'1582 -thorizing the city cOunCil £0 make 'rnie'l3xc1usive privilege is liniited .tothe etreei;s used "for the purpose of constructing, operating, maintailling;and owning such street. railway thereon," or in other \Vords, to the streets on which the plaintiff shall build and operate a street railway. This construction makes the contract harmonize \vith the powers of the citycouIlcil under the law. When an instrument is susceptible of two interpretations, and one will put it in an tagonism to the law, and render it invalid, and the other will make it harmonize with the law and give it "alidity, the latter interpretation will be adopted. It is also a canon of construction that grants offranchises by public corporations to individuals or private corporations are to be strictly construed, and no exclusive privilege passes, unless it be plainly conferred by express words or necessary implication. Let an order be entered sustaining, the demurrer and dismissing the .bilUor want of equity.
MACKiNTOSH
et al. ".
FLINT&P.
M. R. Co. et aI.
YARKER et aZ. v.
SAME.
(Oirouit Oourt, B. D. Mio'higan. March 22, 1888.,
L
RAILROAD CO¥1'ANIEs-BoNDS AND MORTGAGES-REORGANIZATION AGREEMENT -DIVERSION OF FUNDS. .
A railroad being about to be foreclosed under a consolidated deed of trust, a committee of the consolidated bondholders, the members of which were largtl holders of stock and prior bonds, drafted" a plan for purchase and reorganization." This provided that the old stock should be deposited, and that the new company should issue (1) first mortgage 6 per cent. bonds, to be used onJy to fund the past due and maturing interest on the prior bonds, and for permanent construction and improvement; (2) preferred 7 per cent. stock, to represent the par value of outstanding consolidated bonds; and (8) common stock to represent the outstanding common stock. Holders of common stock Were not to be entitled to shares, or to vote, until preferred stock had been paid five su.ccessive annual dividends of 7, per cent. The property was bought in, and a reincorporation effected on this basis. The new charter providedthat the funds ap'pllcable to the uayment of dividends on preferred stock was the n.et income, 'afteJ: paying iIitereston prior bonds, repairs, expenses of equipment," etc., any surplus, after paying 7 per cent., to stand over until next dividend day. At the first meeting of the llew board it was resolved that "under operating expenses only suoh improvements and additions shall be included as are necessary to keep the prope,rty efficient, alld that all beyond this Shall be provided for out of funds other than net earnings." Held. that ,the provisions of the agreenientand the clrarter, as interpreted by the resolution. were binding. upon the directors, and, it having been made to appear that the earnings aDd income, which had beenwron/!;fully converted to pay for improvements and extensio'ns, would, if applied to dividends, be sufficient to pay 'five successive dividends 'of 7 per cent. each on the preferred stock, that the common stock was entitled tQ representation·
.. SAKE-RIGHTS OF CoKKON STOQKHOLDERS-LIENS ON LAND GRANT.
Pursuant to an agreement for p\lrchase and reorganization. a railroad company, which was about to be foreclosed under a consolidated trust deed, con. veyedto the trustees of the separate. mortgage of its land grant all its equities
MACKINTQSH V. FLINT &. P., l{. R. CO.
583
therein, I,D trust t" .payoff all lien s on the lands, and to turn in the balance to the trustlles of the consolidated deed of trust. When the property was sold under this last trust. arid' bought in by the purchasing committee, theseequi. ties went with it. The land trustees paid off all liens, except one of $300,000, which was secured, in part, on other property, and from 188lto1885, both in· elusive, h,ad on hand fourfold security for that charge., Held, as between pre· ferred stock and common stock. which latter under the charter was to be debarred from participation until the former had been paid successive di vidends of 7 per cent. during those five years, that the surplus. after providing for the security of the $300,000 lien, was to be applied to dividends. 8. SAME-PREMIUMS ON MORTGAGE BONDS.
The -same is true of premiums received by the company on first mortgage bonds issued and sold by it. As between such stockholders, a steel rail betterment should be charged to "construction account" and not to "operating expenses."
,. SAME-OPERATING EXPENSES.
a.
The is true as to money spent on steamers owned by the company to make them "more, efficient;" and, where no "depreciation account" is kept, it Is error to charge "expense account" wHh an estimated depreciation,when the money so charged was not actually spent upon repairs. "
6. SAME-MONEY BORROWED TO, PORCHASE ENGINE.
Nor, under, such circumstances, should money borrowed by the company and laid out in the purchase of new freight engines and coal cars be charged to operating expenses. BILL.
7. SAME-PuRCHASE OJ' OTHER ROADS-ACTION TO RESTRAIN-SUPPLEMENfAL
A suit having been brought by holders of common stock of a railroad,c,om· pany to compel the board of directors to recognize them as such. another bi]! to the same effect was filed by substantially the same parties, No'vember 28, 1887, setting out, in addition that the defendant was about to buy in another road, and asking that the contemplated purchase, which was to take place two days later. be enjoined, on the ground that it was ultra vires. etc. Theroad about to be bought was improperly made a party to this bill. Held, the right to the relief demanded in the' origmalbill having been established, that the second bill was properly a supplemental bill. and that, although i,t had been filed without the leave required by equity rule 57, it should, unGer the circumstances, be allowed to stand as to the defendant in the original suit. ' 8. SAME-RIGHT TO, PURCHASE' FRANCHISE OF OTHER ROADS.
There is nothing in the general railroad law of Michigan (act of 1873) au· thorizingon'e railway corporation to acquire the stock ,and franchises of an· other completed company, with the intention of itself exercising such fran· chises; and, in the absence of such a statute, such an acquisition is unlawful.
9. SAME-INJUNCTION.
Where holders of common stock of a railroad company are entitled to, but are deprived of; the right. Of representation, equity will enjoin, pending suit for the.enforcement of sucll'right, '8 disadvantageous, illegal, and uUra fJWU purchase by such company of another road. '
In Equity. On final hearing. J. Lewis Stackpole, Allred RUsseU, and Henry S. Dwey, for complainants. William L. Webber and Henry M. OampbeU, for respondents. JACKSON, J. The above-entitled ca.uses Were heard together. The first is filed by complainants on b,ehalf of themselves and other holders of provisional certificates, as hereinafter explained, to compel the, Flint & Pere Marquette Railroad COlppany and its directory to recognise them in full as stockholders, in said com!)any', and to issue to them regular
'-- ,.- -
584
FEDERAL REPORTER.
eertificatesof stocl(therein, such as will give them the rights of actual stockholders in said corporation, entitle them to vote and exercise a voice in the management opts affairs, from which they claim to be at present unjustly and improperly excluded·. The second bill is. filed qy substantially the same parties, asserting the same right, and seeking to enjoin and restrain. the Flint & Pere Marquette Railroad Company, in which they claim the right to be admitted as actual stockholders, from purchasing or leasing the Port Huron & Northwestern Railway Company, on the grounds that such leasing or purchase·would be injurious to their interests, and unwarranted by law. The questions presented by this second hill, or, rather raised by the motion for preliminary injunction' thereunder, depend toa greater or less extent upon the conclusion which the court may reach as to whether complainants, and those standing with them in the same position with them,are entitled to be treated and regarded as present stockholders in the Fllnt & Pere Marquette Railroad Company. It will, therefore, be most proper first to consider the matter involved in the first of the above suits, and to determine the relations which complainants bear to, and the rights which they may justly assert in, the Flint & Pere M\1rquette Railroad Company. The material facts of this case, as disclosed by the bill, answer, exhibits, and proofs, are these: The Flint & Pere Marquette Railway Company, a corporation existing under the general railroad laws of Michigan, in 1872, executed to W. W. Crapo, Andrew G. Pierce, and Publius V. Rogers, as trustees, its consolidated trust deed or mortgage upon itsfrnnchis'esand property of every description, (except certain land grants derived from the United States through the state of Michigan, which had been previously conveyed in special parcels, and by separate trusts to secure certain bonds of the company,) for the purpose of securing the payment of an issue. ofbonds, as provided for therein, to the amount of $6,657,000, to be known and designated as "Consolidated Bonds" of said railway company. Between four and five millions of these consolidated bonds were actually issued, on which the company made default in the payment of the interest thereon; and in June, 1879, said trustees filed their bill in the United States circuit court for the Eastern district of Michigan, at Detroit, fOf the foreclosure of said consolidated trust deed and mortgage by a sale of the property and franchises covered thereby. Shortly before the commencement of this suit, Jesse Hoyt, as president, and H. C. Potter, as secretary, of said railway company, issued a circular to the stockholders and others interested, notifying them that foreclosure proceedings were about to be instituted, explaining the situation of the company affairs and informing them" that a plan for purchase and reorganization will be prepared by a committee of the consolidated bondholders at an early day." Such committee, composed of H. A. V. Post, as chairman, Francis Hathaway, A. G. Brower, H. H. Fish, and Loull1 Snow, Jr., was appointed by the bondholders about the time of, or soon after, the institution of the foreclosure proceedings. This committee issued the reorganization scheme made Exhibit A to the bill of which, so far as need be noticed, was as follows:
IIACKINTOSH ft. FLINT &: P. H. B. CO.
585
"(3) The miw company to issue reorganized first mortgage six per cerit. bonds, having thirty years to run, and redeemable, at the pleasure of the new company, at par and accrued interest. This mortgage to be used only to fund the past due and maturing interest on the prior bonds, and for such perm&nent construction and improvement as may be deemed desimble by the board of directors of the new company. (4) Preferred seven per cent. stock shall be issued, sufficient in amount to represent the par value of the outstanding consolidated'bonds and the past due coupons to May 1, 1879, inclusive. This preferred stock shall always be entitled to one vote for each and every share. Payment of dividends ofseven per cent., or any partthereof, on this preferred stock, will be contingent on the net earnings of the company, and without accumulation.· (5) Common. stock shall be issued, sufficient in amount to represent the outstanding common stock of the old Flint & Pere Marquette R. R. Co., and this stock shall not be entitled' to vote until the new company shall have earned and paid, for five successive years, seven per cent. annual divi"dends on the preferred stock. (6) The preferred and common stock of the new company will be issued to the purchasing committee, who will deliver, or cause to be delivered, to the representatives, for the time being, of the holders of the eight per cent. consolidated bonds, and of the holders of the stock of the old company, who may join in this scheme of reorganization; the amount pl'O mta to which they are entitled,as near as may be, of f'ractions for the benefit of the parand the purchasi ng committee will .ties entitled thereto, in such manner as they may deem most expedient and equitable·. (7) The benefit of these prClceedings shall accrue only to those who shall deposit their securities and common stock with this committee within the time limited by them; it being understood that they may extend the same from time to time, as seems to them proper for the interests of all concerned. (8) The purchasing. committee will issue· certificates and stock that they may be entitled to." "(12) The general principles in this scheme, and the order of priority, and the respt:ctive amounts of these organization securities and stocks, being substantially maintained, the purchasing committee may cha.nge this schelI\e to meet any e:X:igencies that may arise." The defendants in their answer deny that this was the scheme actually adopted by the committee, and insist that the bondholders in fact agreed upon another and difi'erent plan, which did not contain any recognition, or make any provision for the common stockholders of the railway company. While there is some conflict in the testimony on this point, the decided weight of the evidence establishes to the satisfaction of the court that the reorganization scheme. as set out above in Exhibit A, was the one which the committee adopted, recognized, and acted upon. It was under this scheme that the consolidated bonds and stock certificates of the Flint & Pere Marquette Company were delivered by the holders thereof to the depositaries designated by the committee, and authorized to receive and receipt forthe same. While the committee were engaged in getting the stock and consolidated bonds deposited under this reorganization scheme, and pending the foreclosure proceedings in the circuit court, the Flint & Pere Marquette Railway Company, the only defendant therein, by a conveyance, bearing date August 23, 1879, surrendered to W. W. Crapo and Oliver Prescott, trustees under the several land-grant mortgages, its equity of redemption, and all its right, title, and interest in the surplus lands and land funds then held or thereafter received by said trustetlS, after satisfying and discharging prior trusts, as an addi·
5SG
"FE,DERAL
tionals!'lcul1'ity for the payment of said consolidated bonds. This .conveY'ance'contained a general declaration oftrust, and provided that, after sati,sfyingtheprior land-grantmortgages;'the balance of said lands and f';lnds by said trustees, Crapo and be accounted for, apd transferred to the trustees ofsaid consolidated mortgage or trust deed, so that such surplus funds .and lands would inure to the benefit of said consolidated bonds, and'becolne a part of the' security for their payment. This conveyance and declaration of trust by the Flint & Pere Railway Company, made with the consen,t ofiha stockholders of said company. as the C(lUrt must assume or presume, brought,within the op.eration of the consolidated then being enforced, the surplus lands and land fqnde held by Prescott and Crapo as trustees" after discharging prior liens, and gave the ,consolidated bondholders the benefit of anadditional'security ,worth millions of dollars. Whether the general scheme, of ganizationa.d(mte4 by the cOO1mittee formed the consideration 9F in!iupementror ·thill.la..rge and va.luable addition to the security ofthe;9qnsolidated bonds does not distinctly appear, but it is a fair and reasonable of the railway company then in, default, ahd thenljeing proceeded1iagainst, would ,not have' consented to'place and land funds operation of'the consolidated ·their,surpl\fs without some expectation of being :q'lQrtgage,. at ,.admitted into. the new, company that might be organi7;ed upon the ruins ofthe·old;' After the execution of this ;trust conveyance ofA1,1gust 23, 1879,8. 'supplemental blU was filed immediately in said ·ceediIlg .by the' trustees under both and the hmd;.grarit ·mortgages, for the purpose of bringing this additional security the decree of sale. Such proceedings were thereafter had under the original a;bdsupplemental bills as resulted, June 12, 1880; in a decree of the court, finding that the defendant corporation was in .default; that the unpaid consolidated bonds and interest coupons thereon, outstanding up to and including May 1, 1880, amounted to $6,236,368.80; that tbetr,ustee8were to have the .property sold, as specified in the 'consolidated mortgage and in the trust conveyance of Augqst, 23, 1879; but dil'ected that such sale should be made subject to certain prior claims mentionedip; the pleadings, and enumerated, as. fallows: "(1) Suchlawfill claims as may be made umler the trust deed dated April ,f), 1862,alld the bonds secured thereby,. and referred to in the bill as the first (land) trust; lawful 9Jaims as JPay be made under thetrllst dllCd of September 25, 1866, and tqe bonds secured ;thereby. refened to in the bill as the second trust; (8)snch la\yfllLclaims be made under the and the bonds secured thereby, referred trust deed dated September 4, to in the \:iill as the third (land) trust deed; (4)' such lawful claims as may be made under the trust deed arid the bonds secured thereby on the Bay! City .Branch·. a.mounting ill the whole for pr,ncipal, besides interest, to $175,000; '(5) Buc".la:Wful claims .as maY,be made under.the tru,stdeed RI)d. mortgage datep. the bonds secured thereby, in the pleadings'a.s the Flint & Holly'bonds; (6) such lawful claims as may be made UQder' the 'trust deed and mortgage, dated J al1'uary 2, 1871, and the bonds secui'e(Hlierebr, the pleadings as 'the Holly, Wayne & Monroe
687 bonds; (7) sucb 'claimllllS may be outstanding and unpaid aga.inst the receiver apd Ifuchas maybe hereafter authQrized by this court."
The line of railway, as described iIi the bill,with all its property, rights, 'francl1ises, including things in Ilctionand eqhitable rights, together with the trusts as to the surplus lands and land funds, conveyed by the trust deed of August 23, 1879, were sold August 18, 1880, by a special mastel' commissioner, duly appointed by the court, after advertising the sale as directed by the decree; and said Post, Fish, Snow, Brower, alid Hathaway, as the purchasing committee under the aforesaid scheme pf reorganization, became the purchasers at the price of $1,000,000, which, under the terms of the decree, was paid chiefly with consolidafedbonds as cash. The sale was reported to the court, and the purchasingaommittee thereupon presented their petition to the court, setting forth that their said purchase was made pursuant to a scheme of reorganization before then agreed upon; that said purchasers and their associates had reorganized a corpOJ;ationby the name of the "Flint & Pere Marquette Railroad Company," to take charge of, manage, and operate the railroad property so purchased under the decree, etc.; and praying that the special master commissioner might be ordered and directed to make a deed upon said sale direct to said corporation. This order, after confirming the commissioner's report of sale, was passed by the court. and the special master by dee-'<l bearing date Septernber 28, 1880, formally conveyed and transferred to the new corporation, the Flint & Pere Marquette Railroad Company, all the property, rights, franchises, trusts, etc., so sold, as aforesaid. Afterthe sale by the master commissioner, the purchasing committee, to whom the franchises, privileges,equitable rights and trusts were struck off, together with thair associates, under date of August 31, 1880, filed with the secretary of state at Lansing, Mich., a "certificate of reorganization and articlesof association of the Flint & Pere Marquette Railroad Company, successor to the Flint & Pere Marquette Railway. Company." These articles ofrtssociation, whirih constitute the charter, or organic law, of the new corporation, after reciting the aforegoing stepsand proceedings, leadingup to its' formation, certi(y and declare, among other things not material to be noticed,as follows: "Clause 2. The purpose for which said corporation is organized is to use. maintain, and-enjoy, manage. -and operate the said railroad and other property and franchises as aforesaid,· inell1ding the right of using and enjoyingtbe railroad, built, as aforesaid, and in use; and also for the purpose of extending such spure and b1'l\Dches from tillle to time. as may be found useful and necessary for the purpose of developing and increasing the traffic of said road. . and as may be authorized by law. "CI. 3. present property of the corporation hereby organized consists of all tbe property of every kind and description, including franchises and .' .... rights. sold a,nd purchased undel'said decree. as aforesaid.. "CI. 4. 'fhe capItal stock of the curporation hereby organized be the sum of tenmillion dollars,in shares of one hundred dollarseach; divided into two classes, to-wit: First, preferred stock., which shan consist of the suinof six million-a.ndfive bundl'edi thousand dollars, divided into sixty-.!ivethOl)saud each share beillgthe'sum of one hundred
588
mon stock, consisting of three million five hundred thousand dollars, divided into thousand shares of one hundred dollars each, And it is agreed that the rights of the holders of said preferred stock and said common stock shall be as hereinafter stated, to-wit: The holders of said preferred stock shall be entitled to receive. from the earnings of said railrOad company hereb.}" organized, dividends to the amount of seven per cent. per annum, payable semi-annually or annually, as may be directed by the board of directors; provided the net income, after paying interest on prior bonds, repairs, expenses of eqUipment and renewals, shall be sufficient for that purpose, or such portions thereof as the said net income shall amount to. In case there shall be any surplus of net income after the payment of said dividend of per cent. upon the preferred stock, the same shall stand undivided until the next diVidend day, and so from time to time and from year to year, until such time as the holders of said preferred stock shall receive five consecutive annual di vidends of seven per cent., or semi-annual or quarterly dividends eqUivalent thereto. In case, on any dividend day, tbe net income as aforesll.id shall not be sufficient to pay seven per cent. annual dividend to the holders of said stock, such holders of preferred stock shall have no right to have the dividends made up out of subsequent earnings; it being the intention that there shall be no accumulation of claims against the company for dividends for such preferred stock. We further certify and declare that the said common sl;Qck not be issued, nor any portion thereof, until after the preferred stock shall have received tiveconsecutive annual dividends of seven per cent. from the net income, as aforesaid, or other dividends eqUivalent thereto; nor shll.ll said common stock be entitled to any representation at any meeting of stockholders until the same shall have been issued. When five consecutive annual diVIdends of seven pel' cent., or, in lieu thereof, semi-annual or quarterly dividends equivalent thereto, shall have been paid upon the preferred stock, then the common stock shall be issued and delivered to parties who may .hold certificates issued upon the surrender of the common stock of the old Flint & Pere Marquette Railway Company, or other certificates Which may be issued by tMs company In lieu thereof; and,-if there shall be any surplUS of common stock it shall be the property of the company hereby organized. ·After the common stock sllall have been issued, as above provided, the preferred stockholders shall be entitled to receive from net earnings seven per cent. dividends each year before the common stock shall be entitled to participate; and after the payment of the seven per cent. to the holders of the preferred stock; any snrplus of net earnings that may remain shall be paid as dividends, ratably, to the holders of the common stock, not exceeding seven pel' cent. in anyone year. Should the net income be greater than sufficient to pay a dividend of seven per cent. upon the whole amount of stock, both preferred and common, such surplns shall be divided ratably among the holders of the preferred and common stock. Should the net income of Lhe company, after the common stOck shall have been issued, be insufficient to pay the dividendshel'einbefore prOVided for in any single year, such deficiency shall not be lUade up out of the earnings of the subsequent year or years, and tllis shall apply both to preferred and common stock." .1>y the sixth article it is expressly deelared that "the undersigned purohased said pllopertyat the sale under said decree in trust for themselves and others interested, pursuant to a scheme of reorganization heretofore agreed upo,n.'" . . . At the first meeting of the board of directors of the new corporation, held SepteIPber 7, 1880, 8 resolution was adopted authorizing and di· recting the president and secretary to issue engraved or lithographed cer-