Gunnison Gas & Water Co. v. Whitaker, 4,096.

• Decision Date: 31 December 1898
• Docket Number: 4,096.
• Citation: 91 F. 191
• Parties: GUNNISON GAS & WATER CO. v. WHITAKER et al.
• Court: U.S. District Court — Eastern District of Missouri

91 F. 191

GUNNISON GAS & WATER CO. v. WHITAKER et al.

No. 4,096.

United States Circuit Court, E.D. Missouri, Eastern Division.

December 31, 1898

Dickson & Smith and E. S. Robert, for complainant.

Pollard & Werner, for defendants.

ADAMS District Judge.

This is a bill in equity, averring, in substance and effect, that the complainant, a corporation organized and existing under and pursuant to the laws of Colorado, soon after its incorporation assessed against its shareholders, among whom were defendants Whitaker and Matthews, 80 per cent. of their stock subscriptions; that this amount was paid in, and with it the complainant, in the year 1882, fully constructed and paid for the water and gas works, for the construction and operation of which it had been incorporated; that after the completion of this work a meeting of the stockholders was held, and a pretended contract authorized and subsequently executed by the officers of the corporation, by the provisions of which defendant Whitaker was pretended to be employed to construct the water and gas plants (already constructed and paid for), and the company agreed to duly authorize and issue its certain 150 bonds, each for the sum of $1,000, payable 19 years after date, with interest at the rate of 7 per cent. per annum, and to secure the payment thereof by a first mortgage or deed of trust upon its water and gas works, and to deliver 125 thereof to said Whitaker as a pretended payment for his work and labor to be done and materials to be furnished in the imaginary construction of the already completed water and gas works. It is further alleged in the bill that the real purpose of authorizing this issue of bonds was to raise money to reimburse the shareholders for the 80 per cent. originally paid by them on their stock subscriptions; that to accomplish this purpose the complainant, in the year 1882, duly executed such bonds and deed of trust, and delivered the entire issue of bonds ($150,000) to defendants Whitaker and Matthews, to be sold by them, in order to raise money for the aforesaid purpose; that the said Whitaker and Matthews were unable to make sale of the bonds, and thereafter, without authority from the complainant, made an arbitrary distribution of all of said bonds, except 24, among certain of the complainant's shareholders; that the 24 bonds not distributed were returned to the complainant. The bill further shows that heretofore, upon the demand of the complainant, all of the bonds so arbitrarily distributed have been returned to complainant for cancellation, except 20 of them, which, it is alleged, have been retained by the said defendants Whitaker and Matthews, without any authority or right; that the deed of trust, executed simultaneously with the execution of said bonds, conveyed to the defendant William Nichols, as trustee, all the property of the gas and water company, to be held by him, and sold, if necessary, to pay the interest and principal of said bonds as the same respectively matured; that said Nichols, at the request of the defendants Whitaker and Matthews, has now advertised and is about to sell said property, under the provisions of the deed of trust, because of default on the part of the complainant in the payment of interest matured upon the 20 bonds now held by the defendants Whitaker and Matthews. The prayer of the bill is for an injunction against defendant Nichols, restraining him from selling the property conveyed to him by said deed of trust, on the ground that such sale will cast a cloud upon the complainant's title, and for a decretal order requiring defendants Whitaker and Matthews to surrender up the 20 bonds now held by them to the complainant for cancellation.

To this bill a demurrer is interposed on two grounds: (1) That there is no equity in the bill, for the reason that the parties complainant and defendants, are equally guilty,-- in other words, that complainant has not come into a court of equity with clean hands; (2) that complainant's right to equitable relief is barred by laches.

The scheme set out in the bill is one, often resorted to by promoters of corporations, to issue and negotiate securities in excess of corporate values, and thus appear to have a greater investment of money in a given enterprise than the facts justify. Such a scheme, independent of statute, is deceptive in its character, against good public policy, and often leads, in public or quasi public corporations, and for that matter in many strictly private corporations, to exacting excessive and unreasonable charges and tolls from the public, supposed to be made necessary to pay dividends upon the outstanding securities. It is a practice I regard as a growing evil, prejudicial alike to the public and to the best interests of corporate shareholders. This view is not only the dictate of common business honesty, but in many states, and especially in the state of Colorado, now particularly concerned, is enforced by constitutional and legislative inhibitions.

Section 9 of article 15 of the constitution of Colorado ordains as follows:

'No corporation shall issue stocks or bonds except for labor done and services performed or money or property actually received, and all fictitious increase of stock or indebtedness shall be void.' This constitutional provision has been re-enforced by legislative prohibitions to the same effect. M

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