ERVIN V. OREGON RY. &: NAV. CO.
the implied contract of association, by which it is agreed, in advance, that a majority shall bind the whole body as to all transactions within the scope of the corporate powers. But it is also of the essence of tlle contract that the corporate powers shall only be exercised to ac.. complish the objects for which they were called into existence, and that the majority shall not control those powers to pervert or destroy the original purposes of the corporators. Livingston v. Lynch, 4 Johns. Ch. 573; Hutton v. Scarborough Cliff Co., 2 Drew. & S. 514; Brewer v. Boston Theatre, 104 Mass. 378; Keane v. Johnson, 9 N. J. Eq. 401; Rollins v. Clay, 33 Me. 132; Clinch v. Financial Corp., 4: Ch. App. 117; Clearwater v. Meredith, 1 Wall. 25. It is for this rea· son that the majority cannot consolidate the corporatio,n with another corporation, and impose responsibilities and hazards upon minority not contemplated by the original enterprise, unless express statutory authority for this purpose is conferreel upon the majority. It is no more repugnant to the purposes of the association to permit the majority to merge and consolidate the corporation with another corporation than it is to permit them to dissolve it, and abandon the enterprise for which it is created, when no reasons of expediency require this to be done. A dissolution under such circumstances is an abuse of the powers delegated to the majority. It is no less a wrong beclJ,use accomplished by tbe agency of legal forms. In the language of BLACKBURN, J., in Taylor v. Chichester By. Co., L. R. 2 Exch. 379:
"As the shareholders are, in substance, partners in a trading corporation, the management of which is intrusted to the body corporate. a trust is, by implication, created in favor of the shal'eholdars that the corporation will manage the corporate affairs, and apply the corporate funds, for the purpose uf carrying out the original speculation."
When a number of stockholders combine to constitute themselves a majority in order to control the corporation as they see fit, they become for all practical purposes the corporation itself, and assume the trust relation occupied by the corporation towards its stockholders. Although stockholders are not partners, nor strictly tenants in common, they are the beneficial joint owners of the corporate property, having an interest and power of legal control in exact proportion to their respective amounts of stock. The corporation itself holds its property as a trust iuncl for the stockholders who have a joint interest, in all its property and effects, and the relation between it and its several members is, for all practical purposes, that of trustee and cestui que trust. Peabody v. Flint, 6 Allen, 52, 56; Hardy v. Metropolitan Lnnd Co., L. R. 7 Ch. 427: Stevens v. Rutland R. Co., 29 Vt. 550. When several persons have a common interest in property, equity will not allow one to appropriate it exclusively to himself, or to impair its value to the others. Community of interest involves mutual obligation. Persons occupying this relation towards each other ale under an obligation to make the property or fund pro·
ductive of the most that can be obtained from it for all who are interested in it; and those who seek to make a profit out of it at the expense of ·those whose rights in it are the same as their own are unfaithful to the relation they have assumed, and are guilty, at least, of constructive fraud. Jackson v. Ludeling, 21 Wall. 616, 622; Story, Eq. § 323. Among the disabilities imposed by courts of equity upon those wbo occupy a fiduciary relation towards others, respecting property which is to be administered for beneficiaries, is that which precludes the fiduciary from purchasing the property on his own account, without such a full and complete understanding, in advance, with the beneficiaries, al;;! will repel all inferences that the fiduciary intended to derive any peculiar advantage for himself. The reason why this disability does not apply to a mere dry trustee is because his position gives him no vantage ground either of superior information or undue influence over the cestui que tmst. Parkes v. White, 11 Ves. 226; Perry, Trusts, § 195. The rule is stated in Sugden on Vep.dors, (page 566, 13th Ed.,) as follows:
"It may be iaid down as a general proposition that trusteees, '" '" '" or any persons who, being employed or concerned in the affairs of another, have acquired a knowledge of the property, are incapable of purchasing the property except under the restrictions which will shortly be mentioned."
The fiduciary cannot retain his bargain by that the sale was public, or that the price was fair, or that there was no intention on his part to gain an unfair advantage. Where he has a duty to perform which is inconsistent with the character of a purchaser, he cannot divest himself of the equities of the beneficiaries to demand the profits that may arise from the transaction. Greenlaw v. King, 3 Beav. 49, 61; Gibson v. Jeyes, 6 Ves. 278; T01·rey v. Bank of Orleans, 9 Paige, 663; Michaud v. Girod, 4 How. 555; Gardner v. Ogden, 22 N. Y. 327; Hoyle v. Plattsbu'rgh et M. ll. Co., 54 N. Y. 314. Applying these principles to the case in band, although the minorityof stockholders cannot complain merely because the majority have dissolved the corporation and sold its property, they may justly complain because the majority, while occupying a fiduciary relation towards the minority, have exercised their powers in a way to buy the property for themselves, and exclude the minority from a fair participation in the fruits of the sale. In the language of MELLISH, L. J., in 2tfenier v. Hooper's 7'elegraph Works, 9 Ch. App. Cas. 350, 354: "The majority cannot sell the assets of the company, and keep the consideration, but must allow the minority to have their share of any consideration which may come to them." The minority stockholders are therefore entitled to demand their fair share in the transaction. and to be placed upon terms of equality with the majority. It may be that the property of the old company was not worth more than the sum fixed by the appraisers, estimating its value with a view of the winding up of the corporation; but for several months the prop-
ERVIN V. OREGON RY. & NAV. CO.
erty had been used by the defendants in a joint venture with the other property of the new corporation, and its value, at the time of the sale, should be estimated at what the property was worth as then situated. This results from the rule of equity which entitles those whose property has been misapplied by an agent or fiduciary to follow it into any form in which it has been converted, and impress it with a trust whenever its identity can be traced, or, at their election, to recover the varue of the property in any form into which it has been transmuted. Story, Eq. §§ 1261, 1262. If it was worth much more as a constituent of the new corporation than it would have been worth otherwise, the minority stockholders are entitled to the benefit of the increase. The majority stockholders are not to be permitted to segregate it from the conditions in which they have placed it, for the purpose of fixing its value to the minority. For this l"eason the estimate made by the appraisers is not controlling, even if it is of any value in determining the price for which the defendants should account. This is so, not only because the appraisers were the agents of those who were at the same time negotiating as the purchasers and the sellers of the property, but also because they adopted a basis of valuation which will not be sanctioned by a court of equity. As the new corporation sold the property to itself, the inquiry is, what was the property worth to the purchaser as a constituent of its general properties? It is difficult, if not impossible, to determine with precision what the property was worth as a component of the new corporation. When Villard bought the st(\ck of the old company under the Ainsworth contract, he agreed to take it at the price of 50 cents on the dollar (par value) cash, and 50 cents in the securities of the new company. When the new corporation assumed this contract, and took an assignment of it from Villard, the stock actually cost the new company, by its arrangement with Villard, about 167 cents at par in its own stock and bonds. As the new company paid for this stock partly in its own securities, and the value of those securities was contingent upon the future success of the new company, it is not fair to assume that either of the defendants regarded the stock of the old company as worth the sum of 167 cents upon the dollar. rrhey were willing to pay this price in the securities of a company which they expected wonld prove a financial success. But the transaction was a speculative one. It turned out, however, that, as soon as the defendants acquired control of the old company, and were able to merge its business with that of the new, whether the result was due to more efficient management, or to an unexpected development of traffic, or to circumstances quite independent of the new order of things, the new corporation became a financial success; and that the property and business of the old company was the factor of chief value in its prosperity. The new company immediately began to derive an income sufficient to pay the interest on its bonds and large dividends to its stockholders, and over three-fourths of this income
arose from its share of the earnings of the old company. Between the fall of 1879 and the spring of 1880 the stock of the new corporation, which had been listed in the mean time on the stock exchange, sold at prices ranging from 94 to 122. If the minority stockholders had been offered the equivalent of the par value of their shares at any time before the results of the first five months of the business of the new company had been ascertained, it would seem that this would have been a favorable proposition 'in view of the past history of the old company. On the other hand, such an offer would have seemed inadequate if made after these results had been ascertained, as shown by the report of the operations of the new company to January 1, 1880, to its stockholders. At the time of the sale of March 31, 1880, the new company had expended, upon the construction of 'new railroads and the improvement of its property, about $2,100,000. It retained in its treasury at that time about $630,000 of its mortgage bonds, and about $659,000 of its unissued capital stock. The market price of its shares on the stock exchange is not a reliable criterion of the true value of its property. Indeed, the mortgage bonds of the company were being sold on the stock exchange, in March, 1880, at prices ranging between 92t and 94t. But the exhibit of its earning capacity, and the cost of its conproperties, together with the sums expended in their improvement, would indicate that the value of its property approximated within $2,000,000 or $3,000,000 the sum at which it had been capitalized. The proofs also indicate that the traffic of the new company was considerably larger than that which belonged, before the consolidation, to the old company and to the Oregon Steamship Company combined. Some of the lines of the new railroad which had been built by the new company would have diverted the traffic which would otherwise have accrued to the old company. If it were practicable to ascertain accurately the value of the property of the old company, considering it as a component of the new corporation, the proper course would be to order a reference to a master; but there are so many elements of uncertainty in arriving at a just conclusion that it seems as well to determine the question now as to refer it for further proofs. In view of all the evidence, and without entering upon it in detail, the conclusion is reached that the value of the whole property of the new corporation, at the time of the sale, was from $9,000,000 to $10,000,000, and that of the old company should be fixed at the sum of $5,500,000, including the franchise. Upon this basis the complainant is entitled to a decree, with interest from the time of the sale. The acts of Villard, although he was a director of the old company at the time of the sale, are not to be discriminated from the acts of the majority of the stockholders, of whom he was the representative. The circumstance that his position was more technically that of a trustee towards the minority stockholders than was that of the new
PITTS 11. CLAY.
corporation, as the majority of stockholders, does not essentially alter or affect the rights of the parties. All that he did was sanctioned by the majority. The complainants are adjudged to have an equitable lien, to the extent of the sum due them, upon the property of the old corporation now in the hands of the new corporation, prior to the lien of its stockholders, but not prior to the lien of the holders of its mortgage bonds. Ferris v. Van Vechten, 73 N. Y.1l3. Villard is a prop'er party to the suit as one of the actors in the transaction by which the complainants bave suffered. He cannot escape liability merely becanse his conduot has been sanctioned by the majority of stockholders.
(Oircuit Oourt, N. D. Iowa,
May Term, 1886.)
TAXATION-VALIDITy-INTEREST OF UNITED STATES IN LA)).".
A settler located a bounty land-warrant upon the premises in dispute, and received a duplicate of location; but the commissioner of pensions addressed a notice to the commissioner of the general land-office, requesting that the issuance of a patent be withheld, on the ground that the assignment of the warrant was a forgery. After a lapse of some years the applicant furnished a new warrant, which was substituted for the one he formerly held, and the patent for the land was issued to him thereupon. Held, that during the period which elapsed between the tiling of the original, and the filing of the substituted, warrant the United States had such an interest in the land as prohibited taxation under the laws of the state; and that tax deeds based upon assessments during that period are void.
ESTOPPEL-A.CTION TO QUIET TITLE-PUBLICATION-DECREE BY DEFAULT.
A party is not barred from asserting title to realty by reason of a decree rendered in a proceeding to quiet title against one through whom the claimant derives title, where the antecedent owner was a non-resident, and the only notice given of the pendency of the suit was by in a newspaper; there being no aooearance in that cause, and the decree being rendered upon a default. .
In Equity. Bill to quiet title. Barrett If Bullis, for complainant. Struble, Bishellf Hart and G. R. Marks, for defendant. SHIRAS, J. The subject of controversy in this cause is the title to 80 acres of land situated in Sioux county, Iowa. The complainant claims title under a patent issued by the United States to Jesse Williams, dated March 8, 1871. The defendants claim title under two tax deeds executed by the treasurer of Sioux county, Iowa, one dated December 14, 1865, and the other, Febrnary 3, 1873, both being based npon sales of the property for delinquent taxes assessed upon the realty prior to the year 1870. The evidence shows that on the second day of Jnne, 1857, Jesse Williams located bonnty land-war-