Munson v. Syracuse, G.&C. RY. Co.

Citation103 N.Y. 58,8 N.E. 355
CourtNew York Court of Appeals
Decision Date05 October 1886
PartiesMUNSON and others v. SYRACUSE, G. & C. RY. CO. and another.

OPINION TEXT STARTS HERE

Appeal by plaintiffs from a judgment upon a decision of the general term of the Fifth department of the supreme court, affirming a judgment entered upon the report of a referee in favor of defendant. The action was to enforce specific performance of a contract to deliver certain bonds of the Syracuse, Geneva & Corning Railway Company. The issues were referred to J. L. Angle, of Rochester, who reported in favor of plaintiff, August 20, 1880, and judgment was entered directing specific performance of the contract, from which judgment defendants appealed to the general term, Fourth department, on which appeal said judgment was reversed, on the ground that the contract sought to be enforced was against public policy. The case was again tried before A. J. Northrup, as referee, who reported in favor of defendants, upon which report judgment was entered dismissing the complaint, from which judgment plaintiffs appealed to the general term, when the last-named judgment was affirmed. Plaintiff thereupon appealed to the court of appeals.

Samuel Hand and B. W. Huntington, for appellants, Edgar Munson and others.

Geo. F. Comstock, for respondents, Syracuse, G. & C. Ry. Co. and another.

ANDREWS, J.

We think it would be difficult to affirm the judgment of the court below dismissing the complaint, if, in order to do so, it was necessary to uphold the proposition that the original contract of August 13, 1875, between the plaintiffs and Magee, was invalid either because Munson, one of the plaintiffs, was, at the time of entering into the contract, a director of the Sodus Bay & Corning Railroad Company, or for the reason that the contract violated the rule which prohibits combinations to prevent competition at a judicial or other public sale. The situation was briefly this:

The Sodus Bay & Corning Railroad Company was organized in 1871 to construct and operate a railroad from Corning, in the county of Steuben, to Sodus Bay, in the county of Wayne, a distance of about 86 miles, passing through the counties of Schuyler, Yates, and Ontario, by way of Savona, Penn Yann, and Geneva. Of this road the plaintiff Munson was president and a director. In 1872 the corporation created a mortgage on its projected road, its franchises and property, for $1,500,000, to secure a contemplated issue of bonds to that amount, to be used in the construction of the road. It proceeded to secure rights of way over a portion of its line, graded about 30 miles of its track, between Savona and Geneva, and expended in the aggregate, in securing titles and in the prosecution of the work, the sum of $250,000. It issued bonds under the mortgage to the amount of $257,000, from the proceeds of which the expenditures were made. At the date of the contract between the plaintiffs and Magee, August 13, 1875, the plaintiffs held and controlled, of the bonds, $241,000 in amount; the remaining $16,000 being in the hands of a former treasurer of the company, whose title thereto seems to have been disputed, but who subsequently received a dividend thereon from the proceeds of the mortgage sale. The title of the plaintiffs to the $241,000 of bonds was not questioned, and there is no suggestion that they were not bona fide holders for value, or that the bonds did not represent a valid debt against the company for their full amount.

In January, 1874, the company became insolvent. It defaulted in the payment of the interest on its bonds at that date, and in the spring of 1875 all operations on the road were suspended, and the further prosecution of the enterprise was practically abandoned. In short, when the contract of August [103 N.Y. 70]13, 1875, was made, the company was hopelessly bankrupt, the work had stopped, the interest on its bonds had been unpaid for 18 months, and practically its whole property consisted of disconnected rights of way over a portion of its route, and a road-bed partially graded between Savona and Geneva; and whatever property it had of any value was acquired through the means furnished by the holders of the bonds.

Under these circumstances the parties entered into the contract of August 13, 1875. It recites that the plaintiffs own and represent $241,000 of the bonds of the Sodus Bay & Corning Railroad Company, and that Magee, the other party to the contract, represents the persons and interests proposing to organize another railroad company for the construction of a railroad from the vicinity of Corning to Geneva. The parties of the first part (the plaintiffs) agree to proceed at once to secure the foreclosure of the mortgage, and purchase, on the foreclosure sale, the property, rights of way, franchises, and interests covered thereby, and convey the same to Magee, or to the railroad company proposed to be organized. Magee, the other party to the contract, agrees to deliver, or cause to be delivered, to Munson and his associates, in payment for the said property, rights of way, and franchises- First, mortgage bonds of the proposed railway company to the amount of 50 per cent. of the principal and interest of the bonds of the Sodus Bay & Corning Railroad Company held by them. The contract contains other stipulations not now necessary to mention.

In the view we take of another question in the case, we deem it unnecessary to determine whether the contract of August 13, 1875, was valid as between the original parties thereto; that is, whether the plaintiff Munson, in entering into the contract, violated any duty owing by him to the corporation of which he was a director, or whether the contract as a whole was, on the part of Munson and his associates, anything more than a legitimate arrangement to protect their interests as bondholders, and to make the mortgage security available for the payment of a part of the mortgage debt. The contract was not by or with the Sodus Bay & Corning Railroad Company; and, assumingthat the question as to the validity of the original contract can be raised in this action, we are not prepared, without further consideration, to condemn the transaction on either of the grounds suggested. Duncomb v. New York, H. & W. R. Co., 84 N. Y. 190;Marie v. Garrison, 83 N. Y. 14;Harpending v. Munson, 91 N. Y. 650. But this action is not brought to enforce the contract of August 13, 1875, against the defendant Magee. It is an action to compel the specific performance, by the defendant corporation, of the undertaking of Magee in that contract to deliver the bonds of the new company as therein provided, founded upon the assumption by the new company of that obligation, by resolution of its board of directors passed August 13, 1875, and also upon the subsequent contract of September 14, 1875, made between the company and the plaintiffs, which in its primary provision substituted the company to the place of Magee as the party of the second part in the contract of August 13, 1875.

The action in its entire scope is framed to enforce the obligation of the defendant corporation under its contract of assumption. It was tried upon this theory. The exceptions point to this as the ground of the action, and Magee is joined as defendant, and in the demand of relief, as the custodian of bonds of the company which the plaintiffs claimed he should be adjudged to deliver to them by the judgment in the action. Throughout the trial the action was treated as an action against the defendant corporation upon its contract, and in no respect as an action against Magee to enforce a liability against him under the contract of August 13, 1875. The plaintiffs, therefore, are compelled to meet the question whether, upon principles of equity, they are entitled to the aid of the court to enforce an executory contract between themselves on the one side, and the defendant corporation on the other, for the sale of the property of the former, in a case where one of the plaintiffs, at the time the contract was made, was a director of the purchasing corporation, and took part in making the contract upon which the action is brought.

For a proper understanding of the situation a few additional facts need to be stated. On the twenty-sixth of August, 1875, Magee and his associates organized a railroad company to construct a railroad from Corning to Geneva, as contemplated by the contract of August 13, 1875. The plaintiff Munson was one of the promoters, and became a director and stockholder, and was the first president of the corporation. On the thirty-first of August, 1875, Magee executed a written assignment to the new corporation, the Syracuse, Geneva & Corning Railway Company, of his rights under the contract with the plaintiffs of August 13, 1875; and the board of directors, at a meeting on the same day, in which the plaintiff Munson participated, passed a resolution assuming the contract on the part of Magee, and agreeing to perform it, except in one particular not now material to be...

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