Farmers' Loan & Trust Co. v. New York & N. Ry. Co.

• Decision Date: 20 October 1896
• Citation: 150 N.Y. 410,44 N.E. 1043
• Parties: FARMERS' LOAN & TRUST CO. v. NEW YORK & N. RY. CO. et al.
• Court: New York Court of Appeals Court of Appeals

150 N.Y. 410

44 N.E. 1043

FARMERS' LOAN & TRUST CO.

v.NEW YORK & N. RY. CO. et al.

Court of Appeals of New York.

Oct. 20, 1896.

Appeal from supreme court, general term, Second department.

Action by the Farmers' Loan & Trust Company, trustee, against the New York & Northern Railway Company and others. On their own motion, Artemus H. Holmes and Alfred R. Pick were made parties defendant. From a judgment of the general term affirming a judgment for plaintiff (28 N. Y. Supp. 933), defendants Holmes and Pick appeal. Reversed.

The action was brought to foreclose a second mortgage upon the property of the New York & Northern Railway Company, made by it, and given to the plaintiff, as trustee, to secure the payment of second mortgage bonds issued by that company, amounting to $3,200,000. This mortgage was made in pursuance of a plan for the reorganization of the predecessor of the New York & Northern Railway Company. The interest on the bonds for the first four years was payable only out of the net income, and no interest became due under the mortgage until June 1, 1892. It provided that no foreclosure could be had until the expiration of one year after default in the payment of the interest, and that then the plaintiff might, and upon the written request of the holders of two millions in amount of such bonds should, apply to a court having jurisdiction for a foreclosure and sale of the mortgaged premises. The capital stock of the New York & Northern Railway Company consisted of $3,000,000, par value, of common stock, and $6,000,000, par value, of preferred stock, making a total of $9,000,000. On July 20, 1893, Drexel, Morgan & Co., claiming to own a portion and to represent the holders of another portion of the second mortgage bonds, which together amounted to more than $2,000,000, requested the plaintiff to take proceedings for the foreclosure of the mortgage, and, under a provision in it to that effect, to declare the whole principal and interest secured thereby to be at once due and payable. None of the original defendants interposed any defense; but on October 5, 1893, on their own motion, the appellants were made parties defendant in the action, and served an answer. The appellants are stockholders of the New York & Northern Railway Company, representing about 20,000 shares of preferred and common stock, and appear in this action on their own behalf, and also on behalf of the holders of the other shares represented by them. In the answer, the appellants, with other defenses, in substance, allege that this action was brought in pursuance of an unlawful plan and combination by and between the New York Central & Hudson River Railroad Company and others acting for it to render the stock of the New York & Northern Railway Company valueless, and to secure its property for the benefit of the New York Central & Hudson River Railroad Company; that the latter, in order to carry such plan into effect, purchased a large number of the second mortgage bonds, and also a majority of the stock of that company; that by virtue of its ownership of a majority of such stock, and preparatory to the foreclosure of the mortgage, it obtained and assumed control of the affairs of the New York & Northern Railway Company, by causing changes in its directory and officers so as to make them favorable to the New York Central & Hudson River Railroad Company, thereby preventing the New York & Northern Railway Company from saving its default in payment of the interest then due, and from taking measures for its safety, or from resisting the New York Central & Hudson River Railroad Company's scheme to acquire its property by such foreclosure; that the railroad of the New York & Northern Railway Company was a parallel and competing road with the New York Central & Hudson River Railroad, and that, by the means already referred to, the latter company sought to secure the property of the former through such foreclosure for its own benefit, and at a price much less than its true value; that this was rendered possible by its acquiring a majority of the stock of that company, and thereby being able to control the affairs of the New York & Northern Railway Company, and to so manage its business in collusion with its directors and officers that its obligations coule not be met or its default made good; that such acts on the part of the New York Central & Hudson River Railroad Company were fraudulent, and prohibited by the laws of the state; and that the written request to the plaintiff asking for a foreclosure did not comply with the terms and provisions of the mortgage, as the persons making the request were not at the time holders of $2,000,000 of the bonds it was given to secure.

On the trial, the defendants introduced in evidence the following letters and papers.

‘The New York Central and Hudson River R. R. Co. Principal Office. Albany, N. Y., March 18th, 1893. Circular letter to the stockholders in respect of acquiring control of the New York and Northern Railway. The New York and Northern Railway extends from One Hundred and Fifty-Fifth street, in the city of New York, occupying a line practically midway between this company's Hudson River Division and its Harlem Division, to Brewsters, on the line of the latter, a distance of about 60 miles. It has a fine bridge across the Harlem river, and has, within the bounds of the city of New York, 8 miles of a hundred-foot roadway, and it owns 32 acres of terminal property, also within the bounds of the city. The relation and value of this line to this company is too well known to require explanation. To acquire the control of it will cost this company about $4,000,000, and agreements in respect thereof have been entered into subject to the approval herein asked for. It is proposed, after the control is acquired, to enter into a lease with the present company, or perhaps with a company to be organized in its stead, under which this company will guaranty the principal and interest of $5,000,000 in 4 per cent. 100-year gold bonds. Of this amount, $4,000,000 will represent the cost of control, as above stated, and $1,000,000 will be reserved for developing, improving, and bettering the line. As will be seen by the form of notice at the top hereof, a special meeting of the stockholders of this company has been called, to be held on the 19th day of April next, to which meeting this matter will be submitted for approval and authorization. Accompanying this is the form of a proxy to be used at that meeting, which, when executed, may be returned to the undersigned in the same envelope with the proxies for other meetings which are sent herewith. What has been said in the other circular letters which go out with this in respect of the desirability of a full vote may be taken to apply, with equal force, to this present letter. E. D. Worcester, Secretary.’

‘New York, April 3, 1893. Drexel, Morgan & Company. E. V. W. Rossiter, Esq., Treasurer New York Central and Hudson River Railroad Company, Grand Central Depot, New York-Dear Sir: We have paid out for the New York Central as follows:

+--------------------------------------------+
                ¦$1,700,000 second mortgage bonds,¦          ¦
                +---------------------------------+----------¦
                ¦at 80                            ¦$1,360,000¦
                +---------------------------------+----------¦
                ¦2,500,000 preferred stock, at 35 ¦875,000   ¦
                +---------------------------------+----------¦
                ¦2,200,000 common stock, at 15    ¦330,000   ¦
                +---------------------------------+----------¦
                ¦Total                            ¦$2,565,000¦
                +--------------------------------------------+
                

‘Will you kindly send us your note dated April 1st for that amount, and oblige, yours, truly, Drexel, Morgan & Company.

‘P. S. Equipment obligations and floating debt obligations have not yet been delivered. We will report later as to them. D., M. & Co.’

‘New York, April 1, 1893. $2,565,000. On demand, upon ten days' notice after date, we promise to pay to the order of Drexel, Morgan & Company two million five hundred and sixty-five thousand dollars, with interest. Value received. New York Central and Hudson River Railroad Company. Chauncey M. Depew, President. E. V. W. Rossiter, Treasurer.’

The indorsements were: August 1, 1893, interest paid to date; also $740,996 on account of principal of within. Also further indorsements of full payment, August 1, 1893, for $1,804,094.89.

‘New York, April 5, 1893. E. V. W. Rossiter, Esq., Treas'r N. Y. C. & H. R. R. R. Co., City-Dear Sir: In payment for the following securities of the N. Y. & Northern R. R. Co., viz. $1,700,000 2d Mtge. bonds, $2,500,000 preferred stock, $2,200,000 common stock, we have received from you a demand note, on ten days' notice, for $2,565,000, dated April 1st, 1893, and signed by Chauncey N. Depew, president, and E. V. W. Rossiter, treasurer of the N. Y. Central & H. R. R. R. Co. We hold the abovementioned securities subject to your order. Yours, very truly, Drexel, Morgan & Co.’

The following is a resolution of the stockholders of the New York Central & Hudson River Railroad Company, which was adopted at a stockholders' meeting held April 19, 1893:

‘Resolved, that the stockholders of the New York Central and Hudson River Railroad Company hereby approve and authorize the acquirement, by purchase, of a controlling interest in the stock and bonds of the New Youk and Northern Railway Company, and approve and authorize the making of a lease with the company, or a company which shall be organized in its stead, of its railroad and property, and approve and authorize the guaranty under such lease of the principal and interest of $5,000,000 in four per cent. one hundred year gold bonds of the lessor company.’

The report of the New York Central & Hudson River Railroad Company to its stockholders, made June 4, 1893, was as follows:

‘At a special meeting held April 19, 1893, 640,378 shares of the capital stock of this company were voted in favor of a...