Farmers' Loan & Trust Co. v. Toledo & S.H.R. Co.

• Citation: 54 F. 759
• Decision Date: 14 February 1893
• Docket Number: 49.
• Parties: FARMERS' LOAN & TRUST CO. v. TOLEDO & S.H.R. CO. et al.
• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)

54 F. 759

FARMERS' LOAN & TRUST CO. v. TOLEDO & S.H.R. CO. et al.

No. 49.

United States Court of Appeals, Sixth Circuit.

February 14, 1893

Charles H. Campbell, Henry Russel, and Henry M. Campbell, for appellant.

Dallas Boudeman and John W. Adams, for appellees.

Before JACKSON and TAFT, Circuit Judges, and HAMMOND, District Judge.

JACKSON Circuit Judge.

The appellant, as trustee or mortgagee under a trust deed or mortgage made and executed October 27, 1886, by the Toledo &amp South Haven Railroad Company, to secure the payment of its first mortgage coupon bonds, bearing 6 per cent. interest, to the amount of $216,000, of even date, brought this suit, at the instance and upon the demand of the holder of $210,000 of said bonds, to foreclose said mortgage; the mortgagor having made such default in the payment of the interest, warrants or coupons on said bonds as entitled the holder of a majority thereof, under the terms of the trust deed, to declare the principal of the bonds to be due and payable, etc. The defendant railroad company was duly served, but made no defense to the suit. The appellee Charles F. Young intervened as a defendant, by leave of the court. He attacked the validity of the mortgage and bonds secured thereby, and claimed an equitable interest and incumbrance in, to, and upon the mortgaged property, to the extent of $3,500, with interest from December 28, 1889, which was prior and superior to the lien of said mortgage. The circuit court sustained the validity of the mortgage, and of the bonds issued by the railroad company, directed a sale of the rights, properties etc., covered by the mortgage, and decreed that said Young was entitled to priority of payment out of the proceeds thereof to the extent of his said claim for $3,500, and interest thereon. It was further adjudged that the First National Bank, as the holder of 210 of said railroad bonds was not entitled to the full amount of same, and interest, but only to its debt, for which said bonds were originally pledged as collateral, as hereinafter explained. The complainant has appealed from so much of said decree as awards Young this priority of payment, and denies the right of said national bank to recover the principal and interest of the 210 bonds it holds. In both of these respects it is claimed that the decree below was erroneous.

The claim of said Young, which was given preference of satisfaction out of the proceeds of the mortgaged property grew out of the following transactions and proceedings: The Paw Paw Railroad Company, a Michigan corporation, organized under the general laws of said state, extended from the village of Lawton to Paw Paw,-- a distance of four miles. Its capital stock consisted of 750 shares of $100 each. The Toledo & South Haven Railroad Company, another Michigan corporation, extended from Lawton to South Haven, as completed,-- a distance of 36 miles. In 1878 the Paw Paw Railroad Company leased its roadbed, etc., to the Toledo & South Haven Railroad Company at a rental of 8 per cent. on $30,000, or 40 per cent. of the par value of the stock in the lessor company. While this lease was in force the two companies, with a view to their consolidation, entered into a written contract with the appellee Young, bearing date June 21, 1884, by which he undertook, for a specified consideration, to dispose of the securities of the Toledo & South Haven Railroad Company, the proceeds of which were in part to be used and employed in purchasing the interests of parties in the Paw Paw Company for the benefit of the Toledo & South Haven Railroad Company, in order to effect the desired and contemplated merger of the two companies. In August following this contract was partially modified in respect to his compensation for what he might accomplish, and he was thereafter in the employ of said companies, to aid in the accomplishment of the general result contemplated, viz. that of uniting the two corporations into one. It appears that only 730 shares of the capital stock of the Paw Paw Railroad Company were actually issued, leaving 20 shares not issued, and that several of the holders of said issued shares were also stockholders in the Toledo & South Haven Railroad Company. Of the outstanding stock in the Paw Paw Company, 75 shares were, in August, 1875, issued to one George W. Longwell, the certificate for which, numbered 114, recited upon its face that said shares were 'transferable only on the books of said company, by the holder thereof, in person or by attorney, on surrender of this certificate. ' Said Longwell, by written indorsement on said certificate under date of April 3, 1884, transferred and assigned said 75 shares to J. Riley Bank, who in February, 1886, transferred and assigned the certificate and shares to Thomas Welch, the said Welch on September 6, 1886, by a similar indorsement on the same certificate, transferred and assigned said 75 shares to the appellee Young. Neither of said transfers appears to have been registered on the stock book of the company, nor was the company notified by Young of the transfer thereof made by Welch to him. On September 9, 1886, three days after Young's acquisition of said certificate, a meeting of the stockholders of the Paw Paw Railroad Company was held, at which a resolution was passed, accepting a proposition of the Toledo & South Haven Railroad Company, that day made, for the purchase of the property and franchises of the former company. The proposition to purchase was duly authorized by the stockholders of the Toledo & South Haven Railroad Company, and the consideration offered and accepted was the full-paid stock of the purchasing company to an amount equal to the outstanding stock of the Paw Paw Company, which was to procure its stock to be transferred to the former, and in exchange therefor give to the stockholders of the latter an equal amount of the paid-up stock of the purchasing company. 'It appearing to be for the manifest interest of this company (the Paw Paw Railroad Company) to make such sale at the price and on those terms,' the stockholders formally accepted the proposition to buy, and authorized the directors of the company to consummate the sale. At the meeting which authorized this sale, 655 shares of the 730 shares outstanding were represented, and voted unanimously for the sale. The minutes of the meeting show, as 'not represented, Thos. Welch, holding 75 shares. ' It appears that neither said Welch nor defendant Young had any formal notice of said meeting, which was not attended by either of them. Under and in pursuance of said resolution, its directors on the same day, September 9, 1886, by deed duly executed, conveyed and transferred all the property, rights, and franchises of the Paw Paw Railroad Company to the Toledo & South Haven Railroad Company. This deed, which was properly acknowledged and filed for record on the day of its execution, recited that, at the meeting of the stockholders which authorized it, 'all the stockholders, except 75 shares, of said party of the first part, were present in person or by proxy,' and duly sanctioned and directed the sale and conveyance. The purchasing company turned over to the vendor company 730 shares of its paid-up capital stock, as the consideration agreed to be paid for the property, etc., conveyed. In pursuance of authority duly conferred by the stockholders, the Toledo & South Haven Railroad Company, on October 27, 1886, executed the trust deed to complainant upon its property, etc., including that purchased from the Paw Paw Company, to secure the payment of its 216 first mortgage bonds. In January, 1887, before the bonds of said railroad company thus secured had been actually negotiated, but while held by the complainant as trustee in New York, the intervening defendant, Young, filed his bill in the circuit court for Van Buren county, Mich., against the Toledo & South Haven Railroad Company, the Paw Paw Railroad Company, and the complainant herein, setting forth his ownership of said 75 shares in the Paw Paw Company; that he had no notice of the meeting of its stockholders held on September 9, 1886; that he was unwilling to accept the stock of the purchasing company for his stock in the vendor company; and alleging that the proceedings resulting in the sale of the Paw Paw Company's property, etc., to the Toledo & South Haven Railroad Company, were, under the general facts already stated, illegal and void; that the mortgage made by the purchasing company to the trustee communicated no valid title to or right in the property, etc., attempted to be sold and conveyed by the Paw Paw Company, which he claimed was a completed railroad, and therefore had no authority or power, under the laws of Michigan, to make said sale, etc., and prayed that the sale might be declared void, as contrary to his rights; that the deed of trust executed to secure the bonds of the vendee company might also be declared void, and the negotiations of said bonds be restrained; and that the Toledo & South Haven Railroad Company be decreed to reconvey to the Paw Paw Railroad Company the property, etc., which the latter attempted to sell and convey to the former. The two railroad companies were duly served with process. The Toledo & South Haven Railroad Company alone appeared and made defense. The Farmers' Loan & Trust Company did not appear, and was not served, otherwise than by publication. It had no actual notice of the proceeding. The circuit court of Van Buren county rendered a decree in Young's favor, from which the Toledo & South Haven Railroad Company appealed to the supreme court of the state, which reversed the decree of the court below. By reference to the opinion of said supreme court, (Young v. Railroad Co., 76 Mich. 485-497, 43 N.W. 632,) it will...