CHICAGO .. E. I. B. CO.
a.ccounts of the division of the railway covered by the mortgage with the accounts of consolidated, constructed, and leased lines aoquired by the fendant after the execution of the mortgage, including charges for additional equipment for the new lines. The answer fully meets and denies all the averments of fraud and conspiracy, but it admits that separate accounts have not been kept by the defendant of the net earnings of the original lines; that the accounts of the earnings and expenses of these lines and those subsequently acquired have been mingled and that the board of directors did not attempt to make any ascertainment in 1884 or 1885 of the net earnings of the original lines. It appears by the bill and answer that the new lines built, acquired, or leased by the defendant embrace a large mileage, and have cost the defendant a large sum of money; and that in June, 1884, the defendant issued cousol bonds bearing interest at 6 per cent. per annum, secured by a mortgage upon its property, which have been used in part to pay for the new lines and their equipment, and has used part of its earnings to pay interest thereon. The bill prays for an accounting, and a decree for the payment of what is ascertained to be due from the defendant. . When the case was before the court on a former occasion upon a demurrer for want of equity, and alleging that the trustee named in the income mortgage was a necessary party, the demurrer was overruled by Judge WHEELER, (30 Fed. Rep. 397.) The questions then considered and decided adversely to the defendant cannot be appropriately reconsidered now. It must be held, therefore, for present purposes, that the complainant is entitled to the relief sought, unless the material averments of the bill are sufficiently met and denied .by the answer. Under the terms of the income mortgage it was the duty of the defendant to keep an account of the earnings, expenses, and net income of the lines included in the mortgage, as distinct from those subsequently acquired. The granting clause in the mortgage subjecting to the lien the "line of railway belonging or hereafter to belong" to the defendant is qualified by the description of the line which follows it; and the words "hereafter to belong" refer to such lines between the specified termini as the company did not then own,-like the road from Chicago to Dalton then leased by the company, and constituting the link by which its line of railway extended from Chicago to Danville. If the mortgage provides expressly or by implication that the board of directors are to set apart the income of the railway lines particularly described for the payment of the maturing interest upon the bonds, the bondholders are entitled to that in"" come; and their pledge is not to be transmuted from one upon the earnings of a particular line of railway to one upon the earnings of a system of which the line may be a part. This would dilute their security upon a designated fund into a nebulous lien upon the profits of such new enterprises as the corporation might see fit to undertake. The terms of the mortgage are that in ascertaining net earnings there is to be deducted from gross income expenditures or liabilities for ordinary expenses, interest, or sinking-fund requirements, and for renewals, repairs, and betterments requisite to maintain the line of railroad in a first-class condi-
,*iQn.' ofspecificati.9u.would be unnecessary; if the mort· to define,cllotefully what. expenses and liabilities gage were not: IUay be treated:llBan offset. to gross income, and limit the .offset to those incurred in the.. operation and improvement of the particular lines described. Within this limitation tbeamount that may be appropriated for the specified Qbjects, and the manner in. which the railway lines may be managed, are,n)atters resting exclusively in the discretion and good faith of the directors. ' An income railway mortgage, although it is a pledge of tangible propertyfo,r the payment of the. principal sum, is, as a security for the payment ·ofinterest, but little· more than the pledge of the good faith of the company in managing: its lines. It necessarily contemimprovements as Seem necessary to the efficient use plates that and operation of such property, and such alterations.in the CO'I'PU8 as desirable, are to be made, at the discretion of the directors j and unless it contltins !lome limitations upon the pOW6q'! of the directors, express or implied, the right of the company toconduot its operations as it may see fit. subject only to the conditions of its organic law, is qualified; anll consequently the company can lawfully extend its lines, acquire new ones,discontinue old onell, and thus essentially change the earning capacity of the property. It is important, therefore, that any limitations QPon the general powersof the directors. intended to define the boundaries,of their discretion, should be given due effect if such a mortgage is to afford ,any substantial security to bondholders for the payment of their interest;· and if these are found in the instrument they should not be nullified by, a lliltitudinarian interpretation calculated torelegate bondholders to the pOfjition of stockholders. They are not stockholders, but creditors, whooontract upon the assurance that the income fund upon which they fely when they purchase the bonds is to continue to exist durthe life of the mortgage. When the mortgage implies that the income fund is to· consist of the profit of the future transactions of the company from all sources, as maybe the case when the property pledged to the fund includes .not only what is owned by the company at the time of the. execution of the instrument, but also all that may be thereafter owned or acquired by the 9Ompany, the bondholders cannot complain if, when the interest periods occur, it is found that the profits which would have been made by operating the original lines exclusively have been deplete.d by the losses arising from the operation of new lines in conjunction with 'the old ones. Day v. Town of New Lots, 107 N.Y. 148, 13N. E. Rep. 915; Buckv. Seymour, 46 00nn.156. But where, 8,S here, the terms are that specific lines are granted, and that income is wbe ascertained by the gross earnings of those lines and deducting from them lipecified expenses and liabilities, the bondholders are entitled to bolli the,company to its promise. It is to 1?e inferred that they have invested ,upon the faith of the earning capacity of. the particular property, basing their expectationsfor the future upon the results of the past, and not intE)nding to trust wholly to the integrity and good judgDlent of a body of .directors whose personnel may change at-anytime.
SP1Jl1S V. CHICAGO &: E. Y. R.
The case,tben, presents the question whether the board of. directors are justified in deducting the expenditures and expenses, including in..' terest charges, incurred by operating the new lines acquired by the pany from the earnings of the original lines. Olearly they are not. unless these new lines are to be deemed "betterments requisite to maintain the line of railway [described] in first-class condition." The mere statement of the proposition is the only answer it requires. If it is said that the successful operation of the old lines may have demanded the acquisition of new ones, the answer is that, nevertheless, the income fund consists of the earnings of the old lines, less the expenses of operation, and the bondholders have the right to look to that fund exclusively. The :qlortgagElintrusts the directors with a wide discretion in determining what is to be treated as net income. Their conclusions, when embodied in a resolution of the board, are not vitiated by an error of judgment, and can only be disturbed when the circumstances establish bad faith. But their (Juty'to the bondholders requires them to make an honest effort to ascertain the net earnings of the' original lines at the several interest periods; and ,this they have not done; nor can they do so practically, unlesss separate account of the earnings and expenses of those lines are Barry .\7. Railroad Co., 27 Fed. Rep. 1;, Mackintosh v. Railroad Co., 34 Fed. Rep. 582. The perfunctory ceremony of passing a resolution that no income has been earned, without an attempt to ascertaii:lthe fact, ia not a compliance with the letter or the spirit of the contract. The condition in the bonds and mortgage, whereby the interest is payable,as and when fixed· by the action of the board of directors, does not preclude the bondholders from all remedy whenever the directors improperly neglect or refuse to take the necessary action. No corporation can itself behind a contract that it shall not be liable for its own wrongful acts. n has seemed proper to consider these questions fully, because both parties are 'anxioulilfor the opinion of the court as to their respective rights and obligations under the bonds, and the argument at the bar has been principally directed to the discussion of them. Nevertheless 'no relief can be granted to the complainant under the present bill, because, having alleged a ease Of fraud, he cannot be permitted to support it,On any other ground; Wilde v. Gibson, 1 H. L. Oas. 626; Eyre v. Potter, 15 How. 56; F1i.8her v. Boody, 1 Curt. 206; Pricey. Berrington, 7 Eng. Law & Eq. 254. The present bill does not even proceed upon the ground of a willful neglect of duty on the part of the directors of the defimdant to make the ascertainment and adjudication respecting the income pra-, vided for in the mortgage, but it charges them with actual fraud and conspiracy designed to compel the complainant to surrender his bonds and accept consol bonds in lieu, and alleges the failure to make the ascertainment as ODe of the evidential facts supporting the conspiracy. There is nothing in the facts, as they appear by the pleadings, to justify any inferenceofm.ala fide8 on the part of the directors; and it would seem that they have acted under an honest misapprehension of their duties to bondholders,' supposing that the position conte1}ded for by their counsel
FEDERAL REPORTER, vol. 40. was correct. and that the income of all the linell, the new as well as the old. was the fund pledged by the mortgage. The bill is therefore dismissed, with costs.
TERBELL et al.
(C£rcuit Court, S. D. New York. October 5, 1889.)
In a suit to stay proseeution of an 'action on bonds executed to commissioners ss part payment certain property p1:\rcbased by complaiuants at a sale under foreclosure1 it ,appeared that on a resale tbereof for complainants' default in the payment 01 such bonds the purchas'ers represented a portion of the bondholders, who had combined to bid in the property in case the amount of the original sale should not be realized. Before such resale, the purchasers bad agreed, if tbey should buy such property, to sell it, on the terms of the original sale, to aeertain syndicate, who did not intend to bid at the resale. One M. had with said sym!icate not to bid at such resale in uonsideratioll of an interest 1D the property, to be transferred to bim on the terms which they should have to pay. The purchasers on the resale sold the property to the syndicate for $86,000 more than they paid. The com-, missioners who conducted the resale were.not aware of the agreement which had been made between the'!.urchasers and thll syndicate, or the agreement between the syndicate and:M. Jlel ,tbat the agreement between the pUl,'chasers and the syndicate, not being intended to suppress competition at the sale, was a legitimate one.
Neither the purohasersat the resale, nor1lbe bondholders for whom the sale was made, beinlr partie!! to the actioll, the cause cannot be determined in their absence.
8. SAME-ORIGINAL SUIT.
An original suit to set aside B sale under a decree of foreclosure, by the party to a foreclosure suit, where relief can be; obtained by a summs,ry application to the court in the foreclosure suit, should only be sanctioned in exceptional cases. Where, complainants failed to apply to have such resale vacated in the trial court, and an unexplained delay of six years has intervened since such resale, it will not be vacated as fraudulent.
The court will ,not decree a. deductioll of Buch 186,000, paid by the syndicate to the purchasers in excess of ',he purcbase price, from tbe amount due on tbe bonds, as neither· the commissioners nor the 'bondholders not represented by such purchasers were participants in any wrong.,
,In Equity. On motion for an injunction pendente,lite., Joseph II.. Ohoate and John Winslow, for complainants. John T.JvfasDn and H. O. Cloughton, for defendants. WALLACE, J.' The complainants have filed the present bill to stay the prosecution of a suit at law brought against them by the defendants, and have moved for an injunction pendente lite. The suit at law is brought to recover the sum due upon fonrbonds, for the payment of $135,OOO,each, executed by. the complainants and others under the following stances: A bill was filed in thecitcuit court of the city of Richmond, Va., to foreclose a mortgage executed by the Washington & Ohio way Company upon its railway,and the suit proceeded to a decree of foreclosure appointing the present defendants special commissioners to make sale of the railway, and execute a conveyance to the purchaser.
TERBELL ". LEE.
The complainants and others, associated with one Best, became the purchasers, and the purchase was ratified by the court, and a deed was executed pursuant to the decretal order of the court, May 23,1882, conveying the property to Best and his associates, who thereupon executed the bonds. The decree provided that upon delivery of the deed Best and his associates should, in accordance with a statute of Virginia, be constituted a corporation under thE:' name of the" Washington & Western Railroad Company," and also provided that the special commissioners should have a lien upon the property for all unpaid purchase money represented by the bonds, to be enforced by a rule for a resale of the property. Default having been made in the, payment of the bonds, after possession of the property had been surrendered to the new corporation the court duly ordered a resale of the property, and on the 9th of May, 1883, the property was resold by the special commissioners to Oakman and Bates, who were the highest bidders at such resale, for the sum of $400,000. On ,an application made in ,the cause to confirm the resale, exceptions were 'filed by Best, alleging, among other things, that the property was sold at an inadequate price; that certain creditors, who were entitled to a diStributiveshareof the combined together to suppress competition at the bidding; and that other irregularities occurred. These exceptions were supported by affidavits. The exceptions were overruled, the proceedings on the resale were ratified,and the court made a'de<;ree for a conveyance to the purchasers on the resale. Subsequently the court directed the special commissioners to enforce payment of the bonds. They brought suit in this court, and have obtained a verdict. In the present bill the complainants allege that the resale was not conducted in good faith, and that, by a secret agreement and combination between parties holding 51-100 of the bonds, represented in the decree of foreclosure, and other capitalists, a scheme to suppress' competition was formed, and was carried out at the resale, and that, pursuant,to this agreement, the capitalists mentioned paid Oakman and Bates $86,000 more t.han the sum for which the property was struck off to them, and took a conveyance from them of the property. Theya!lege that at the resale the property was sold at an inadequate price. They do not allege that the special commissioners were parties toa scheme to suppress competition. They insist that if they are not entitled to any other relief they are entitled to have the amount due upon their bOl1ds reduced by the sum of $86,000. Among the papers used upon this motion is the stenographic report of the testimony introduced upon the trial of the suit at law, in which suit the present complainants set up as a defense substantially tbesame matters alleged in the'ir pres'ant bill; ,and upon the trial they were permitted to introduce full testimony, in reference to the alleged combination to suppress competition at the, resale. From tbis testimony it appears that Oakman and Bates .represented a party of bondholders who had associated together to pro,. teet their own interests in the foreclosure proceedings. When the 'resale was ordered, they determined: to bid in the property, unless it should bring as much as it did upon the original sale. Before the time of-the