Gloninger v. Pittsb. & C. R. Co.

• Decision Date: 05 January 1891
• Docket Number: 214
• Citation: 139 Pa. 13,21 A. 211
• Parties: J.R. GLONINGER v. PITTSB. & C. R. CO
• Court: Pennsylvania Supreme Court

21 A. 211

139 Pa. 13

J.R. GLONINGER v. PITTSB. & C. R. CO

No. 214

Supreme Court of Pennsylvania

January 5, 1891

Argued October 27, 1890

APPEAL BY PLAINTIFFS FROM THE COURT OF COMMON PLEAS NO. 1 OF ALLEGHENY COUNTY.

No. 214 October Term 1889, Sup. Ct.; court below, No. 477 March Term 1886, C. P. No. 1, in Equity.

On February 3, 1886, John R. Gloninger, administrator of the estate of Sarah B. Fetterman, deceased, and executor of the will of G. L. B. Fetterman, deceased, and Ada K. Chain, filed a bill in equity, on behalf of themselves as stockholders in the Pittsburgh & Connellsville Railroad Company, and on behalf of any other stockholders therein who might intervene as plaintiffs, against said Pittsburgh & Connellsville Railroad Company, the Baltimore & Ohio Railroad Company, the Union Trust Company of New York, and Robert Garrett president, and Mendes Cohen and others, directors of the Pittsburgh & Connellsville Railroad Company. The bill prayed inter alia, that certain bonds to the amount of $ 10,000,000 issued by the Pittsburgh & Connellsville Railroad Company to the Baltimore & Ohio Railroad Company, and by the latter pledged to the Union Trust Company of New York, as security for a debt of its own, and also a certain mortgage of the railroad and franchises of the Pittsburgh & Connellsville Railroad Company, given as security for the payment of said bonds, should be declared null and void and decreed to be delivered up for cancellation.

Issue having been joined, the court appointed Mr. Robert B Carnahan, examiner and master, by whom the following, among other facts, were found:

The Pittsburgh & Connellsville Railroad Company was incorporated by act of April 3, 1837, P.L. 185, to construct and operate a railroad from the city of Pittsburgh to Connellsville, in Fayette county. By subsequent legislation in the states of Pennsylvania and Maryland, it was empowered to extend its road to Cumberland, Md. The entire line from Pittsburgh to Cumberland was opened for business in 1871, and at the Cumberland terminus it connected with the main line of the Baltimore & Ohio railroad.

Prior to 1870, the Baltimore & Ohio Railroad Company became the holder of a majority of the shares of the capital stock of the Pittsburgh & Connellsville Railroad Company, and has ever since held the same. In 1875, the Pittsburgh & Connellsville Railroad Company leased its railroad to the Baltimore & Ohio Railroad Company for the term of fifty years from January 1, 1876, with a stipulation for a perpetual renewal of the lease, from year to year, at the option of the lessee. The lease provided that the lessee should furnish the necessary rolling stock and equipment for the operation of the railroad, and should receive, out of the revenues of the road, a reasonable compensation for the use of such rolling stock and equipment. Since 1876 said railroad has been operated under that lease by the Baltimore & Ohio Railroad Company.

The mortgage in controversy was made in February, 1885. The bonds secured thereby were of the denomination of $ 100,000 each, and aggregated $ 10,000,000, bearing interest at the rate of five per cent, and to mature in forty years. They were taken by the Baltimore & Ohio Railroad at ninety per cent of their face value, the consideration for which they were issued being made up as follows:

Debt of the Pittsburgh & Connellsville Railroad

Company to the Baltimore & Ohio

Railroad Company, the greater part of which

was represented by a judgment recovered

in the Circuit Court of the United States,

$ 4,688,282.67

Rolling stock sold by latter company to

former,

1,212,500.00

Stocks and bonds issued by various

corporations owning railroads connecting with and

forming feeders of the Pittsburgh & Connellsville

railroad, sold by the B. & O.R.

Co. to the P. & C.R. Co.,

2,803,239.63

Cash,

295,977.70

Total,

$ 9,000,000.00

The issue of these bonds and the making of the mortgage to secure them, were authorized by the unanimous vote of the stock represented at a stockholders' meeting held January 30, 1885. Of this meeting, sixty days notice had not been given, in accordance with § 7, article XVI. of the constitution, and the act of April 18, 1874, P. L. 61; but the holders of 33,303 shares were present, in person or by proxy, the entire capital stock consisting of 38,888 shares. The mortgage was made to cover the franchises, as well as the railroad and other property of the corporation.

By the act of April 3, 1837, P. L. 185, incorporating the Pittsburgh & Connellsville Railroad Company, power was conferred upon it to "purchase, receive, have, hold and enjoy . . . lands, tenements and hereditaments, goods, chattels, and all estate, real, personal and mixed, of what kind or quality soever, and the same from time to time to sell, mortgage, grant, alien or dispose of," etc. By § 5, act of April 18, 1853, P. L. 566, said company was authorized "to mortgage or otherwise encumber their said road, and any real or personal estate which may belong to it, for the purpose of carrying out the privileges granted by the act, and the several supplements thereto, incorporating the same." It was by § 6 of the act of 1853, that the company was authorized by this state to extend its railroad beyond Connellsville; and, by the act of April 6, 1854, P. L. 281, said company was empowered "to issue its bonds heretofore authorized, bearing any rate of interest not exceeding seven per centum per annum, convertible at the will of the holder into stock of the company at par, or on such terms as may be agreed upon, and any sale of said bonds for a less amount than their par value shall not be construed to be a violation of the usury laws of this commonwealth."

The plaintiffs' bill alleged that the transaction consummated by the issuing of the bonds and mortgage in question, was a fraudulent scheme, concocted for the benefit of the Baltimore & Ohio Railroad Company to enable it to raise money for its own purposes, and carried out to the prejudice of the other stockholders of Pittsburgh & Connellsville Railroad Company, by means of the domination and control which the former company had over the management of the affairs of the latter; that there was no necessity, on the part of the Pittsburgh & Connellsville Railroad Company, for the issue of said bonds, and that the Baltimore & Ohio Railroad Company compelled it to buy, at inflated prices, the rolling stock and corporate stocks and bonds above referred to, simply for the purpose of creating a seeming basis for the issue of the bonds now in question, whereas it had no need therefor at all.

Upon the question of fraud thus raised, the master presented in his report a very elaborate history of the Pittsburgh & Connellsville railroad; of the connection of the Baltimore & Ohio Railroad Company therewith, and of the relations between it and the connecting roads whose stocks and bonds formed part of the consideration of the mortgage; and, after reviewing fully the transaction in question, negatived the charges of fraud made by the plaintiffs, and found that the mortgage bonds involved in the controversy were given for a bona fide and fair consideration, and that the discount of ten per cent of the face thereof was a fair and proper one, their market value not exceeding the amount paid for them, in view of the fact that the mortgage securing them was a second mortgage, subject to one for @2,200,000 sterling, placed upon the railroad in 1876, and that the rate of interest borne by the bonds was five per cent. A part of the master's findings upon this subject is quoted in the opinion of the Supreme Court, infra. He found also that the bonds were in the hands of bona fide holders for value, whose rights could not be affected even if the plaintiffs' allegations respecting the character of the transaction were sustained. As to the delay of the plaintiffs in filing their bill, the master reported that they were not guilty of laches, for the reason that they had no actual knowledge of the transactions complained of until about sixty days before the bill was filed.

The master reported, further, that the provisions of § 7, article XVI. of the constitution, and of the act of April 18, 1874, P. L. 61, passed in pursuance thereof, regulating the manner in which corporations may increase their stock or indebtedness, had no application to the Pittsburgh & Connellsville Railroad Company, a corporation existing at the time of their enactment, citing: Lewis v. Jeffries, 86 Pa. 340; Hays v. Commonwealth, 82 Pa. 518; Ahl v. Rhoads, 84 Pa. 319; Williamsport Ry. Co.'s App., 120 Pa. 1; that in 1868, the company accepted the act of April 1, 1868, P. L. 547, empowering it to build branches from its main line, but it was unnecessary to determine whether such acceptance subjected it to the act of May 3, 1855, P.L. 423, and the constitutional amendment of 1857, so as to render its character subject to alteration or repeal, inasmuch as the act of April 18, 1874, P. L. 61, was not intended to alter existing charters; and that the facts and circumstances stated in McAboy's App., 107 Pa. 548, did not show that the company had accepted or received the benefit of any legislative grants since 1874, so as to become subject to the new constitution. The master held, accordingly, that the mortgage and bonds in question were valid, notwithstanding the provisions of the present constitution and the act of April 18, 1874, the company having been invested with power to give them by the acts of April 3, 1837, P. L. 185; April 18, 1853, P. L. 566; and April 6, 1854, P.L. 281; and recommended that the bill of the plaintiffs be dismissed at their costs.

Exceptions to the master's findings and recommendation having been overruled by the master and afterwards...