Bray v. Jones

• Decision Date: 21 June 1926
• Citation: 190 Wis. 578,209 N.W. 675
• Parties: BRAY v. JONES ET AL.
• Court: Wisconsin Supreme Court

190 Wis. 578

209 N.W. 675

BRAY

v.JONES ET AL.

Supreme Court of Wisconsin.

June 21, 1926.

Appeal from Circuit Court, Winnebago County; Fred Beglinger, Judge.

Action for rescission and cancellation of sale of shares of stock by William M. Bray against John S. Jones and others. From a judgment for defendants, plaintiff appeals. Reversed and remanded, with instructions.Rix, Barney & Kuelthau, of Milwaukee (J. G. Hardgrove, of Milwaukee, of counsel), for appellant.

Bouck, Hilton, Kluwin & Dempsey, of Oshkosh (W. A. Hayes and Frank T. Boesel, both of Milwaukee, of counsel), for respondents.

OWEN, J.

This action was brought by the plaintiff for the rescission and cancellation of the sale of certain shares of the capital stock of the Wisconsin & Northern Railroad Company. From a judgment in favor of defendants, the plaintiff appeals. The record is voluminous, and, in many respects, the evidence is in conflict. The facts, however, which require a reversal of the judgment are comparatively brief and undisputed. We shall confine ourselves to a statement of only such facts.

The Wisconsin & Northern Railroad Company, a Wisconsin corporation, was organized during the year 1905, with an authorized capital stock of $1,500,000, by a group of men largely interested in forest and timber products. It was organized for the purpose of constructing and operating a line of railroad between various points in the state of Wisconsin,extending for the most part through the timber regions of the state, and largely to enable those interested in the road to market their timber products. The original plan contemplated the building of a road from Neenah and Menasha in a northerly direction to North Crandon, with connections at each end with the Minneapolis, St. Paul & Sault Ste. Marie Railroad Company. The road was constructed in a piecemeal fashion, and it was not until the fall of 1920 that the original plan was fully consummated; the last gap between Appleton and Neenah and Menasha having been constructed during the season of 1920.

William M. Bray was the holder of 772 shares of the stock of said company of the par value of $100 each. He had owned this stock for a number of years, during a portion of the time had been a director of the corporation, and until about a year before the sale of his stock to the defendant Jones had been in rather close touch with the affairs of the corporation.

On the 14th day of February, 1919, a trust agreement was entered into between the stockholders of the corporation and the defendant John S. Jones and C. H. Hartley and five other individuals as trustees. This agreement provided that all the certificates of the capital stock of said company should be deposited with the Wisconsin Trust Company of Milwaukee as depository, properly indorsed for transfer on the books of the corporation, and that the shares represented thereby should be assigned to the said trustees, provided “that the trustees may, if they deem it wise, permit not to exceed one share of stock to stand on the books of the Northern Company in the name of said person or persons, respectively, as they may desire, to qualify to act as directors, and in such event the certificate or certificates for such qualifying share or shares of stock shall be indorsed in blank by the person or persons in whose name or names they shall have been issued, and shall be forthwith deposited with the depository and held by it in like manner as the shares issued in the name of the trustees.” It was provided that, after such deposited shares of stock shall have been duly transferred to the said trustees or to persons whom said trustees desire to qualify as directors of the company as aforesaid, the certificate or certificates therefor shall be returned to, and thereafter remain in the custody of, the depository under the control and disposition of the trustees aforesaid. Upon the depositing of this stock with the depository, the depository was required to issue a certificate to the depositing stockholder to the effect that such depositing stockholder had an interest in the stock deposited with the depository to the extent of the number of shares stated in such certificate. It was provided that––

“During the period aforesaid the legal title and all rights, powers and privileges in, to and over the stock represented by said deposited certificates, including the right to vote thereon, and any and all other rights incident to the ownership thereof shall be and remain vested in said trustees except as herein otherwise provided.”

The trust agreement also provided:

“In exercising their rights, powers and privileges hereunder the trustees in voting upon any and all matters which may come before them at any stockholders' meeting will exercise their best judgment as to what action shall be for the best interests of the Northern Company.” “The trustees shall possess, and be entitled to exercise, all rights of every name and nature in respect to all stock deposited with the depositary hereunder, including the sole right to vote thereon at all meetings of the stockholders of said Northern Company. Subject to the requirement as to two directors being representative of the interests of the bondholders in the management of the business of the Northern Company, the trustees may vote for any of themselves as directors and officers of said Northern Company, and may in all other respects vote and act as the absolute owners of said stock and as if certificates of beneficial interest in respect thereof had not been issued hereunder.” “The trustees are hereby authorized by action of at least three–fifths thereof to sell the stock of the Northern Company deposited hereunder at such price as in the judgment of said three–fifths of said trustees may be adequate; provided, however, that any such sale made by said trustees pursuant to authority hereby granted must cover all of the stock of the Northern Company deposited hereunder and not part thereof only. The proceeds from the sale of said stock so sold by the trustees shall be deposited with the depositary hereunder, who shall distribute the same among the holders of certificates of beneficial interest issued hereunder in proportion to the interest of each such holder in said deposited stock as evidenced by his certificate of beneficial interest issued hereunder.”

Another significant provision of the agreement required the trustees from time to time to “inform the holders of certificates of beneficial interest in the trust regarding the progress and condition of the business of the Northern Company.”

The purpose of this trust agreement was evidently to facilitate the financing of the company by giving the bond holders representation on the board of directors. The sum and substance of the trust agreement, however, was to transfer to the seven men named as trustees all of the powers over the corporation which are vested by law in the stockholders. This included the power to sell and dispose of the property of the corporation. It should here be remarked that practically from the very organization of the corporation the promoters and the officers of the corporation entertained the hope that they would be able to sell the railroad to one of the larger railroads of the state, and that from time to time efforts have been made to dispose of the property to the Chicago, Milwaukee & St. Paul Railroad Company, the Chicago & Northwestern Railroad Company, and the Soo line. Defendant Jones became president of the company in 1916, and from that time down to the time of the sale of the property to the Soo line was on constant lookout for opportunity to sell the Wisconsin & Northern Railroad. His testimony shows that, while the railroads of the country were under federal control during the war, there was no opportunity to sell the property, as the larger railroads so under federal control were in no position to add to their mileage. However, according to his own testimony, when the railroads were restored to their owners in 1920, the prospects for a sale of the Wisconsin & Northern became very much brighter.

In the spring of 1920 the road had been built only as far as Appleton. It was then determined by the directors to extend the road from Appleton to Neenah and Menasha for the purpose of making a connection with the Soo line, which connection, it was believed, would add greatly to the desirability of the road by one of the principal railroads mentioned. This extension was determined upon in May, 1920, and soon thereafter representatives of the Canadian Pacific Railroad Company made a thorough inspection of the road, its accounts, business, and property. The report made by these representatives to the Canadian Pacific Railroad Company was very exhaustive, went very much into detail, and consists of more than 30 pages of typewritten material. This report was subsequently submitted to President Pennington of the Soo line, which, if not a subsidiary, at least maintains close relations with the Canadian Pacific. In September, 1920, Pennington and other officials of the Soo line made a trip of inspection over the Wisconsin & Northern railroad, accompanied by the defendant Hartley. The purpose of this trip was to get all the information it could concerning the railroad.

On October 12, 1920, the defendant Jones opened up negotiations with the Chicago & Northwestern railroad looking towards a sale of the Wisconsin & Northern to the Chicago & Northwestern. These negotiations were had principally between Mr. Jones and H. R. McCullough, vice president of the Chicago & Northwestern Railroad Company. Correspondence passed between them from time to time until January 5, 1921. A prospectus of the road was furnished Mr. McCullough. He laid it before President Finley. That Mr. Jones must have had some faith in a favorable termination of these negotiations is illustrated by certain correspondence passing between him and Vice President McCullough. For...