Alexander v. Searcy

• Decision Date: 23 January 1889
• Citation: 81 Ga. 536,8 S.E. 630
• Parties: Alexander et al. v. Searcy et al.
• Court: Georgia Supreme Court

8 S.E. 630

(81 Ga. 536)

Alexander et al.

v.Searcy et al.

Supreme Court of Georgia

January 23, 1889

1. Estoppel—In Pais—Corporations—Purchase of Stock—Ultra Vires.

Where notice of purchases of stock of a corporation is given to the directors and stockholders, and the purchaser regularly votes the stock, and expends large sums for the benefit of the corporation under resolution of the stockholders, the minority stockholders cannot complain, 7 to 15 years after the several purchases were made, that the purchaser, being the majority stockholder, has procured the mismanagement of the corporation, nor that such purchaser, being a corporation, had no power under its charter to make the purchases.

2. Railroad Companies—Foreclosure of Mortgages—Defenses by Stockholders —Cross-Bill.

On foreclosure of a mortgage executed by a railroad company, the minority stockholders cannot maintain a bill alleging, in defense of the foreclosure, the mismanagement of the affairs of the corporation in the interest of the principal bondholder and stockholder, and usury in the negotiation of the bonds, where no demand upon, or refusal by, the directors or stockholders to make the defense is averred, and no excuse for not doing so is made, except that the officials are in collusion with the persons seeking the foreclosure. ¹

3. Same.

Neither can such bill be maintained by one who was not a stockholder at the time of the illegal transactions complained of.

Error from superior court, Spalding county; Marshall J. Clarke, Judge.

Bill by Searcy and others against Alexander, trustee, etc., and others. Defendants bring error.

Lawton & Cunningham, It. F. Lyon, and John S. Hall, for plaintiffs in error. A. M. Speer, C. Anderson, E. W. Hammond, and F. D. Dismuke, for defendants in error.

Simmons, J. It appears from the record in this case that, in the year 1871, the Savannah, Griffin & North Alabama Railroad Company made and executed a deed of trust or mortgage on its railroad and other property to William M. Wadley, president of the Central Railroad & Banking Company of Georgia, and his successors in office, and William B. Johnston, as trustees, to secure the principal and interest of $500,000 of bonds which said Savannah, Griffin & North Alabama Railroad Company was about to issue. These bonds were issued, and in the course of time the major part of them came into the possession of the Central Railroad & Banking Company. It further appears that the Savannah, Griffin & North Alabama Railroad Company had defaulted in the payment of the interest on these bonds for several years. The deed of trust or mortgage contained a clause authorizing the trustees to foreclose the mortgage in case of such default. Wadley, one of the trustees named in the deed, died, and Alexander, the plaintiff in error here, became his successor as president of said Central Railroad & Banking Company, and his successor in this trust, under the terms of the mortgage. In 1887 he and Johnston, the other trustee, filed their bill to foreclose this mortgage. Johnston died pending the suit, and Alexander thus became the sole complainant. After the appearance term of the case, and before the trial term, Searcy and others, as stockholders of the Savannah, Griffin & North Alabama Railroad Company, filed their bill against said Alexander, trustee, the Savannah, Griffin & North Alabama Railroad Company, and the Central Railroad & Banking Company, wherein they allege that they are stockholders of the Savannah, Griffin & North Alabama Railroad Company; that they own about 400 shares of thecapital stock thereof; and that the Central Railroad & Banking Company owns a majority of the stock of said Savannah, Griffin & North Alabama Railroad Company, and likewise the bonds issued by said company as aforesaid. They further allege that, by reason of the Central's ownership of a majority of the stock, it has had the control of the Savannah, Griffin & North Alabama Railroad since 1872, and by reason of having such control has placed its own directors on the board of directors of the Savannah, Griffin & North Alabama Railroad Company, and that it has purposely mismanaged said Savannah, Griffin & North Alabama Railroad, by cutting off its through freights, and sending them over the Atlantic & West Point Railroad, a road in which the Central also had an interest; by building a depot in the town of Carrollton much more costly and extensive than the business of the road required; and by placing the net income earned by the Savannah, Griffin & North Alabama Railroad upon its road-bed in the way of improvements, —all of which has greatly injured and damaged the stockholders of the said Savannah, Griffin & North Alabama Railroad Company They also allege that the bonds of the Savannah, Griffin & North Alabama Railroad Company were purchased below par by the Macon & Western Railroad Company, (which, by an act of the legislature, was afterwards consolidated with the Central Railroad & Banking Company,) which latter company now owns said bonds, and is seeking to recover the full value thereof and interest thereon, besides interest on the unpaid coupons. They allege that the purchase of these bonds at 65 or 70 cents on the dollar was an usurious transaction, and that the Central Railroad & Banking Company ought not to be allowed to recover the face value thereof and interest on the same; that, if it can recover at all, it can only be allowed to recover the amount it paid for the bonds, with the legal interest on that amount. They further allege that neither the said Macon & Western Railroad Company, nor the Central, had the power, under their charters, to own or purchase the stock of the Savannah, Griffin & North Alabama Railroad Company; that the purchase of said stock was ultra vires and void. They also allege that the president of the Central Railroad & Banking Company was a director of the Savannah, Griffin & North Alabama Railroad Company, and was president of the former company when the stock of the Savannah, Griffin & North Alabama Railroad Company was sold to it, and that this rendered the contract illegal and void. They prayed for an accounting between the Central and the Savannah, Griffin & North Alabama Railroad Company as to the damages incurred by the latter road by reason of the mismanagement thereof; insisting that, when such damages were assessed, they should be credited upon the bonds held by the Central, and that such damages would be sufficient to pay off all the legal interest due on said bonds. They also prayed that an accounting be had as to the usury sought to be collected by the Central, and that the usury be deducted from said bonds, and that the Central be enjoined from disposing of any of said bonds. They prayed the appointment of a receiver to take charge of and manage said Savannah, Griffin & North Alabama Railroad, under the direction of the court. They further prayed that the ownership of the stock of the Savannah, Griffin & North Alabama Railroad Company by the Central Railroad & Banking Company be decreed to be ultra vires, and null and void.

Alexander, the trustee, answered said bill, but it is unnecessary to notice his answer, as it is not material to the decision of this case.

The Central Railroad & Ranking Company showed cause against the granting of the injunction by demurrerand answer. The second and third grounds of the demurrer are as follows: "Second. Because the complainants do not show by their bill any right to prosecute this suit on behalf of the minority stockholders; it not being alleged that the directors of the Savannah, Griffin & North Alabama Railroad have ever been requested to make such defense, or that they have ever refused or declined to make such defense. Third. Be-cause the complainants, if they have any cause of complaint or grounds of equity, have not made such complaint within a reasonable time, but have, alter full knowledge of all such grounds of complaint, or a full opportunity to acquire notice thereof, acquiesced in such acts of alleged error for more than four years. " The answer shows that the complainant Searcy owns 296 shares of the capital stock of the Savannah, Griffin & North Alabama Railroad Company, which were acquired by him since the beginning of this litigation, and that the other complainants owned their stock from 10 to 15 years before the beginning of the litigation. It denies all the charges made in the bill as to the mismanagement of the road, and insists that the road was managed according to the best judgment of the officers and board of directors thereof. It admits owning the stock and bonds of said railroad, and alleges that the purchase thereof was made by the board of directors of the Central with the full knowledge of all the stockholders of the Savannah, Griffin & North Alabama Railroad Company; that the matter was laid before said stockholders by the president of their company; and that by a vote of said stockholders they authorized their said president to sell said bonds and stock to the Central Railroad & Banking Company, upon certain conditions named in the resolution. The answer also goes into a detailed account of the management of the Savannah, Griffin & North Alabama Railroad, giving the facts as to its management, and the earnings of the road, year by year. It denies that there was any usury in the transaction of the purchase of the bonds, claiming that it did not lend any money to the Savannah, Griffin & North Alabama Railroad Company; that the bonds were purchased by it in open market, and the full market price paid therefor. Under the view we take of this case, it is unnecessary to go further into the details of the answer.

On the hearing, the chancellor granted the injunction prayed for, and appointed a receiver to take charge of the Savannah, Griffin & North Alabama Railroad. To this decision Alexander, the trustee, the Savannah, Griffin & North Alabama Railroad Company, and the Central Railroad & Banking...