Farmers' Loan & Trust Co. v. New York & Northern Railway Co.

That the New York Central and Hudson Eiver Eailroad Company purchased a majority of the second-mortgage bonds and a majority of the stock of the New York and Northern Eailway Company for the sole purpose of obtaining' control of the property of the latter, is clearly established by the proof contained in the record. Indeed, such was the avowed purpose of its purchase. The record renders it equally clear that the New York Central and Hudson Eiver Eailroad Company was the actual and beneficial owner of such bonds and stock for several months before the commencement of this action. They were retained in the hands of Drexel, Morgan & Company, not as owners or holders in their own right, but as agents or naked trustees for the New York Central and Hudson Eiver Eailroad, and were clearly subject to the order and control of the latter. Moreover, the request that Drexel, Morgan & Company made to the plaintiff to commence this action was not only based upon the bonds owned by the New York Central and Hudson Eiver Eailroad Company and others it had contracted to purchase, but the sole purpose of that request was to procure a foreclosure and thus enable the New York Central and Hudson Eiver Eailroad Company to acquire control of the property and franchises of the New York and Northern Eailway Company for its own benefit, as set forth in the circular letter sent to the stockholders of the New York Central and Hudson Eiver Eailroad Company. The president of the latter company himself testified that that was the object and purpose which induced the sending of the notice requesting the commencement of this action. The notice given by the New York Central and Hudson Eiver Eailroad Company to its stockholders states the fact that on March 18,1893, agreements had already been made in respect to the purchase of a controlling interest in the New York and Northern Eailway Company, subject to the approval therein asked for. The letter of Drexel, Morgan & Company to the treasurer of the New York Central and Hudson Eiver Eailroad Company, dated April 5, 1893, shows that the majority of the stock and bonds mentioned therein was held by them, subject to the order of the

The facts already referred to are strong proof that the New York Central and Hudson Biver Bailroad Company was in the control of the affairs of the New York and Northern Bail-way Company. It is hardly to be supposed that a board of directors who was not under the control of another corporation would appoint three of the friends of the president of that corporation as directors of the company, and place the officers

On the trial the appellants sought to prove that after the New York Central and Hudson River Railroad Company became the owner of such stock and bonds, and while its officers were in substantial control of the New York and Northern Railway Company, they declined to accept traffic from other roads that would have produced a fund with which to pay the interest due on the bonds in question; that the income of the road which should have been employed to pay such interest was used for other and improper purposes; and that such action caused the inability of the New York and Northern Railway Company to pay the interest and thus cure its default. This evidence was rejected as immaterial, and the appellants duly excepted.

In determining the correctness of the rulings made by the trial court, it becomes necessary to determine incidentally whether a corporation, purchasing a majority of the stock of another competing corporation, may thus obtain control of its affair’s, cause it to divert the income from its business, or to refuse business which would enable it to pay the interest for which it was in default, and then institute an action in equity to enforce its obligations for the purpose of obtaining control of its property at less than its value to the injury of the

In Gamble v. Q. C. W. Co. ( 123 N. Y. 91 ), in discussing a similar question, Judge Peckham, in effect, said that, although it is not every question of mere administration or of policy upon which there might be a difference of opinion that would justify the minority in coming into a court of equity to obtain relief, yet, where the action of a majority of the stockholders of a corporation is fraudulent or oppressive to the minority shareholders, an action may be maintained by the latter, where the contemplated action of the majority is so far opposed to the interests of the corporation as to lead to a clear inference that such action is with an intent to serve some outside purpose, regardless of the consequences to the company and inconsistent with its interests.

In Pondir v. New York, L. E. & W. R. R. Co. ( 72 Hun, 385 , 389), where the Erie Eailroad Company, through the action of the Buffalo, Bradford and Pittsburgh Eailroad Company, whose directors were elected and controlled by the Erie Company, without consideration, obtained the property of the latter corporation and so arranged its affairs as to render all the shares of its stock, other than those held by the Erie Company, valueless, it was held that a stockholder of the Buffalo, Bradford and Pittsburgh Eailroad Company might maintain an action to redress the wrong done to Ms company. In that case Fir. Justice Follett said : “This was a fraud on the Buffalo, Bradford and Pittsburgh Eailroad Company and its shareholders. Such frauds are not uncommon in the management of corporations, and when they are exposed should be condemned by the courts and a heavy hand laid upon all who participate in them.”

Sage v. Culver ( 147 N. Y. 241 ) is to the effect that when it can be fairly gathered that the officers and directors of a corporation have made use of relations of trust and confidence to secure or promote some selfish interest, it is enough to set a court of equity in motion, and to require them to explain such a transaction which there is a presumption against in equity.

In Meyer v. Staten Island R’way Co. ( 7 N. Y. St. Repr. 245 ) it was held that a majority of the stockholders of a corporation would not be permitted to sanction a transaction which is the outcome of a scheme, dishonest or fraudulent in its inception, and that the minority stockholders have rights which under such circumstances must be recognized; that the majority may legally control the company’s business, but in assuming such control they take upon themselves the correlative duty of diligence and good faith, and that they cannot manipulate the company’s business in their own interests to the injury of the minority stockholders.

In Ervin v. Oregon Ry. & Nav. Co. ( 27 Fed. R. 630 ) it was held that when a number of stockholders combine to constitute themselves a majority, to control the corporation as they see fit, they become, for all practical purposes, the corporation itself, and assume the trust relation of the corporation towards its stockholders, and, if they seek to make profit out of it at the expense of those whose rights are the same as their own, they are unfaithful to the relation they have

In Wright v. Oroville M. Co. ( 40 Cal. 20 ) it was in substance held that in dealing with the relations between a corporation and its officers on one hand, and the stockholders upon the other, in the management of the corporate affairs, courts of equity will look beyond the mere observance of the forms of law, and inquire if the authority has been in good faith exercised to promote the interests of the stockholders; and that a court of equity will, at the instance of a stockholder, control the corporation and its officers, and restrain them from doing acts even within the scope of the corporate authority, if such acts would amount to a breach of the trust upon which the authority had been conferred.

In Meeker v. Winthrop Iron Co. ( 17 Fed. R. 48 ) it was held that a majority of the holders of the capital stock of a corporation could not, by their votes in a stockholders’ meeting, lawfully authorize its officers to lease its property to , themselves, or to another corporation formed for the purpose and exclusively owned by them, unless such lease was made in good faith, and supported by an adequate consideration; and that in a suit, properly prosecuted, to set aside • such a contract, the burden of proof, showing fairness and adequacy, is upon the party or parties claiming thereunder.

In Goodin v. Cincinnati and Whitewater Canal Co. ( 18 Ohio St. 169 ) a railroad company purchased a majority of the shares of stock in a canal company, elected for the latter a board of directors who were in the interest of the railroad company, and then, with the assent of such board, appropriated the entire canal and property of the canal company as a railroad track, paying therefor a price or compensation which was agreed upon by the directors of the two companies, but which was far below the actual value of the property. Under those circumstances the court held that, although the stockholders and creditors of the canal company could not, after the road had been completed, reclaim the property, or enjoin its use, yet they Were not concluded by such agree

In Jackson v. Ludeling ( 21 Wall. 616 ) it was held that the managers and officers of a company where capital is contributed in shares, are in a very legitimate sense trustees, alike for its stockholders and its creditors, though they may not be trustees technically and in form. They accordingly have no right to enter into or participate in any combination, the object of which is to divest the company of its property and obtain it for themselves at a sacrifice; they have no right to seek their own profit at the expense of the company, its stockholders, or even its bondholders. In case of embarrassment to the company, and any necessity to sell the estates of the company, it is their duty, to the extent of their power, to secure for all those whose interests are in their charge the highest possible price for the property which can be obtained.

In Menier v. Hooper’s Telegraph Works (L. R. [9 Ch. App.] 350) it was held that where a majority of a company proposed to benefit themselves at the expense of the minority, the court might interfere to protect the minority, and that in such a case the bill is rightly filed by one shareholder on behalf of the others and against the company.

In Gregory v. Patchett (33 Beavan, 595), where the only available property of a company was transferred to two shareholders in lieu of their shares, and the company was thereby practically put to an end, and this was sanctioned by a majority of the shareholders at a general meeting, it was held that the majority could not bind the minority in such a transaction ; that where measures were adopted which were plainly beyond the powers of the company, and inconsistent with the objects for which the company was constituted, the court, at the instance of the minority, would interpose to prevent the performance of such an act.

While the opinions in the cases cited are instructive and have an important bearing upon the question under consideration, still, within the limits of this opinion, we have found it impracticable to quote from the language of the courts in those cases.

Hackettstown Nat. Bk. v. D. G. Yuengling Brewing Co. (15 N. Y. Law Jour. 541) is to the effect that every delegation of power implies that it will be honestly exercised, and in that case it was held that the evidence offered upon the trial presented a question of fact for the jury whether a consent, given in pursuance of a resolution passed by a majority of the bondholders of a corporation, extending the time of payment of the principal and interest of its bonds, was given in good faith in the common interest of all, or amounted to an unwarranted exercise of the power of the majority because given in the interest of one bondholder, with a view of enabling him to compel the minority bondholders to sell their bonds on such terms as he might dictate.

While the question in some of the cases cited arose between stockholders and the directors and officers of a company who as such held a position of trust as to the former, still, where, as in this case, a majority of the stock is owned by a corporation or a combination of individuals, and it assumes the control of another company’s business and affairs through its control of the officers and directors of the corporation, it would seem that for all practical purposes it becomes the corporation of which it holds a majority of stock, and assumes the

It is a controlling maxim that a court of equity will not aid parties in the perpetration or consummation of a fraud, nor give any assistance whereby either of the parties connected with the betrayal of a trust can derive any advantage therefrom. (Farley v. St. Paul, Minneapolis & Manitoba Ry. Co., 4 McCrary, 138 .) "It is a sound principle, that he who prevents a thing being done shall not avail himself of the nonperformance he has occasioned.” (Fleming v. Gilbert, 3 Johns. 528 , 531 ; United States v. Peck, 102 U. S. 64 ; Dolan v. Rodgers, 149 N. Y. 491 .)

The principle of these authorities renders it quite obvious that a corporation, purchasing a majority of the stock of another competing one, cannot obtain control of its affairs, divert the income of its business, refuse business which would -enable the defaulting company to pay its interest, and then institute an action in equity to enforce its obligations, for the avowed purpose of obtaining entire control of its property to the injury of the minority stockholders. Such a course of action is clearly opposed to the true interests of the corporation itself, plainly discloses that one thus acting was not influenced by any honest desire to secure such interests, but that its action was to serve an outside purpose, regardless of consequences to the debtor company, and in a manner inconsistent with its interest and the interest of its minority stockholders.

The respondents, however, contend that the doctrine of the authorities cited is not controlling in this case, but that the Flew York Central and Hudson Biver Bailroad Company had a right to purchase a majority of the stock and bonds of the Flew York and Northern Bail way Company, for the express purpose of obtaining control of the affairs of the latter for its own use and benefit, and to thus acquire its property at less

In Morris v. Tuthill the action was to foreclose a mortgage brought by an assignee. There was no question or principle of trust involved in that case. The plaintiff owed the defendant no duty, and, hence, it was held that under such circumstances the plaintiff had a right to maintain an action for the foreclosure of the mortgage, although he took title to it from motives of malice, and the assignor assigned the mortgage to him from a like motive. That that case was correctly decided we have no doubt, but it is clearly distinguishable in principle from the case at bar, and has no bearing whatever upon the question under consideration.

In the Phelps case it was held that a party was not liable for the consequences of an act done upon his own land, lawful in itself, which did not infringe upon any lawful right of another, simply because he was influenced in doing it by wrong and malicious motives, and that courts would not

In the Beveridge case this court held that all the powers conferred upon a corporation, unless otherwise expressly prescribed, must be exercised by its directors, who are constituted by law the agency for that purpose; that the consent or ratification by its stockholders was unnecessary unless required by statute or its by-laws, and, therefore, that contracts which a corporation may legitimately make may be made by its board of directors, and, in the absence of fraud or collusion on the part of the directors, they are binding upon the corporation; that an appeal to equity on the part of the stockholders to be relieved from the acts of the directors, where they were within their powers and apparently uninfluenced by corrupt motives or personal interests adverse to those of the stockholders, should at least be justified by some showing that the acts were improper within the belief of a fair proportion of the stockholders. The principle enunciated and the decision made in that case are undoubtedly correct. But the question as to the right of a majority of the stockholders of a corporation to enforce its obligations as against the minority stockholders to their injury by reason of a default caused by the wrongful act or omission of the majority, was not considered or in any way involved. It, however, seems to recognize the principle that where there is fraud or collusion, corrupt motives, or personal interest adverse to the stockholders, another rule would apply.

That any person or corporation authorized to do so might have purchased the bonds of the New York and Northern Bailway Company, and have rigorously enforced them by a sale of its property, there can be no doubt. They might also have purchased the stock of the company and thus have become the owners of both; and while such owners might have enforced the liability of the company upon its bonds, so long as they acted in good faith and their purpose was proper; but when the New York Central and Hudson Biver Bail-road Company purchased the stock and bonds in question, thus obtaining a controlling interest in the affairs of the New York and Northern Bailway Company for the avowed purpose of destroying it, to serve a purpose entirely outside of that for which it was organized, and in hostility to it, it becomes clear that as such stockholder it owed a duty to the minority stockholders, that the law implied a quasi trust upon its part, and that a court of equity will not aid it in the destruction of that corporation and a confiscation of its property, although it held a majority of its stock and the required amount of its bonds.

Hence, we are of the opinion that the court erred in rejecting as immaterial evidence offered by the appellants to show that, after the New York Central and Hudson Biver Bailroad Company became the owner of a majority of the stock and bonds of the New York and Northern Bailway Company, and while its officers were in control of the latter corporation and its affairs, it declined to accept traffic from other roads which yould have produced a fund with which to pay the interest that was due; that the income of the road, which should have been employed to pay such interest, was used for

On the trial the learned trial judge refused to find various facts, upon the ground that they were immaterial. It is manifest from an examination of the appellants’ requests to find, and the rulings of the court thereon, that it refused to find many facts that were material to sustain the appellants’ defense, and which were established by the undisputed evidence in the case. This, we think, constituted error, as it is the duty of a trial judge to find upon every material question submitted to him and involved in the evidence. (Callanan v. Gilman, 107 N. Y. 360 , 372.)

The respondents claim that by virtue of the provisions of section forty of the Stock Corporation Law the New York Central and Hudson River Railroad Company had the right to acquire the stock of the New York and Northern Railway Company. We do not deem it necessary to either discuss or decide that question, for if it be admitted that the New York Central and Hudson River Railroad Company was authorized to purchase such stock and bonds, still nothing will be found in the statute which authorizes it to employ them for the purpose of destroying the property of the New York and Northern Railway Company to the injury of its minority stockholders. If we are correct in our conclusion that a corporation cannot acquire the majority of the stock of another corporation, obtain control of its affairs, divert the income of its business, refuse business which would have enabled the defaulting company to pay its interest, and then institute an action

The appellants also contend that the plaintiff had no authority or right to bring this action in the form in which it was brought, as it had not received a valid request to do so from a sufficient number of bondholders. The mortgage provides: “ In the event of any of the defaults mentioned in the next preceding article, the party of the second part may, and upon the written request of the holders of $2,000,000 in amount of said bonds then outstanding and unpaid or unredeemed, the party of the second part shall apply to any court having proper jurisdiction in the premises for a foreclosure and sale of the mortgaged premises.” The plaintiff, in its complaint, alleged that it had received a written request, signed by the holders of more than two millions in amount of said bonds outstanding and unpaid or unredeemed, requesting it to bring proceedings for the foreclosure and sale of the property and premises covered by this mortgage. The only request which was made to the trustee was that made by Drexel, Morgan & Company, who stated therein that they were the holders of $1,700,000, and represented the owners in $896,000 of such bonds. It was upon this request alone that the action was instituted. The proof tends to show that, although bonds to the amount of $1,700,000 were in their hands, yet that they were not in fact the owners of such bonds, but they belonged to the Yew York Central and Hudson Biver Bailroad Company. The

It is, however, contended that inasmuch as the plaintiff had the right of its own motion or in its discretion to commence this action without any request whatever, it follows that the action, having been commenced, was properly begun and the appellants’ contention cannot be sustained. The mortgage provides for two cases, in either of which the action might be properly commenced. The trustee might act upon its own motion and exercise its own judgment and discretion upon the question whether it was for the interest of the bondholders and all concerned to have the mortgage foreclosed, and if it so determined it might institute an action for its foreclosure although no request whatever was made. On the other hand, it might be required to institute such an action upon the writ

There are several other questions raised by the appellants, but, as the judgment must be reversed .for the errors already pointed out, it is unnecessary to discuss or determine them.

This consideration of the questions involved in the casé has led us to the éonclusions that the learned trial judge erred : 1, In refusing to find material facts upon the ground that they were immaterial;

3. In rejecting, as immaterial, evidence offered by the appellants tending to show that the Hew York Central and Hudson River Railroad Company, while in control of the affairs of the Hew York and Horthern Railway Company, declined to accept traffic from other roads which would have produced a fund with which to pay the interest due upon the bonds in suit; and,

4. In rejecting, as immaterial, evidence to show that the income of the road, which should have been employed to pay the interest on such bonds, was used for other and improper purposes.

We think the judgment should be reversed, and a new trial granted, with costs to abide the event.

All concur, except Andrews, Ch. J., and Gray, J., not voting.

Judgment reversed.