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

This action was to foreclose a mortgage made by the New York & Northern Railway Company to the plaintiff, as trustee, to secure the payment of bonds amounting to the sum of $3,200,000. The railway company did not defend, but the defendants Holmes and Pick were permitted by the court to intervene and serve an answer to the complaint, and they .have appealed from the judgment. Prior to January, 1893, thecmajority of the bonds and stock of the Northern road, were owned by the New York Loan & Improvement Company. About January 28th,

The first defense alleged is that the earnings of the Northern Company bad been misapplied in order to bring about a default. This defense involves neither the plaintiff nor any bondholder. If there was any misapplication of the earnings prior to June 1,1892, it was the act of the mortgagor alone. It had the right to apply all the net earnings prior to December 1, 1891, to the improvement of the road, and the action of the directors was approved by the stockholders at their annual meeting, and, if the just and proper limitation of that authority was exceeded, the loss fell upon the bondholders to complain of this action. From the date eof the mortgage until the foreclosure, the appellant Holmes was a stockholder, and attended t,he annual meetings, and had knowledge of the manner in which'the income of the road was applied by the directors, while the appellant Pick purchased his stock after the default in the payment of the coupons.

The second proposition asserted as a defense is that the Central Company acquired 'a majority of the bonds and stock of the Northein Company for the purpose of destroying it as a competitor, and securing its property, and to that end so managed its business that its obligation should not be met or its default repaired. Nothing appears in the evidence to support this claim. Defaults on two coupons had occured before the Central Com

The third defense is that the request of holders of $2,000,000 of the bonds was requisite to the commencement and maintenance of the action ; that the Central Company had no power to purchase bonds and stocks of another railroad corporation, and that an action instituted upon its request could not be proceded with. This contention rests upon a misconception of the mortgage. The provision applicable to the case is as follows:

“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 of said bonds * "/r shall, apply to any court having jurisdiction * * * for a foreclosure and sale of the mortgaged premises.”

Two cases are provided for. Intone, the trustee may act upon his own motion ; in the other, his action may be coerced. It was not therefore essential that plaintiff should have alleged in its complaint that it had been requested to foreclose, and it is not essential to the support of the judgment that that fact should have been proven upon the trial. Morgan's L. & T. Railroad & Steamship Co. v. Texas Cent. Ry. Co., 137 U. S. 171 ; Guaranty Trust & Safe-Deposit Co. v. Green Cove Springs & M. R. Co., 139 U. S. 137 . If the fact be that there was any informality in the request made, the plaintiff may, upon this appeal,, avail itself of the provision of the mortgage quoted, as it would be a useless proceeding to reverse the judgment upon this ground, when, upon a new trial, tlie plaintiff would be entitled to the same relief without proof that any request was made. It is of no importance, therefore, to this case whether the Central Company’s act in acquiring its bonds and stock was authorized or not. Ownership of the

The main argument, however, which the learned counsel for the appellant has addressed to us is based upon the assumption that the Central Company became an owner of a majority of the stock of the Northern Company. As the disability of the Central Company would apply equally to the ownership of stock and bonds, we shall assume, for the purpose of this appeal, that it had the power to purchase these securities. The meaning of § 40, chap. 588, Éaws 1892, is, we think,, hardly debatable, and power existed under that statute to acquire ownership of the stock and bonds in question. If we are wrong, however, in this, the argument addressed to the court, and which I shall now briefly, consider, has no force and no application to the case, as it rests solely upomthe ownership by the Central Company of a majority of the stock in the Northern Company. The argument is that the Central Company, as the owner of the majority of stock, occupied' a sort of trust relation towards the minority stockholders, which in some way is available to them as a defense to this action. I have been unable to learn from the appellant’s written or oral argument what is the practical application to this case of the relation that he claims to exist between majority and minority stockholders. If. it is intended to assert the Central Company could purchase bonds of the Northern road only in trust for all stockholders, the answer is that there is no such rule of law. Undoubtedly the holders of the majority of the shares of a corporation owe to the minority much the same duty which directors owe to all the stockholders. They may not use their power to obtain advantages at the expense of the minority, and, when that is done, equity will interfere to restrain the wrongful acts. All must be permitted to share equally in the benefits, and the law requires, both from the officers of the corporation and the majority stockholders, the utmost good faith in the management and control of the corporate business and property. But, between themselves, stockholders owe no duty to each other. In the purchase and control of his- stock, or any of the corporate obligations, each stockholder acts for himself, and he is in no sense a trustee for others. Gamble v. Queens County Water Co., 123 N. Y. 91 ; 33 St. Rep. 88 . The Central Company purchased the bonds after default in payment of the coupons. It had a right to hold and enforce these obligations, and was subject to no restraint in so doing, except such as flowed from the terms of the contract. As a stockholder, it was not responsible for the default, and was under no obligation to contribute money to pay the interest or relieve the Northern Company from the effects of the default. It could remain passive until foreclosure, and become a purchaser of the mortgaged property, or receive payment of its bonds from the proceeds of the sale, without trespassing upon any right of the other stockholders. But assume it intended to compel a foreclosure, and for that purpose entered into the contract with McHarg and Bell for the purchase of additional-