national legislation to assist private construction efforts. The secession of the southern states freed Congress to legislate the now urgently needed development of the northern route. In 1862 a detailed statute created the Union Pacific Railroad Company and conferred land-grant and bond subsidies to the Union Pacific and other railroad companies that participated in the construction of the route. This statute named the incorporators of the Union Pacific, spelled out its powers and functions, charted its organizational structure, and directed the time and place of its meetings. In addition, it specified detailed operating procedures for the other participating railroads, including rights of way, materials for construction, collection of subsidy bonds and patenting of land grants, and repayment of debts incurred by the railroads on the bonds.[1]

Congress entrusted construction to the Union Pacific for the eastern portion of the transcontinental route, which stretched from the Nebraska Territory to an unspecified point near the western boundary of Nevada. The Central Pacific Railroad Company, a corporation formed under California law, was to build the western segment, from San Francisco to the California-Nevada boundary and beyond until the railroads met. The 1862 statute recognized that the Central Pacific was "a corporation existing under the laws of the State of California," but it nonetheless provided that the Central Pacific should receive the same subsidy bonds


and land grants "upon the same terms and conditions, in all respects, as are contained in this act for the construction of [the Union Pacific] line."[2]

The participating railroads received loans at 6 percent interest in the form of subsidy bonds for each mile of track completed: $16,000 per mile for the line west of the Sierra Nevada, $48,000 per mile for 150 miles through the Sierra Nevada, and $32,000 per mile for the sector east of the mountainous part. To induce speedy construction, Congress authorized loan payment on completion of each forty-mile segment of track. Over the course of its construction efforts, the Central Pacific received vast land grants and loan subsidies totaling $27,855,680. With interest at maturity, the Central Pacific's total indebtedness reached $60 million. Although historians have made much of the economic benefit conferred on the railroads by the land-grant policy, at least one economic historian has calculated that in real terms the loan subsidies brought twice as much aid to the Central Pacific as the land grant did.[3]

The 1862 statute also established the corporate bases of liability for loan repayment. Section 5 provided that "the Secretary of the Treasury shall . . . secure the repayment to the United States . . . of the amount of said bonds so issued . . . together with all interest thereon which shall have been paid by the United States." It authorized the government to secure repayment by holding a "first mortgage on the whole line of the railroad and telegraph, together with the rolling stock, fixtures and property of every kind and description, and in consideration of which said bonds may be issued." Congress empowered the secretary of the treasury to take possession of any railroad that defaulted on its bonds.[4]

Questions of repayment and liability, however, received little attention in the early days of construction. The four key shareholders of the Central Pacific—Leland Stanford, Collis Huntington, Mark Hopkins, and Charles Crocker—achieved considerable renown, being called "the Associates" or "the Big Four." As their designated foreman, Crocker, scouted to find adequate crews to lay track, the Big Four struggled to keep their investment viable. After months of negligible progress, Crocker began to use Chinese laborers. Their efforts succeeded in transforming a losing proposition into a profitable one. All told, thousands of Chinese toiled long hours to build the road. By late 1867, the Central Pacific's segment was approaching the California state line, some 278 miles east of Sacramento. The Central Pacific added 362 miles of track in 1868 and pushed into Utah early the following year. The Central Pacific and Union Pacific celebrated their link-up by driving a golden spike at Promontory Point, Utah, on May 10, 1869.[5]


Almost from the very beginning, legal controversies plagued the Union Pacific and Central Pacific railroads. Because the subsidies and land grants vested upon the completion of segments of track, the railroads received public funds before the line was finished. At an early stage, the government and the railroads clashed over payment of interest on the subsidy bonds, due semi-annually. The secretary of the treasury contended that the railroads owed the interest when it came due; the railroads interpreted the 1862 statute as amended in 1864 to require repayment of principal and interest upon expiration of the thirty-year loan period. Notwithstanding an official opinion from the attorney general validating the treasury secretary's view, Congress passed an appropriations bill requiring the secretary to pay out money withheld from the railroads for nonpayment of the interest.[6]

Throughout the 1870s and 1880s, scandals involving the Union Pacific and Central Pacific inspired concern in Congress over repayment of the subsidy bonds. As a government-created corporation, the Union Pacific received the most attention, but the Central Pacific did not escape scrutiny. In 1887 Congress established the Pacific Railway Commission to investigate wrongdoing by the railroads. The commission found plenty. It reported that the Central Pacific had defrauded the United States government, violated "[n]early every obligation which these corporations assumed under the laws of the United States," and "impelled the people of [California] to adopt amendments to the State constitution regulating railroads and creating a State commission to protect shippers against the discriminations of the Central Pacific Company." When the commission sought to compel Leland Stanford to answer questions or submit data, his close friend Justice Stephen Field held in the circuit court that such an investigation unconstitutionally invaded the power of the judiciary, states' rights, and Stanford's personal rights.[7]

By the 1890s, as the first of the subsidy bonds neared maturity, public attention focused anew on the railroads' liability for these loans. President Cleveland's administration expressed little interest in pursuing repayment from the two great railroads. In any event, by the middle of the decade both of them were either in receivership or on the verge of bankruptcy.[8] The shareholders of these behemoths, however, enjoyed great wealth and power, having stripped the companies of assets through payments of large dividends. For the Union Pacific this fact brought little solace. The 1862 statute incorporating the Union Pacific contained no provision holding shareholders liable for the corporation's unpaid debts in proportion to their number of shares. As a creature of California law,


the Central Pacific seemingly stood in a different position. To the modern lawyer, schooled in the general principle that shareholders have limited liability for a corporation's debts, this rule may appear to defeat the purpose of incorporation. In the late nineteenth century, however, the rule of limited shareholder liability was not universal, and California was a very important exception.[9] In its original constitution of 1849, California law provided that "[e]ach stockholder of a corporation or joint-stock association shall be individually and personally liable for his proportion of all its debts and liabilities."[10] For the government to succeed in the Stanford suit, then, it would have to convince the courts that the California law applied, and the Central Pacific shareholders were liable for the company's debts.

By the mid-1880s, published reports of the Big Four's ostentatious lifestyle increased the attractiveness of pursuing the shareholder-liability theory. Former Governor and at that time United States Senator Leland Stanford lived particularly well, much to the chagrin of his partner Collis Huntington, who sought to shield the Big Four's personal wealth from the view of Congress and the public. In 1886, Stanford shattered Huntington's carefully crafted myth of the robber barons' poverty, when he announced the founding of Leland Stanford Junior University. This large endowment suggested that the Central Pacific stockholders had the financial means to repay the loans. Huntington viewed the gift with contempt, repeatedly referring to it as "Stanford's circus." When the benefactor died unexpectedly on June 20, 1893, reports that he had left an estate estimated at between $35 and $75 million combined with the current severe economic downturn to fuel demands that the government press its claims.[11]

The issue divided Congress. Senator George F. Hoar of Massachusetts introduced a resolution on June 8, 1894, directing the Judiciary Committee to inquire whether the government's claim against the Stanford estate "should be forthwith relinquished and put at rest." Hoar, whose feelings on the matter were surely influenced by his own service as an overseer of Harvard, believed that a government suit would threaten the existence of the young university, "one of the illustrious examples of munificence and public benefaction." Remarking that Hoar's resolution was "premature," Senator William A. Peffer of Kansas raised the salient political fact that "with millions of our people out of employment and with hundreds and hundreds of thousands of business men upon the verge of bankruptcy, we here in the Senate of the United States should not be talking about releasing a claim against a multi-millionaire's es-


tate." Even given the possible adverse political consequences of Hoar's proposal, however, Attorney General Richard Olney endorsed it. In a letter to Senator Hoar, he wrote: "Whatever money may be due the Government, or might be collected by it at the end of a litigation, will probably be of more use to humanity at large, if applied to the charitable purposes for which Mr. Stanford designed it than if administered by the United States."[12]

Olney made no effort to hide his opinion from the public, which mirrored the divisions in Congress over the propriety of bringing suit. One member of Congress from New England observed that Californians were so angry at the Central Pacific syndicate that they might be willing to dismantle Stanford University to enforce the government's claim. And indeed the San Francisco Call demanded that the government follow through: "If the law makes the property of the four members of the syndicate responsible for its obligations, it will be no answer to the Government's suit to plead that part of that property has been put to beneficial uses." The Call editorialized that "this claim should be made, and its rightfulness determined." The newspaper advanced the "moral rather than [the] pecuniary grounds" of this position:[13]

[I]t is of less importance to the people of the United States that this debt should be collected than it is that notice should be served that men shall not make free with public money and escape with the plunder. The people of the United States cannot afford to let a record be made that if a man gets hold of enough he may hold it in spite of court and Congress. . . . It is not well to establish loose precedents. The case of four rich but insolvent men has attracted the attention of the civilized world. People abroad do not understand how such things can be.[14]

While, during the summer of 1894, the public continued to debate the merits of bringing a suit, a group of senators prepared legislation to compel the attorney general to institute an action. Senator David B. Hill of New York introduced a bill requiring Olney to prosecute a suit "as rapidly as the interests of justice will permit." Even though Congress never passed the bill, the momentum to file suit built up. But it was not until the first of the bonds became due, in January of 1895, that the Justice Department's lawyers could initiate suit.[15]

II. The Government's Suit

By early 1895, Justice Department lawyers had ruled out bringing suit against the Central Pacific itself, since they believed that the railroad


lacked sufficient funds to pay the estimated $60 million judgment sought by the government. Of the Big Four, Crocker and Hopkins had already died and their estates had been distributed; Stanford's estate was still intact, and Huntington was still alive. Why the Justice Department elected to pursue the Stanford estate rather than the last living Central Pacific magnate remains a mystery, though Huntington's presence must have played a role. The most cunning of the four, Huntington had long been the leader of the Central Pacific. He reportedly had invested over $1 million to ensure the support of Congress for his various schemes.[16] Whether Huntington influenced Olney and the members of Congress, who in turn pressured the attorney general, or whether Huntington simply intimidated them, the government's decision to sue Jane Stanford as executrix of Stanford's estate freed Huntington from the expense of defending the suit. It also may have made the task more difficult. By going after a sympathetic widow who was struggling to keep a university afloat, the government lost the public sympathy it might have gained by pursuing a robber baron.

Accurately anticipating that the Stanford estate would refuse to pay on the claim, Olney appointed Judge Lewis D. McKisick as special counsel to prosecute the suit. McKisick had earned his honorific as a member of the Tennessee Commission of Appeals and later as a special judge of that state's Supreme Court. He moved to California in 1879 and soon gained a reputation as one of the best lawyers in the state. United States Attorney Henry S. Foote, whose later correspondence would cast serious doubt on his enthusiasm for the task, joined McKisick in preparing the government's case. If the Justice Department had been halfhearted in its effort to pursue litigation against the Stanford estate thus far, the appointment of McKisick represented a clear change in zeal. On March 15, 1895, the former judge filed the government's claim for $15,237,000 in the United States circuit court for the northern district of California.[17]

Jane Stanford well understood the threat presented by the complaint. An adverse decision would render her unable to sustain support payments for Stanford University, and the life of the institution would be in jeopardy. She put together a first-class legal team to defend the suit. Her lead counsel was a former justice on the Nevada Supreme Court, John Garber, of Garber, Boalt and Bishop. Russell J. Wilson and Mountford S. Wilson served as co-counsel, as did F. E. Spenser, who bore "a most striking resemblance to Justice Field." Russell J. Wilson filed one general and five special demurrers to the complaint on May 6, 1895, in an


attempt to block the suit. The common-law demurrer pleading had the practical effect of denying the legal sufficiency of the complaint. Jane Stanford's lawyers based the demurrer on two theories: first, that neither stanford nor his wife ever owed the amount demanded by the United States; and, second, that the suit failed because the government had never redeemed the bonds.[18]

A large crowd gathered at the Appraisers' Building in San Francisco on June 3, 1895, "in anticipation of oratorical efforts to be made" in the Stanford case. Judge Joseph McKenna disappointed the assemblage. He took the bench only to declare that he would not be hearing the case and to postpone it for "some judge" to hear. He did not explain that he had recused himself, but the onlookers learned through the court grapevine that McKenna and Leland Stanford had been close friends and that the senator had named the judge as a trustee of his estate. Although McKenna had resigned as trustee, "he felt a natural and commendable delicacy about sitting in a case where a decision in favor of the government would undoubtedly destroy the institution." McKenna's service in the circuit court as trial judge was not unusual. Until 1911, when Congress abolished the circuit courts and merged their original jurisdiction with that of district courts, the circuit judges appointed to the circuit courts of appeals routinely tried cases in the circuit courts.[19] After enactment of the Judicial Code of 1911, circuit judges tried cases in district courts and district judges sat on appellate panels with decreasing frequency.

Judge Erskine Ross replaced McKenna and on June 5, 1895, began to hear argument on the demurrers. Ross had been elevated to the appellate bench from the district court in southern California only two weeks before the government filed suit. Although he was junior to William B. Gilbert, the third circuit judge in the Ninth Circuit, Ross had a wealth of trial experience. His assignment to the circuit court for the Stanford case thus represented a sensible division of judicial labor, even if it foreclosed him from sitting on the panel for the almost-certain appeal in the case.[20] If the expected appeal occurred, Gilbert would preside over a panel with two district judges sitting by designation. These designations, which date from the first session of the court in 1891, formed an important staffing component of the circuit court of appeals during its first half-century. Panels composed of circuit judges were the most common, but district judges sat by designation much of the time.[21] This use of judicial personnel in the Stanford case theoretically meant that two district judges could reverse, over the dissent of one circuit judge, the trial decision of another circuit judge.


Such hypothetical outcomes seemed remote at the hearing in the circuit court. As counsel for the moving party on the demurrer, Garber spoke first. He spent an entire day developing his argument that Congress had not intended under the 1862 statute to create a personal agreement or liability on the part of the railroads' shareholders to pay the bonds. As an alternative position, Garber maintained that Stanford was liable under California law only for that portion of the Central pacific debts incurred in California: action by the California corporation outside the state would be ultra vires , and thus outside the power authorized by law. After making this point, which rested on state law, however, Garber confusingly referred back to the 1862 congressional statute. A legal commentator berated the argument as "weak, rambling and inconclusive—the work of an evidently overrated lawyer."[22]

The local press was as critical of McKisick as the lawyer had been of Garber: "Judge McKisick open[ed] with an assortment of hard dry statement[s], utterly unpalatable to the few laymen present and not particularly refreshing to the assembled bar." The report continued in a similar vein: "Long passages from longer acts were read and deftly dovetailed with the theories of attorneys and the opinions of courts until everybody but the attorneys actually engaged were in more or less of a muddle on the entire proposition." McKisick's argument was that California law imposed liability on shareholders for a corporation's debts in the proportion to which they held stock ownership. Under this theory, the Stanford estate owed one-quarter of the debt issued to the Central Pacific. The legal observer who faulted Garber was not alone in his appreciation of McKisick's skill. Word quickly spread that "'McKisick is making a strong argument' [and t]he courthouse soon filled with attentive listeners; for lawyers like to hear a good argument in a great case." The gathered assemblage rewarded McKisick with an ovation at the close of his argument.[23]

Throughout these two days of argument, "Judge Ross sat unmoved as granite. Not a word dropped from his lips, nor an expression of his face, could be read as indicating what impressions the argument was making upon his mind." This imperturbable countenance reflected no lack of comprehension. Blessed with a razor-sharp intellect, he handed down a detailed decision a mere three weeks later. "[O]ne of the most capable and upright jurists who has ever adorned the wool sack of the State or Federal courts," Ross delivered his opinion sustaining the defendant's demurrer from the bench. It ran to some 13,000 words and paid Garber's argument "the left-handed compliment of deciding in


favor of the demurrant on a ground neither raised by the demurrer nor discussed by Judge Garber in argument." Judge Ross focused almost entirely on the relevant provisions of California state corporation law, rejecting arguments that the issue required close analysis of the 1862 congressional statute.[24]

His opinion rested on four propositions. First, Ross wrote that statutory, and not common, law created individual liability of stockholders for corporate debts; he then analyzed California state law and determined that stockholders were not individually liable. Second, he interpreted a California Supreme Court decision as rendering nugatory the provision of the California constitution that assessed individual liability for corporate debt in the proportion of stock ownership. Third, Ross deemed California's general corporate statute invalid for vagueness, because it did not definitely assess liability on individual stockholders. "It is manifest," he said, "that the declaration that the stockholder is liable for all the debts and liabilities of the corporation 'in proportion to the amount of stock by him held' does not establish any rule by which any definite liability can be fixed." Finally, he held that the contract between the United States government and the railroad companies excluded any option for the government to seek indemnity from stockholders for the railroad companies' debts. Of this last proposition Ross observed that the congressional statute "embodying the contract" should speak to the question, yet he determined that the statute, though "drawn with great care, . . . is not ax explicit as it should have been." Ross concluded that the statute contained no "absolute, unqualified promise to repay the bonds" and that Stanford thus assumed "no personal obligation . . . to repay them."[25]

III. The Ninth Circuit Decision

Ross's decision elicited a letter from Jane Stanford, who conveyed her gratitude with these words: "God in His mercy ruled that a just and righteous judge should pronounce judgment and you have graciously done more for me than save millions; you have by this decision vindicated the honor of my husband, the father of my sainted son—which is more precious to me than untold gold." The government's counsel saw it differently. Lewis McKisick fired off a spirited letter to Judson Harmon, Olney's replacement as attorney general, attacking the "lame and impotent conclusion that under the Constitution and laws of the State, the complainants have no remedy against the stockholders." With great care,


McKisick laid out precisely why he believed that Ross had misinterpreted California law. "By a bald assumption the Judge [had] confounded" the appropriate principle. "I say to you that the counsel for Mrs. Stanford were as much surprised at the result as I was, for Judge Garber did not argue that if there were a debt owing by the corporation, the stockholder was not liable for his proportion; on the contrary he admitted that he was, but did argue that he was only liable under" California law "for the reason no doubt that he wanted to avail himself of the increase of the capital stock to 1,000,000 shares." Accordingly, McKisick recommended that the Justice Department permit the bill to be dismissed and then to appeal the decision, even though Ross had given leave to amend. The judge's "error is so manifest that I doubt if the Circuit Court of Appeals will affirm the judgment, even without argument."[26]

A careful analysis of Ross's opinion that supported McKisick's assessment appeared in the well-respected American Law Review a few months later. "In a square, manly way," wrote the San Francisco Call , Seymour D. Thompson picked apart the circuit court judgment. "Judge Ross stands high in the professional and public estimation on the Pacific Coast. We share in that estimate of his character and talents. We have often had occasion to refer to his decisions in terms of commendation," Thompson wrote. "But we are in this case unable to follow his reasoning to the result which he reaches. We have regarded the question as a very important public question, and one suitable to be discussed in a legal journal. We have, therefore, investigated it with some care, in the light of a collection of rules and principles applied by the courts in determining the liability of stockholders in corporations, which rules and principles are not unfamiliar to us."[27]

Thompson's critique began at first principles. He disagreed with Ross's proposition that statutory law alone created stockholders' individual liability for a corporation's debts. Indeed, the original California constitution, which had been in effect when the Central Pacific incurred the bond obligations, provided for unlimited shareholder liability up to the proportion of stock ownership. Ross had deemed this constitutional provision unenforceable for vagueness under the California Supreme Court's ruling in French v. Teschemaker , which had held that section of the state constitution to be non-self-executing. Thompson attacked Ross for relying on this precedent, a decision that was "so extraordinary—so utterly opposed to common sense—that it has not met with much favor in other jurisdictions." Evidently, the California legislature, too, had


viewed French with disfavor, because it had speedily enacted legislation to restore the rule of proportional shareholder liability for corporate debts. The principle of federal comity to the decisions of state tribunals interpreting state law did not, Thompson asserted, bind the federal courts "to unjust and monstrous results."[28]

Thompson's disagreement with Ross's expression of federal comity in following a state court decision exposed an important facet of Ross's jurisprudence. It also underscored a curious reversal in the continuing debate in legal circles over the exercise of power by federal tribunals. From the Civil War onward, Ross had resisted extensions of federal power into state affairs. The ex-Confederate soldier may have seen in the Stanford case an opportunity to chip away at doctrines that supported the discretion of federal courts to ignore state court precedents or to decide questions of state law under general principles.[29] Thompson's long recitation of contrary authority suggested that Ross might easily have devised his own interpretation of California statutory and constitutional law on this issue without following the state Supreme Court. Ross's decision to reject that course evidenced his enduring commitment to limitations on federal incursions into the state sphere. Ironically, the employment of the comity principle to protect a corporation and its stockholders departed from the historical circumstances in which the federal courts had extended their power. As corporations became larger and more powerful after the Civil War, they generally supported efforts by federal courts to devise general principles in diversity cases, because adherence to local law fostered uncertainty in interstate business. Consequently, federal courts developed a reputation as allies of big business.[30] Ross's support of corporate interests by resorting to local principles turned the conventional thinking on its head.

On the question of federal comity in adhering to state court precedent, therefore, the decision could have gone either way, as Thompson appeared grudgingly to concede. The commentator refused to grant as much in his third point of criticism: that Ross simply read out of existence the general California railroad statute, which made shareholders liable for corporate debts. Thompson chastised the judge's application of a state Supreme Court precedent to this provision when that decision did not address the salient statute.[31] Although Thompson did not say as much, Ross's reasoning on this issue differed fundamentally from the comity principle he had so carefully followed on the California constitutional question.


Thompson's last point addressed Ross's interpretation of the 1862 statute that established the government's "contract" for the construction of the transcontinental road by the Union Pacific and the Central Pacific. Ross had held that the congressional railroad statutes "unmistakably show that no personal liability of the individual stockholders was contemplated, either by the United States, on the one side, or the railroad companies and their stockholders, on the other side." Thompson reacted with total incredulity: "Lawyers need not be told that when a person gives credit to a corporation whose stockholders are individually liable for its debts, it is not necessary, to enable the creditor to enforce that liability, that either he, or the corporation, or its stockholders, should have contemplated such a result at the time when the credit was given." Examination of the "thousands of cases relating to the statutory liability of stockholders" revealed the novelty of Ross's approach: "not one can be found advancing such a doctrine."[32]

The historical justification for Congress's decision to subsidize construction of the railroad was subject to a wide variety of interpretations, as is shown by Thompson's scathing critique. Ross saw the 1862 and 1864 laws as an endeavor to extend public monies to private companies with the aim of advancing public aims. His critic interpreted the history in a much more sinister light:

If [Judge Ross] had extended his researches downward through that public history, he would have discovered that the four co-adventurers who had received the aid from the government began by swindling the government, through a false representation made to a committee of Congress, as to the distance at which the foot-hills of the Rocky Mountains commenced from the City of Sacramento, out of double the amount of aid per mile that was really due under the terms of the statute, for a considerable number of miles; that they immediately organized an outside corporation composed of themselves, for the purpose of building the road, by contracting with themselves in the form of the railroad corporation, at a price enormously in excess of its real value, paying themselves in the bonds of the United States issued under the statute, and issuing to themselves stock composed of pure water and for which no value was ever paid by them. That they paid themselves thirty-four millions of dollars in dividends upon this stock; that they expended nearly five millions of dollars for purposes which their president, Leland Stanford, refused to disclose on oath, which purposes were not disclosed by any vouchers, and which expenditures a congressional committee reported as having been probably made in influencing legislation. . . .[33]

The truth arguably combined elements of both perceptions. Part of the history, mentioned by neither Ross nor Thompson but nevertheless


lurking beneath the surface of the discussion, was the bequest Stanford had made to create the university named for his late son.

For Stanford University officials, the prospect of an appeal threatened disaster. On July 2, 1895, David Starr Jordan, the university's president, wrote to Attorney General Judson Harmon explaining the financial effect continued litigation would have on the institution. In agonizing detail he explained exactly where every penny from the Stanford legacy was needed to finance the university. "Should a decision be delayed long," he assured the attorney general, "the University would be obliged to live within its actual, not its prospective means. In other words it must close its doors and discharge most or all of its Faculty." The Justice Department recognized the university's predicament. It had no interest in unduly delaying the speed of litigation. Indeed, the disposition of the case was remarkably quick, especially considering its great complexity. From the initial filing in March, 1895, the case proceeded through arguments and final disposition at the circuit court, circuit court of appeals, and Supreme Court levels in just under one calendar year. By contrast, during this period the average time for a case to reach final decision in the circuit court of appeals alone was nine months from the date of docketing. Moreover, the Supreme Court at this time still had a backlog of cases.[34]

The Ninth Circuit convened on September 16, 1895, to hear argument in the appeal of Ross's decision. Judge William B. Gilbert of Oregon presided, with District Judges William W. Morrow of California and Thomas Hawley of Nevada sitting by designation. Although the audience was meager, the argument promised to be a good one. The court assented to McKisick's request for an unlimited time for oral presentations, and he began to read from the two-hundred-page book in which he had printed his argument. Delivered in a "quiet conversational tone," McKisick's exhaustive presentation placed heavy emphasis on Ross's alleged error in granting the demurrer for reasons emanating from California law. After dedicating well over half of his argument to an examination of the relevant California legal principles, McKisick developed an interesting argument in equity. If Ross was correct and the United States had no remedy at law, he argued, did it not have a viable remedy in equity? Surely the late railroad magnate owed something to the federal government for the generous loans that had facilitated his accumulation of wealth.[35]

McKisick closed by urging the circuit court of appeals to reconsider Ross's construction of the congressional statutes. The Union Pacific and Central Pacific were different types of entities and Congress must have


intended to treat them as such. Whereas to the Union Pacific the United States government was both sovereign and creditor, to the Central Pacific it was only a creditor. That is, the United States government had not created the Central Pacific; it had merely lent it money. This detailed analysis, which took McKisick just over a day to deliver, elicited no questions from the bench. The local newspaper, however, reported a feature of the oral argument that differs from modern custom: "The plain level of [McKisick's] reading was occasionally broken into by remarks or questions equally quiet on the part of Judge Garber (representing Mrs. Stanford), which were answered or replied to by Judge McKisick with no change in the tone of voice."[36]

Garber himself, according to Seymour Thompson in his legal commentary, "had his case much better in hand than on his argument before Judge Ross, and it is fair to say that he made an argument worthy of his distinguished reputation." Despite Garber's efforts to advance the circuit court's analysis, McKisick's "powerful and learned argument" forced the appellate court to consider the "only debatable ground in the case": whether Congress, by creating a statutory scheme for the development of a transcontinental railroad, had intended to place the liability of the Central Pacific stockholders on an equal footing with that of the stockholders of the Union Pacific. Garber first addressed Congress's intent in holding the Central Pacific stockholders personally liable. The legislature's treatment of the Union Pacific offered the appropriate guide. The 1862 law that created the Union Pacific contained "no provision whatsoever for any individual liability on the part of the stockholders thereof." Because Congress had conferred the same rights and benefits of construction on the Central Pacific as it had on the Union Pacific, the legislature must have intended to relieve the Central Pacific shareholders of liability for the corporation's debts. The contract between the Central Pacific and the United States government, Garber asserted, was a contract in the fairest sense. It was the government's interest in completing the railroad at the earliest possible date that had inspired the deal. This argument had some persuasive appeal. If the government's aim during the Civil War had been to bridge the gap between the West Coast and the East Coast quickly, it could accomplish that goal either by building the road itself or by providing subsidies to private entrepreneurs willing to undertake the task. According to Garber, the government essentially traded an opportunity to hold the Central Pacific shareholders liable in order to achieve its short-term aim of improving communications and facilitating commerce with the West Coast.[37]


Garber concluded his argument the following day, "a remarkable effort, the two days' talk being made wholly without notes or memoranda, except the citations of law." When McKisick launched his rebuttal, he emphasized the equities on the government's side. In addition to large sums from the federal government, he noted, the railroads had received substantial subsidies from the major cities in California. San Francisco had paid $400,000, Sacramento nearly $300,000, and Santa Clara, San Joaquin, and Placer counties together had contributed hundreds of thousands of dollars more. "What has the appellee brought here? A demurrer supported by a rhetoric so brilliant and scintillating that it has illuminated the darkest continent, gone to Africa, and by a torrent of eloquence that poured out of this temple and resounded through the halls of this building as if a mountain had been lifted." Through his "torrent of eloquence," McKisick undoubtedly hoped to impress upon the judges that they owed the railroad no favors. Notwithstanding the railroads' receivership filings and poverty pleas, the fact remained that government subsidies had contributed substantially to the shareholders' wealth. Now was the time to repay the debt. When McKisick finally closed, Judge Gilbert in his courtly manner advised the litigants that the court would take the matter under "immediate study" and "render a decision as early as possible."[38]

Armed with this array of arguments, the Ninth Circuit might easily have reversed Ross's decision. As trial judge, he had ignored the arguments raised by counsel and devised a new theory of the case. An interested legal commentator had thoroughly criticized Ross's approach, and the government's counsel had comprehensively attacked it. But the circuit court of appeals affirmed. Judge William B. Gilbert wrote for the court, holding that Congress had not intended to impose liability on the Central Pacific stockholders under the contract terms created by the 1862 statute. Gilbert veered away from Ross's heavy reliance on California law and instead emphasized the special status of the Central Pacific under the laws of the United States. Whereas Ross's elaborate treatment of the state issues of corporation law and stockholder liability had been colored by his suspicion of national power, Gilbert took precisely the opposite tack.[39]

Although it might have done so, the Ninth Circuit did not devise its own interpretation of California law and thereby advance the power of the federal judiciary to decide issues involving state statutes. Rather, Gilbert looked to the congressional statutes, which he saw as embodying the "attitude of the United States." He concluded that "it was a matter


of indifference to the government whether the Central Pacific Railroad company or the Union Pacific Railroad Company built the road that was to be aided by the government bonds and subsidy." Premising his conclusion on this "indifference" and on the statute's omission of any imposition of shareholder liability, Gilbert contended that it was "impossible to conceive" that if Congress had "in view the ultimate liability of the stockholders of the Central Pacific Company it would not at the same time have imposed a like liability" on the Union Pacific's stockholders. He concluded that the government had thus "waived" its right to collect from the Central Pacific's shareholders the debts incurred by the company. Gilbert imputed the omission of shareholder liability provisions in the Union Pacific statute to the contract between the Central Pacific and the United States; he then inferred Congress's intent to waive its rights as a creditor. Gilbert's statutory analysis in this case underscored a wide contrast between his approach and that of Ross, who construed statutes strictly and eschewed attempts to infer congressional intent.[40]

In the American Law Review , Seymour Thompson commented that the "opinion of Judge Gilbert cannot be too highly commended as a good piece of literary work, if such an expression can properly be applied to a judicial opinion. It is well constructed, and is reasoned in a manner to make the conclusion very plausible, at least to one who is not well versed in the principles governing the liability of stockholders in corporations." Thompson explained Gilbert's seemingly radical departure from ordinary principles of corporation law, under which a creditor's rights did not depend on intent to hold the stockholders liable: "on the contrary, the charter or statute under which the stockholders are individually liable is conclusively deemed in law to enter into and form a part of the contract between the parties."[41]

If Gilbert's rendition of corporate law inspired objections, so too did his approach to statutory construction. He went a long way toward reaching his result through negative inferences and intentions by omission. His theory had a self-contained logic to it, but so did the opposite conclusion. Under an alternate approach, these omissions and inferences might have yielded a completely different outcome. The statutory omission of shareholder liability for the Union Pacific could instead be explained by Congress's control of the appointment of directors and the terms of the corporation's existence. If the Union Pacific acted contrary to Congress's intent, the legislature could then amend the original statutes and direct appropriate action.[42]


Congress had no such control over the Central Pacific, an entity incorporated under California law. If the terms of that railroad's incorporation or its actions raised concern in Congress, the national legislature could not redress the problem by statue. Congress reserved to itself only the right to amend the 1862 statute, which set out the terms of the land grants and subsidy bonds, "at any time, having due regard for the rights of such companies named herein."[43] Thus, Congress could alter the terms of the contract but could not change the Central Pacific as a corporate entity. Accordingly, Congress might well have intended not to hold the Union Pacific's shareholders liable for the corporation's debts and yet have retained its option of pursuing the Central Pacific stockholders. Given this view of the congressional legislation, Ross's concentration on the substantive basis for shareholder liability under California law made a great deal of sense, whether or not one agreed with his interpretation of that law.

IV. Saving Stanford University

The day the Ninth Circuit rendered its decision, Lewis McKisick announced the government's intention to appeal to the Supreme Court. Although the special counsel had ably represented the government, now the Justice Department in Washington assumed control over the case. McKisick's post-hoc analysis of the circuit and appellate court opinions to Solicitor General Holmes Conrad fully expressed his bitterness at the judicial results: "The truth is that the decision of the Circuit Court and the Appellate Court, in so far as the law of the case is conserned [sic ], has met the disapproval of every intelligent lawyer of the State, and has met the approval of only those who sympathize with Mrs. Stanford and with the Stanford University." In representing the estate, John Garber had followed a good strategy in omitting any reference to Leland Stanford's character, because "if he should have done so I should have replied that Stanford's testimony given before the Pacific Railway Commission and contained in the record, when read between the lines, convicts him of systematic corruption, and in fact convicts him of having been the most conspicuous criminal of the Century." Neither side had openly debated the suit's likely effect on the university, but McKisick believed that the "maudlin sentiment . . . manifested in its behalf" may have made a difference. The sixty-seven-year-old lawyer found this mysterious. He considered the university "the most astounding, vulgar, sepulchral monument to Egoism to be found in history, endowed with the


largest race horse breeding establishment in the world, and with the largest vineyard in the world where is manufactured every year enough wine and brandy to debauch every misguided youth who attends the races to see the Stanford horses run or trot."[44]

If these sentiments fueled his commitment to the cause, the anger in them did not cloud his ability to analyze the legal problems confronting the department in its appeal to the Supreme Court. McKisick settled into a calmer tone in offering his advice to the solicitor general on how best to prepare. The "rather anomalous condition" of the case before the Court intensified the difficulties of preparation. While the circuit and appellate courts had decided the case on different theories, neither had relied on the arguments made by Mrs. Stanford's counsel. The Supreme Court itself might devise yet another theory. Having invested so much of himself in the case, McKisick relinquished his role with great reluctance: "This is submitted without desiring to thrust myself into the case, but I feel deep interest in it and believe that I am and always have been right."[45]

Beginning on January 28, 1896, the Supreme Court heard argument in the case. McKisick and Garber had been replaced by lawyers of higher official standing, with Assistant Attorney General J. M. Dickinson and Solicitor General Holmes Conrad representing the government, and Joseph H. Choate of New York arguing Jane Stanford's cause. The government's attorneys followed the structure of McKisick's arguments in the courts below. They emphasized Stanford's liability under California law and the irrelevance of congressional statutes in determining the Central Pacific stockholders' liability for the debts incurred by the company. When Conrad concluded, Choate began by "saying the magnitude of the claim was wholly unparalleled." He proceeded to cover the range of possible theories for resolving the case in Mrs. Stanford's favor, from the intent of Congress in forming the contracts with the railroads to the absence of shareholder liability under California law.[46]

On March 2, 1896, the Supreme Court rendered a unanimous decision. Writing for the Court, Justice John M. Harlan affirmed the decision of the Ninth Circuit. With only a few minor embellishments, the Court essentially adopted Gilbert's view that the 1860s statutes did not impose personal liability on the railroad stockholders. Harlan's analysis of congressional intent also mirrored Gilbert's: "[I]t cannot be inferred from the legislation of Congress that it intended, for the protection of the interests of the United States, to impose a heavier liability upon the stockholders of the California company than was imposed upon the


stockholders of the Union Pacific Railroad Company. Why should it have so intended? Why should it be supposed that Congress would purposely make it more difficult to construct one part of the proposed national highway than another?" Harlan posed these questions without explaining how the Central Pacific construction effort would have been more difficult if Congress had intended to hold the company's stockholders liable. He then made no effort to offer an objective answer. Instead, the Supreme Court proceeded from premises that, if believed, led inexorably to the result it reached. In this respect, Harlan's opinion was far less impressive analytically than the lower-court opinions by Gilbert and Ross.[47]

For Stanford students, who closely followed the results if not the analysis, the Supreme Court's decision set off a spontaneous celebration. Word of the Court's ruling reached the campus late on the morning of March 2, 1896. Students streamed out of lecture halls at the blaring of horns and train whistles. Undeterred by a steady rain, a thousand students marched excitedly toward the president's house. David Starr Jordan made a half-hearted attempt to urge restraint until the news could be confirmed, but as the throng moved on to the chapel, he was overheard to say, "If it is as we hope, the students are at liberty to paint everything cardinal except the statues in the museum." Appropriately, the sun peeked through in the early afternoon as word spread that the initial rumors had been true. The Supreme Court's ruling saved the university. After years of delay, the assets in Leland Stanford's estate—well over $3 million—were to be distributed to the university.[48]

The potential effects on the university had hovered above the proceedings without playing any official part. Absent from the lawyers' briefs and the judges' opinions was any mention of Stanford's bequest. Yet the beneficence of the gift undoubtedly affected the outcome. The day after the Supreme Court announced its decision, Justice Field, who sat on the case, sent a telegram to Jane Stanford: "Heaven's care and overflowing kindness never fail." The sentiment stemmed from a long-standing friendship between Field and the Stanfords, yet the justice's telegram perhaps gave an appearance of impropriety. According to Field's biographer, "He wrote none of the court opinions, [but he] gave every possible assistance to Mrs. Stanford in protecting her interests." A later attorney general of the United States, Homer Cummings, added to the legend of Field's behind-the-scenes efforts: "Although Justice Field did not sit in the case when it was argued in the circuit court in California, it was said that he consulted with the judge who heard it and that he was


responsible for the selection of Joseph H. Choate as Stanford's counsel before the Supreme Court."[49]

Even stronger evidence of the unspoken effect of the bequest on the litigation came from one of the government's lawyers involved in the case. Were it not for McKisick's vigorous prosecution of the government's claim, a letter from United States Attorney Henry S. Foote to Mrs. Stanford would cast serious doubt on the sincerity of the government's effort. Within a week after the Supreme Court's decision, Foote wrote: "Circumstances of course compelled me to appear for the Govt. against you, in your noble and heroic effort to preserve for yourself, and the State of California the University that bears the name of your dear son. . . . But not for one moment . . . had [I] any other feeling than that you ought and would succeed, in preserving to the young men and women now living, and to those yet unborn the blessings entailed by the preservation of the institution so beloved in this State."[50]

The very magnitude of the claim may also have shaped the outcome. The Supreme Court has never again relied on the Stanford case, arguably because it departed so far from ordinary principles of law.[51] United States Representative James G. Maguire of San Francisco noted the anomaly created in California's corporations law by the decision, which he summarized as, "in effect, that a stockholder in a corporation under the laws of California is not liable for his proportion of the debts of the corporation unless at the time of the contraction of the debts the creditor had in mind the stockholders' liability and intended to hold them for the debt." Because the Court's judgment appeared to nullify the existing California rules, Maguire bemoaned the fact that cases such as United States v. Stanford "have arisen in judicial procedure to obstruct the regular current of decisions, because the failure to apply ordinary rules of construction and decision to them tends to bring our judicial system into disrepute." He believed that the claim's size—$15 million—had distorted the judicial process. Maguire's proposed solution was to divest the courts of jurisdiction to decide any claim above $5 million.[52]

While the generosity of the bequest and the magnitude of the claim may have affected the outcome of the case, a third possible influence was the climate of railroad success in the Ninth Circuit between 1891 and 1906, when nearly one-quarter of all appeals heard by the court involved a railroad. As appellees, railroads prevailed 82 percent of the time over non-railroad appellants. Given the general tendency of appellate courts to affirm, this figure is not altogether surprising: the average rate of affirmance in the Ninth Circuit during this period was 69 percent. When


data for the railroads' record as appellant is included, their success before the Ninth Circuit was not markedly better than non-railroad litigants'. As appellant, railroads succeeded 33 percent of the time, as against 31 percent for non-railroad appellants.[53] Whether these figures show the legal correctness of the railroads' contentions, the skill of their lawyers, favoritism by the court, or some subtle combination of all three, they establish that as either appellant or appellee, railroads won their appeals at a higher than average rate. It is untenable to attribute the result in the Stanford case to the railroads' general success during this period, but Jane Stanford's good fortune was no surprise in the context of railroad litigation victories.[54]

The Stanford case had the highest stakes of any litigation that came before the Ninth Circuit in its first decade of existence. The Supreme Court's decision did not dim the crucial role of the appellate court in constructing the legal framework upon which Justice Harlan's opinion chiefly relied. Through their opinions Judges Ross and Gilbert implanted in the law the seeds of their own views about the power of the central government and the place of states in the federal system. In the Stanford case their competing theories achieved the same outcome. In many other cases, it would not. For the next thirty years, Gilbert and Ross clashed frequently on issues ranging from property disputes to search-and-seizure law. The Stanford case provided a glimpse of the foundations for their jurisprudence. It also highlighted the extent to which the railroads succeeded in the federal courts. The case presented very complex issues upon which reasonable minds could differ. Yet the government's position secured not a single vote at any of the three levels of the federal judiciary. Even if Foote was something of a quisling to the government's cause, McKisick certainly dedicated great energy to winning the suit; his arguments were thorough and, to many, persuasive. Arguably the guaranteed calamity a government victory would have been to Stanford University contributed to unanimity among the federal judges and justices who decided the case. The legal issues upon which they concurred originated in Congress's Civil War-era goal of building a transcontinental railroad. Another facet of this construction—the use of Chinese laborers—produced legal problems of a different type over the last three decades of the nineteenth century and into the twentieth. Concurrently with its handling of the Stanford matter, the newly created circuit court of appeals for the Ninth Circuit was facing a multitude of cases associated with Chinese immigration.


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