Wabash Ry. Co. v. American Refrigerator Transit Co.

Decision Date22 July 1925
Docket NumberNo. 6220.,6220.
Citation7 F.2d 335
PartiesWABASH RY. CO. v. AMERICAN REFRIGERATOR TRANSIT CO. et al.
CourtU.S. Court of Appeals — Eighth Circuit

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N. S. Brown, of St. Louis, Mo. (L. H. Strasser and Homer Hall, both of St. Louis, Mo., on the brief), for appellant.

Edward J. White, of St. Louis, Mo., for appellees.

Before SANBORN, LEWIS, and KENYON, Circuit Judges.

KENYON, Circuit Judge (after stating the facts as above).

Wide divergence exists in the theories of the respective parties.

Appellees contend the suit is an attempt of a minority stockholder to recover against the corporation a definite portion of the corporate assets, on the theory that such assets represent deferred dividends which the board of directors should have declared but did not.

Appellant's theory is that the suit is not one to review corporate acts, or to bring about a dissolution of the refrigerator company, or to secure control of said corporation; that the question of discretionary power in the board of directors of said company is not involved, as the terms of the stockholders' contract of January 1, 1894, make mandatory the distribution of surplus earnings to the parties thereto in proportions there provided; that the action is one to declare and define a trust relationship of the refrigerator company to the appellant and appellee Missouri Pacific Company and to compel the refrigerator company to carry on its business as such trustee according to the terms of the stockholders' contract of January 1, 1894, and the purposes of its creators.

In ruling on the motions to dismiss, the trial court said: "The charter of the American Refrigerator Transit Company surely conferred on it the power to hold its own property, and to manage and operate its own business in its own way, till it by some overt act hurt the rights of plaintiff, or of some other stockholder." And again: "Thus considered, the matter seems to be a simple contest over the control of a corporation; that is, whether plaintiff, with its 25 per cent. holdings of the corporate stock of the American Refrigerator Transit Company, or defendant railroad, with its 75 per cent. of those holdings, shall manage and control the business of defendant American Refrigerator Transit Company. With this question, I take it, the courts have nothing to do, so long as the subsisting control, in whomsoever vested, shall be had in such wise as not to hurt those stockholders who are out of control. Neither an actual, threatened, nor even a contingent hurt, having been shown by the bill, and none, in my view, being possible till there shall happen an overt act inimical to the alleged rights of plaintiff under the alleged contract of January 1, 1894, I am of opinion that plaintiff has no standing in equity." It is evident that the learned trial court considered the bill merely as an attempt of a minority stockholder to interfere with the management of a corporation, and the contest one for control thereof.

It is elementary that the property of a corporation belongs to it and not to the stockholders, and a stockholder has no such title thereto as to enable him to assert ownership or control, or to enter into possession thereof as against the corporation; nor can a stockholder secure a review of the management of the corporation by its board of directors elected by the majority of the stock if such board exercise its judgment in good faith and without fraud. Likewise the declaration of dividends is within the power of the board of directors, and a court of equity can interfere with directors' prerogatives as to declaring dividends only where there is bad faith or clear abuse of discretion. Nor are the rights of stockholders in the corporate assets superior to the rights of creditors. These general principles of corporation law are not denied by appellant; it contending they are not applicable to the corporate status of the refrigerator company, claimed to be differentiated from the ordinary corporation by contract arrangements made with and between all its stockholders.

I. If appellee American Refrigerator Transit Company (herein designated as the refrigerator company) is the usual, ordinary, independent corporation, with all the powers ordinarily incident thereto, and if this case, as claimed by appellees, is merely an attempt of a minority stockholder to have the affairs of the corporation wound up and its assets distributed to the stockholders because of the investment of corporate income in refrigerator cars and other property, then this opinion could be abbreviated, as suggested difficulties would disappear. To so hold, however, would necessitate closing our eyes to the allegations of the amended bill of complaint, and giving no force or effect to the operating and stockholders' contracts.

The purpose of the parties in organizing the original refrigerator company in 1881, and the appellee refrigerator company in 1898, is shown by the circumstances surrounding such transactions and the method in which the business has been subsequently carried on. The amended bill charges that said original refrigerator company "was organized for the purpose of creating in said corporation a joint instrumentality or agency of the said three railroad companies for the carrying out of all the business and affairs usually incident to the solicitation of certain perishable freight for transportation over the various lines of railroad then owned and operated by said three railroad companies, and the operation and management of what are commonly known as refrigerator cars."

The stock thereof was issued to the railroad companies, signatories to the original contracts, without the payment of any money or property therefor. Said railroad companies contributed the sum of $50,000, in equal proportions, to provide funds for its initial operations, and also contributed a large number of refrigerator cars. At the time of its (original refrigerator company's) organization the railroad companies interested therein and owners of all the stock entered into two contracts with it bearing the same date, which have been designated respectively as "operating" and "stockholders'" contracts. The preamble to said operating contract, as follows, assists in clarifying the purpose of the organization:

"That for and in consideration of the several covenants and agreements hereinafter contained, to be kept and performed by the respective parties hereto, and in further consideration of the fact that the party of the first part will, in pursuance hereof, expend large sums of money in the manufacture or purchase of cars and other equipments required under the terms of this agreement, and in further consideration of the fact that the business of the said parties of the second part will, under this agreement, be largely increased and greater safety secured in the transportation of all kinds of perishable property over the various lines of railroads owned and operated by said parties of the second part; it is therefore stipulated and agreed by and between the parties hereto, as follows, to wit."

The railroad companies agreed in said operating contract to pay the refrigerator company a car mileage of one cent per mile and a 12½ per cent. commission on freight revenues derived from freight carried in the cars furnished and managed by it.

The stockholders' contract of even date provided for the distribution of earnings after the payment of operating expenses and rentals on leased cars.

The new operating and stockholders' contracts of January 1, 1894, superseded those of 1881. The operating contract was substantially the same as the former one. The stockholders' contract contained some new and important provisions as to the distribution of surplus revenues derived from all sources (to which reference is made in another part of the opinion); the business at that time having expanded beyond the original plan, which embraced only the business on the lines of the railroad companies, parties to the original contract, and their successors in interest.

It is apparent that under the operating contracts the railroad companies undertook to carry on all the business of transportation, except the solicitation of perishable freight and the furnishing of refrigerator cars therefor. The same purpose runs through the various contracts.

We have then a situation presented where the railroad companies, signers of these contracts, and their successors in interest, have at all times owned all the stock of the appellee refrigerator company and its predecessor, paying nothing therefor, have selected its directors, have made the railroad companies' officers its officers, have shorn it of all power to control its own profits, and have directed and dominated its policies. No discretion was left to either refrigerator company as to the payment of dividends. The directions in both contracts as to the distribution of the surplus earnings were mandatory. It may be suggested also that the refrigerator companies have not operated in any way as common carriers of property, have not filed schedules of rates or issued bills of lading. Both stockholders' contracts contained the following:

"It is further agreed that each of the parties hereto of the second part shall hold its stock in said American Refrigerator Transit Company subject to all the provisions of this contract, and in the event that they, or either of them, transfer or assign said stock, or any share or shares thereof, to any other person or persons, such transfer shall be subject to all the provisions hereof. To that end, all certificates of stock in the American Refrigerator Transit Company shall contain full reference to this agreement, and be expressly subject to all of its provisions."

The stockholders' contract of January 1, 1894, has carried forward the same ideas as...

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