United Light & Power Co. v. Grand Rapids Trust Co.

Decision Date30 June 1936
Docket Number6764.,No. 6763,6763
Citation85 F.2d 331
CourtU.S. Court of Appeals — Sixth Circuit

Charles McPherson, of Grand Rapids, Mich., and Park Chamberlain, of Chicago, Ill. (Norris, McPherson, Harrington & Waer, of Grand Rapids, Mich., and T. K. Humphrey and Park Chamberlain, both of Chicago, Ill., on the brief), for appellant United Light & Power Co.

S. E. Knappen and W. N. Snow, both of Grand Rapids, Mich., and J. A. Noonan, of Niagara Falls, N. Y. (Knappen, Uhl, Bryant & Snow, of Grand Rapids, Mich., on the brief), for appellee Grand Rapids Trust Co.

Before MOORMAN, HICKS, and SIMONS, Circuit Judges.

HICKS, Circuit Judge.

This suit is ancillary to one brought by the Guaranty Trust Company of New York, trustee, to foreclose a mortgage executed by Grand Rapids, Grand Haven & Muskegon Railway Company (hereinafter called the railway). The District Judge in the foreclosure proceeding found the railway unable to meet and discharge its obligations, and, finding it to the interest of creditors and stockholders to have a receiver appointed, designated appellee, Grand Rapids Trust Company as receiver for all property of the railway. The receiver, having been authorized by the court, brought this suit against United Light & Power Company as sole stockholder of the railway (except for a few qualifying shares outstanding in others) and as successor by purchase to the United Light & Railways Company (hereinafter called United), likewise virtually a sole stockholder from 1912 to 1925. The receiver sued to recover a total of $579,000 paid to appellant and its predecessor in stock dividends, a sum in excess of $200,000 expended by the railway in management and contracting and engineering fees, and considerable sums paid out as interest at usurious rates, all of which it claims were unlawfully exacted by appellant and United from the railway by reason of the control exercised over it through the ownership of stock. It also sued for interest on the whole amount claimed.

The District Judge allowed a recovery of dividends paid after December, 1922, at which time he ruled the railway to have become insolvent; of management fees from 1917 to 1925 in excess of $6,000 per annum which he deemed a reasonable compensation; of engineering and contracting fees in excess of 5 per cent. of the cost of five designated major engineering projects which he considered were the only ones demanding outside engineering service. The court allowed interest on the above items from the dates they were received. It held the high interest rates charged by United on moneys furnished the railway to be in effect charges for the lending of credit, and denied recovery.

Briefly, appellant, Union Light & Power Company, complains of all items of recovery, allowed, totaling $322,077.89; of the holding that the two dividends ordered returned were in fact cash dividends and not merely bookkeeping entries; of the holding that the contracts by which the management and contracting and engineering fees were established, were voidable; and of the holding that the statute of limitations had no application.

Cross-appellant, the receiver, contends principally: That dividends from 1912 to 1921, inclusive, were not paid out of surplus or profits but out of capital, and that such payments were in impairment of capital and hence unlawful; that the payments of dividends under such circumstances was an evidence of bad faith on the part of the stockholder (United) in receiving them; that the court erred in not holding that reserves should have been set up to offset depreciation in the property; that it erred in holding that the loans from United to the railway were sales of credit rather than customary loans at usurious rates; that it further erred in not declaring all management and contracting and engineering contracts void.

It is urged that the bill of complaint is insufficient, in that the receiver sued as the representative of creditors without alleging that any of the payments complained of were made after insolvency. It is perhaps enough to say that there was no motion to dismiss the bill for insufficiency as provided by Equity Rule 29, 28 U.S.C.A. following section 723; but, aside from this, we think its allegations carry a fair inference of insolvency. The bill averred "that at all times during said period the actual cost of the property and assets of the railway company was less than the amount of its liabilities, including capital stock, and the actual value of said properties and assets was less than the amount of its liabilities, including capital stock. * * *" If more specific allegations were necessary, we think that upon the facts in the record we are justified in considering the bill as so amended. Norton v. Larney, 266 U. S. 511, 516, 45 S.Ct. 145, 69 L.Ed. 413.

The testimony and documentary evidence are voluminous. However, on the issues presented, it does not seem necessary to burden this opinion with an undue recitation of details.

The railway, an interurban electric line, combining light freight and passenger carriage and running from Grand Rapids to Muskegon, Mich., with a branch line to Grand Haven, was organized in 1899 under the Street Railway Act of Michigan, and was constructed by Westinghouse, Church, Kerr & Co., contractor, about the year 1900. The cost to the contractor was $1,276,388.82 and to the railway $1,553,103.97. The expense was financed partly by the payment of cash and partly by the issue of $1,250,000 in bonds to the contractor dated May 1, 1901, with interest at 5 per cent. semiannually and maturing in 25 years, secured by the above-mentioned mortgage. Another $250,000 in bonds, making $1,500,000 in all, was reserved to finance the construction of a bridge at Grand Haven and for other purposes. $100,000 of these bonds went for the purchase of the Grand Haven Street Railway System. It does not appear just when or for what purposes the balance issued, though the full amount of $1,500,000 appeared on the books of the railway. Capital stock to the amount of $1,200,000 was also issued, but it was not paid for and represented no value except that which might accrue from appreciation in the value of the property. $1,100,000 of this stock was held by Westinghouse, Church, Kerr & Co., who operated and controlled the road from 1902 to 1912. $100,000 of the stock was issued to the organizers in exchange for franchises, rights of way, etc.

In April, 1912, United purchased the entire issue of stock for $300,000 and held it until the organization of appellant, which then acquired the stock and title and possession of all the assets of the railway and assumed all the liabilities of United. Appellant continued to hold this stock until April, 1925, when it sold the entire issue of $1,200,000 par value, together with $6,000 par value of bonds and an unsecured note of the railway amounting to $417,700, to United Motors Products Company for $25,000 in cash.

Continuously from April, 1912, to April, 1925, United and appellant, by virtue of their ownership of the entire issue of common stock, exercised complete control over the railway. The foreclosure of the mortgage was precipitated by the failure of the railway to meet the interest payments on the bonds on January 1, 1926, and to pay interest and principal at maturity on July 1, 1926.

The railway had a checkered existence. During the eleven years of Westinghouse ownership and control, it earned enough to pay operating expenses and the interest on its bonds, but it paid no dividends. For the first few years it operated at a slight loss, but later it did better, and on December 31, 1911, its balance sheet showed a surplus of $43,119.47. During this period, W. K. Morley served as vice president and general manager at a salary of $5,000 per year. In 1911 the books showed additions and betterments of $44,419.58, but up to that year no amount had been set up for depreciation. In 1912 the number of passengers carried was 1,058,275 and the freight 36,009 tons. The total operating revenue in that year was $327,544. In 1912 United took over the ownership and control of the railway as sole stockholder. Of the directors elected May 3, 1912, the president, Mr. Schaddelee, and the vice president, Mr. Hulswit, were vice president and president, respectively, of United. Morley continued as a director and general manager until June, 1922, when Sidney L. Vaughan, who had been with the railway since 1906, took his place. Neither Morley nor Vaughan were officers of United.

For about three years the books showed no substantial change in the operation of the railway other than the institution in December, 1912, of the practice of paying annual dividends. From 1916 to 1920 the books reflected a decided increase in business activity caused by the World War and the general prosperous condition of the country. The number of passengers carried reached its highest mark of 1,367,467 in 1920. Freight tonnage was highest in 1916, with 51,641. It lagged through the next two years, but jumped to 45,298 in 1919. It dropped to 33,625 tons in 1921 (a depression year), but rose to 42,221 in 1923. Thereafter with some fluctuations it declined to a low of 26,127 in 1927. Passenger traffic broke sharply between 1920 and 1921, dropping off nearly 400,000. Unlike the freight tonnage, it did not reflect the prosperous year of 1923, but declined steadily after 1920 to a low of 248,206 in 1927.

A number of factors complicated the affairs of the company, but we think it was made clear that the drop in traffic and earnings was due, not to poor management or poor condition of the road and equipment, for it was well maintained up to the sale to the United Motors Products Company in 1925, but to the widespread operations shortly after the war of private passenger cars, freight and passenger bus...

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    ...(10th Cir.1972); Guaranty Trust Co. of New York v. Grand Rapids G.H. & M. Ry. Co., 7 F.Supp. 551 (W.D.Mich.1931), mod. on reh., 85 F.2d 331 (6th Cir.1936). 296 267 F.2d at 719-20. The fact that Western Union ultimately decided to accomplish the divestiture through a sale rather than a spin-......
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    • May 10, 1977
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