588
FEDERAL REPORTER.
mon stock, consisting of three million five hundred thousand dollars, divided into thousand shares of one hundred dollars each, And it is agreed that the rights of the holders of said preferred stock and said common stock shall be as hereinafter stated, to-wit: The holders of said preferred stock shall be entitled to receive. from the earnings of said railrOad company hereb.}" organized, dividends to the amount of seven per cent. per annum, payable semi-annually or annually, as may be directed by the board of directors; provided the net income, after paying interest on prior bonds, repairs, expenses of eqUipment and renewals, shall be sufficient for that purpose, or such portions thereof as the said net income shall amount to. In case there shall be any surplus of net income after the payment of said dividend of per cent. upon the preferred stock, the same shall stand undivided until the next diVidend day, and so from time to time and from year to year, until such time as the holders of said preferred stock shall receive five consecutive annual di vidends of seven per cent., or semi-annual or quarterly dividends eqUivalent thereto. In case, on any dividend day, tbe net income as aforesll.id shall not be sufficient to pay seven per cent. annual dividend to the holders of said stock, such holders of preferred stock shall have no right to have the dividends made up out of subsequent earnings; it being the intention that there shall be no accumulation of claims against the company for dividends for such preferred stock. We further certify and declare that the said common sl;Qck not be issued, nor any portion thereof, until after the preferred stock shall have received tiveconsecutive annual dividends of seven per cent. from the net income, as aforesaid, or other dividends eqUivalent thereto; nor shll.ll said common stock be entitled to any representation at any meeting of stockholders until the same shall have been issued. When five consecutive annual diVIdends of seven pel' cent., or, in lieu thereof, semi-annual or quarterly dividends equivalent thereto, shall have been paid upon the preferred stock, then the common stock shall be issued and delivered to parties who may .hold certificates issued upon the surrender of the common stock of the old Flint & Pere Marquette Railway Company, or other certificates Which may be issued by tMs company In lieu thereof; and,-if there shall be any surplUS of common stock it shall be the property of the company hereby organized. ·After the common stock sllall have been issued, as above provided, the preferred stockholders shall be entitled to receive from net earnings seven per cent. dividends each year before the common stock shall be entitled to participate; and after the payment of the seven per cent. to the holders of the preferred stock; any snrplus of net earnings that may remain shall be paid as dividends, ratably, to the holders of the common stock, not exceeding seven pel' cent. in anyone year. Should the net income be greater than sufficient to pay a dividend of seven per cent. upon the whole amount of stock, both preferred and common, such surplns shall be divided ratably among the holders of the preferred and common stock. Should the net income of Lhe company, after the common stOck shall have been issued, be insufficient to pay the dividendshel'einbefore prOVided for in any single year, such deficiency shall not be lUade up out of the earnings of the subsequent year or years, and tllis shall apply both to preferred and common stock." .1>y the sixth article it is expressly deelared that "the undersigned purohased said pllopertyat the sale under said decree in trust for themselves and others interested, pursuant to a scheme of reorganization heretofore agreed upo,n.'" . . . At the first meeting of the board of directors of the new corporation, held SepteIPber 7, 1880, 8 resolution was adopted authorizing and di· recting the president and secretary to issue engraved or lithographed cer-
M. CKINTOSH V. FLINT & P. M. R. CO.
589
tificates, to be given to the committee of reorganization or their assigns, representing the beneficiary interest to be deri ved from the issue of common stock, when it may be issued, in accordance with the form then presented, which form was as follows: "Certificate for Common Stock, when the same bill shall be issued. "STATE OF MICHIGAN.
"Th,e Fum
Pere Marquette Raikoad 001npa'1ll1/.
"INCORPORATED AUGUST 31, 1880. "This certificate will entitle - - - to - - shares of the common stock of the Flint & Pere Marquette Railroad Company, when such stock shall be issued. Said common stock consists of 35.000 shares of $100 each, but will have no vote nor voice in the management until issued in accordance with the plan of organization, viz., when the preferred stock shall have received five consecutive annual dividends of seven per cent., or semi-annual or quarterly dividends equi valent thereto. This certificate is negotiable. and be transferred on the books of the company in the city of New York on the s'urrender hereof. By order of the board of directors. "Dated East Saginaw, - - , 1886. WM. W. CRAPO, President. "H. C. POTTER, JR.· Secretary. "A. S. APGAR, Transfer Agent." While the capHnl stock of the foreclosed company consisted of 35,000 shares .of $100 each, making $3,500,000, only $3,298,200, or 32,982 shares of stock, had been actually issued. Of this actual issue there were deposited with the various depositaries designated by the reorganization committee, for the purpose of sharing in the reorganization scheme, and in pursuance of notice from the committee, stock certificates to the amount of $3,266,500, for which receipts were given by the several depositaries receiving the same, and for which the certificates in the form above stated, as directed by the board at its first meeting, September 7, 1880, were given in exchange. It appears from the testimony of Dr. H. C. Potter, whose relations to, and long connection with, the foreclosed company placed him in a position to know the fact, that when the foreclosure proceedings were commenced, and while the reorganization scheme was being arranged, the holders, or those interested in the old stock, were the same parties, or very largely so, who controlled the .consolidated bOll(ls that were in default, and prior bonds. This is an important fact, and should not be lost sight of in considering the questions involved in this case. It will be noticed that by the fifth and sixth dauses of the reorganization scheme both the preferred and common stock, or certificates therefor, were to be issued in favor of those who should join in the plan adopted, immediately upon the formation of the new company, although the common stock was not entitled to vote until the preferred stockholders had been paid seven per cent. annual dividends, for five successive years. This provision for the issuanJe of the common stock is changed by the fourth clause of the articles of reorganization, which declares "that said common stock shall not be issued, nor any portion thereof, until after the preferred stock have received five consecutive $nn,ual dividends of seven per cent. from the. net income, as aforesaid, or other dividends equivalent thereto." In explanation ot
l)9Q
.:FEDERAL REPORTER.
this. or chanp;e in. the reorganir:ation .scheme previously adppted, It IS saId that the commIttee's attorney advIsed them that underthelaws of Michigan it lfould not be legal to actually issue common stock,and deprive it of the immediate right to vote. The provisional certificate issued to the old stockholders,aB above set out, follows the provision of article 4 of the new companYi :ahd the complainants, being the holders of such' certificatl;ls, acquired silice the reorganization or formation of the new cornplllly, can only assert the rights which are conferred upon them by and under the fourth'article of the reorganized company, a,nd the contract expressed on the face of their certHicates. Hav,:, ling acquired or accepted the present fornl of certificates, the complainants are fairly estopped from asserting claim for the issuance of thecommon stock, as contemplated by the scheme of reorganization. They are nbt in a position, nor do they make a case entitling them to have the articles of association, or chnrter of the new corporation so reformed as to conform to the reorganizatIon scheme in respect to the issuance of common stock certificates., On the part of the complainants 'it is claimed that the preferred stock,. as provided for in the articles of association forming the new company, ··was unauthorized by the of Michigan; and on the part of defendants it is insisted thatthtl provision in reference to the issuance of common or unpreferred stock was invalid, because founded upon no considI!lration moving from the old stockholders, or to the new company, and because that provision was in contravention both of the letter and spirit of the Michigan statute.agaillst stock wat lring, (act of 1859,1 How. St. § 3409;Y and that the new corporation may rIghtfully refuse to recognize or issue said common stock. Neither of these positions, which were practically waived. or abandoned on ,both sides at the hearing, can be successfully maintained. The act of Feb. 10, 1859, (1 How. St. § 3409,} clearly authorizes the issuance of stock in cases like the present. It is equally clear that the stock watering provision of the statute (Id.) hasuo application. There was no fraudulent qr unfair valuation of the property, franchises, privileges, or rights and trusts, which the promot.ers, consisti.ng of lien claima,nts and stockholders of the old company, turned over to the new under the scheme of reorganization. Certainly there nothlng that be called stock wateril)g, within .ot any ot the laws ,of this state, nor for any officer of any such companYl to sell, dis. III Sec.
8409. That it shall not.be lawful tor any railroad company existing byvirtult
pose of, or pledge any shares'in the capital stock of such company, nor tolssue certiflCates of shares in the capitlLl 'stock of suoh company, until the ,shares so sold, disposep.of, or pledged, and the shares for which such certificates are to be issued, shall have been fully paid; nor issue anylltock or bonds except fdrmoney,labor, or property ootually received, and applied to the purpose for Which such corporation was created; .and all fictitious stock dividendsllind other,fictitious increase of the capital stoCk or indebtedness of any such corporation shall be vo,d; and, if any officer or officers of any .such 'company sliall issue, sell, pledgel or dispose 'of any shares or certificates of shares. ..of the capital stock of such company, lD violation of the, provisions of t):1is act, such offi'eer fir officers so doing shall be deemed guilty of a misdemeanor, and upon conviction 'thereof shall be punished as prdvidedby law in of iSfluing false or fraudUlent railroad stocks., Thc;l pl,'olisions of thi.s act shallapply as.fully to the stocks and officers of . . .IOZll\oUdated rliilroad companies)' as existing in'wliole 'or in part within the state; as to;ariglllal unconsolidated companIes e.xit\ting as afOresaid. "
MACKIKTOSII V. FLIKT & P.M. R. CO.
591
either the letter or the spirit of the Michigan statute. The case of Railroad'v. Dow, 120 U. S. 287, 7 Sup. Ct. Rep. 482, is a conclusive authority in favor of the legality and validity of the reorganization in the present instance. The provision of the Arkansas constitution there under consideration was substantially the same as the Michigan statute; and a reorganizntion of a railroad company by purchasers at foreclosure sale, under circumstances undistinguishable in principle from the present, was sustained by the supreme court as not coming within the constitutional prohibition. The objection of a want of consideration for the provision in reference to the common stock, caImot, for many reasons, avail the defendants; because there was ample consideration in the mutual agreements of the consolidated bondholders and the stockholders, under which the latter surrendered their certificates, and not only assented to the foreclosure, but, by the conveyance of August 23, 1879, provided an additional and valuable security in the shape of the surplus lands and land-grant funds held by Crapo and Prescott, trustees. The courts have not hesitated to recognize and give effect to such compromise arrangements between bondholders and stockholders in respect to corporations being foreclosed. In Sage v.Hclilroad Co., 99 U. S. 343, Mr. Justice STRONG, speaking thecoutt, says:' "Let it be conceded that the new organization must be for the benefit of tiLII holders of the first mortgage bonds, how can we say it is not for the benefit {If those holders that entirely subordinate interests are cdncerled to junior lien creditors, and' to the stockholders of the former corporation? How can we say that such a concession was beyond the discretion with which the agents of the ia to say. the majority-weredothed? Such concessions .are in reorganizations of l'aUroad companies, and they are regarded as beneficial to the joint lienholders. They prevent delay and expenditures arising out of litigation between creditors, which are sometilles almost ruinous, and they lessen the risk of re4emptions." "It is sometimes so far within the power of stockholders and unsecured creditors to embarrass and delay proceedings for the foreclosure of the mortgage and sale of the property that it is expedient for the mortgage creditors to arrange fOl' a reorganization, and give up something of their own ,security for the sake of avoiding litigation and delay." Jones, By. Sec. § 614·.
But, aside from the aforegoing considerations, which sufficiently dispose of the objection of a want of consideration for the provisional certificates or unpreferred stock, it should he borne in mind that the common :stock in the old company was held largely by the consolidated bondholders; who, whiltl accepting preferred stock for their bonds, naturally enough assented to the provision for the common stock. After the formation of the new company, its directors, selected alone by and from the preferred stockholders, issued the provisional certificates for common stock,' which are not only recognized by the corporation, but become the subject of sale and transfer in the market; and now, after the original holders of these certificates, consisting to a considerable extent of the present directory, have disposed of their holdings, and when the preserit holders thereof seek to have their rights thereunder recognized and en·
·
592
forced, theyare met with the objection, interposed by the same directory who issued these certificates, and by the corporation, wholle charter recognized their existence, and provided for the issuance of the common Fltock represented thereby upon the happening of a certain contingency, that this common stock has no validity for want of consideration moving to the new corporation. How can this new company dispute or call in question its own constitution, and the provision therein made for the issuance of common stock in a certain event? How can preferred stockholders, or their representatives, the directors of the corporation, dispute the validity of the very clause of the organic act, which confers and establishes their own rights? Such a proposition rests upon no principle, and is supported by no authority. It is founded upon the idea that because the bondholders, by virtue of their lien, had superior rights over the stockholders of the old company, and could have exhausted its property to the utter exclusion of the stockholders, therefore, when they became preferred stockholders in the new company, they in some way carried with them the superior equities belonging to their former relation to .the old ()oncern. This is, however, 110 miFltake, and a fallacy. Their right as bondholders ceased when their character of preferred stockholders began. Their lien as bondholders, as well as their character of bondholders, was extinguished by the foreclosure sale, and the reorganization thereafter had in pnn-mance of the scheme previously adopted with their consent. In forming the constitlltiori' of the new corporation, all prior equities existing under the old company were settled and extinguished; new relations were established, and new rights created. Neither the new corporation, nor the preferred stockholders, nor the common stockholders, who have accepted, acted upon, and acquired rights and privileges under the reorganized company, <Jan be heard, in contests among themselves, to question the organic: law declaring and defining the beneficiaries ofthe legal being thus created. Stockholders, preferred and unpreferred, are only entitled to such rights as the constitution of the new corporation, found in its articles of association, properly confer. These rights the company cannot question; nor can it properly take sides in contests between the two sets of stockholders in respect to their relative rights, as defined by the act or articles of incorporation. We come next to the main controversy in this case, which relates to the right of complainants, as holders of the provisional certificates for unpreferred shares, to have regular certificates of stock issued to them by the Flint & Pere Marquette Railroad Company. This right is claimed on the ground that the event or contingency {n which the provisional certificates holders were to become actual stockholders of the common class has, in the view of a court of equity, hllppened. It is not claimed in the bill that the preferred stockholders have, in fact, received 7 pel' cent. annual dividends for five successive years. It is alleged that the· dividends actually paid on the preferred were 5i per cent. in 1881, 6i percent. in 1882, 7 per cent. in 1883, 7 per cent. in 1884, and '± per cent. in 1885; but it is charged the failt·. e of the directors to declare} and pay the the full 7 pel' cent. dividends each year for eachoi said
MACKINTOSH V. FLINT & P ·.M:. R. CO.
593
years was due to their neglect of duty, and intentional disregard of complainants'rights; that the net income of the company applicable to the payment of preference dividends, as defined by article 4 of the certificate of incorporation, was misappropriated, and diverted from its legitimate purpose, as contemplated and provided by said article, and applied to other uses in the interest and to the advantage of the preferred stockholders; "that the real and actual net income of these several years, if the affairs of said railroad company had been properly conducted and the accounts thereof kept with a legal and proper consideration of the rights of your orators, as hereinbefore set forth, together with the surpluses remaining on hand in each !leveral preceding year, was, after paying interest on prior bonds, repairs, expenses of equipment and renewals, sufficient for the payment of a dividend of 7 per cent. in each of said years to the preferred stockholders; and that it was the duty of the defendantcorporation to pay such dividend, anu issue such common stock, qn the 11\t of January, 1886." It is further alleged that "the accounts of the company have been kept wholly in the interest of the preferred stockholders,and without regard to the interest of the common stockholders, and in disregard of the trust created, and with intent, on the part of the preferred stockholders and. the officers and. agents appointed by them, of preventing the common stockholders from h,aving any voice whatever in the management, and with a view to postponing the issue of the common stock to an indefinite period. And your orators are informed and believe, and so aver, that, for this purpose, accounts have not, been properly kept of permanent improvements in the property, which should have been paid for as additions to the plant, by way of constructioll and equipment, out of funus applicable thereto; but that said permanent improvements have been, in fact, paid for out of the current yearly income from the property applicable to dividends. And your orators show that earnings have been diverted from their proper application to dividends, and spent upon the railroad, and upon its road-bed, rails, track, station buildings, and other property, and in the building of branches, especially a branch to thecity of Manistee, and in the building'of side tracks and sidings, and the purchase and improvement of cars, engines, locomotives, and other equipments; that the operating expenses have in this way been undUly increased, and the net income diminished, all to the prejudice of the common stockholders, in violation of their rights and of the agreement, whether contained in the scheme of reorganization or in the certificate of organization filed with the secretary of state." The bill also alleges that the defendant corporation is entitled to the beneficial interest in the land grants and funds thence arising held by Crapo and Prescott, trustees; that, after satisfying all prior claims and demands thereon under the trust upon which they are held, there is a large surplus belonging to said defEmdants; that there was, on December 31,1885, of this fund over $1,000,000 in bills receivable and cash, bbsides about 90,000 acres Qf unsold lands; that since the date of its reorganization in 1880, said corporation had received from said trustees many thousands (j)f dollars,. of which only a portion had been applied to construction v.34F.no.8-38
694
andeql1ipment of its road; ihat said defendant has used sums received ft&n:i.'the'OOl'tllnt'operation of the road, which properlyhelong to the net ine6l'l'l&thereof, for thepnrposes of construction and equipment, in place ofJ{ttn'dEl'lipplicable thereto from thelanddepartmentj ahd that the surplus lands and funds now in the hands of said trustees, and subject to the demands of the company, are properly dividends in place' of, the money from earnings and' income diverted" and applied to constrnctionand equipment, It is further alleged that complainants, 'and others in'like situation, have applied to the management of thedMendant company to correct these misapplications of earnings to eonstruction purposes, and to respect the rights of the common stockholdersjwhich requests have been totally disregarded. 'It is also charged that they have denied access to the books of account of the company. Aside:from the preliminary injunction asked for, which was heard befoteMr.Justice MATTHEWS, (32 Fed. Rep. 350,) the relief sought on this branch, of the cas&is that the court will ordersuc'h amounts from the 'surplus llmd funds to be paid into the income amount of the com· pany, applicable to' dividends, as will reimburse said income account fof any and 'all/mms wrongfully taken therefrom, and spent uponconstruc.l tionor'equipment during the period aforesaid;: that the'defendant coin. pany may be ordered, to' furnish to complainants the accounts received by it from thtr trustees of"the land department, and to render accouhts of the SunlS' ,paid over to. it bysaill' trustees; that a true and correct ac· count bema<ie up 'or the 'inCOll1e' of the defendant 'company, from the date of its organization,' for each successive year, arid that all improper <lharges to said be stI'icken out, and that any proper addi· tions mny be made thereto, and balance may be struck and that, the iricorneof the succeeding year may he added to thesurpllls of the year preceding;' that the' defendant corporation, its officers and by/the court to issue stock certificates to the corn.· plainante seiverally, for 'the several, 'afuounb!l of sharfls to which they are entitled; that the defendants 'may be perpetually from depriving them of their legal "rIghts as $tockholders in voting at the meetings of stockholders, and in;otherrespllcts; and, generally, that they may have'such other and further reliefas the nature of the case may require, and to the court may seem m e e t . ' , ,Thede'fendants admit:that the holders of 'preferred stock have been recognized as the only' entitled to any' ,'oice 1I1 the ment and control of the corporation since the: time 'of its reorganization, and that the directors elected by them of the compaljy and its management; but they deny that the holdel'sof said preferred stock unlawfully combined together: They admit that they have tEf fused to permit the to, send,'their agents into the 'Qf the company., there to interfere with its busin'ess by an exiidI': inaticm in detail of the transactions of the corporation; but state that printed annual reports of the company were open 'to their inspectio'n. They state, on and belief,that thea,ccollnts olthe company have been properly ke}Jt as such, and that "uo greater amount has been
KACKIN;I0SH fl. FLINT &: P ·., lIf. R. CO.
charged to operate expenses than sufficient to cover the -actual expenses incurred." As to the charge "that earnings have been diverted from theh\ proper application to dividends, and spent upon the railroad and upon its road-bed, rails,track, station buildings,and in the building of etc., and in the of side tracks and sidings,anJ in the purcha,se of cars, engines, locomotives, and other equipment; that the operating.expenses have in this way been unduly increased and net income diminished, to the prejudice of the COInmon stockholders, in vioand of the agreement, whether contained in the lation of their scheme of reorganization, or in the certificate of reorganization,"-there is po direct or denial; but the defendants Sll-Y they" admit that, as directors of said company, charged by the law witp. the duty of managing the same, they have believed that their duty to the public required thttt they should keep the road-bed, rails, track, station buildings,and. other property in good condition; that they should keep the rolling stoc4, sufficient tQenable it to transact its business as the public might. require; and. these defendants believe that in so doing they promoted the true interests of the corpotation in their charge, and also performed their duty in accordance with law; and therefore these defendants deny that the interests of complainants,. or others in like were prejudiced, or their rights violated." They further "state and insist tl1-!1-t their first duty in the management of the defendant corporatiol,1 is to Use the income and funds for the purpose of mainof the road, and the value of the property, that the taining the same.may not be depreciated, and that the sa,memay be safely operated, andseryethe public in accordance with the design of its creation." They also deny that the defendant corporation has received, from time to time, sums of money which should have been added to the net income cable to dividends, and which they have neglected to add; they deny that the premium received on the sale of bonds should have been treated or applied as income; they deny that the railroad company is entitled to recejve.or has received from the land department incomtl which should be added to its net yearly income, and be applicable to dividends; they deny that said land funds·are applicable to dividends within the meaning and in accordance with the certificate of reorganization, now cOllstitut,ing the charter of said defendant company, "and state the fact to be that they have paid dividends from time to time to the holders of the preferfl:ldlltock to such an extent as, in the of the board of directors, it was. prudent, legal, and honest to do; aI+dthey deny that a greater sum has been taken from income for the purpose of repairs, equipment, or oth(jT uses than what, in the judgment of the board of directors, the best interests of the property, and all interested therein, considered as a wholt(, absolutely required; and they deny that complainants,and as hplders of provisional certificates aforesaid, others have anyrigRts which are Buperior to the pUQIic or oLthe preferred stockholders, or any rights wh,ichwould require or justify the defendants, or any oft.h,epl,·to withhold money from needed and properrepairll and improVerncl,1rlll ,in order to force the contingency specified ill the l;ertifi-
cafe of reorganization." They admit that dividends to the extent and percentage stated in the bill were declared and paid the preferred stockholders for the years mentioned; but they do .not claim that full 7 per cent. dividends for each of said years could not have been paid. The fourth article of the certificate of reorganization, forming a part of the defendant company's charter, was intended to define the legal relations and relative rights of the two classes of stockholders therein described, and to designate, as between them, the fundl! of the corporation out of which dividends on preferred stock were to be paid. By that provision of the charter, which is obligatory upon the corporation and its directory, the funds applicable to the payment of dividends on the preferred stock was the net income of the company, "after paying interest on prior bonds, repairs, expenses ofequipment and renewals." Any surplus of net income, after the payment of said dividend of 7 per cent. upon the preferred stock, was tostatid undivided until the next dividend day, and so on, from year to yea,r, until such time as holders of said preferred stock should receive five consecutive annual dividends of 7 per cent., or semi-annual or quarterly dividends equivalent thereto. There was to be no accuIllUlation of dividends on preferred stock. When five consecutive annual dividends, or, in lieu thereof, semi-annual or quarterly dividends equivalent thereto, shall have been paid upon the preferred stock, then the common stock, with the right to vote, was to be issued and delivered to parties who held the certificates issued upon the surrender of the common stock of the old Flint & Pere Marquette Railway Compll;ny, or other certificates, which the new company may have issued in lieu thereof. Any surplus of the common stock was to remain the property of the new corporation. At the first meeting of the board of directors under the new organization, a resolution was formally adopted, September 8, 1880, defining the policy of the company, as follows: "Resolved that the board of directors define their policy to be in conformity to the articles of association; that, under the head of operating expenses, only such improvements and additions shall be included as are necessary, in the judgment onhe directors, to keep the property up to the proper standard of efficiency, and that such portion of additions and extensions beyond this, as the board decides, shall be provided for out of funds other than net earnings; that the stockholders are entitled to the benefit of all earnings after paying expenses and coupons." This resolution was never repealed or modified; and, read in'the light of the reorganization scheme, which provided for the issue of reorganized first mortgage 6 per cent. bonds, "to be used only to fund the past due and maturing interest on the prior bonds, and for such permanent construction and impr()Vement as may be deemed desirable by the board of directors of the new company," it may fairly bEl regarded as a correct contemporaneous construction of the meaning and intention of article 4 of the charter, in respect to the duty of the new company and of its agement,· n'Ot only in making proper expenditures, but in keeping proper accounts., as between construction and permanent improvements, or additions and extensions, on the one hand, and operating expenses on the
MACKINTOSH V. FLINT & P. M. R. CO.
597
other, upon which the respective rights ofthe two classes of stockholders were to be regulated, adjusted, and determined. At the next meeting of the board, on the 22d day of September, 1880, a resolution was passed authorizing the issue of the new consolidated 6 per cent. bonds to the extent of $5,000,000, to be used and appropriated for certain specified purposes, among which, as designated in item 4 of the resolution, were" for such extensions of the road and improvements of the property, . including the construction of the Manistee Railroad, the extension of the Saginaw & Clare County Railroad, and the purchase of Lbe Saginaw & Mt. Pleasant Railroad, as may, in the judgment of the directors, be deemed expedient from time to time." These bonds were to be secured upon aU the property ofthe company, except the land assets and landgrant proceeds, held by Crapo and Prescott, trustees. Dr. H. C. Potter was appointed general manager of the railroad company, entered upon his duties as such about October 1, 1880, and has since occupied that relation to the corporation,having the practical control of its buainess :and operations,· and directing the manner in which its expenditures .should be charged, whether to operating or construction, and the 'keeping of its accounts, showing receipts and disbursements. The evidence clearly establishes that the company expenditures for operating expenses, .and for additions and extensions or permanent construction improvements' were not kept as directed by the resolution ofSeptember 8,1880, nor as the company was bound to do by the fourth article onts charter, :So as to preserve the rights of and discharge its obligations impartially between its two classes of stockholders. While the board of directors .exercised their proper and legitimate discretion in directing the new works,-additions, extensions, improvements, and equipment that :should be made to the road,-they did not designate the account to which the expenditures thereby incurred should be charged. The gimeral manager, directly, or indirectly, through subordinate officers, indi.cated and directed to what account all expenditures sMuId be charged and receipts credited. In two instances his discretion was so far supervised by -the board of directors as to direct $78,472.59, made up of severalitems, to be transferred from operating to construction account of the current year, -which was done by resolution adopted December 19, 1884, and the depreciation on steamers to be reduced. No question is made as to the .correctness of the company's expenditures; but the claim on behalf of the complainants is that their rights have been ignored and disregarded in improperly charging portions of such expenditures to operating, rather tban to construction, whereby the net income applicable to dividends under the charterdefining their relations to the com pany and the preThey further ferred stockholders, have been reduced to their .claim that receipts and revenues received have not been credited, as they :should have been, to income account. It distinctly appears from the testimony of its officers, that the accounts of the defendant company have not been kept with any reference to the rights of the common stocklJ.oldersj that no regard has been paid to the pro_visions of the fourth article of the charter in the keeping of the aCcoullts; that the road WaS not
,
598
FEDERAL REPORTER. ,., I
operated to the nnpreferred cll.The general manuge'r'states that the books !tncl accounts,\vere kept, "as we way of doing and administeriu.g! with .to lts and safety. We have .not operated It [the roaq] whhrefyrenge to them [the cOll;1illon stockholrlers] at all. We have operate$! ritin accordance wi.U1 public bene,6.t and the maintenance'oftheproperty." Hismam}er of dealing with the expenditures of the roaqis faif}y illustrated iii the following question and answer, (Record, p. 260:) i" q.uestion.And therefore you think that' the question as to whether a: of grade should be chp.rged to construction or to operating expen,ses,'is simply a.matterfor the general manager to decide according to the state of the finances? . Answer" No, sir; according to his judgment." Not only were the rights of the:common stockholders or,considered in, the keeping of the company's accounts, state(by the auditor, Mr. Ledlie, no account was kept to show but, the surplUS 'ornet income yearly affer the paymellt of the 7 per cent. On stock, as providedfor in sai,d f01;lrth .article of the charter ,policy .thus adopted and pursued llY the management assimielf that the conthlgeqt rights and of the provisional certificate q'oIqeIil. were eptirely subject to the discretion of the directors, or those of the road, in degiding, not only what expenditures should be Oiade;' but how they should be charged, .as between operating and con.stmetioQ. If this position is correct, and It lies with the directors selected by' ,the preferred stockholders to determine how outlays made tomeet,whlit tbey may for the best interests of the corporation, or mosCben.eJ?,¢iaJ. to themselves and associates, or for what they.may deem neceEls#j in serving an<i. discharging the c9wpany's duty to the public, shsJrO¢ charged, whether to. operating expenses, or to construction, then the"provisional certificate holders are phwed completely in the ap.dat the mercy ot the preferred stockholders, and the arbitrary charter for their be{tefit, in purl;!uance of the reorganization agreement,.. :,w,,"ctically abrogated,' and becoineutterly While the company, in the exercise of its franchises. and the management of its busiIiess, undoubtedly owes duties to the public and to its creditors which aie pa.ramount to the rigl\t of its stockholders, preferred and unpreferred, this artificial' body, '. called the ,is after all but the of its s,tockholders, and exists mainly for thei1; benefit; and in their interest It is to,' be governed, controlled, andadmiuistered according to the provisiot;1.8 of the charter wh!qh the state. has conprovisions restrict.ing or qualifying ferred. In the ,absence the; their powers,d,irectors have t:lsually a large affairs oUhe corporation, in its as to eft.penditures, and divic1ends have· been earned {lnd should he declared.· , in deciding as .to making dividellds is not. Ul;J.limited orcpn·.., to supervise or conti-olits i cl'usive, courts Will not ordi,DtlTilJr, honest a,n<:lfeasoilable exeroiae 'on the groi,1l1dthat' shareholders have no right to, Ii divislop; of profits. .Tayt. Corp. S§562, 563, J'lf" present casej the question was merely one and
MACKINTOSH t7.
& P.'M. R. CO.
'599
-to the policy which the company should pursue, or if its duty to the public, or its obligations to its creditors, were involved in a way to affect the company's ability to perform such duty or discharge such then the aforegoing principles would properly apply. But the facts deby the proof in the case do not warrant the suggestion that these paramount duties are in any way inconsistent with the company's fair -and proper observance of its charter duty towards both classes of stockholders, or that the rights of provisional certificate holders could not be without requiring the company to disregard and recognized and neglect its obligations either to creditors or to the public. The company is perfectly soh'ent; demands of the creditors have been, and are being, promptly met; and in respect to the public, whose rights are set up -as a justification of the policy pursued by the management in not considering the rights of the provisional certificate holders, there is now and 'has been no failure of duty on the part of the company. Its road has :been maintained in first-Class condition, comparing favorably with any line of railroad in the state of Michigan. Year byyenr its lines have its equipment enlarged, its tracks and buildings 'and its efficiency increased. These results have been to a large extent acthe application of earnings to construction purposes, n9twithstaildingthe company hadatits disposal funds from either sources mbre 'properlyapplicable to those objectsi the general manager, as the representative of the directors, asserting and exercising the discretion of charging all ·expenditures either to operating expenses or to construction, as he deemed proper. Provisionalcel'tificate holders, in November, 1882,entered their protest against this course; but theircomplaint was utterly ignored by the board of directors, and their general manager continued to divert portions of the net incolIle to permanent construction purposes. This Tefnsal Oll tIle part of the directors to respect the rig;hts of the common stock partakes more of disregard of duty than of ei-ror in judgnlent. It was a. non-performance of official obligation, amounting to' what the law -considers a breach of trust, if the complaint was well-founded, and made by parties entitled to have their policy as to earnings changed. But the position is broadly assumed in the answer and in the argument of counsel fordefenqants that the board of directors, being charged with the power and duty of managing the corporate property and franchises for the best'iriterests of the company, and for the benefit of the public, had the rightiand were entitled to dispose of and apply the net .ea11iings of the cotnpany in the same way, or in as unrestricted manner, as they would havenad if the charter had contained no such provisions as are found in article 4, and there had been but one class of stockholdersi and that their discretion in appropriating net income for construction purposes, as they sa", proper, and in withholding the same from divi· dends, 'could not, at the instance or upon the complaint of the contingent shareholdilrs, be controlled by the court. Cap. this proposition be t'lUstained without practically nullifying, or destroying article 4 of the charter? We think not. ,The reorganization scheme contemplated a fund applicable to construction and equipment other than earnings. alid
FEDERAL, REPORTER.
the fourth. article of corporate constitution undertook to define what expenditures should be borne by net income, as between the two classes of The provisions of that article constitute some restriction u pOll, or qUalification of, the powers oHhe. board of directors, which,may not, at their option, be disregarded or ignored, If that articleof the organic law of the corporation confers upon the provisional uertificate holders any rights orinterests, even though contingent, there must co·exist with such rights the correlative duty on tl1e part oftbe company and its management to observe -and respect those rights, and especially so when the preference class are in exclusive cohtrol of the corporation. This correlative duty and obligation on the part of the company and its management necessarily implies and involves the keeping of proper apcounts as between construction and operating expenses, and the proper applicationof net income tp the purposes indicated, and only to those purposes, to. end that a fair opportunity may be allowed for the qappening of the contingency o):} which the provisional certificate holde,rs were to be adqlitted into the company. The true import and meaniog of article 4 of the charter is that, when the company's net income,after paying certain specified cha:rges and expenses; is sufficient to paya7 per, cent. dividend on the preferred stock, itshall be so applied,provided the rights of creditors are not affected, and be continued for five successive years if in condition to do so from net income. to the end that provisional pertificate may then be let into the company ,and Q.e entitled to a voice in its management, and to share in future· earnings in excess of further 7 per cent. dividends. It operates as a charter direction to themanll,gement in the interests of the commonstock, and limitstlle discretion which the p.irectors might otherwise exercise in applying the net earnings, or net income of the company. It may be t1,'Ue, as argued by defendant's counsel, that the preferred stockholders COl1ld not ha,:,e compelled the board of directors, selected by themselves, to declare larger dividendl;l than were declared and paid from 1881 to 1885, iqclusive, as held by.the supreme court in New York. Railroad v. Nickal,g, 119 U. S. 296, 7 Sup. Ct. Rep. 209, and similar authorities, which rest upon the principle that, in the absence of charter provisions. controlling or modifying their usual powers, courts will not. generally review or control the discretion of directors on the su1;>ject of making or,withholding dividends, when honestly and fairly exercised. But the present does not fall within that class of cases, nor is it controlled by them" because the rights here asserted are charter rights, iJ:nposing charter duties, binding and obligatory upon both the company and its managing officers, and operating as restrictions and limitations upon the general disc.retion o,f the directory in dealing with the net income of the road between the preferred and unpreferred stockholders. The question in the present case is not, therefore, what regular stockholders, having a voice or vote in the selection of the corporate management, may demand and enforce in the way of having dividends declared and paid; but it is whether the contingent shareholders, having no voice in the corporation or its direction, are entitled to have the company and its di--
MACKINTOSH'!:. FLINT' &: 1". M. R. CO.
601
rectors, selE-cted by and from the preferred class, observe and respect their rights by carrying out the charter provisions in their favqr. It is not a sound proposition, as applied to this case, that the directors, selected by and from the preferred class, have and may exercise the same discretion as against the provisional certificate holders in dealing with, disposing of, or appljring the net income of the company, which they might be ent.itled to exercise as against the preferred stockholders. They were entitled, as between the two sets of stockholders, 'to employ the net income in paying interest on prior bonds, old or new; in lnaking repairs upon the road, buildings, and other property of the company, so as to maintain their efficiency; and in meeting the expenses of equipment and renewals, which evidently refers to repairs upon and keeping up of the rolling stock of the company, but does not include the purchase of new equipment. The company from the start adopted this construction as to the expenditures chargeable against income, as shown by the resolution already referred to, passsed at the first meeting of the board of directors. With this limitation upon the company and its directors in the way of expending earnings as between the two classes of shareholders, we may next consider what net income applicable to dividends were earned or received during the years 1881 to 1l:585, inclusive, and the manner in which the management of the company has dealt with or disposed of the same, or, generally, whether the company could reasonably and properly have declared and paid full 7 per cent. dividends during each of said years. hands of Crapo As to the surplus lands and proceeds of land sales in and Prescott, these were undoubtedly equitable assets of the defendant company corporation, acquired under the trust conveyance of August 23, 1879, and the foreclosure sale, purchase,and reorganization in 1880. Subject to the prior mortgage lien, or liens on said lands, and land proceeds, the company was the beneficial owner thereof, and held the equitable title to the same. In respect to these surplus assets it had something more than the simple right to call the trustees to an accounting. It was the real equitable owner of the property; and the surplus thereof after satisfying prior inc.umbrances, belonged to the corporation, just as it held its other property subject to mortgage. As the obsolute owner of this equitable title and right in said surplus lands and proceeds arising from the same, whatever the company received from that source was as much a part of its income or revenues as if it had been derivedftom any other source, such as receipts from operating its road, or rents collectedfor the use of its cars or other property. Income is not limited to the gain which results from business and labor, but it includes as well the proceeds derived from the use or sale of property. Now, what is the situation of these land assets, and what revenues have been actually derived therefrom during the years in question, or could have been received from that source, without impairing or interfering with the rights of creditors? When the new cOIrlpany acquired its right to these lands and assets, the }>rior charges thereon amounted to about $2,000,000. Of those prior bonds remaining on January 1, 1881, (Report of company for 1880, p. 21,) there were $1,704,000 of 8 per cent'. bonds,
'<'
;'
n:qERAL REPORTER.
and $3,00,000 of Flint &:Holly 10 perpeQt. 1)OIH18. During 1881 the. former were discharged, partly by funds in the hands of the trustees and partly by exchange of new 6 per cent. bonds of the company; so that. aUhe close of1881, $qOO,OOO of l!'lint & Holly bonds constituted the Only incumbrance on these, land assets. " They were also secured by a the Flint & Holly branch of the company's lines of road. Now I on December 31, as shown by the conipany's annual report, of $575,978.77, arising from the trustees had in their hands a land. while the land commissioner who made the sale held bills receivab.."amouating,. principal and interest, to the sum of$902,058.73.. and the unsol,d lands held bythe trustees,amounted to 138,454.28 acres,. worthahout $10 per acre, Here, then, were $2,863;577.88 of good assets jn.the hands of said. trustees to sec.ure 000 of 10 per cent. bonds" by mortgage on, of ,the company's main hra,nphes, TpE} cash balance in the hands of the trustees exceeded. this, py $275,978.77. The declared and paid for1881 bouded was5! per thftu 7 per cent. by 1!percenL,-which, on the of preferred stock, ,amounted to $97,500. If this aIllount had ,been dra'Yl1:pytbe compl1tny from the hands of the trUstees, the full ,7 could have been rell.djly declared. and paid without, security held .by theni for the payment of the in the leastimp.ll.iring 1882, said trusteeS: $300,000 Flint&H;<?lly bonds. On I)ecember, held a Wf598,117.28 ·. Thebillsreceivable from sales ofland8in the handsqf&he land commissloner,/l-mountecl' to ,$747,532.78, and there were unsold landlJ to, ,the extent of 109..815! acres, worth upon on average, say $9 per acre,or$988,340"making an aggregate of $2,133,controlled and held, by the tru'stees to secure said $300,000 of bonds. b,1882 divideud decll;1.redand paid was 6! per cent. The: deficiency of t per cent., Qr $32,500, was actually in the hands of the: company,auhown,on page. 6 of its aunllal report for that year. For that year it had a sqrplu8 of $35,613.52, after paying the 61 per cent. dividend, which was carried over to 1883! It could'pave paid the 7 funds; but, if per cent. for the year 1882, ,without drawing on the there had been an actualdeficienqy of income of $32,500 from othel'" sources, it could have been, withdrawn from the land assets, without in any wise or eqqlmgering the security forthe payment of the bonds. In ;and 1884 fu117 perwnt.dividends were declared,and ,paid, leaving in the hands of said trustyes large surplus assets, afjl follows, viz., on Decllmber 31,1883, the balanCE! in their hands was $681,259.29, the land cql11tilissioner beld $627,021,55 in bills able, and their were acr,es unsold, worth $932,574, gating $2,240,854.84 ofavailable assets charged with only $300,000 of lial:>ility; on December. 8,1, 1884, the balancein the 'bands of the trustees was $693,681.33, the bUls receivable from lands solp were $492,334.14 acres unsold, worth $900,000, aggreand there were 'gating $2,086,015.47 of ,security, charged with $300,000 of bonds. On December 31, 1885, there remained of unsold lands 95,914.22 acres, say $6 ,per acre, or $575,485, and the trustees worth upon lip
'held in their stated byMr. Crapo, (pages 596,597 ofthe Record,) funds to the arnounf of $764,556 j of that amount ,th,esum of $579,& Pere Mal'q1;iette Railroa:dnew 6 per cent; 000, was invested in bonds, while the 'balance, except perhaps a small cash deposit arising from daily receipts, Was loaned out at interest,-pattly to the defendant corporation, to whom t,his surplus fund and which paid interthereon, which charged to operating expenses. For the year 1885 the company only declared and paid a dividend of 4 per cent. on the stock. The3 per cent. shortage, amounting to $195,000, could readily, safely, and properly have been withdrawn from the large surplus'in the hands olthe trustees, without in the least impairing or endangering the security for the payment of the $300,000 of Flint & Holly bonds, whic,hconstituted the only charge against funds and assets held by the trustees. The '$579,000 of Flint & Pere Marquette 6 per cent bonds, WIllCh the trustees held, were worth in the market, and are. still worth, a premium ranging from 15 to 20 per cent. If the deficiency Qf $195,000 had been withdrawn from the hands of the trustees, thev would have still held $384,000 or more of the company's 6 per cents:, worth a premium of 15 per cent., as security for the $300,000 of Flint &; Holly bonds, beside unsold lands worth $575,485. On the 31st December, 1886, the balance in hands of the trustees had swelled to $826,. 852.73. 'The$300,000 Flint & Holly bonds mature May 1,1888. To nothing of the branch road for their payment, the trustees have for years held, and now hold, funds and assets for the security of these bonds, exce<:>ding fourfold the amount needed, or necessary for their payment. This large surplus the company or its management have intentionally declined to draw upon for the purpose of making dividends, or of returning to income sums that were improperly charged to operating expenses, except in 1884, when the board of directors, after directing the general manager to transfer $78,472.59 from operating to construction account, called lipan and received from said trustees $100,000, which was used in making the dividend of that year. Why could not the $195,000 required to make up the 7 percent. dividend for 1885 have been caned for from the same source? Why was it not caned for and so applied? The board of directors, by resolution passed December 13, 1883, "resolved, that the trustees of the land funds be authorized to pay over to the treasurer of the company I from time to time, all land funds which shall. come into their hands, in excess of what may be required to pay the securities outstanding, for which said land funds have been specially pledged, and all such p'ayments heretofore paid by them to the treasurer be confirmed and approved." The land funds in the hands of the trustees at the close of 1885 in excess of what required to pay the $300,000 of Flint & Holly bonds (the only securities outstanding and chargeable against said fund) was more than $400,000. Out of this excess, $195,000, for 1885, could have been drawn either to apply on dividends, or to restore to income or earnings what had been diverted from that fund, an.d applied to construction or new equipment. But, for some reason' not this was hot done.
604
FEDERAL REPO;RTEB.
Now, aside from the $100,000 received from the trustees under the resolution of December 19, 1884, how has the company or its manage·· Dlentdealt with the moneys actually received from these land trustees? Ifappears that from Octoper 1, 1880, to the close of 1885, said trustees paid over to the treasurer'of the company at various times, as requested, sumsofmoney aggregating $1,221,168.62. and which was used by the company as follows, viz., $646,000 in paying off 8 per cent. laud-grant bonds, $100.000 for Bay City & Ea.st Saginaw bonds, $22,118.09 for improvement of Bayou Spur property in East Saginaw, $81,000 for coupons on Flint & Holly bonds, $4,500 and' $22,550.53 for interest received, and $345,000 for the company's use, and which went into the general treasury, and was used "according to the necessities of the comneeds of any kind," as stated by the general manager. pany for But this $345,000 is not credited to income or earning. In the keeping of the company's accounts the provisional certificate holders are not allowed any bellefit from this receipt. It is not permitteli to go into earnings or income account. If that had been allowed, it would have more than cover,ed the shortage in the 7 per cent. dividends for the five years in question. In other words, if that sum had been treated as applicable to dividends, or as an equitable restoration to earnings or income of what .had been applied to construction, full 7 per cent. dividends could have been declared aildpaid during the five consecutive years unconRideration. But how were these large receipts from the land assets disposed of.in the company's account? By I:eference to the annua1 report for 1884 (pages 15 and 24) of the vice-president and genera1 manager, it will be seen that the sum of $1,105,276.97, received from sales of lands and premiums on. bonds, (the latter item amomiting to $164,541.25,) was charged to depreciation, and deducted from the road-bed and equipment account of the company·. This latter account was, at the same time, further reduced by a credit of $10,793.48, being the proceeds of narro\v-gauge equipment,' telegraph line, and portable engine sold. No depreciation account was. kept by the company, as the general manager testified, (page 344, :!;tecord,) and, year by year, operating expenses, were charged with all repairs and expenses of equipment and renewals made orincurred in, about, or upon the road-bed, rolling stock, buildings, or other property of the company, as contemplated and provided by article 4 of the charter, and then, at the close of 1884, a lumping charge of $1,116,070.45 is made to depreciation, and deducted from the road-bed and equipment account. While doing this the managemE)nt of the company, without reason and in disregard of the rights of the provisiona1 certificate holders, keep large surplus land funds in reserve, portions of which it borrows from the trustees from time to time, and pays interest upon its own funds, which is charged to operating expenses, to the prejudice of the uripreferred stockholders, who are excluded from any voice in th.e managem&nt of the corporate The court is unable to understand upon what principle the receipts or revenues derived from the surplus land assets are to be distinguished from other mcome or earnings of the company applicable to the payment of dividends
MACKINTOSH't'. FLINT & P. M. R. CO.
605
under the facts of this case. These land assets were brought into the company by the consent of the old common stockholders, under the trust conveyance of August 23, 1879, made manifestly in furtherance of the reorganization scheme. But, whether that creates any equity or not in favor of the provisional certificate holders, they have the same interest in these land assets that they possess in other property of the company, and the funds derived from that source are just as applicable to the payment of dividends on the preferred stock, so as to meet the contingency on which theunpreferred class are to be let in, as revenues derived from operating the road" or renting its cars and dining stations. The principle announced in St. John v. Railway <:1.,22 Wall. 149, where it is said: "We are aware of no legal principle which would authorize the stockholders in question to analyze the business, select out a portion of it, and to say that the net earnings specified must be a predicate of that part and none other," applies here. So in Ryan v. Railway Co., 21 Kan. 365, the court says, in considering the rights of stockholders in reference to the sources from which profits are made "that it is immaterial at what time Or from what sources these profits may have been derived. It is wholly immaterial whether they have accrued from rents, the profits of the construction of the road, or from the sale of lands equitably belonging, to the company, they are all incidents to the shares." Without reference, therefore, to the diversion of income, or the improper application of earnings to construction, or the charging to operating expense what properly belonged account, but taking the company's re.ports as made, and,the dividends annually declared on the net earn,ings there shown, it is clear that there was at the disposal of the company ample surplus land funds in addition to such net earnings, to have made and paid full 7 per cent. dividends for each of the years 1881, 1882, 1883, ,1884, and 1885, without in any way impairing the rights ofits creditors, or neglectipg its duty to the public. In the judgment of the court, fair dealing and a due regard to the contingent rights of the provisional certificate holders, required of the management that funds thus at their disposal should have been applied in making the full 7 per cent. dividends for the five years, so as to let the unpreferred stockholders int() their inheritance. Is it to be said in a court of conscience that the preferred stockholders in charge of the corporate management and affairs, may have at .tpeir disposal ample funds to meet the contingency, and comply with the event on which the unpreferred class are to be let int() their Fights; that they may arbitrarily decline or wrongfully neglect t() receive and apply such funds" so that the happening of the contingency is thereby postponed, and that they, or the corporation controlled by them, may thereafter set up and rely upon such contingency as an excuse or defense against the admission of .Buch ullpreferred class into their corporate rightl'! and privileges? To state this proposition is A court of equity will not permit parties occupying towards each other either legal or relations, whether direct or through the instrumentality of an artificial ,body called a "corporation," thus to act, and thereby postor defeat the rights of the
.'Btit\uside from the surplus land fu'bds and assets; how stands theca36 in respect to income earnings derived from other sources? Were 't'lleysufficieht, if fairly and properly applied, according to the true mean· 'ingof the article 4 of the charter to have paid full 7 per cent. dividends on the preferred stockf'orthEifi\'e consecutive years in question?' Thiscan !bedettlrmined analysis and examinatioh of the company's 's.ccoilrits,' filhowingreceipti! arid disbursements duting said period. It 'ilppearsthat the total issue 'of the company's new 6 per cent. bonds amounted to $3,924,000; 'that Of these $1,058,000 weteexchanged for 8 per6ent. land-grant borids;that the land trustees purchased over $500,000 of said bonds at par,' and that the residue thereof were sold at a premium, ranging from StolO per cent. This premium on its bonds sold was received by the company as follows, viz.: $500 between October 1, 1880',' during 1881; $34,702.50'in 1882; $12,136.50 in 1883; and $9,945 in 1884, aggregating $164,561.25. This premium WM, at first, set upon the credit side of the company's ledger, or placed to the credit of construction, and afterwards, . as shown by the annual report for 1884, (page 15) it was included in the amount of $1,105,276.97, chargfJd to deptediation, and deducted from road-bed and equipment account.. This premium was received by reason of the rate of interest which the bonds bore, ,and the ample security provided fortheir payment. Earnings were charged with the ment of that interest on Itceount of which said premium was earned or received;' 'and it would therefore seem to be proper to credit earnings or income with the amount of such premium. Ifincome is burdened with a rate of interest which secures a profit on the bonds, then income is en· titled to the benefit of that profit, just as it would be entitled to the profits made on any contract by the company. In crediting such premium to earnings and profits, there is no increase of the bonded debt, nor improper enlargement of the company's construction account. It is apparent that 5 per cent. bonds, secured as these were, could have been negotiated at par. In carrying 6 per cent., earnings are charged with the extra burdenof $39,240 annually. It is, therefore, reasonable and proper that income should have the benefit of the profit which has been derived from the extracharte placed upon such income. Theexperts differ ill opinion as to the proper disposal to be made of such premiums on bonds, and there is no uniformity in the practice of railroads in respect to such profits. . In th,e j1.1dgment of this court, such premiums, in the present case, as between the two classes of stockholders, should have been credited to income during the respective years in which the same was received. Next, as to the steel-rail account. At the close of 1880 the mileage on the mainline of thel'oad was 317.17 and 90.40 miles of sidings. Of the main line 200 miles were laid with steel rails. At the claseof 1881 line and 111.29 in sidings and there were 345.16 miles in the spurs, 283 miles of which were laid with steel rails (being an increase of 83 miles) during 1881, (page 5, annual report for 1881.) At the close of 1882 the main line and sidings amounted to 485.62 tuiles
V. FLINT & P. ,M. R. CO.
607
laid with steel rails, being an increase in steel rails over 1881 of 19.72 miles. At the close of 1883 the main ,line was 361.31 miles; sidings miles, with 341.31 miles on main line and spurs 175.17; and 18 miles on branches laid with steel rails, being an increase in steel mileage over 1882 of 56.5:9 miles. At the close of 1884 there were 369.91 miles laid with steell'ails, an increase over 1883 of about 10 miles. At the close of 1885 the main line, sidings, branches, and spurs amounted to 543.12 miles, of which 373.88 miles were laid in steel, an increase over1884 of 3.97 miles of steel rails. Now, with the exception of some comparatively IilmaU aIl10unts expended in 1884-85 qn the yards at East Saginaw, Flint, and Evart, not a single doUar was charged to construction, or for bettermen.ts on the main line of the company's road for the years 1881 to 1885inclusive. During that period about 15,772 tonBof steel rails were purchased and paid for out of earnings. Whilethe,aceounts of the company lj,re in much confusion on that subject of tl.1fse steel rails, it appears from defendant's Exhibit G that the cost of these rails, with freight and fittings, after deducting what was on hand at close of 1885, amounted to about $900,346.10, while the total amount charged ,to construction as against this expenditure for the same period was only$540.616.S1, and this was on the construction account [or branches, sidings, spurs, and yards. Earnings were bU),'denE)d with the difference, exceeding $350,000. Brown, the road-master, places t,he cost of steel rails during said period at $737,063.82. If from this is deducted the $540,516.81, Qharged to construction there will be left $196,547 ,01. which was borne by earnings for purchase cost of r;r:ails. The. practice of the management was to remove the old iron rails from the main track,and use these in laying sidings, as required, and to put new steel rails in the main track in place of the old iron rails taken up. The difference between the cost of the new steel rail laid down on the main line, and as laid down, and the value of the old iron rail taken up, was charged to operating expenses, under the head of repairs to roadway, or "track repairs." Thus, in the report for 1881, it is stated that 4,000 tOns of steel rails were laid down on the road. The cost of this, less the value of old rails removed, was fixed at $133,whicp was charged to operating expenses, as "track repairs." The purchase cost of this 4,000 tons of steel rails, with fittings, to say nothing of the e;;pense of making the change, was $240,000. In 1882 a similar charge. wasmade to operating expenses for steel rails put down, to the amount of $31,224.56. During that year there were laid 1,697 tons of steel rails which cost $36,365. In 1883 the increase in steel-rail mileage on main track and sidings was 56.59 miles. Counting 38 tons to the mile, and the cost of steel rails at $37 per ton, this increased cost of steel rails alone was .04. For 1884 the cost of the steel rails used on the main line was.about $32,560; and in 1885 about$12,926.32, aggregating $371,850 for steel-rail betterments, which was charged to operating expenses, and taken out of earnings. The complainants' expert, Jones, makellthis expenditlilre for 1881,1882, and 1883, as shown by defendant's ,Exhibit G,amount to ,By taking the total
608
FEDERAl, .REPORTER.
cost of steel rails and deducting therefrom the am(}unt charged to struction, old scrap rails sold, and what was on hand at the Close of 1885, he makes this expenditure amount t(} $277,035.41, which, in the judgment of the court, is a most reasonable estimate; below, rather thaD ab(}ve, the actual outlay for steel rails used in improving the track. The old iron rails, together with some light-weight steel rails taken from the mainline, were used in sidings, spurs, and branches. A portion of these were charged to construction account, the (}lrl rails being charged at their estimated value. But a considerable portion of such sidings, spurs, and branches, as shown by the road-master, Brown, were made at the expense of earnings. The extension of sidings and spurs from October 1, 1880, to December 31, 1881, thus charged to operating expenses, was something over 12 miles, of which the estimated cost, as made by the road-master, was $45,430. For 1882 there were 2.41 miles of net extension made at the expense of earnings, involving an estimated. expenditure of $9,640. In 1884 there were 4.29 miles of net increase in such extensions, involving, as estimated by the road-master, an expenditure of $16,690. In 1884 the net increase of such sidings was 3.82 miles,involving an expense of $11,460; and in 1885 there was a net increase of sidings to the extent of 2.59 miles costing $5,400, aggregating, dUring the five years, $88,890. If the whole cost of the steel-rail betterments placed upon the road had been charged to construction account, as it should properl); have been, as between the two sets of stockholders, then the items makil'lg up this aggregate of $88,890 might properly have been borne by earnings as operating expense; but, instead of dOing this, the road-bed, or track, is improved by substiutil1g new steel rails for old iron rails; the difference in their value is charged t(} operating expense, and taken out of earnings; and then, when the old rail is used for sidings and spurs, it is charged sometimes, when 'the management think proper and so direct, to construction, and at other times no charge is made to construction, and the whole expense of the change, and the entire'cost of the siding or spur is made to fall upon the earnings. The which article 4 of the charter provided should be paid out of net income, did not, 'as between the preferred and unpreferred; or provisional stockholders, warrant this method of dealing with the earnings of the company. It was neither just nor fair towards the latter class. Its effect was, not to k\3ep the trackin repair,-'-in the same state of efficiencyas it existed in on October 1, 1880,-but to improve and enhance its value at the expense of earnings, which are thus reduced, and tIle provisional stockholders correspondingly postponed in coming into the <lonipany. If necessary to the assertion of complainants' rights, this <lourt would order the whole steel-rail account to be charged to construction, and earnings credited back with all that has been expended therefrom for or on account of steel rails and steel improvements. But, withDut changing the account to that extent, the conclusion of the court is that at lea.st $250,000 should be charged to construction on account of steel rails laid in the main tracks, and for outlays connected therewith, such as cost of work train, transportation of materials, etc., and that this
MACKINTOSH V. FLINT .. P. M. R. 00.
609
sum should be credited back to earnings; and further, that earnings should be credited, and construction charged, with the $88,890 expended on sidings, as above stated. The expert testimony in the case warrants these changes, which are, moreover, within the true meaning and reasonable intent of the charter provisions of the company, on which tht; rights of both classes of stockholders depend. Again. in 1883 two· steamers owned by the company were enlarged and made more efficient, at a cost of $40,286.44, which was paid out of and charged to earnings. This change was made in the steamers to meet the demands of a new class or character of business, which sprang up shortly before, acrORS Lake Michigan to Milwaukee. It was an addition of substantial and permanent character, which increased the value of the steamers to that extent, and the cost of the change should, in opinion of the court, be charged to construction. It was actually charged to operating expenses, and taken out of earnings. This should be corrected by credHing that amount back to earnir.gs for the year 1883., In 1884 there was a charge against expenses for depreciation on these steamers amounting to $6,000. In 1885 there was a like charge for depreciation, and also a charge of $2,500, as depreciation on dining-halls,thr three charges making $14,500. These sums were not actually expended out of earnings, but were f'stimated and charged against operating expenses. This was not proper. No depreciation account was either kept or warranted by the charter as between the two classes of stockholders, and, no expenditure having actually been made to meet such depreciation, the estimated amount thereof could not properly be deducted from earnings, or net income. U. S. v. Railway Co. ,99U. S. 459. The sum of $6,000 should therefore be credited back to earnings for 1884, and $8,500 for 1885. In the spring of 1884, $142,000 was expended, under the orders of the board of directors, for 8 new freight enginesalld 200 coal cars. The funds for this purchase were raised by loan, which was paid off by the company at the rate of $3,000 per month, and the sum so paid, in addition to interest on the loan, was charged to operating expenses, and withdrawn from earnings. See Reports for 1884, pp. 8, 23, for 1885, p. 8. This was clearly an improper charge against operating expenses. The outlay was not for the repair or renewal of old, but for the purchase of new, equipment, and should have been charged to construction. Fifteen thousand dollars were thus wrongfully charged in 1884, and $36,000 in 1885. These amounts should be credited to earnings for said years, respectively, and be charged to construction account. During the' years 1883, and 1884, arnings were charged with interest on temporary loans to the extent of $24,958.90. Whether th"se constitute a proper charge against net income or earnings, under the provisions of article 4 of the charter, admits of considerable question; but in the view which the court takes of other items of the company's accounts, as between construction and operating expenses, it is not aary to pass upon the point. So, too, in reference to the sum of $4,225.28, charged to profit and loss on an old claim brought over from v.34F.no.8-89
610 aFlSeta ,Q( the. receiver. ,Ther:e are :v:ariO\1sother items which 'complainl\ntsillsist, ,and whiQh the e:x:perts teSti,(YI should not. be .charged to opgP to'Qonstruction, ·Of be credited to earnings, but they need not be speoially, l1oticed, except as to dividend on the.QoUJ,pany's securities. A word of explanation is necessary as tQ this source of income. The whole $6,500,000 of preferred stock was issued. Only $0,342,000 was issued, leavingin the hands oOhe wmpllny$158,00Q ,of saidpreferr¢stock, the dividend on which the management credited to net income or earnings, as dividends on the entire $lh500,OOO .were charged against such earnings. If 7 per cent. annual dividends are to be chargeq on the whole prefen:ed stock of36,500,.000, then the companY credit earnings annually with 811,060, being 7 percent. on the $158,000 of stock still held by the company;, or,in stating the account of earnings .over operating expenses, said dividend aQquld be charged only On stock actually issued, amounting to $6,842,000; making tb:eanl1ualgividend c4arge $443,940, instead of $455,000,. 8.&. shown by the reports. ,The result will be the same under eitberm.ethod. It appears that the company's net earnings for the pE!riod fr011l October. 1, 1880, to December 31, 1880, was $132,. 584.69. lfthere is added to this the sum of $500,-:-the premium on bonds sold during thatperiod,-we have the sum of $133,084.69 of income to be carried forward as applicable to dividends for 1881. Then, taking the net earnings and /ldding thereto the corrections, or credits due to earnings, as above indicated, the account for the several years will stand as follows: Amount over from 1880 and applicable to dividends, · 3133,084 69 earnings, as reported by COn;1pany, for 1881, $244.037 94 Add: Premium on bonds sold that year, 107.257 25 Relaying track with steel rails, 133,779 09 spurs and main line sidings, 45,430 00 Balance oil Co. securities not 2,357 50 - - - - 532,861 78 Total applicable to dividends, tess 7 per cent. dividend on $6.500,000 of preferred stock, · $665,946 47
455,000 00
Surplus carried to January I, 1882, · $210,94647 1882. Surplus for 1881 brought over to 1882. $210,946 47 Net earnings reported for 1882. · · 3438,989 89 Add: Premiu.Illon bonds sold 1882, 34.70250 Si,224 56 .Relayingtrack with steel rails" SpUl'S and sidings made out of earnings, 9.64000 Bal. of dividend on Co. stock, 647 00 - - - - 515,20S 95
.
Total applicable to dividends in 1882, Less 7 per cent. dividend on $6,500,000 preferred stock. SurplU3 ('.anied tQ188S,
455,00000
MACKINTOSHV,';FtlINT & Pi M. R. CO.
611
1883. Surplus from 1882, .' ,I : . \ . $271,150 42 Net earnings reported for 1883. · · $488.799 13 Add: Premium on sold in 1883, 12,136 50 Relaying track with steel rails, . 65,000 00 Spurs and sidings made out of earnings, 16.960 00 Enlargement of steamers. · · 40,286 44 - '- - - 623,182 07 Total applicable to dividends in 1883, Less dividend of 7 per cent. on 86,500.000, · Surplull carried to January. 1884, · 1884. Surplus from 1883, Net earnings reported for 1884, · · $400.303 Add: Premium on bonds sold 1884 · 9,945 Relaying track with steel raild. 10,000 Spul'sand with earnings, 11,460 Equipment renewals, 15,000 Depreciation on steamers, charged to expenses, 6,000 Total applicable to diviclends in 1884, Less 7 per cent. diVidends on $6,500,000, · $894,332 49 455,00000 · $439,332 49 $439,33249
40 00 00 00 00 00
452,70840
Surplus carried to January 1, 1885. · $437,040 89 1885. Surplus from 1884, $437,040 89 Net earnings reported for 1885, · · 8272,451 77 Add: Relaying track with steel'rails, 9,996 35 Spurs and sidings made with earnings, 5,400 00 EqUipment and renewals charged to expenses, 36,000 00 Depreciation of steamers and dining-hall, 8,500 00 Dividend on Co. securities,. 4.740 00 - - 337,088 12 Total applicable to dividends in 1885 Less 7 per cent. dividend on $6.500,000. · $774,129 01 455,00000
$319.129 01 Surplus January 1. 1886, If, as the experts testify, the expenses of work trains engaged in construction, and freight on material used for construction, should be charged to construction account, and corrections were made in that respect, the anuual balance, after deducting the 7 per cent. dividend, would be still larger than as above given. It thus appears that, inde· pendently of the surplus land funds, the earnings or net income of the road, if the accounts between construction and operating expenses had been properly kept, in conformity with the provisions of the charter, and according to the rights of the two classes of stockholders, as therein defined, were amply sufficient, after paying interest on the company's
--
612
Jl'JIIDERAL REPORTER.
entire bonded debt, repairs, and expenses of equipment and renewals, to pay the annual dividends of7 per cent. on $6 ,iOO, 000 of preferred stock for the five years in question·. But, when the large surplus land fund is taken into consideration. it is difficult to see any reason for not declaring and paying that dividend for five consecutive years, except a deliberate purpose to keep the provisional certificates holders out of any voice or vote in management of the company, or to indefinitely postpone their admission. The 5 per cent. deficiency in dividends for the five consecutive years under consideration on the .$6,500,000 of preferred stock actually issued amounts to $317,100. This could have been readily withdrawn from the surplus land funds if earnings had been inadvertently diverted to construction, and the management had desired to replace the amount, 80 as to make it applicable to dividends; or, if improper charges to earnings had not been mad.e from year to year, as already shown, the deficiency would not have existed. While the earnings have been thus misapplied or diverted, the policy of the management has been steadily in the line of permanent improvements, and large enhancement in the value of the company's property. Its equipment has been greatly enlarged, its main tracks, sidings, spurs, and branches have been extended, and efficiency not merely maintained, but largely increased. When the company took possession in October, 1880, the road-bed and equipment were valued at $9,671,958.90.. On the 31st December, 1880, that valuation had increased to $10,311,193.38. At the close of 1881 the valuation of road-bed and equipment ha,d increased, as reported by the general manager, to $12,281,853.02. At the ,close of 1882 it had grown to $12,966,601.64. At the close of 1883 it was reported at $13,of 1884, after deducting $1,116,070.45, 506,231.94. At charged off to depreciation, the valuation stood at $12,657,430.55, and on December 31, 1885, it was placed at $12,512,928.81. If the trary deduction had not been· made in 1884, the valuation at the close of 188fl would have stood at $13,628,999.26, making an increase since October 1, 1880, of $3,957,040.36; an amount exceeding the provisional certificates now seeking admission as unpreferred stock in the company. These valuations are independent of the large surplus lands and land funds. Look at the condition of the company from another stand-point. Its total funded debt is $5,299,000, while the preferred stock actually issued is $6,342,000, making its total capitalization $11,641.000. It has 361.64 miles of main line, and 115.72 miles of business producing tracks in additioll;making 477.38 miles of roadway, on which there is of capital and funded debt only $11,641,000, or less than $25,000 per mile. The capitlLlization and funded debt of other railroads in the state of Michigan, it is said, will average about $45,000 to the mile. Under these ciJ:cumstances, neither the company nor the preferred stockholders who .control its management, which has been conducted mOre with a view to the permanency and security of their own interests than with regard to the rights and interests of the common or unpreferred stocklatter from their charter shara holders, can rightfully longer exclude in the corporate enterprise. This Butt. is practically a contest between
MACKINTl)SH II. FLINT & P. M. R. CO.
613
the two classes of stockholders. The preference class is in control, and is interested in keeping the other out. This result has been 80 tin effected by expending the company's earnings and income in permanentl,r improving the property, or for other purposes than those contemplated by article 4 of the charter, whereby net income applicable to dividends has been reduced, while the valuation of the company's road-bed and equipment has steadily increased. The preferred class, in control, select the management. This management, or directory. are more than mere agents of the company. They occupy a fiduciary relation towards the unpreferred dass of shareholders, in respect to the rights conferred upon them in and by the company's charter. They neglect or deliberately disregard the duties and obligations growing out 'of such trust relation, and then attempt to shield themselves, or defend their conduct on the ground that they were only discharging the company's duty to the public. The facts of tbe case do not sanction this defense. The court, having been compelled carefully to examine the evidence, which is quite voluminous, and analyze the company's accounts, so !lS to determine the rights of the parties, and being fully satisfied from this investigation of the accounts that the aforegoing statement in respect to the yearly income applicable to dividends is substantially correct, it is not deemed necessary to refer these matters to a special master for a report, and thereby further delay the final disposition of the case. The conclusions of the court on this branch of the case are that complainants are entitled to the relief sought; that they are entitled to be admitted into the defendant company as regular stockholders of the common or unpreferred class; that this right accrued to them and to others similarly situated on January 1, 1886; that a sufficiency of surplus land funds is in the hands of the land trustees, and subject to the control of the company to pay, or make good, the deficiency of H per cent., or $95,110, on dividends for 1881; t per cent., or $31,710, on dividends for 1882; and 3 per cent., or $190,260, on dividends for 1885, upon the preferred calJital stock actually issued, amounting to $6,342,000; and the defendant company should be required to pay over to the preferred stockholders, pro rata, out of said surplus land funds or other funds at its disposal, said annual deficiencies, so as to make up to said preferred stockholder8 their full 7 per cent. dividends for five consecutive years, and thus comply with the conditions, as the company and its management should have done, on which the provisional certificate holders were entitled to be admitted; and, further, that the defendant company, its officers and agents, should be enjoined from depriving complainants, or those in like state with them, of their rights as Common stockholders, in voting or otherwise, and from applying the income and earnings of the company. without the consent of said common stoekholders, to improvements of a permanent character; all of which is accordingly ordered and decreed, with the further direction that the defendant corporation, its officers and directors, be ordered to issue regular certificates for common or unpreferred stock in the company to complainants and other holders of provisional·certificates, severally, according to their respective holdings of
614 the latter and upon the production and surrender of the same, In the c!tse of Parker et al.v. Flint k Pete Marquette Railroad. Company and the 'Port Huron k Northwe8ternRailway Co'mpany et al. the same pro"isional certificate holders as in the other suit seek on behalf of themselves and others with like interests to restrain the Flint & Pere Marquette CompanyfrOn1 purchasing the stock and franchises of the Port Huron & Northwestern Railway Company, alleging that such purchase is not authorized by law; that it would be ultra 'l:ires j that it would involve a very large expenditure of money, inasmuch as the Port Huron & Northwestern Railway Company is a narrow-gauge road, in bad condition, and . would require heavy outlays to render it of any practical benefit to the purchasers, and that such outlays and expenditure would be drawn from earnings and income of the Flint & Pere Marquette Railroad Company, which, under article 4 orits charter, should be applied to dividends; and, generally, that the purchase would deplete the revenues of the latter road, seriously affect their rights, and that they should, if it is legal, have a voice and vote on the question of such purchase. The Port Huron & Northwestern Railway Company filed an answer, saying, in substance, that negotiations were pending for the purchase or acquisition of its road by the Flint &Pere Marquette Company; that the method of effecting that would be such as would be legal under the laws of Michigan, without explaining what method was proposed. The Flint & Pere Marquette Com pany demurred, and thereby admitted the allegations of the bill. On the argument questions were raised as to the character of this suit, which sought, in :addition to restraining said purchase, the same general relief sought in and by the first case. The court is of the opinion that the Port Huron & Northwestern Railway Company was neither a' necessary or proper. party to the litigation or questions involved in either· of these suits; that this last bill was properly a supplemental bill. It was filed without leave, as required by equity rule 57; but it was filed November 28, 1887 ,for the purpose of' enjoining a transaction which was about to occur, as alleged, on November 30, 1887, so that the provisions of rule 57 could not be conformed to. This bill will be dismissed as to the Port Huron & Northwestern Railway Company, with costs. . The court will now order it to stand, and to be treated as a supplemental bill in the original suit, as may be done under the authoritief.>. Story, . Eq. PI. §§ 882-905; Neale v. Neales, 9 Wall. 1; and Graffam v. Burge88, 117U. S. 195, 6 Sup. Ct. Rep. 686. The Flint & Pere Marquette Railroad Company admits the allegations of this supplemental bill by its demurrer, and thus presents the legal question whether, under the laws of Michigan, it can purchase the stock and franchises of the Port Hurun & NOl'thwestern Railway Company; ,and, if so, can it, as against the common or unpreferred stockholders, apply its mcome, either in paying for the interests purchased, or in improving and altering the property so acquired? It is now well settled thatthe proposed purchase of the stock, property, and franchises of the Port Huron & Northwestern Railway Company, as alleged in the supple-
MACKINTOSH V. FJ.INT. &: P.'M. R. 00.
615
mental bi11;whereby the latter company would be absorbed by the purchasing company, cannot he legally made in the absence of lawfuL authority from the state of Michigan. Pearce v. Railroad Co., 21 How. 442 i Tlwmas v. Railroa,d (t,o., 101 U. S. 71; .Branch v. 106 U. S. 478, 1 Sup. Ct. Rep. 495; Railroad Co. v. Railroad, 118 U. S. 290, 6 Sup. Ct. Rep. 1094. Do the laws of Michigan authorize or sanction such purchase? Under the general railroad law of the state (act 1873, § 29) railroad companies are allowed to consolidate upon certain tenus, when they form continuous or connecting lines. This contemplates the 1ormation of a new corporation; and the assent of the stockholders in each company, or a majority thereof, is requisite to the consolidation. Thisstatute is not applicable here. The bill charges, not a purpose to consolidate with the Port Huron & Northwestern Railway Company, but to purchase the latter's stock, property, and franchises, and to use the SRme as part and parcel of the purchasing company, and thus to bring the acquisition within tbe operation of its own cbarter. The consolidation statute does not authorize one company thus to acquire and absorb another. By section 28 oftbe general railroad laws of 1873 (1 How. St. § 3342) it is provided that one railroad corporation may subscribe to the capital stock of any other cc;>mpany organized under said act, ,witbthe consent of the latter; and by the acts of 1869 (1 How. St. § 3413) and, 1873 (1 How. St. § 3403) one railroad company is autborized to aid another having an unfinislledroad, and to make running arrangements; and, where their lines are connected, may enter into arrangements for their common benefit, "consistent with and calculated to promote -the objects for which they were [respectively] created." It is manifest, without discussion, that these statutory provisions do not authorize one railway corporation to acquire the stock and franchises of another completed company, with the intention of exercising the francbises of the latter, which is the case presented by the supplemental bill. Again, the complainants, being now entitled to admission into the Flint &Pere Marquette Railroad Oompany, as common stockholders, under and according to the provisions of its charter, and it being alleged and admitted by the demurrer that their interests and rights will be injuriously affected by the proposed purcbase and acquisition of the Port Huron & Northwestern Railway Company, they have the right to invoke the interposition of this court in preventing the consummation of the transaction until they have an opportunity of expressing their assent or dissent thereto; for, if the transaction 'can be lawfully made in any way, it would still be an enlargemeht and extension of tbe corporate purposes and objects of tbe company, as'defined in its charter, as to which they have the right to express tbeir assent or dissent. The proper time to do this is before, and not after,. the transaction is completed. Black v. Chnal Co., 24 N. J. Eq. 455. In tbe opinion ofthe court tbe preliminary injunction should be granted on the case made out by tbe supplemental bill, admitted by the demurrer, and disclosed ill the c()urse heretofore pursued by the company's management towards the common stockholders. The of de-
-
_.. _ - - - - - - -
616
fendants is o\Terruled, and the injunction is accordingly ordered, with leave at any time hereafter, when the common stockholders shall have been admitted into their rights as ordered and decreed in the main case, to move for a modification or dissolution of the same. The supplemental bill will be dismissed as to the Port Huron & Northwestern Railway Company, with costs to be taxed against complainants. The remaining costs itl both cases will be taxed against the Flint & Pere Marquette Railroad Company.
CENTRAL TRUST
Co.et al.,
(BAr,LOU,
P. Ry. Co.et al.
lntervenor,) v. WABASH, ST. L. &
(Cz'reuit Court. S. D.lllinoia. 1888.) :. , 1. MASTER A1'lD SERVAlIlT-NEGLIGElilCE OF ·FELI,OW-SERVAlilTS.
An expressman and baggageman was killed in a collision, while in the dis, 'charge of hill duty on defendant's passenger train; through the negligence of the employes of defendant's freight train. Held, that they were not fellowservants. 1 . . Intestate left a widow, but no children or descendants of children. He was about 80 years old; ha.d been earning $55 a month; had been in defendant's employ several years; was temperate, industrious, living with and supporting his wife. He left uo estate, and his widow was without means of support. . Damages assessed at $4,000. ;
2.
DEATH BY WRONGFUL ACT-DAMAGES.
In Chancery. W. Black, for intervenor. George B. Burnett, for receiver. AU,EN, J. In the matter of the intervening petition of Julia A. Ballou, administratrix, to be allowed damages for the death of her husband, William A. Ballou.' On the 16th day of August, 1887, the intervening petition of Julia A. Ballou was filed in this case, for the purpose of obtaining damages for the alleged unlawful killing of her husband by the Wabash, St. Louis & Pacific Railway Company. Subsequently the case was argued before the district judge, and submitted upon the following agreed state of facts: "It is hereby stipulated and agreed by the parties to this action that a jury be, and the same is hereby. waived. and said cause submitted to the court for determin!'tion upon the follOWing stipulation as to facts: That the said Julia A.. Ballou was duly appointed administratrix of William A.. Ballou by. the county court of Vermillion county, TIl.· on the 2<1 day of July. 1887; said county court of Vermillion county having jurisdiction of said proceedings for the making of said appointment. That the said William A. Ballou, deceased, came to his death on the 28th day of October, A.. D. 1886. from an injury received in a cullision on said Wabash"St. Louis &, Pacific Railway, on the date . 1 As to who are fellow servants, see Wolcott v. Studebaker, 34 Fed. Rep. 8, and note, McMaster v. Railway Co., (Miss.} 4 South. Rep. 59.