It was alleged that the receiver disposed of a large amount of these securities at auction, at ruinous rates, to Isaac H. Knox, an alleged confederate of the receiver, and that through a conspiracy, the lands and property of the company upon which these securities were issued, were about to pass into the hands of a combination in which the receiver was interested, the debtors claiming that the lands and property were worth millions more than the indebtedness of the company to the bank.
The evidence taken by the committee shows that the company was insolvent and could not pay its indebtedness to the bank and others, and that unless the securities held could in some way be made valuable the bank would lose the whole amount of the loan of $501,000. It appeared further that this could be done only by the completion of the canal, which would require a large additional loan. The company claimed that a loan had been nego-tiated, the amount of which would have been sufficient to pay the indebtedness to the bank in full, but the receiver and those who were operating with him defeated the negotiations and prevented the representatives of the company from obtaining the money. It was claimed that the loan was negotiated through some English parties and that it was based upon the security of rich mineral lands which constituted part of the 400,000 acres granted to the State of Michigan by the General Government.
The receiver denied that he or any person authorized by him in any manner interfered with any negotiations that the company, or anyone acting for the company, were making for a loan on these lands, and the committee reported that the testimony failed to support the allegations made against the receiver in this respect.
Another complication, however, was disclosed by the evidence. The debts of the company due the bank, which were secured by the collateral in question, were all subject to the plea of usury, and by the laws of New York such a defense would defeat not only the collection of the interest, but also the principal of the debt.
The committee reported that the company was willing to waive the plea of usury, if time were given it to negotiate a loan with which to pay its debt to the bank, but if time were not given and the company were pressed for payment, usury would be pleaded. The receiver had no confidence in the company's ability to negotiate the loan, and he therefore formed a syndicate to purchase the securities in order to insure the payment of the debt to the bank. This syndicate was composed of Dr. James C. Ayer, Isaac H. Knox and himself. Ayer and Knox were large creditors of the canal company. The object of this syndicate was to raise money with which to complete the canal and other works as well, and pay the debts due to themselves and to the bank.
The terms of the syndicate were submitted by the receiver to his counsel, who expressed the opinion that the contract was valid and binding and believed to be for the best interests of the bank, its creditors and stockholders.
In furtherance of the syndicate plan and to defeat the plea of usury, the receiver commenced an action against the largest debtor of the bank, who also was one of the largest stockholders in the canal company, and forced him into bankruptcy. He then applied for and received an order from the court to sell certain of the securities in question which were held by the bank. The evience showed that the securities were regularly advertised for sale and sold to the highest bidder, in open market, when some of the owners of the canal were present and protested against the sale, and that Isaac H. Knox, without any collusion with the receiver, purchased $268,000 of the second mortgage bonds at an average price of twenty-seven cents. Sales of the same kind of bonds were made by other parties during October, November and December, 1872, and in July and December, 1873, in New York City, at an average price of only a fraction over twenty cents.
The committee reported that all these sales, so far as the testimony enabled them to judge, were fair and in accordance with general usage.
The evidence showed further that through the efforts of the receiver, the canal work had all been completed, and to do this it required the expenditure of from four to five hundred thousand dollars, all of which sum was raised by Mr. Knox and Mr. Ayer. Following the completion of the canal, proceedings were commenced and a decree obtained from the Circuit Court of the United States for the State of Michigan for the sale of all the lands of the canal company, the proceeds of which were to be applied to the payment of the company's debts.
Messrs. Ayer and Knox declared most positively that the receiver was not in any way interested in the syndicate except as receiver and for the benefit of the bank.
In concluding their report, the committee expressed the opinion that the receiver was not censurable for the course he had pursued, but, on the contrary, he apparently acted in good faith and did what he considered to be for the best interests of the creditors and stockholders of the bank.
During the second session of the Forty-sixth Congress, this whole matter was the subject of further investigation by the Banking and Currency Committee of the House of Representatives, under authority of a resolution adopted June 4, 1879, and the report submitted by Mr. Buckner of the committee, under date of May 19, 1880, contains a most scathing denunciation of the receiver's course in connection with the canal company.
The report reviews at length the testimony taken by the committee of the Forty-third Congress, but reaches a wholly different conclusion.
The report condemns the action of the receiver in depreciating the value of the canal company bonds previous to their sale to the syndicate by publicly proclaiming that they were without value and that the debt to the bank was wholly unsecured.