Brown v. Duluth, M. & N. Ry. Co.

• Decision Date: 18 February 1893
• Citation: 53 F. 889
• Parties: BROWN v. DULUTH, M. & N. RY. CO. et al.
• Court: U.S. District Court — District of Minnesota

53 F. 889

BROWN v. DULUTH, M. & N. RY. CO. et al.

United States Circuit Court, D. Minnesota.

February 18, 1893

Lusk Bunn & Hadley and John C. Spooner, for complainant.

H. G Stone and J. M. Shaw, for defendants.

NELSON District Judge.

The original bill was filed January 23, 1893, and a restraining order was granted, and an order to show cause why a preliminary injunction should not issue. On the return day of the order, February 10, 1893, an amended bill was filed. The purpose of the original and amended bill is to enforce corporate rights, and to restrain the corporation from ultra vires acts, and the specific relief asked is for an accounting, and for a decree restraining the directors, and each of them, and the said other defendants, from voting upon and exercising the rights of stockholders by virtue of certain stock alleged to have been illegally secured by the directors, and directing the said defendants, or such of them as hold said stock, to surrender up the same for cancellation; and that a proposed issue of stock by the corporation, alleged to be a bonus, may be restrained, and that a proposed issue of bonds under a contract attached as Exhibit C to the amended bill, or under any modification of the same, or under any issue or sale of bonds for the purpose alleged to be of putting out corporate stock without receiving par value for the same be restrained, and that the defendants, directors, and officers and other defendants naming them, may be restrained from contracting to issue sell, or give away the stock now held or owned by them.

The complainant claims to be a stockholder of the defendant corporation, the Duluth, Missabe & Northern Railway Company, and brings the suit on behalf of himself and other stockholders of the corporation. At the hearing a motion to dismiss for want of jurisdiction was made, and a demurrer ore tenus interposed. It is urged that there is no equity in the original or amended bill, and that the complainant has no right to institute this suit.. The defendant company was incorporated under the general laws of the state of Minnesota, May 26, 1891, to construct a railroad commencing at a point on the navigable waters of Lake Superior, or St. Louis bay, or St. Louis river, or at a point on some railroad connecting with the said waters, running thence in a northerly direction to some point on the northern boundary line of the state of Minnesota. On January 29, 1892, the company entered into a contract with Donald Grant to build and construct a portion of its line of railroad. By the terms of this construction contract the company was to place in the hands of a trustee bonds and stock as follows: Nine hundred thousand dollars, face value, of its first mortgage bonds, guarantied by the Mountain Iron Company, a mining company located on the defendant company's road, and a party of the third part to this construction contract; also $945,000, face value, of its full-paid common stock; and the party of the third part agreed to put in the hands of the trustee $200,000, face value, of its full-paid common stock; and the Biwabick Mining Company, party of the fourth part to this contract, agreed to put up also $200,000, face value, of its full-paid common stock; and when Donald Grant completed the road all the stock and securities should be delivered to him. On the same day, Foley Bros. & Guthrie, a firm of railroad contractors, D. W. Grant, and Albert S. Chase, a brother of the president of the defendant railroad company, joined with Donald Grant in a copartnership, and assumed the performance of his construction contract, and agreed to build the road for the $900,000 bonds and $333,333 stock, and all the stock to be put up by the two mining companies. By the terms of the copartnership the parties thereto agreed to furnish money for the construction of the road as follows: Each of the parties thereto, except Albert S. Chase, one fifth, and the said Chase two fifths, and the securities received for the construction were to be divided between the parties in the same proportion. A further contract was made with Donald Grant for the construction of a branch line of the company's road, and assumed by the copartnership on the same terms. The compensation for building it was $300,000 in bonds and $300,000 in stock. The contracts were completed, and the securities turned over, in the autumn of 1892, and Foley Bros. & Guthrie received for their interest in the partnership construction contracts $240,000 in bonds and $126,666 of common stock of the railway company.

This common stock the complainant purchased January 12, 1893, for the sum of $9,720 in good faith, as he claims. It is alleged that the Duluth, Missabe & Northern Railway Company and Donald Grant and Albert S. Chase and all of the directors of said railway company conspired and confederated together by means of the said construction contract to issue a large amount of stock of said corporation as fully paid up, without receiving in fact any consideration for the same, and that it was well known that the construction of the road would not cost to exceed $580,000, and that, in pursuance of the conspiracy, A. S. Chase represented his brother and other directors of the company in the partnership contract with Donald Grant and others, and by means of the partnership contract and the original contract with Grand a scheme was devised to evade a statute of the state of Minnesota, (chapter 12, enacted in 1887,) and that by this scheme the amount of $611,667 of the common stock of the railway company, apparently a profit to Donald Grant on his construction contract, was intended to be and actually was divided between the directors of said corporation. The first section of this statute enacts as follows:

'Section 1. That it shall not be lawful for any railroad company existing by virtue of any laws of this state, nor for any officer of any such company, to sell, dispose of, or pledge any shares of the capital stock of such company, nor to issue certificates of shares in the capital stock of such company, until the shares so sold, disposed of, or pledged, and the shares for which such certificates are to be issued, shall have been fully paid; nor issue any

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