Hill v. Glasgow R. Co.

• Decision Date: 17 August 1888
• Parties: HILL v. GLASGOW R. Co. et al.
• Court: United States Circuit Court, District of Kentucky

41 F. 610

HILL v. GLASGOW R. Co. et al.

United States Circuit Court, D. Kentucky.

August 17, 1888

Hargis & Eastin and Richards & Harris, for complainant.

Porter & McQuown and Walter Evans, for defendants.

JACKSON J.

The complainant, as a stockholder in the Glasgow Railroad Company, brings this suit to restrain the directors of said company from the misappropriation of the funds of said corporation. The case made by the bill is substantially this:

The Glasgow Railroad Company was chartered by the legislature of Kentucky by an act approved March 6, 1868, and was empowered to purchase the franchises and unfinished line of road in Barren county belonging to the Barren County Railroad Company, which had been previously chartered in 1856. This purchase was made, and the former company became vested with the rights, franchises, and property of the latter company. By an act of the legislature approved February 25, 1869, the charter of the Glasgow Railroad Company was so amended as to authorize the incorporators, out of their number, or out of such as might become members by subscription to its stock, to elect a board of directors, consisting of seven members. By said amendment, the town of Glasgow and precinct No. 1 of the county of Barren were authorized, upon proper vote of the citizens thereof, to subscribe for the stock of said railroad company, the town of Glasgow to the amount of 1,000 shares of said stock, and precinct No. 1 of said county to the amount of 4,000 shares; said shares being each for the sum of $25. Said subscriptions when voted, were, by the terms of the act, to be paid for in the bonds of said town and precinct respectively. Said bonds were directed to be made payable to the president and directors of said Glasgow Railroad Company, and were made negotiable by their written indorsement, were to be taken and received by the company in satisfaction of said subscription and were to mature in 20 years after date, bearing 7 per cent. interest, payable semi-annually. In pursuance of said authority, and after proper vote of the citizens thereof said subscriptions were duly made by said town and precinct and the bonds in payment thereof were issued to the railroad company, and were by the president and directors thereof indorsed and negotiated. The bonds so issued by the town of Glasgow, in payment of its subscription to the capital stock of the road, amounted to $25,000; while those issued by the precinct in payment of its subscription amounted to $100,000. Stock of the railroad company for said amounts was issued to the town of Glasgow and precinct No. 1 of Barren county, respectively, for said subscriptions so made and paid for, and said town and precinct thereby became and were regular stockholders in said railroad company for said sums.

Other subscriptions to the capital stock of the company were made by individuals to the amount of some $9,000. Said amendment of 1869 further provided that, for the taxes levied and paid by the tax-payers of said town and precinct to pay the interest on said bonds, said tax-payers should also be entitled to be stockholders in the railroad company to the extent of or for the amount of taxes so paid. Tax-receipts were to be issued to the tax-payers, which receipts were made negotiable. Certificates of stock were duly issued to the town of Glasgow and precinct No. 1 of Barren county, to the individual subscribers, and to numerous holders of such tax-receipts prior to the year 1880. The railroad company maintained its organization and operated its line of road, under said original and amendatory acts, until April 8, 1880, when another amendment of its charter was made by the legislature. Said amendment, so far as material to this case, was as follows:

'Section 1. That at the annual election of directors of the Glasgow Railroad Company, hereafter held, the judge of the Barren county court and the two justices of the peace for the Glasgow precinct of said county shall have authority, in conjunction, to appoint on behalf of said precinct five persons, and the Glasgow city council two persons, to act as directors of said company for one year, and until their successors are qualified.'

'Sec. 4. That the president and directors of said company are hereby authorized and empowered to contract with any other incorporated company, or with individuals, for the sale of said road, and the property, real and personal, and the rights, franchises, and privileges, possessed and owned by said company, or to contract with another company or individuals for either leasing their said road, or for uniting and consolidating with such other company upon such terms and conditions as may be agreed upon; and, in case of such sale or consolidation, said president and directors are hereby authorized to convey by deed to the purchaser, or to such company as may unite and consolidate with the Glasgow Railroad Company, the title thereof to said property, franchises, rights, and privileges; and, by virtue of said conveyance, the grantee shall have, own, and control all the property, rights, and privileges now held, owned, and controlled by said Glasgow Railroad Company: provided, the proceeds of such sale, lease, or consolidation shall be first applied towards the liquidation and discharge ratably of the bonds issued by the Glasgow precinct and by the town of Glasgow to aid in building said road; and, in case of such consolidation, provisions and stipulations shall be first made for the discharge of debts due by said company, and the proceeds, profits, or income arising from such consolidation shall be then applied towards the payment of said precinct and town bonds: provided, further, that said president and directors shall, by virtue of this act, have no authority whatever, either to sell, lease for a longer time than six years, or consolidate and unite with another company, until the question of accepting and confirming such sale, lease, or consolidation be first submitted to the vote of the qualified voters of said precinct, and a majority of voters at the precinct voting. That, for the purpose of ascertaining the wish of the voters of said precinct and of said city, it shall be the duty of the judge of the county court, when requested to do so by said president and directors, to cause to be printed and posted, for at least ten days, a notice of such election, in which shall be set forth the terms, conditions, and stipulations of such sale, lease, or consolidation, as may be the case. That said election shall be held, and the vote of the people of said precinct and of said town be taken, at the court-house in Glasgow, after reasonable notice by the officers appointed and qualified, as now required by law in case of election of county or state officers.'

Under and by virtue of the authority conferred by said amendment the town of Glasgow and precinct No 1 thereafter alone elected the board of directors for the company, and the directory so elected by these two stockholders subsequently leased the road to the Louisville & Nashville Railroad Company for a term of years, at a stipulated annual rental. This rental, as received, was first applied to the payment of the debts of the company, which were extinguished by the summer of 1885, after which the directors commenced applying the proceeds or rental arising from the lease of the road to the payment of the bonds issued as aforesaid by the town of Glasgow and said precinct No 1, pro rata.

This application of the company's funds is the misappropriation or breach of trust and duty on the part of the directory which the bill complains of, and seeks to have restrained. The complainant alleges that he was a tax-payer in said town and precinct from 1870 to 1887; that as such he paid taxes to meet the interest on said bonds issued by said town and precinct in payment of their subscriptions to the capital stock of said company; that by reason of his payment of such taxes he held tax-receipts which entitled him to the rights of a stockholder; that he also purchased other tax-receipts, which were under the law convertible into stock; and that he was, in addition to said tax-receipts, the holder of certificates of stock in said railroad company when said directors, in 1885, commenced applying the company's funds to the payment of the bonds issued as aforesaid by said town and precinct. He alleges that he complained of and protested against the action of said directors, in so appropriating the company's assets, as being illegal and unauthorized by any valid law, and urged and requested said directory to desist form so doing, but that they have have steadily and persistently refused to respect his complaints and have continued, and are continuing, to so appropriate the company's funds as received, in disregard of the rights of himself, and other minority stockholders; that said town and precinct, holding a large majority of the stock, have the exclusive control of the company's affairs, with the sole and exclusive authority under the amendment of 1880 to select the seven directors of the company, and are thus wrongfully applying the funds of the corporation to the payment of their private debts incurred in obtaining the stock, which now enables them to assert the power of misapplying funds, belonging equally to all the stockholders, to their exclusive right and benefit. The complainant further alleges that said directors and stockholders refuse him any relief, or to change their action in the premises, after repeated applications on his part; that he brings this suit without collusion, for the benefit of the company, and of any and all stockholders who may choose to accept the benefits thereof; that the funds of the company already so misapplied by said...