Barr v. New York, L.E.&W.R. Co.

• Decision Date: 13 January 1891
• Citation: 26 N.E. 145,125 N.Y. 263
• Parties: BARR et al. v. NEW YORK, L. E. & W. R. Co. et al.
• Court: New York Court of Appeals Court of Appeals

125 N.Y. 263

26 N.E. 145

BARR et al.

v.NEW YORK, L. E. & W. R. Co. et al.

Court of Appeals of New York.

Jan. 13, 1891.

Appeal from supreme court, general term, first department.

The plaintiffs, as stockholders of the Suspension Bridge & Erie Junction Railroad Company, have brought this action against that company, the New York, Lake Erie & Western Railroad Company, and Hugh J. Jewett, as receiver of the Erie Railway Company, as defendants, to compel the payment of certain rental moneys, which were payable according to the terms and provisions of a lease under which the New York, Lake Erie & Western Railroad Company is now operating the road of the company. The action was instituted by the plaintiffs, because the lessee company owned all the rest of the stock of the lessor company, and through its possession had obtained the control of its management and board of direction. Upon the trial, the complaint was amended by striking out the Erie Railway Company as a party defendant, and the recovery sought is actually against the present corporation, which is in possession of the leased road, as successor to the Erie Railway Company, and to Jewett as its receiver; and the demand covers the period commencing with and continuing since his possession and operation as such receiver. The facts proved concerning the origin and history of the lease in question, and which exhibit the acts of all the parties, are not in dispute. In October, 1868, the plaintiffs' company was incorporated to construct and operate a railroad in order to connect that of the Erie Company, at the city of Buffalo, with the Canadian system of railroads, by way of the falls of Niagara. This was unquestionably a desired and much-needed connection. The then Erie management promoted the formation of this company, and some of its incorporators were directors of the Erie Company. Various schemes of construction were prepared and abandoned, but in June, 1870, a contract was made, by which Mortimer Smith agreed to build the road, and the Suspension Bridge Company agreed to issue in payment therefor $1,000,000 of its 7 per cent. bonds, and $500,000 of capital stock; these issues to constitute the whole of its stock and bonded debt. Of the directors who authorized this contract several were also Erie directors. Smith was an assistant secretary of the Erie Company, and was a mere figure-head, or conduit of interest; for, on the same day, a syndicate was formed composed wholly of members of the board of directors of the Suspension Bridge Company, whose agreement was to subscribe and take the stock and bonds from Smith as they were received, and to whom, a few days later, in June, jpon their request, Smith assigned his contract. In July, 1870, the lease in question of all the property and franchises of the plaintiffs' company was executed. Its execution had been authorized, in the previous month, at a special meeting of the Erie board of directors, their resolution reciting the project of the road, the issuance of bonds for completing it, and directing a lease, in which the rent reserved should be fixed at a sum equal to 30 per cent. of the gross earnings of the leased road, and guarantying that such sum should never be less than $105,000 per annum. In November following, the executive committee of the Erie Company, by resolution which recited the making of the lease, and the guaranty by the lessee of a rental of $105,000 equal to 7 per cent. interest on the issue of bonds, and 7 per cent. dividend upon the $500,000 of capital stock, authorized the execution of a guaranty of the payment of a semi-annual dividend of 3 1/2 per cent. upon the stock. In December, 1870, the road being then almost, but not in all respects, completed, it was taken possession of by the Erie Company. In February, 1871, the directors of the lessor company formally ratified the lease. There had been expended by the syndicate in construction work about $850,000, of which plaintiff Barr and plaintiff Bush's assignor had contributed each their due proportion. The stock and bonds had been issued to the members of the syndicate, and, of the former, plaintiff Barr received 335 shares, and plaintiff Bush's assignor received 330 shares, of which 80 were assigned to Bush. The Erie Company paid the full amount of the rental moneys, in interest on bonds and dividends on the stock, down to January 1, 1872, and, since then, only an amount of money equal to the interest on the issue of bonds has been paid. In March, 1872, a change occurred in the Erie management, which was overthrown, and the road then came under the direction of a board presided over by John A. Dix. In May, 1875, the Erie Company became insolvent, and Hugh J. Jewett was appointed by the court as its receiver. Under the court's suthority to that effect, he continued to operate the leased road as a part of the Erie's system of connections. Between the years 1872 and 1876, the Erie Company and its receiver Jewett acquired, at various prices, by negotiation and by purchase, practically all of the stock of the Suspension Bridge Company, except what the plaintiffs possessed. With this ownership of the capital stock, the management of the Erie Company and of its successors in interest obtained complete control, and have elected directors in their company's interest. In 1878, the defendant the New York, Lake Erie & Western Railroad Company became the owner of the railroad properties and assets of the Erie Company, by conveyance from a purchasing committee, who bought them in at a sale in mortgage foreclosure, and included in this conveyance was the leased property of the Suspension Bridge & Erie Junction Railroad Company. The grantee also covenanted to assume the payment of all of the receiver's liabilities. At all times the Erie Company, its receiver, and its successor, the present company, have operated the Suspension Bridge road under the lease, as an integral part of the Erie road; but they never have paid since January 1, 1872, other rent than $35,000 semi-annually, in the shape of the interest due upon the lessor's bonds. It was found by the trial court that at no time would 30 per cent. of the earnings from the operation of the leased road equal the guarantied rent.

The lessor company's stockholders had, in August, 1872, requested its board of directors to take the proper steps to collect the amount due by the terms of the lease, and that board did direct a formal demand to be made and proceedings to be taken. It was subsequent to these steps that measures were taken and negotiations entered into by the Erie Company to purchase the whole of the lessor's stock. The trial court found that the ‘syndicate, consisting of members of the board of directors of the Suspension Bridge, etc., Company, and of the Erie Railroad Company, fraudulently caused the contract to be made * * * with Mortimer Smith,’ and its assignment to themselves, and that it was designed for their benefit and gain solely, and to the loss of the Erie and Suspension Bridge Companies. He found that the execution of the lease and of the guaranties was fraudulently induced by the syndicate. His conclusion, upon all the facts, was that the complaint should be dismissed, and the defendants had judgment accordingly. At general term the judgment was sustained. The opinion of the learned judge who spoke for that court proceeded mainly upon the ground that, as there were four persons interested in the contract for the building of the road, and in the receipt of the bonds and stock payable therefor, who were directors in each of the companies, it could confer no rights; and, to use his words, ‘the agreement of lease created no binding obligation.’ It was ‘incapable of performance through the instrumentality strumentality of courts of justice.’ Rescission, in his opinion, was not required to enable the parties to the agreement to avail themselves of the invalidity of the lease, and continued possession does not aid the right to recover rental moneys. From the judgment of affirmance, the plaintiffs have appealed to this court.

Elihu Root, for appellants.

Wm. W. MacFarland, for respondents.

GRAY, J., ( after stating the facts as above.)

There is no conflict of evidence, nor any dispute about the facts which I have stated above. The plaintiffs' appeal questions the correctness of the legal conclusion which has been deduced from these facts. In reviewing that conclusion we should not lose sight of what the action was intended to accomplish, and that was, simply stated, to compel the New York, Lake Erie & Western Railroad Company to pay for the use and operation of the railroad and property of the Suspension Bridge & Erie Junction Railroad Company, the consideration or rental moneys secured to be paid by the contract of lease of that company, through which the right of possession and use was derived. This is not an action to compel a specific performance of some executory agreement, but it is one to compel the defendant, as the successor in interest of the lessee company, to pay that which the contract of lease bound the lessee and its successors to pay as a condition of the right to have and to operate the leased road. The question which is raised by the defense to the action is whether the fraudulent nature of the acts and proceedings, by which the railroad was constructed, and the contract of lease effected, are matters which have reached in their vice so far as, at this day, to disable the plaintiffs from enforcing against the lessee of their company the payment of the full amount of rental stipulated for in the lease. I cannot think that such is the result, or that the law intends such consequences to attach, as the respondent claims, and as the courts below have held. There is something repugnant to our sense of justice, and a seeming subversion of ideas respecting property rights, in the position that property may be retained and enjoyed, and payment of the...