Burnes v. City of Atchison

• Decision Date: 09 April 1892
• Citation: 29 P. 579,48 Kan. 507
• Court: Kansas Supreme Court
• Parties: LEWIS C. BURNES et al. v. THE CITY OF ATCHISON et al. W. H. HARRIS v. SAME. THE CHICAGO & ATCHISON BRIDGE COMPANY v. SAME

29 P. 579

48 Kan. 507

LEWIS C. BURNES et al. v. THE CITY OF ATCHISON et al.

W. H. HARRIS v. SAME.

THE CHICAGO & ATCHISON BRIDGE COMPANY v. SAME

Supreme Court of Kansas

April 9, 1892

Error from Atchison District Court.

ACTION by the city of Atchison and George W. Howell, receiver against Lewis C. Burnes and others. Action by the city of Atchison, the Chicago & Atchison Bridge Company, and George W. Howell, receiver, against W. H. Harris. Action by the city of Atchison and George W. Howell, receiver, and others against the Chicago & Atchison Bridge Company. Judgments for plaintiffs, at the September term, 1888. Defendants bring error.

Judgment reversed.

Waggener Martin & Orr, for plaintiffs in error.

H. C Solomon, city attorney, and W. R. Smith, for defendants in error; T. S. Brown, of counsel.

JOHNSTON J. All the Justices concurring.

OPINION

JOHNSTON, J.:

In December, 1886, an action was brought by the city of Atchison against the Chicago & Atchison Bridge Company, Lewis C. Burnes and other stockholders in the bridge company, charging fraud in the contracts and transactions of the bridge company and in the issuance of the capital stock of the same, and asking a recovery of the unpaid balance due upon the stock and the cancellation of that which was fictitious and fraudulent. In the amended petition, which was filed in July, 1887, it was substantially alleged that the Chicago & Atchison Bridge Company of Missouri was organized, with a capital stock of $ 1,000,000, for the purpose of building a bridge across the Missouri river at the city of Atchison; that the Chicago & Atchison Bridge Company of Kansas was incorporated for the purpose of building a bridge across the Missouri river at the city of Atchison, with a capital stock of $ 1,000,000; that, for the purpose of raising money with which to construct the bridge, the Chicago & Atchison Bridge Company of Missouri, on June 1, 1872, executed 1,200 bonds of the denomination of $ 1,000, and each bearing interest at the rate of 7 per cent. per annum, and executed a mortgage deed upon the bridge, approaches, together with the franchises and right-of-way for the bridge, to secure the payment of the bonds; that, as a further security, the Chicago & Atchison Bridge Company of Kansas executed a like mortgage to secure the payment of said bonds; that the payment of the principal and interest of the bonds mentioned was guaranteed by the Hannibal & St. Joseph Railroad Company, the Central Branch Union Pacific Railroad Company, and the Chicago & Southwestern Railway Company; that the consolidation of the two bridge companies was effected on July 18, 1873, with a capital stock of $ 1,200,000, and the consolidated corporation took the name of the Chicago & Atchison Bridge Company; that the city of Atchison subscribed to the capital stock of the bridge company to the amount of $ 100,000, and received therefor the stock of the company in the like sum; that the Chicago & Atchison Bridge Company entered into a contract with the American Bridge Company, of Chicago, on April 3, 1874, for the construction of a railroad and wagon bridge across the Missouri river at the city of Atchison, wherein it was agreed that the American Bridge Company should furnish the material and construct the bridge, and in payment should receive $ 1,200,000 of the first-mortgage bonds of the Chicago & Atchison Bridge Company, and $ 1,200,000 of the full-paid capital stock of the same company, and $ 100,000 of the bonds of the city of Atchison; that the American Bridge Company thereupon began the construction of the bridge, and completed the same about September, 1875, at a cost not exceeding $ 450,000, and upon the completion thereof the Chicago & Atchison Bridge Company delivered to the American Bridge Company the bonds and capital stock in accordance with the said agreement; that when the bonds and stock were so delivered, and during the time of constructing the bridge, a conspiracy existed between the American Bridge Company and the directors of the Chicago & Atchison Bridge Company to swindle and defraud the city of Atchison out of $ 100,000 of bonds, and that the difference between the sum of $ 450,000 and the amount of the bonds and stock of the company was divided up between the officers and directors of the two bridge companies; that none of the stockholders in the Chicago & Atchison Bridge Company, except the city of Atchison, paid anything for the stock subscribed by them, and that the city was ignorant of this fact until within the two years preceding the beginning of this action; that the first-mortgage bonds of the Chicago & Atchison Bridge Company were worth $ 1,000,000, and that the capital stock was worth $ 600,000, in cash, at the time of the delivery of the same to the American Bridge Company, and the bonds of the city of Atchison were worth par at the same time; that the consolidated company issued its bonds to the amount of $ 200,000 in excess of what it was authorized by law to issue; that the stock was divided out among various persons without consideration or payment, and the city alone, of all the stockholders, has paid into the corporation the amount of its capital stock; that since the completion of the bridge its earnings have amounted to not less than $ 2,000,000, and that after the payment of expenses, repairs, taxes, and dividends, there remains the sum of $ 800,000, which should be appropriated as dividends on the legitimate stock of the company; that the city has received as dividends on its stock only the sum of $ 5,000, while other stockholders have received $ 55,000; that the president and managers of the company in 1885 took out of the treasury $ 200,000 and paid off outstanding bonds to that amount; that the company has refunded its bonded indebtedness at a rate of 6 per cent. per annum, by the issuance of mortgage bonds payable thirty years from January 1, 1885; that on August 13, 1886, the city, by its attorney, made a demand upon the president and directors to compel each stockholder to pay into the treasury of the company the full face value of the stock held, and that in case they failed to do so within 10 days that suit be instituted against each stockholder for the recovery of the face value of his stock; that the bridge company has failed to comply with the demand, and that the defendant stockholders took their stock with full knowledge that it was unpaid, and fraudulently issued to them or to their assignors. The city prays judgment that the stock held by the defendants be declared void and canceled; that the bridge company be required to render an account of its receipts and expenditures; and that a receiver be appointed to further prosecute the action against the stockholders, to collect from all the amount of stock held by them, and for such other relief as in equity the plaintiff is entitled to.

The sufficiency of the allegations of the petition were challenged by demurrers filed by the defendants, each of which was overruled by the court; after which an answer was filed by the Chicago & Atchison Bridge Company, admitting the allegation with reference to its incorporation, and that the city of Atchison was duly incorporated, but denied that the city ever subscribed to the capital stock of the Chicago & Atchison Bridge Company, and alleged that it acquired $ 100,000 of the stock from the American Bridge Company. It admitted the contract with the American Bridge Company for the construction of the bridge across the Missouri river, and alleged that the city had actual notice of the existence of the contract, and of all the terms and conditions of the same; that the contract was recognized in several ordinances passed by the city, and that the $ 100,000 bonds of the city, voted to aid in the building of the bridge, were deposited with a trustee in the city of New York to be delivered to the American Bridge Company under the terms and conditions of the contract between the Chicago & Atchison Bridge Company and the American Bridge Company. It also alleged that the action was barred by the statute of limitations, because that, during all the time from 1875 down to the institution of the action, the city had knowledge of the contracts and the conditions of the same; that it became and was a party to the contracts, and that it ratified and confirmed the action of the Chicago & Atchison Bridge Company in entering into contracts with the American Bridge Company; that it knew the amount that was to be paid to the American Bridge Company for the construction of the bridge, and acquiesced therein.

The allegations with reference to the issuance of the bonds and stock of the bridge company are admitted, and it is alleged that the bonds were executed and delivered with the consent and authority of the city; and further, that the city consented to and ratified the action of the bridge company with full knowledge of the fact that the stock of the Chicago & Atchison Bridge Company was to be used as part payment for the construction of the bridge, and with knowledge that it had no other assets whatever than the stocks and bonds with which to construct the bridge. It alleges that the $ 1,200,000 first-mortgage bonds were not secured by a lien upon any property other than the franchises for building a bridge over the Missouri river, and at that time were not worth to exceed the sum of $ 10,000. It admits that it has paid off $ 200,000 of the mortgage bonds, and alleges that the mayor of the city has been designated by the city to act as a member of the board of directors of the bridge company, and as such director has represented the city for the past 10 years in all the proceedings of the board of directors, and the city as a stockholder has been fully informed with...