Gates v. Boston & N. Y. Air-Line R. Co.

• Decision Date: 14 December 1885
• Citation: 53 Conn. 333,5 A. 695
• Court: Connecticut Supreme Court
• Parties: GATES v. BOSTON & N. Y. AIR-LINE R. CO. and others.

5 A. 695

53 Conn. 333

GATES

v. BOSTON & N. Y. AIR-LINE R. CO. and others.

Supreme Court of Errors of Connecticut.

December 14, 1885.

Appeal from a judgment of superior court, Middlesex county, in favor of defendants.

This was a suit brought by the holder of railroad bonds secured by mortgage for an injunction, receiver, and an account. The mortgage by which his bonds were secured had, without notice to him, been foreclosed by the majority of the bondholders, who had reorganized themselves into a new corporation under a charter obtained from the legislature. The new corporation then leased its property to another railroad. The injunction asked for is to restrain the ratification of this lease. The facts are fully stated in the opinion.

S. L. Warner and S. A. Robinson, for appellant and plaintiff.

An act which deprives the creditors of a corporation of all remedy against its property, impairs the obligation of a contract, and is void. Curran v. State, 15 How. 3.04, 311; Sturges v. Knapp, 31 Vt. 1. A trustee cannot denude himself of the trust, or delegate it, without the consent of the cestui que trust. Hill, Trustees, 175; Thrall v. Spencer, 16 Conn. 142; Goddard v. Prentice, 17 Conn. 553. And the legislature cannot, by an enactment, vest the private property of one corporation in another without its consent. Enfield Tollbridge Co. v. Connecticut River Co., 7 Conn. 48; Derby Turnpike Co. v. Parks, 10 Conn. 541; Knapp v. Railroad Co., 20 Wall. 121. It was not in the power of the stockholders, against a single dissenting voice, to vote that no dividends should be paid on this common stock, and what they could not do directly they cannot do indirectly, by means of a lease. Black v. Delaware & Raritan Canal Co., 24 N. J. Eq. 455; Const v. Harris, Turn. & R. 496, 525; Green's Brice, Ultra Vires, 552. See, also, Hawes v. Oakland, 104 U. S. 460.

S. E. Baldwin, for appellees.

STODDARD, J.¹ The New Haven, Middletown & Willimantic Railroad Company was chartered by the general assembly of the state of Connecticut in the year 1867, for the purpose of constructing and operating a railroad from the city of New Haven to the village of Willimantic, and wholly within the territorial limits of this state. By its charter that corporation was invested with all the usual franchises and powers conferred upon railroad companies, including, of course, the right to take private property by the exercise of the right of eminent domain.

The capital stock was $3,000,000, with the privilege of increasing the same to an amount not more than $6,000,000. The company was authorized to borrow money to an amount not exceeding at any one time one-half of the amount actually expended for the construction and equipment of its road, and to secure repayment of the same by its bonds with or without coupons. Provision is made in the charter for securing these bonds by the execution of a mortgage of the "railroad, and all its property, rights, and franchises," to the treasurer of the state, and his successors in office, in trust for the holders of the bonds.

In pursuance of its chartered powers the company proceeded to build its railroad, and in 1869, having obtained stock subscriptions and partially completed the road, issued coupon bonds, either negotiable or not at the option of the holder, to the amount of $3,000,000, and secured the payment thereof by a mortgage, is provided by the charter. In that mortgage it is recited that the company desired to borrow money "for the purpose of constructing and equipping said railroad," and proposed to make and issue such bonds "pursuant to the power and authority to that effect in said charter contained." The bond itself states that it is secured by a "first mortgage to the treasurer of the state of Connecticut upon the railroad of said company, and all its property, rights, and franchises under its charter," and stipulates that, "should any of said interest coupons remain unpaid for six months after presentation and default, the principal sum secured hereby shall, at the option of the holder thereof, become due immediately."

The granting clause of the mortgage also conveyed the railroad, its appurtenances, rolling stock, and all other real and personal property, particularized at length, "which may now belong, or may at any time hereafter belong, to said company, and be used as a part of said railroad, or be appurtenant thereto, or necessary for the construction, operation, or security thereof; and also all the property, rights, and franchises of the said company under its charter, and every part thereof, together with the tolls, income, issues, and profits thereof, and all rights to receive the same, and everything necessary for the completion and operation of the road." In the habendum clause of the mortgage deed it is provided that the state treasurer, in his official capacity, is "to have and to hold the said property," etc., "subject to the terms and stipulations of said bonds and the provisions of the said charter under which the said company derives its powers."

Default was made in the payment of the interest, and, under the terms of the bond and mortgage, more than a majority in value of the bondholders elected that the principal sum should be then due, and at their instance the then treasurer of the state brought his petition in equity to the May term, 1875, of the superior court, to obtain a decree of strict foreclosure of the mortgage. Such decree was had; a majority in value of the bondholders and the creditors being parties thereto. A plan of reorganization of the railroad had been proposed by a majority in value of the bondholders, which resulted in the foreclosure, and the passage by the general assembly of the act incorporating the Boston & New York Air-line Railroad Company.

A scheme for the reorganization of the management and ownership of the railroad, having been assented to by the parties in interest, was referred to in the foreclosure decree. The time for redemption expired in June, 1875, and the foreclosure thereby became absolute.

On the eighth day of June, 1875, the general assembly incorporated the new company. The act of incorporation recites that the interest of the bonds remains unpaid since November 1, 1872; that foreclosure proceedings in behalf of the holders of the bonds are pending, etc.; and that public convenience and necessity require a considerable further expenditure to complete and equip the road.

The capital stock consisted of 40,000 shares of $100 each, 30,000 of which is preferred stock, and 10,000 common stock. The preferred stock is to be issued "only in exchange for the first mortgage bonds of said company, at the rate of five shares for every bond of $500, and ten shares for each bond of $1,000."

The common stock is to be issued—First, for overdue and unpaid coupons detached from the bonds; and, second, in satisfaction of certain legal and equitable claims existing against the road prior to the time the decree of foreclosure became absolute. The charter then provided that when a majority of the bonds had been exchanged for the preferred stock and upon some other conditions, the trustee should convey to the new corporation all his title and interest in the trust property in fee-simple, and then provided that such conveyance "shall be effectual to discharge him forever from said trust, and to vest said premises with all the rights and privileges of the old corporation."

The charter then provided that no dividends shall be declared upon the common stock until dividends have been declared, out of the net earnings of the railroad, upon all of the 30,000 shares of preferred stock, equal to 7 per cent. a year thereon from the date of the last coupons on the first mortgage bonds, default on which was made prior to the time when the title of the trustee under the mortgage to the mortgaged premises became absolute by foreclosure. Then it is provided that the new corporation may issue mortgage bonds upon its property, under certain conditions and stipulations, by a vote of three-fourths of all the stockholders.

The plaintiff owned, prior to the reorganization scheme, bonds to the value of $2,500, and "has never personally been a party to or participated in any of said proceedings, nor authorized any one to act for him or represent him, or been personally served with notice, nor has assented to them, and has not elected to have his bonds due, and still claims them as valid, subsisting securities under said original first mortgage. He was not aware that said charter had been granted to the Boston & New York Air-line Railroad Company, or that said foreclosure decree had been made,"

The broad claim is now made by the plaintiff that as he was not personally a party to the reorganization scheme, had no actual notice of it, and has not assented that his bonds should mature and the trustee be discharged, therefore his bonds, with their coupons, are outstanding, subsisting obligations of the old corporation charged upon this railroad property, and that either by an absolute sale, or by operation of the railroad by the trustee, said property and franchises must be appropriated to the discharge of the obligations held by him, notwithstanding that a different mode of appropriating the property in liquidation of the bonds has been agreed upon by a majority of his co-bondholders, and has been sanctioned by the state and by a court of equity having jurisdiction of the subject-matter.

The plaintiff's contention in this behalf rests upon his assumption that he has a constitutional property right to have the property appropriated in the manner claimed by him.

In making this claim the plaintiff ignores, or subordinates to his own claim, both the private rights of his co-bondholders and public rights vested in trust in the state, while upon every true theory and exposition of his contract the rights of the public are superior to his private rights, and the rights and...