483 lESUP
v.
ILLINOIS CENT.
R. tI.
CO.
et al.
DuBUQUE
& S.C. R. CO.
JESUPet al.
(Circuit Court, N. D.IZlinof8;October6,1890.)
1.
EQUITY-J'URISDICTJON-RAli:aOAD LEAS_ENFORCEMENT.
In September, 1866, the Cedar Falls Railroad. Comllany leased its road to the Dubuque Com pany for the term of 40 years. A veal' later the Dubuque Company leased its own road to the Illinois Central Railroad'Company for 20 years, with the option to retain it in perpetuity, the la'tter company agreed to assume the lease theretofore entered into between 'tho Dubuque and the Cedar Falls Railroads. HeW" that the assumption of this lease by the Illinois Central created no direct obligation on its part to the Cedar Falls Company which it or its mortgagees could enforce by an action at law, but such obligation could be enforced only by a'suit in equity. ' ,
S.
RAILROAD' COMPANJES-Ass,MPTION Oll' LEAS_CONSTRUCTION.
As the Illinois Central elected to surrender both the Dubuque and Cedar Falls roads to the Dubuque Company, after the expiration of 20 years, the assumption of the lease of the Cedar Falls road by the Illinois Central does not bind it for the rent of the Cedar Falls road after the expiration of the 20 years for which it had leased the Dubuque road, which forms the connecting link between the Illinois 'Centraland the Cedar Falls Railroads.
S. SAME-ESTOPPEL.
imum rent which that comllany had thereby obligated itself to pay is more 'than sufticient to meet the entire amount of interest on the bonds, does not estop the Illinois Central from denyipg its liability Oll tbe lease after the expiration of the 20 years, where such indorsement was not made at its instance or by its direction· .. EQUJTY-JURISDICTION-CROSs-BJLL-DISHIS8AL OF ORIGINAL BILL.
to the' effect that the Illinois Central had assumed the lease, and that the min-
An indorsement on the bonds of the Cedar Falls Company, made by its.
The trustee In a mortgage executed by the Cedar Falls Company to secure the proper application of the rents of its road filed his bill a'_ ainst the Illinois Central, the Dubuque, and the Cedar Falls Companies, alleging the insolvency of the latter company an.d its refusal to collect tbe rents. The prayer of the bill was that the trustee be henceforth empowered to collect such rents, and that the lease be declared binding on the Illinois Central for the entire term of 40 years. HeW that, after a dismissal of the bill as to the Illinois Central, the court still had jurisdiction of a cross-bill filed by the Dubuque Company against the Cedar Falls Company and the trustee for a cancellation of the lease of the Cedar Falls road, as tlie relief sought by the cross-bill is directly. connected with the subject-matter· of the original bill, and is of an affirmative character. The fact that the Dubuque Company and the Cedar Falls Company are both Iowa corporations will not defeat the jurisdiction of, this court over the cross-bill \ both of these corporations being properly before the court as parties to the original bill.
6.
SAME-RESIDENCE.
Go
RAILROAD COMPANIES-LEASE-FRAUD OF DIRECTORS.
The the dirO(,wrs of the Dubuque Company failed to make the continuance of the lease of the Cedar Falls road dependent on construction of roads in Minnesota that would connect that road with St. PauloI' Minneapolis, which was the expectation when the lesse was executed, but whicb expectation was realized, will not warrant the presumption that the directors of the Dubuque Company were guilty of actual fraud towards that company in executing the lease. Neither will the court induljte the presumption of fraud against the directors of the Dubuque Company because the rent stipulated for in the lease turned out to be larger than the business over the Cedar Falls road really justified, where such rent was fixed in accordance with the report of coml'etent and disinterested experts, to whointhat question had been referred. OF FRAUD.
'I.
SAH_ExCESSIVE RENT.
8.
.... The fact t,bat the bonds and allowed by the Cedar Falls to those its road, some of whom were also directors of the Dubuque Company, were.in excess: of the actual cost of construction. is a matter entirely betlWeentbe Cedar Falls Company and those who received such bonds, and in no .tbe Dubuque Company or the validity of its lease of the Cedar :9'alls road.
484 9.
REPORTER,
vol. 43.
(JORPORATIONS-CONTRACTS-J)IRECTORS.
A contract, in the name of a corporation, by its board of directors, is not void, if otherwise unassailable, simply because some of the directors, a minority, used their position with the effect, or even for the purpose, of advancing their personal interest to the injury of the company they assumed to represent, although the fact that such directors, constituting but a minority, participated in the making of the contract, would cause the transaction to be closely scrutinized, to the end that the rights of complaining stockholders, however small in number, might not be sacrificed by those who were hound to protect their interests.
10.
SAME-VOIDABLII CONTRACT.
The contract by which the Dubuque Company leased the Cedar Falls road would not have 1;leen void even if the majority of the directors of that company had been personally in.terested in the Cedar Falls Company. It would have been simply voidable at the election of the Dubuque Company, or. in a proper case, at the suit of its stockholders, and that election must have been exercised, or the suit broul![ht, within such time as was taking into consideration all the facts and ClrculIlstances of the case, including the nature of the property that was the subject of the lease. The rule is a wholesome one that requires the court, in cases of merely voidable contracts, to withhold relief from those who,. with knowledge of the facts, or with full opportunity to ascertain tl1em, unreasonably postpone application for relief.
11.
SAME-ACTION TO SIlT ASIDE-TIME TO SUE.
19.
SAME-RATIFICATION BY ACQUIESCENCE.
A contract not wholly invalid when executed, nor prohibited by law as relating to some illegal transaction, and which is therefore voidable only, may become, by the acts of the parties or by long acquiescence, binding upon them, especially where tbe nature of the property, which is the SUbject of the contract, is such that its value may be affected by its relations to other property of like kind or by the changing business of the country.
18.
SAME-DELAY IN SUING.
14.
SAME-KNOWLEDGE OF STOCKHOLDERS.
InEquity. Morris K. Jesup, plaintiff in the. original suit, and a citizen of New York, is the surviving trustee in a mortgage made September 22, 1866, by the Cedar Falls & Minnesota Railroad Company, covering its road and the net earnings thereof, its franchises, privileges, right of way, depot grounds, and all material designed to be used in construction; also "the rents and moneys payable by any person or company" to that corporation "for the use of said road and appurtenances." The main question in the original suit is wheLher the Illinois Central Railroad Company is liable to account to said trustee for certain rents reserved to the Cedar Falls & Minnesota Railroad Company in a lease by. the latter company of its road, franchises, privileges. etc., to the Dubuque & Sioux City Railroad Company, a corporation of Iowa, which lease was assumed by the Illinois Central Railroad Company in a written contract, whereby the Dubuque & Sioux City RailrQad Company, to be hereafter called the" Dubuque Company," leased its own road to the Illinois Central Railroad Company, for a specified term, with an option to retain it in perpetQity.
JESUP tI. ILLINOIS CENT. R. CO.
485
The question in the cross-suit is whether the Dubuque Company is entitled to a decree for the surrender and cancellation of the lease to it of the Cedar Falls & Minnesota Railroad. The original and cross suits, as to some matters, are so closely connected that it will be proper to state the principal facts in chronological order, without stopping to distinguish those specially applicable to the original suit from those that are material in the cross-suit. The case made by the pleadings, exhibits, and proofs is, in substance; as follows: The Cedar Falls & Minnesota Railroad Company, to be hereafter called the "Cedar Falls Company," was incorporated in the year 1858, the laws of Iowa, for the purpose of constructing a railway from a point in that state on the Dubuque & Sioux City Railroad to the Minnesota state line. Its proposed route was through Waverly and Charles City to Mona, on the line between Iowa and Minnesota. The completion of the road to Mona became an object of great interest to the Dubuque Company. As early as December 29, 1860, the board of directors of that company, obviously for the purpose of assisting the Cedar Falls Company, passed a resolution reciting that it was "impor7 tant to the interests of the Dubuque and Sioux City Railroad that the construction of the Cedar Falls and Minnesota Railroad, lying between the Dubuque and Sioux City Railroad and the state line of Minnesota, should be prosecuted with all possible dispatch," and directing "that for the term of five years from the 1st of January, 1862, there shall be paid by the Dubuque and S\OUX City Railroad Company, in monthly payments, to the order of the trustees of the first mortgage bonds of the Cedar Falls and Minneapolis Railroad Company, fifteen per cent. of the gross earnings from all business passing to and from all points lipon the Cedar Falls and Minnesota Railroad, provided the Same is upon the through tickets or bills of lading, and upon condition that such fifteen per cent. so paid shall be applied to the purchase and cancellationof the bonds issued by said company." In 1863 it made, with the Cedar Falls Company-, what is called a" drawback contract," to continue in force for 10 years from March 15, 1863, whereby, "for the purpose of inducing the investment of capital in the construction of the Cedar Falls and Minnesota Railroad," it agreed with" John Jackson, M. K. Jesup, and James Huff, trustef,S of said Cedar Falls and Minnesota Railroad." to pay over to them "fifteen per cent. of the gross earnings earned upon their road, or [upon] any part thereof, in the transportation of passengers or freight coming from or going to any place or station on said Cedar Falls and Minnesota road." That contract provided that this 15 per cent. should be applied to the payment of interest on any construction bonds issued for the purpose of constructing or equipping the Cedar Falls road. In the annual report of the president of the Dubuque Company, January 1, 1864, it was said that "when another division shall be completed, and the road built from Cedar Falls to the Minnesota state line, a portion of which is now under contract, there would seem to be no reason why
486
FEDERAL
vol. 43:.
the eommon In the report, of the.,operations of the Dubuque Oompanyfor the five monthS' endmg March 16. 1864) it was said: '.'TheCedar Falls and Minnesota Railroad is under contract from Cedar Falls to Waverly, a distance of miles. 'It is expected that it will he completed operation early nextfalJ.On the 9th of March, 1863, the Dubuque and Sioux City Railroad entered into a contractaUowing adrawhack to that road of 15 per Cl'ut. of all bus:nl'ss coming ,from or goil'lg, to that road. The Galena and Chi'cago Union and'lllillois Central Companies will both enter into like contracts. This road when cOIlJpleted to the s,tate line will, in connection with the Minnesota Centl'al Rllilruad, furm a continuous line to MinneapQlis an!l. St. Paul. The Minnesota Central HaiIroad' Company expect to b\lihl thei.' rOad to within miles of the state line year. These two roads when com,pletedwill form a very impOl'tant raih'oad connection, and a valuable c'ontributor to the Dubuque and City. l'he country on the line' is'tolerablywell settIl'd now, and is one of the finest wheat-growing rf'gions weilt of the The Cedar vallf'y for beauty, 'fertilit,\' of soil, and water"power cannot be surpassed by any other valley in the north-west."
,. These views were shared by many. if not by all, who largely interested in the prosperity of the Dubuque Company. The result was that in October) 1864, the directors of that company passed a resolution authorizing its president to lease the Cedar Falls Railroad from station to station, as the track was completed and in running order, and Allan Campbell, one of the board, was appointed to examine the road, and report,upon the amount of rent to be paid. In his report he stated that, while he thought well "of, the business of this northern line,n it was impossible; upon a cursory examination, and before the road was plated, to establish a rent that would be fair and equitable between the parties. He added: "From my own ohservation, and from information derived from various Bourct'S. I feel a strong Ilssurancethat this northern road, when completed to the Minnesota slate line, a distance of - - ' - miles, will tend materially to incrl'ase the rl'ceipts of the Dubuque and Sioux City road. The route passes through a rich grain country, and along w.atf'r-COUl'ses which furnish a cliellp and never-failing power fOl'manufactul'illg purposes."
The terms of the proposed lease were for some time ,the subject of considerable discullsion, particularly as to the amount of rent to be paid to the Cedar Falls Company. The matter was referred by that company to Col. R. B.,Mason. a stockholder and former director of the Dubuque Company) and T. B.Blackstone, president of the Ohicago & Alton Rail· rQad Company, both gentlemen Qf high standing and' of large experience in railroad matters. , Neither of them had the slightest interest in the Ced,ar Falls Company. To them was submitted the form of a lease prepared by the vice-president of the Cedar Falls Company. They reported: Dubuque and SiOUlC City Railroad Company under such a lease would receive, when the earnings amounted to $3,500 per mile, about' 54 per cent" and l when the eamingsamounted, to $10,000 per mile, about 58 per cent., of the' woss earnings., \f ado. not think this would leave a very large margin for the Dubuque and Sioux City Railroad Company. But if a good road is constructed, complete in all' respects, we believe, from the best information we have"tbat if $1,500 per mile and forty pel' cent. of the excess over $3,500
J;ESUP tI. tLLINOIS CENT. B,' ·CO.
I
481
pel'mile was paid to the Cedar Fa1l8 and Minnesota RaHroad; ftwoltldbe a fair and equitable between the .'. . . The Jetter or report having been submitted to the directors of the Du· buque Company, the latter authorized a lease upon the terms by Mason and Blackstone, "ex.cept that the division of earnings after $3.500 per mile shall be seventy per cent. for the Dubuque and Sioux City &ilroad Company and thirty per cent.· for the Cedar Falls and Minnesota Railroad Company, and that said lease commence' January 1, 1866;" fUr,ther, that the lease should be inliau of the drawback contract then existing between the companies. By this lease, which was dated September 27, 1866, the Dubuque Company agreed to pay to the Cedar Falls Company, during the term Qf 40 years from January 1, 1867, a fixed rental of $1,500 per mile per annum, in equal monthly installments, and a further rent, every six: 9f35 per cent. of the gross earnings of the leased property when they exceeded $3,500 per mite. per annum, and did not exceed $7,000 per mile per annum, and 30 per cent. of the gross. earnings when they exceeded the latter sum per mile per annum. The lessee enanted .to b.tke possession of the road as it was opened from station to station, and to fully .and efficiently equip, operate, qand maintain it, as· sumingallliabilities and paying all expenses incident thereto, and to the property the same' care' and attention bestowed upon' its own road. . This lease, by its terms, superseded the then existing drawback contract between the parties. 'fhe mortgage in question, this lease, must have been e.x.ecuted Rubsequently, for it recites that the Cedar Falls Company "have leased their road, constructed and to be constructed, tathe Du.. buqueandSiouxCity Railroad Company," and states the terms of the lease as they appear in the instrument of September 27, 1866 ;:01' it may have been executed on the day it bears date, in anticipation of a lease then agreed to be made. It was given to secure the proper application of the rents and profits of the Cedar Falls road, constructed and to be punctual payment of the principal and interest of constructeq, and construction bonds proposed to be issued, and which .were issued, for 81,407,000, maturing Ja.Quary 1, 1907, and bearing interest at the rate of 7 per cent. per annum, payable semi-annually. It constitutes a seeond lien on the part of the road then constructed from the junction with the Dubuque road, near Cedar Falls, to Waverly,a distance of about 14 miles, and a first lien upon the road to be constructed from Waverly to the Minnesota state line. The first lien on the 14 miles of road then was created by a recorded deed of trust to Jesup and Richmond, dlltedApril25,1864, to secure certain bonds issued by the Cedar C,Qmpany, of. which $210,000 were outstanding when the gage for 81,407,000 was made. 'rhe mortgage of September 22, 1866, recites the purpose of the Cedar Falls Company to issue certificates of stock on its railroad, constructed and to be constructed; at the rate of $21,000 per. mile, including the stOUK already issued. It also provides, among