HITCHCOCK V. BARRE'rT.

653

HITCHCOCK

et al,

11. BARRETT

et al.

(Oircuit Vourt, E. D. New York.

RAILROAD COMPANIES-LEASE-RESCISSION.

May 2,18112.)

,Vhere the directors of a railway company enter into a contract with third persons, wherebyI' new company is organized, franchises secnred, and a road built and leased to t,he old company, and the profits realized from the transaction are equally divided between the directors and the third persons, the latter are not liable for their profits, even though exorbitant, on suit by stockholders of the old company. unless the contract of lease is rescinded, and the road restored to the new company.

In Equity. Bill by Hitchcock Iud others, as stockholders of the Brooklyn Elevated Railroad Company, against Barrett and others, to restrain the latter from exercising any acts of ownership over certain shares of stock, and to enjoin the company from recognizing their claim toutle therein. Injunction denied. Julien T. Davie8,Wheeler H. Peckham, and J. G. HaU, for plaintiffs. Geo. W. Wingate, Edmund Wetmore, and Wm. H. Paige, Jr., for defendants.

a.

WALLACE, Circuit Judge. 1 am so strongly of the opinion that there is no ground upon which this suit can be maintained that I must decline to grant the interlocutory injunction which has been applied for. This bill is filed by certain stockholders of the Brooklyn Elevated Railroad -Company, against that corporation and one Barrett, to restrain the latter from exercising any acts of ownership upon 23,792 shares of stock of the railroad company, from voting thereon at any election of stockholders -of the railroad company, and to enjoin the railroad company from recognizing any title of Barrett to such shares. The plaintiffs allege that the ,corporation is controlled by directors who affiliate with Barrett, and refuse to protect the interests of the corporation. The substantial facts are briefly as follows: Prior to the 1st day of February, 1887, the Elevated Railroad Company, shortly designated as the" Brooklyn Company," was -operating its railway over various streets in the city of Brooklyn, and another elevated railway company, shortly designated as the "Union .company," owned franchises, which the BrooklynCompany had attempted unsuccessfully to obtain, for constructing and operating a railway over :lertain other streets in the city of Brooklyn. Each company was a corporation organized under the laws of the state of New York. It was desirable for the Brooklyn Company that tHe railway of the Union Company should be built, and, when built, that the properties of the two .corporations should be merged and opEJrated under one management. The Union Company had been organized in June, 1886, by Messrs. Wingate, Cullen & Barrett, upon an understanding with Messrs. Lauterbach .&. Pettus that the former should effect the organization and secure, the franchises, and the latter should provide the money to pay all the expenses and build the railway, and that the profits arising from the trans-

pO.
action should be divided, one half to go to Wingate, Cullen &: Barrett, and persons they htl-d' associated with themselves, all.u the other half to Lauterbach & Pettus and their associates. Lauterbach & Pettus were directors of the Brooklyn Company, and had associated with themselves in the enterprise seven other directors of that company. By February 3, 1887 of the -qnion Company had been fully acquired by theeJforts of Wingate, Cullen & Barrett, and Lauterbach & Pettus had advll-I;lced$110,OOO in organizing, arid procuring the franchises of the corporation;and onthst daytbese persons organized a construction company as a corporation under the laws of New Jersey, in which one half of the stock was snbscribed for and taken by the Wingate party, and the other half by the Lauterbach party. These persons at the time owned or controlled all the stock of the Union Company. The construction company was organized pursuant to a plan of the promoters, that the Union Company should be capitalized at the same amount per mile of railway as the Brooklyn Company, viz.: First mortgage bonds, $550,000; seCond mortgage bonds, $185,OOQ.;stock, $740,000; that the Union Company should make a contract with the construction company, by which a,lllts, bonds and sto.ck Elhould be'paid to the construction company for building the railway; that a syndicate should be formed of the stockholders of the Brooklyn Company to market enough of the bonds received by the .constrlldion company from the Union Company to build themilway; that the Union Company should lease for the full term of its corporate existence its .franchises and railway to the Brooklyn Company, and deliver the railway in sections as completedjthat the Brooklyn ,Compainyshould p;uarll,nty the inte'l'est on the bonds of the Union Company, and the same dividends on the stock of the Union it should derJlw'e<ontits own; that Ollr:the completi()n of the railway .the two concerns should b& merged Fltnd the stock of the Brooklyn Company should be eXiehallgeo, share :for,,!lbare,with that of the Union Company; and that the :profits made construction company in building the railway for the, Union Company. should be,.divided betweenthe construction companyand'the syndicate representing the shareholders of the Brooklyn Company in specitied proportions. . Shortly after the construction company wus orgnnized,.co.lJtracts were entered into between it and the UniOl1Company, between- H and the syndicate, and between the Union Company and the .BroQklynCompany, by which lhe original scheme was madeetfective. AmOng other thingJI. these contracts relieved the risk of 6nancialloss in building the railconstruction cowpany from way. By thecc;mtract between the Union Company audthe constructiollcompany the, latter' ·agret'.d to refund to the holders of the capital ,stock of the UnionCoDlplliIiIy:all moneys ,that hadbep.D paid. into that cOmpany :to S!i!cure its organization and franchises. : The contract between the construction company and the syndicate was designed to ena,ble ,the construction compaby:.to obtain all money to build the railway; and reimburse the expenses of thepromotersj and it was expected that the, proceeds !of the sale of ,the first :nl0rtgage bonds would be nearly sufficient for the .purpose. The contraotswere cll.rried ont, the railway

HITCHCOCK', V.BARRETT·

;655

.:was btult,and the merger of the two companies was effected. ,As:a result thetailway was built out of the proceeds of the first mortgage bonds. The coastruction companyteceived,as its share of the profits under the contract 'between it rand the syndicate, $1,364,000 of second mortgage bonds, and 54,680 shares of Union Com pany stock; the syndicate received $702,000 of the second mortgage bonds and 37,656 shares of the stock; and the Brooklyn Company got the franchises and property of the Union Company at the same cost per mile of road as that of its own. The profits madeby,the construction company were divided between its shareholders according to their respective holdings; one half going to the Wingate party, arid the other half to the Lauterbach party. The 23,792 shares of stock in suit .are part of the shares. allotted to the Wingate party upon the. distribution of the profits of the construction company. The profits of the syndicate were divided between the stockholders of the Brooklyn Company who participated in the syndicate, and these represented 92-100 of the whole number of shares of. that company. The franchises oithe Union Company were valuable, and the property of that company at the time of merg!'lr was certainly as, valuable per mile of road as that of the Brooklyn Company; and as thesAfranchises and property were tl,'ansferred to the latter upon the same basis of bonds and stock pE.'r mile of toad 8S itscbwn, the transaction was; as between the two corporations, one in which a fair, equivalent was given and received. , Vppnthe facts as they appear upon this motion, it seems plain that the Brooklyn fairly dealt with, unless its directorsmadfl a clandestine profit I1t its expense. Among the promoters, there were nine ,persons who were hs directors; and the plaintiffs invoke the wellrecognized rule that th:osewho are directors of a corporation cannot, while directors;' enter into and authorize contracts on behalf of the corporation, out of which they personally derive a secret profit. Undoubtedly, such contracts are voidable at the election of the corporation. Equity forbids any person standing in a fiduciary positi6n' froOl making any profit, in any way, at the expense of the party whose interests he is bound to protect, without the fullest and most complete disclosure. I shall not enter upon the inquiry whether these directors attempted to make any secret profit in this case, or whether the Brooklyn Company, by the action at the .several stockholders' meetings held prior to the institution of this suit, has not ratified the transactions which are assailed. It should be said, in justice to them, that there is much to denote that there was no attempt by them to conceal their real part in the trJln!!a{}tion, and that their acts were not regarded by the great xnitjorityof stockholders as involving any breach of trust. In the most favorable view of the facts .which can be taken for the plaintiffs; the Brooklyn Company, upon whose rights the plaintiffs stand, may be entitled to proceed for a rescission of the agreements by which it has acquired the franchises and property of the Union Company, and obligated itself to the liabilities it assumed as a consideration therefor; or, besides the remedy of it reseission, the Broooklyn Company may be entitled to resort to It cou,rt of equity to·compel th08.e .who were its direct-

will

656

FEDERAL REPORTER,

vol. 50.

orsto 'account and charge the profits made by them with aI1 implied trust. But the present bill does not proceed for a rescission. Itstheory is tbalt the Brooklyn Company, while retaining the benefits of the agreeme:dtsentered into, is entitled to reclaim some of the fruits which are in the hands of the defendant Barrett. None of the profits made by the directors are represented by, the stock which was distributed to the defendant Barrett. That stock represents the profits made by the Wingate party, Of whom none of the members stood in any fiduoiary relation to the Brooklyn Company; and although they acquired it with knowledge offactsientitlingthe Brooklyn Company to rescind, or compel its directors to Mcount. the stooknevertheless represents their share of the value of tbefranchises and property of the Union Company. Even though they obtained an inordinate price from the Brooklyn Company for what they transferred, their stOck could not be confiscated, or their right to it annulled, without restoring to them what they parted with. But they ,did not obtain, aslt seems to me, more than a fair equivalent. It is 'said by a recent commentator: "Because a'directot of a'company may have sold to the company, at an tortionate'valuation, property which they supposed he was purchasing for them from another·. but which really' belonged to hhnself, it does not follow that the c\>l)lwnymay .oonfillcate the property altogether, and not pay him anything for it. He willpe entitled to retain what it was really worth, and ,Will be obliged to the profit which he has received. Nor will what he IIlll.y have given fOl' the property beutaken as a conclusive standard of its value;" rrhomp. Liab. Off. 361. Certainly a severer rule oBght not to be applied towards Barrett than towards the directors. Yet the directors are not pursued by the present bill. They are not named 11.8 parties, and their conduct is apparently condoned by the plaintiffs. Clearly, it would not be equity to allow them to retain their profits, and charge the amount upon the stock of Barrett. on theory of a trust. The motion. is denied.

GILMOUR '11. EWING

et al. 1

May 4,1892.)

WIn'C1J/tt Cou'rt, D. Wa8Mngton, W. D.

1. 2.
   

Ail insolvent debtor cannot by his vol\lIi\;ary assignment defeat the right o1'a lIlortgagee to whom he hail exeouted a mortgage to foreolose the mortgage after , .·
FEDER.AL

1!'0R BENEFIT OFCREDlTORB-RIGHTS OF MORTGAGEE,

The pendency of an action in a state court.will not bar an aotion in a United States oourt to same question between the same parties.

011' CAUSE IN STATE COURT.

B. INSOLVENOy-ApPOINTMENT OF ASSIGNEE.'

Under the insolvent act of W..shington, oontained in the Code of 1881, the title of the debtor's property:· d,id not pass out 'of the debtor until an assignee had been. appointed, and was authoriied to receive the property. by T. W. Hammond, Esq., of the Tacoma bar.

1 Reported