Foster v. Mansfield, C. & L. M. Railroad Company

Suit by Charles Foster against the Mansfield, Coldwater & Lake Michigan Railroad Company and others to open a decree foreclosing a mortgage on the company's property. Demurrers to the original and amended bills were sustained by the circuit court, and a decree entered dismissing the bill. 36 Fed. Rep. 627. Plaintiff appeals. Affirmed.

Statement by Mr. Justice BROWN: This was a bill in equity by a stockholder of the Mansfield, Coldwater & Lake Michigan Railroad Company to open the foreclosure of a mortgage upon its road executed to George W. Cass and Thomas A. Scott, trustees, and to vacate the order of sale and all proceedings thereunder upon the ground of fraud and collusion, and for a receiver and injunction.

The bill purported to be filed for the benefit of the plaintiff and all other stockholders of the defendant company, and, after averring a written request to the directors and chief officers of the company to commence this suit, and the neglect and refusal of such directors so to do, set forth that the plaintiff was, and had been since the transactions set forth in the bill, the owner of 258 shares of the capital stock of the defendant company; that the suit was not collusive; and that, until within a few months prior to the filing of this bill, he was ignorant of the fraud charged.

The bill further averred that in June, 1871, the Mansfield, Coldwater & Lake Michigan Railroad Company was incorporated under the laws of Michigan and Ohio for the construction of a line of road from the city of Mansfield, in Ohio, to the town of Allegan, in Michigan, with an authorized capital stock of $4,000,000. That it began the construction of its road on such line, and, in order to obtain the money necessary for its completion and equipment, on October 1, 1871, executed a mortgage to George W. Cass and Thomas A. Scott, trustees, in the sum of $4,460,000. That on July 20, 1871, the defendant, hereinafter designated as the 'Coldwater Company,' entered into a contract with the Pennsylvania Company, also made a defendant to this bill, by which the latter bound itself to provide the necessary iron, etc., and to equip and operate the whole line as a first-class road. In consideration of these obligations, the Coldwater Company agreed that its preferred stock should be issued to the amount of the actual expenditures made by the Pennsylvania Company in doing the work aforesaid, said stock to be entitled to dividends equal to 7 per cent. out of the net earnings of said road, with the further agreement to deliver to the Pennsylvania Company bonds to the amount of $20,000 per mile of track laid, and common stock to an amount $5,000 greater than the whole amount of stock issued for all other purposes, said bonds and stock to be delivered to Cass and Scott, trustees, for delivery to the Pennsylvania Company, as fast as material should be delivered by said company to the value thereof, and in full as each 10 miles of iron should be laid, and the track put in running condition. That afterwards, and on May 4, 1872, the Coldwater Company entered into another contract with the Pennsylvania Company, by which it delivered to the latter all of its bonds of the par value, as above stated, of $4,460,000, whereupon the Pennsylvania Company, by its president, the said Scott, agreed that, in consideration of the delivery of such bonds before the iron was laid, and the other conditions performed, the Pennsylvania Company bound itself to take care of and pay all interest coupons which might become due thereon prior to the completion of said line of railway for traffic, and that for all interest so paid and not justly chargeable thereto under the contract of July 20, 1871, the Pennsylvania Company should be reimbursed out of the earnings of said road, after the same should be completed in sections under said contract, and begin to make earnings on the respective sections. The bill further averred that all of said bonds remained in the possession and under the control of the Pennsylvania Company from the time of their delivery as agreed until the sale of the railroad under the decree of the court. That on May 1, 1872, the Pennsylvania Company wrongfully obtained $1,500,000 of the common stock of the Coldwater Company, claiming to be entitled thereto under the contract of July 20, 1871; and that, after obtaining the same, it managed and controlled the affairs of the Coldwater Company, and thereby secured a majority of the members of its board of directors, and absolutely influenced and controlled all its corporate acts. That when it was given said capital stock it had in no way complied with its undertakings hereinbefore mentioned, nor had it earned the same, nor in any way become entitled thereto, but, on the contrary, had entirely failed to perform upon its part its undertaking of July 20, 1871. That it finished no portion of said road as therein provided, and in no way earned an ownership in the bonds and capital stock aforesaid. That on January 20, 1876, the said Cass and Scott, trustees, filed a bill for the foreclosure of the mortgage, averring the insolvency of the Coldwater Company, and its failure to pay the interest on its bonds. That on April 17, 1876, the defendant company filed its answer, denying each material allegation of the bill, and setting up a full and complete defense. That on January 3, 1877, the Coldwater Company withdrew its appearance and answer, and on March 21st suffered an order pro confesso to be entered against it, in pursuance of which a decree of foreclosure and an order of sale was made, and the property was sold August 8, 1877, to Joseph Lessley, in trust for the Pennsylvania Company, for the sum of $500,000; that all of the proceeds of such sale were applied to the payment of the bonds held by the Pennsylvania Company, and no portion came to the Coldwater Company, or was applied to the payment of its debts or liabilities.

The gravamen of the bill was that at the time of the execution of the mortgage the said Thomas A. Scott, trustee thereunder, was president of the Pennsylvania Company, and its chief executive officer. That George W. Cass, cotrustee, had full knowledge of the relations of said Scott to the Pennsylvania Company, and of his aims and motives, and conspired with him in forwarding the interests of the Pennsylvania Company to the detriment of the Coldwater Company. That J. Twing Brooks, who was also made a defendant to this bill, was a director of the Coldwater Company, and was also general attorney for the Pennsylvania Company, and legal counselor and adviser of Cass and Scott, and as their solicitor brought the suit to foreclose the mortgage; and in all of their acts these parties were moved by, and acted wholly in, the interest of the Pennsylvania Company, and in violation of their obligations to the Coldwater Company. That Reuben F. Smith, George W. Layng, and Frank Janes, who were also made defendants, were directors of the Coldwater Company, and were also at the same time employes of the Pennsylvania Company, and were made directors of the Coldwater Company at the instigation of Scott, for the sole purpose of carrying out the plans and schemes of the Pennsylvania Company. That Cass and Scott, as trustees, prosecuted the foreclosure suit in the interest of the Pennsylvania Company, to destroy so much of the road of the Coldwater Company as lay west of Tiffin, in Ohio, and to sink and destroy its stock; and that the interests of said trustees and said Pennsylvania Company and of the holders of said bonds were one and identical. That, by the terms of the agreement of May 4, 1872, the Pennsylvania Company was bound to pay the interest matured upon the bonds, and the subsequently accruing interest thereon, until the completion of the road, under the agreement of July 20, 1871; and that the allegations of the foreclosure bill that the interest upon the bonds was overdue and unpaid, and that the Coldwater Company was insolvent, were untrue, and were known to be untrue by said trustees and the defendant Brooks.

It was further averred that the existence of the contract of May 4, 1872, was, at the time of the withdrawal of the appearance and answer of the Coldwater Company and the entering of the decree, purposely concealed from the court and from the stockholders of the company, as a part of the conspiracy and fraud; that the defense to the foreclosure suit was withdrawn in pursuance of the collusive action of the board of directors; that such withdrawal was solicited by Scott, in the interest of the Pennsylvania Company, and secured by Brooks through the aid and support of Smith, Layng, and Janes, employes of the Pennsylvania Company, all of whom were aided and abetted by Henry C. Lewis and Joseph Fiske, two directors of said company, also deceased, both of whom were directors of the Coldwater, Marshall & Mackinaw Railroad Company, to which company was to be given, by Scott and Cass, the trustees, a large portion of the property of the Coldwater Company, to induce them to favor the withdrawal of their answer; that the withdrawal of said defense was the fraudulent act of Scott and Brooks, aided and abetted by the directors conspiring together to cheat the Coldwater Company, and to benefit the Pennsylvania Company; that, in furtherance of such fraudulent scheme, Joseph Lessley, an employe of the Pennsylvania Railroad Company, also made defendant, bid off the property, and in so doing acted only as agent or trustee of the Pennsylvania Company, which was the only real party in interest; that the Pennsylvania Company organized the Northwestern Ohio Railway Company, which is now the nominal owner of so much of the road of the Coldwater Company as lies between Tiffin and Mansfield, and that the Pennsylvania Company is operating that part of said road as the nominal lessee of the Northwestern, which the bill averred is but a branch of the Pennsylvania Company, and in their relations to the said road the two corporations are identical; that in the operation of that part of the said road the Pennsylvania Company has accumulated large earnings, and has derived large revenue and receipts from sales, leases, and other sources from that portion of the Coldwater road between Tiffin, Ohio, and Allegan, in Michigan, and that the Pennsylvania Company is now operating, and will continue to operate, said road, and will dispose of and incumber its property, to the irreparable injury of the Coldwater Company, unless restrained, etc. The bill further averred that until recently neither the plaintiff nor any of those whom he represents had any knowledge of the contract of May 4, 1872, by which the Pennsylvania Company was bound to pay the interest as it accrued upon the bonds, and he believes that such knowledge was purposely kept from plaintiff and the other stockholders, as well as from some of the directors of the Coldwater Company, by the Pennsylvania Company and by Scott and Brooks, for the purpose of carrying out the fraudulent scheme set forth; that at the time of the sale of such property, and the application of the proceeds of such sale to the payment of interest upon the bonds, the Pennsylvania Company was under obligation to pay such interest by the terms of its contract of May 4, 1872, and there was no liability on the part of the Coldwater Company to pay the same, all of which facts were known to the Pennsylvania Company, to Scott and Cass, trustees, and to Brooks and the other directors referred to, and that they conspired to keep such knowledge from the plaintiff and from other stockholders.

The bill prayed that the decree of foreclosure and order of sale and all other proceedings be vacated; that the answer withdrawn be reinstated; that the case be held for further hearing upon the issues joined by the bill and answer in the foreclosure suit; that the defendant Cass, then surviving trustee, be required to account; that the Pennsylvania Company be held to have received the rents, issues, and profits from all of said railroad property in trust for the benefit and use of the Coldwater Company, and that a receiver be appointed, and an injunction issued against the further selling, leasing, or otherwise incumbering the property of the Coldwater Company during the pendency of the suit. There were annexed as exhibits to the bill the construction contract of July 20, 1871, the agreement of the Pennsylvania Company of May 4, 1872, and a complete transcript of the proceedings in the foreclosure suit.

The answer of the defendant the Coldwater Company to the bill of foreclosure in that suit averred that the company was not legally incorporated until January 6, 1873, and that prior to that date it possessed no power or authority to execute either the bonds or mortgages, and denied that they were the act of the corporation, or constituted any valid lien upon its property; that, while the company was created by the consolidation of a Michigan and an Ohio corporation by an agreement of April 13, 1871, no election of directors of said consolidated company was held until January 6, 1873, and that, until such election, the consolidated company did not succeed to the rights and franchises of the original corporation, nor was its organization perfect and complete until such election, nor did it have power to make contracts and incur liabilities; that the agreement of July 20, 1871, was entered into with one Willard S. Hickox, on behalf of the defendant, and that he subsequently entered into a traffic contract with the Pennsylvania Company, assuming to act for the Coldwater Company, and as president thereof. The answer further set up the contract of May 4, 1872, and alleged that at the date of the delivery of the bonds to the Pennsylvania Company such company was not entitled to any portion thereof; that 'none of said bonds are held by bona fide owners, but the pretended holders and owners thereof have, and are chargeable with, notice of all the matters herein set forth, and all of the equities of the defendant arising therefrom;' that the Pennsylvania Company had never earned the stock frauduiently delivered to it, nor had it entitled itself to any interest on the bonds delivered as aforesaid. The other allegations of the answer were much the same as those of the bill in the present case.

The bill was subsequently amended, and general demurrers were filed both to the original and amended bills, and upon the hearing of said demurrers the circuit court made a decree dismissing the bill. 36 Fed. Rep. 627.

From this decree the plaintiff appealed to this court.

John H. Doyle, for appellant.

J. T. Brooks, for appellees.

Mr. Justice BROWN, after stating the facts in the foregoing language, delivered the opinion of the court.