Drake v. New York Suburban Water Co.

Headnote

1. Corporation—Validity op Contract.

In an action toy a holder of stock of a corporation, the complaint attacked the validity of an issue of stock under’ the terms of a construction contract, the consolidation of the company with another corporation, and a sale under a decree of foreclosure. It appeared that the contract was made and the stock issued through the sole stockholders at the time, that the transaction

was within the scope of the corporate authority, and that the work of the contractors under the contract had been fully performed, and accepted and enjoyed by the corporation and its successors. Held, that the transaction was not open to attack.

3. Same—Estoppel.

The stock held by plaintiff was a part of that issued to the contractors, and had been derived by him through them. Held, that there was no basis for holding the general transaction invalid, and at the same time sustaining the validity of plaintiff’s stock.

3. Same.

At the time of the consolidation objected to, plaintiff’s predecessor in ownership received due notice of the proceedings; and apart from a suit brought by him in reference thereto, in which the complaint was dismissed, neither he nor plaintiff interposed any objection for many years. Held, that plaintiff was estopped from asserting any right as against any person who had in good faith dealt with the corporation, or received its securities.

4. Same.

Held, further, that persons who had advanced money to the corporation for its corporate purposes upon the faith of negotiable instruments issued by it were entitled to protection, and the stockholders were estopped from setting up the defense of invalidity in order to secure for themselves property thus acquired.

5. Evidence—Former Judgment.

A prior judgment which might have been pleaded in bar to an action is, though not thus pleaded, admissible as evidence of the matters determined by it.

Appeal from special term, Westchester county.

Action by John R. Drake against the New York Suburban Water Company and others. From a judgment for plaintiff, certain defendants appeal. Reversed.

The New York & Mt. Vernon Water Company was organized in January, 188G, pursuant to the provisions of chapter 40 of the Laws of 1848. Prior to this time, and in 1873, the Mt. Vernon Water Company had been incorporated, with a capital of $25,000. The two above-named companies came into existence for the purpose of supplying the village of Mt. Vernon with water. The first named of these companies upon its organization purchased the stock of the other company, paying therefor .its full par value. Thereupon the village, through constituted authority, granted to the New York & Mt. Vernon Water Company, and to its successors and assigns, the exclusive privilege of constructing, maintaining, and operating its waterworks in said village for a period of 20 years. The terms and conditions Of this ordinance were accepted by the company, and the same became operative for the purpose contemplated. On March 20, 1886, three shares of stock of the company were issued, evidenced by certificates 1, 2, and 3, to F. ELopkinson Smith, George H. Holt, and G. D. L’Huilier, respectively. On the same day the said company, through its president, F. Hopkinson Smith, entered into a construction contract with Inman Bros., a co-partnership composed of William F. and George B. Inman. By the terms of this agreement the Inmans were to acquire all land and water rights and privileges necessary for the construction, maintenance, and supply of the waterworks, and to transfer the same to the company; also, to acquire, at their own cost and expense, permanent rights of way in and through all private property adjacent to the village, for running, repairing, and maintaining pipes, machinery, reservoir plant, etc., of the company; also, to furnish all labor and material required to lay the pipes, construct the mains, and place hydrants and appurtenances in compliance with the ordinance of the village, and in accordance with certain plans and specifications of the company. The company agreed to pay for such construction $199,700 of its capital stock, being its entire issue of capital stock, less the three shares issued as heretofore stated; also, .$125,000 in the first mortgage, 20-year bonds of the company, or such amount of bonds as should be determined upon by Smith, Holt, and George B. Inman,—the exact amount to rep

resent a fair compensation for the work under the contract, including a contractor’s profit of 15 per cent.; these sums to be in full payment for the cost of construction, excepting land for a permanent structure, mentioned in the first section of the contract, and the damages, if any, sustained by adjacent property, unless otherwise mutually agreed. These bonds were to be a part of a series of 200, of $1,000 each, with interest coupons attached, and be secured by mortgage upon the property of the company. The stock was to be delivered upon the execution of -the agreement and the bonds as the work progressed, and as determined by the trustees of the company. Upon the execution of the contract the company delivered to Inman Bros, certificate No. 4, for 1,997 shares of stock. On the same day Inman Bros, entered into a contract with the firm of Taintor & Holt, bankers, composed of Giles E. Taintor, George N. Holt, and G. D. L’Huilier, for a sale of the stock and bonds secured by virtue of their contract with the company. By the terms of this agreement, Inman Bros, were to sell $101,000 of the capital stodc, being 1,010 shares, and $125,000 of the first mortgage bonds, for $112,500; the same being the equivalent of $900 for each bond and the stock. The stock was to be delivered at once, and the bonds as received from the company. Taintor & Holt agreed to pay the purchase price as the work progressed, not to exceed 60 per cent, in value of the work performed and materials furnished, and only upon the certificate of Smith that the work and materials were furnished in accordance with the contract between the company and Inman Bros.; the remainder to be paid to Smith upon the completion of the work in pursuance of the contract, and the acceptance of the work by the village authorities as provided in the ordinance. Inman Bros, completed their contract on the 16th day of August, 1886, and Taintor & Holt paid the money as agreed. d?hereafter the works were operated by the water company. Inman Bros, surrendered the first certificate issued to them, and transferred a part of the remaining shares held by them. Among the shares, 430 were transferred to Moses B. Grow, represented by certificate No. 5. Grow subsequently surrendered this certificate, and procured certificates numbered from 26 to 33, inclusive; each certificate representing 10 shares of stock. The last certificate he transferred to Henry Huss on the 26th of June, 1886, in payment for services rendered to Crow and Inman Bros, in procuring water rights, abstracts of title, and other information, during the construction of the works. On the 11th day of January, 1887, Huss surrendered this certificate, and procured certificate No. 41 to be issued to him for 10 shares, which he thereafter, and on September 8, 1896, transferred to the plaintiff in this action, together with all rights and interests which in any wise accrued to him by reason of such ownership. In pursuance of its contract with Inman Bros., the water company made and executed a mortgage on the 1st day of May, 1886, to the Central Trust Company of New York, to secure its bonds to the amount of $200,000, payable in 20 years, with interest. The consent of the stockholders of the water company to the execution of this mortgage was duly given, and among such consenting stockholders was Grow. In July, 1887, the water company executed, a second mortgage to the same mortgagee to secure the payment of an additional $100,000 of bonds. This mortgage had the consent of all the stockholders of the water company, including Henry Huss, who then held 10 shares. On the 1st of August, 1889, the water company, needing more money, executed a third mortgage -to the same mortgagee to secure the payment of $200,000 of its bonds. This mortgage became a second lien upon the property, as the bonds secured by the second mortgage were exchanged for the bonds secured by the third, and the Second mortgage was satisfied and discharged of record. The third mortgage was assented to by stockholders representing 1,905 shares out of 2,000.

On March 26, 1891, a majority of the stockholders of the water company determined to increase its capital stock and extend its operations. Acting under the advice of counsel, a new company was incorporated, under the name of the New York City Suburban Water Company, with a capital stock of $1,500,000, divided into 15,000 shares of $100 each. This company was created for the purpose of consolidating with the New York & Mt. Vernon Water Company, and in reality merging the latter into the former. After the incorporation of the Suburban Company, and on the 22d day of April, 1891, it executed a mortgage to secure an issue of $1,500,000 of bonds. This mortgage was assented to by all of its stockholders. At this time, however, but 10 shares of stock had been

issued, which the consenting parties held. The recital in the assent of the stockholders is that the)' owned and held the entire capital stock thereof, according to the provisions and intent of chapter 163 of the Laws of 1878. On the 28th day of April following, an agreement was made and entered into by and between the trustees of the two last-named companies for the consolidation of the two-into one. This agreement provided, inter alia, that the name of the new company should be the New York City Suburban Water Company; that its object should be to supply water to the village of Mt. Vernon; that the new corporation should succeed to and be held liable to pay all the debts and liabilities of the consolidated corporations, and in particular the mortgage of the New York City Suburban Water Company, executed to the Atlantic Trust Company as trustee, should be an obligation of the consolidated company, as to the entire issue of bonds, the same as though such mortgage had been issued after consolidation; that the bonds should be held by the trustee, or disposed of by it, for the benefit of the consolidated company. Shares of stock of the consolidated company equaling the capital stock of the New York & Mt. Vernon Water Company, and 10 shares of stock issued by the Suburban Company, should be issued in lieu thereof and exchanged therefor. The remainder of the stock was to remain unissued at ■the time of consolidation, or, if issued, it should be represented by its par value in the treasury of the consolidated company. It was further agreed that any stockholder not consenting to consolidation should not be prejudiced by the valuation fixed by the agreement, but should have all the rights to a cash valuation of his stock or otherwise as allowed by law.

After the execution of this contract a meeting of the stockholders of the New York & Mt. Vernon Water Company was called for the 8th day of June, 1891, to determine whether consolidation should take place, pursuant to the terms of the written agreement, a copy of which was sent with the notice calling the meeting. A copy of this notice and agreement was received by Huss. On the 6th day of June, Huss and one Cameron, stockholders of the New York & Mt. Vernon Water Company, began an action in the supreme court to restrain the proposed consolidation, upon the ground that the same was illegal, and procured an injunction restraining the said companies from proceeding further in the matter. This action brought in as parties defendant the New York & Mt. Vernon Water Company, the trustees of said company, the Mt. Vernon Water Company, and the New York City Suburban Water Company. Motion was made at a special term to dissolve the injunction, which was denied. Thereupon an appeal was taken to the general term, where the order denying the motion was reversed, and the injunction was dissolved. From this order the plaintiffs appealed to the court of appeals, where the same was affirmed. While the appeal to the court of appeals was pending, a stipulation was entered into by the parties to the effect that, if the order was affirmed upon its merits, the complaint should be dismissed upon the merits, and the judgment should recite that the Mt. Vernon Water Company did not seek to, and would not, consolidate with the defendants, or either of them. Upon the affirmance of the order a judgment was entered, August 12, 1892, pursuant to this stipulation, whereby it was adjudged that the complaint of the plaintiffs be dismissed upon the merits, and that the plaintiffs were not entitled to the preliminary injunction. Pending this-action, and pursuant to the notice hereinbefore^referred to, the stockholders of the New York & Mt. Vernon Water Company, holding 1,855 shares of stock, voted in favor of consolidation, and the holders of the stock then issued of the1 New York City Suburban Water Company in like manner voted in favor of consolidation. A large majority of the stock of the New York & Mt. Vernon Water Company voting for consolidation was in the name of Smith, but in fact it was owned by Coffin & Stanton, a firm of bankers, who controlled the enterprise. On the 10th day of June, 1892, the required certificate was executed and filed, and the two companies became consolidated. The holders of the 1,855 shares of stock of the New York & Mt. Vernon Water Company subsequently exchanged such stock for the stock of the consolidated company. Huss did not exchange his stock, nor within the 20 days object to the consolidation, or demand payment therefor. After the consolidation the new company assumed control of ah the property of both companies, and conducted the business for which it was incorporated. Of the $1,500,000 bonds authorized and secured by the mortgage to-the Atlantic Trust Company, $400,000 were to be used in retirement of the bonds.

of the New York & Mt. Vernon Water Company, and $900,000 for extending and improving the plant. This provision was inserted in the mortgage. Thereafter bonds amounting in the aggregate to $1 95,000 were issued, and exchanged for the bonds of the New York & Mt. Vernon Water Company, secured by its third mortgage to the Central Trust Company of New York, leaving five bonds of $1,000 each outstanding, and secured by this mortgage. All of the bonds were issued by the Atlantic Trust Company in compliance with the essential requirements of the mortgage. $495,000 of' the bonds appear to have been issued before consolidation of the corporations was effected, but after the agreement of consolidation was executed, and the remainder after consolidation. The whole amount issued was $1,270,000. They were all issued upon the order of the president of the New York City Suburban Water Company, and delivered to Coffin & Stanton. What disposition was made of the bonds by Coffin & Stanton, aside from those used to retire the bonds of the New York & Mt. Vernon Water Company, and improve and extend its works, dees not clearly appear. At the time of the failure of the firm of Coffin & Stanton, they were the holders of $480,000 of the bonds which were hypothecated as collateral security for money owing by the firm. The remainder of the bonds are held by various persons, corporations, and banks in the United States and England. When Coffin & Stanton failed, Newman Erb was appointed receiver of the estate, and entered upon his duties. Default having been made in payment of interest upon the bonds, Erb, in pursuance of a provision contained in the mortgage, requested the. Atlantic Trust Company to foreclose the same. Thereupon a foreclosure action was instituted, and in usual course carried to a judgment of foreclosure and sale. Pending this foreclosure, holders of bonds in an amount exceeding $1,000,000 deposited the same with the Atlantic Trust Company; and a committee of such bondholders was appointed, who executed and delivered a trust agreement providing for the rights of the bondholders and the reorganization of the company. By the terms of the judgment of foreclosure and sale, so much of the bonds and overdue coupons were authorized to be received in payment of the purchase price of the property as should be the equivalent of so much of the purchase money as would be distributable and payable thereon. Acting under the trust agreement and the authority of the judgment, the property was bid in by Newman Erb and Charles Bard, a committee representing the committee created by the trust agreement, for $50,000. Thereafter, in pursuance of the same authority, Erb and Bard and their associates incorporated themselves under the name of the New York Suburban Water Company. The certificate of incorporation provided, inter alia, that there should be paid upon the new bonds 2y2 per cent, per annum for the first five years, and an additional 2% per cent., or so much as shall be earned, and at the end of five years interest at the full rate of 5 per cent, per annum; that the bondholders should receive of the securities of the new company for each $1,000 bond a new first mortgage bond, par value of $800, and 10 shares of full-paid common stock, $1,000; that negotiations were then pending for a sale of the property, and, in the event a sale was not effected during the period, the bondholders were compelled to suffer an abatement of a part of the interest upon the new bonds; the stock to be held in trust and deposited with the Atlantic Trust Company for a period not to exceed five years, and certificates of beneficial interest issued to the bondholders fh lieu thereof; the stock so held to be used to elect the board of directors from among the bondholders; the trust created to leave the committee with power to dispose of the entire stock, subject to the approval of the owners of three-fourths in amount of certificates of beneficial interest. After the company was organized, it took possession of the property, carried on the business, and on .Tune 10, 1895, executed to the Atlantic Trust Company, as trustee, a mortgage upon its property to secure $1,500,000 of its bonds, pursuant to the provisions of the agreement of reorganization. Of these bonds, $1,010,500 have been issued to the holders of the bonds of the New York City Suburban Water Company, who deposited their bonds under the agreement, $130,000 have been issued for cash, and $39,500 have been delivered to the president of the company for its use. These bonds are now held by various parties, and are widely scattered. The property purchased at the foreclosure has been conveyed to the new corporation. The original incorporators of the New York City Suburban Water Company were all employés of Coffin & Stanton, as clerks or otherwise, except Gleason, who was the counsel for the firm, and

conducted the proceedings resulting in the incorporation of this company, and the consolidation, as hereinabove stated. Ludwig, the president of the first Suburban Company, signed all of the bonds, and made requisition of bonds in the aggregate of $495,000, which were delivered to Coffin & Stanton before consolidation was effected. The president of the consolidated company was Clarence D. Turney, the manager of Coffin & Stanton; and it was upon his requisition that the remainder of the bonds issued were received from the trust company, and delivered to the firm of Coffin & Stanton. The plan of consolidation originated with Coffin & Stanton, and was carried out at their instigation. They used some of the stock and bonds for their private purposes, and as a re-enforcement of security for loans, but how many went in this direction the record does not disclose. Newman Erb occupied for a time an office with Coffin & Stanton, and did some business for them. By his declarations it appeared that he was more or less familiar with the operations of Coffin & Stanton, and to some extent with their operations in connection with the water companies.

In the action of foreclosure and sale by the Atlantic Trust Company, Turney filed an answer in which he admitted the allegations of the complaint, and upon this admission the subsequent applications to the court were made. Upward of a year after the foreclosure and sale of the mortgaged property, Huss assigned his interest to the plaintiff, as hereinbefore stated, and thereafter the plaintiff brought this action. The complaint demands as relief that the New York Suburban Water Company be adjudged to hold the property in trust for the discharge of valid liens of the New York & Mt. Vernon Water Company, to be ascertained; that the mortgage or deed of trust is not a valid lien upon the property, or any of it; that the judgment of foreclosure and sale, and the reorganization proceedings, be vacated and set aside; that the proceedings of consolidation are null and void, and the property of the New- York & Mt. Vernon Water Company was not affected thereby; that the stock held by the receiver of the New York City Suburban Water Company, and the bonds issued to Coffin & Stanton, or any substituted stock or bonds, are null and void; and for such further relief as may be just. Upon the complaint and the proof the court rendered a judgment adjudging, among other things, that the plaintiff is entitled to recover his proportionate share of the proceeds of the property of the defendant the New York & Mt. Vernon Water Company, as upon its dissolution on June 17, 1892; and it directs that the property as described be sold, subject-only to the lien of the first mortgage for $200,000, and of the second mortgage for $5,000, and that the property be free of any lien by virtue of the mortgage executed by the New York City Suburban Water Company, or the judgment of foreclosure obtained by the Atlantic Trust Company thereunder, or of the mortgage executed by the reorganized company; that none of the parties to this action are entitled to share in the proceeds of the sale, except the plaintiff; that the property be sold at public auction for cash, subject only to the aforesaid liens; that the referee named pay to the plaintiff io/145, and costs of the action, and that he hold the balance for further disposition as shall be provided upon the foot of the judgment; that the plaintiff have leave to bring in the owners of 135 shares of the capital stock of the defendant the New York & Mt. Vernon Water Company, not owned or held by parties to this action, that their interest and share in the proceeds may be determined.