Kitchen v. St. Louis, Kansas City & Northern Ry. Co.

• Citation: 69 Mo. 224
• Parties: KITCHEN et al., Appellants, v. THE ST. LOUIS, KANSAS CITY & NORTHERN RAILWAY COMPANY.
• Decision Date: 31 October 1878
• Court: Missouri Supreme Court

69 Mo. 224

KITCHEN et al., Appellants,

v.THE ST. LOUIS, KANSAS CITY & NORTHERN RAILWAY COMPANY.

Supreme Court of Missouri.

October Term, 1878.

[COPYRIGHT MATERIAL OMITTED]

[COPYRIGHT MATERIAL OMITTED]

Appeal from St. Louis Circuit Court.

Pope & McGinnis for appellants.

I. The sale of the North Missouri Railroad under the second mortgage was illegal, for the following reasons: Humphreys and Vail, the trustees making the sale, were purchasers. A trustee in a deed of trust executed to secure a debt of any kind, cannot purchase at his own sale. “A total disability is enjoined to take away all temptation.” Grumley v. Webb, 44 Mo. 451; Thornton v. Irwin, 43 Mo. 153; Reddick v. Gressman, 49 Mo. 389; McNees v. Swaney, 50 Mo. 388; Benham v. Rowe, 2 Cal. 387; Hull v. Voorhis, 45 Mo. 555; Gaines v. Allen, 58 Mo. 537; Wormley v. Wormley, 8 Wheat. 421; Davoue v. Fanning, 2 John. Ch. 251; Michoud v. Girod, 4 How. 503; Spencer's Eq. Jur., 428; Perry on Trusts, §§ 199, 602 v, 602 w; Hawley v. Cramer, 4 Cow. 735, 2 Sug. on Vendors, (7 Am. Ed.) b, p. 887; Robbins v. Butler, 24 Ill. 387; Kerr on Fraud & Mist., 155; and this irrespective of the motives of the trustees or the sufficiency of the price paid. Rea v. Copelin 47 Mo. 83; Moore v. Moore, 5 N. Y. 256; Gardner v. Ogden, 22 N. Y. 343; Scott v. Freeland, 7 S. & M. 409; Boyd v. Clements, 14 Ga. 639; Jewett v. Miller, 10 N. Y. 402; Fox v. Mackreth, 1 Eq. Cas., (4 Am. Ed.) 240; Slade v. Van Vechten, 11 Paige 21; Iddings v. Bruen, 4 Sandf. Ch. 223; Railroad Co. v. Howard, 7 Wall. 392; Torrey v. Bank of Orleans, 9 Paige 664; Mapps v. Sharpe, 32 Ill. 14; Kerr on Fraud & Mist., 157.

2. This sale was also illegal because twelve out of thirteen of the directors, and the superintendent and the treasurer of the North Missouri Railroad Company were largely interested in the purchase. Aberdeen R. R. Co. v. Blaikie, 1 McQueen 461; Cov. & Lex. R. R. Co. v. Bowler, 9 Bush 468; Port v. Russell, 36 Ind. 60; Bentley v. Craven,18 Beav. 75; Great Lux. Ry. Co. v. Macquay, 25 Beav. 586, 592; York & Midland Ry. Co. v. Hudson, 19 Eng. L. & Eq. 365; Butts v. Woods, 37 N. Y. 317; Cumberland Coal Co. v. Sherman, 30 Barb. 571, 188; Kœhler v. B. R. F. Iron Co., 2 Black 715; Jackson v. Ludeling, 21 Wall. 616; Richardson v. Jones, 3 Gill & J. 184; E. & N. A. Ry. Co. v. Poor, 59 Me. 178; H. S. C. Co. v. C. C. & I. Co., 16 Md. 456; C. C. & I. Co. v. Sherman, 20 Md. 117, 134; Robinson v. Smith, 3 Paige 222; Verplanck v. M. Ins. Co., 1 Ed. Ch. 84; Kerr on Fraud & Mist., p. 161; C. C. & I. Co. v. Parish, 42 Md. 598; Keech v. Sanford, 1 L. Eq. Cas. (4 Am. Ed.) 65; Bliss v. Matteson, 45 N. Y. 22; Bedford R. R. Co. v. Bowser,48 Pa. St. 29; Bayless v. Orne, Bybee et al., 1 Free. Ch. 161; Hodges v. N. E. Screw Co., 1 R. I. 312; Dodge v. Woolsey, 18 How. 331, 345; G. C. & S. R. R. Co. v. Kelly, 77 Ill. 426; Perry on Trusts, § 207; Chapin v. Weed, Clark's Ch. 464; Campbell v. Johnston, 1 Sandf. Ch. 148; McGill v. Schaeffer, 7 Watts 412; Bell v. Webb, 2 Gill 164; Evertson v. Tappen, 5 John. Ch. 495, 513; Bank of Orleans v. Torrey, 7 Hill 260: Van Epps v. Van Epps, 9 Paige 238; Fox v. Mackreth, 1 L. C. in Eq. (4 Am. Ed.) 252.

3. The sale was illegal because the deed of trust under which it was made was illegal and void. This deed was executed by order of the board of directors in pursuance of a contract made by the board with the St. Louis & North Missouri Company, of which last company eleven out of thirteen of the directors, including the president and leading men on the board, were members, with a definite understanding that they should control the company. Port v. Russell, 36 Ind. 60; Aberdeen R. R. Co. v. Blaikie, 1 McQueen 461; Cov. & Lex. R. R. Co. v. Bowler, 9 Bush 468; Butts v. Woods, 37 N. Y. 317; E. & N. A. R. R. v. Poor, 59 Me. 278; H. S. Coal Co. v. C. C. & I. Co., 16 Md. 456; C. C. & I. Co. v. Sherman, 20 Md. 117, 134; Cumberland C. Co. v. Sherman, 30 Barb. 571; San Diego v. Railroad Co., 44 Cal. 104; Perry on Trusts, §§ 207, 602 w.

(a) The organization of a company or corporation by the directors and trustees so as to contract with themselves through that agency and thus conceal their interest in the contract, like the employment of a third person as agent to buy for the benefit of the person under disability to purchase, adds an element of actual fraud to what otherwise might have been only constructively fraudulent. Smith v. Isaac, 12 Mo. 109; Thornton v. Irwin, 43 Mo. 153; Michoud v. Girod, 4 How. 503; Abbott v. American Hard Rubber Co., 33 Barb. 578, 594; James v. R. R. Co., 6 Wall. 752; C. C. & I. Co. v. Sherman, 20 Md. 117; H. S. Coal Co. v. C. C. & I. Co., 16 Md. 456; C. C. & I. Co. v. Sherman, 30 Barb. 563.

(b) The result is the same whether the St. Louis & North Missouri Company was composed entirely of directors of the North Missouri Railroad Company, or partly of directors and partly of others in partnership with them. Notice to one member of the firm that a breach of trust is being perpetrated in making the contract is notice to the firm. A trustee cannot become qualified to contract with himself by taking a partner. Perry on Trusts, § 205; Paul v. Squib,12 Pa. St. 300; 2 Sug. on Vendors, (7 Am. Ed.) b. p. 887, note; Kerr on Fraud & Mist., p. 162; ex parte Bunnell, 9 Jur. 116; Stephen v. Beall, 22 Wall. 340; Fox v. Mackreth, 1 L. Eq. Cas. (4 Am. Ed.) 241; Robbins v. Butler, 24 Ill. 387; Hawley v. Mancius, 7 John. Ch. 185; H. S. Coal Co. v. C. C. & I. Co., 16 Md. 456; Mapps v. Sharpe, 32 Ill. 1; C. C. & I. Co. v. Sherman, 20 Md. 117; Sypher v. McHenry, 18 Iowa 232; Mitchum v. Mitchum, 3 Dana 265; C. & L. R. R. Co. v. Bowler, 9 Bush 468.

4. But this deed of trust under which the sale took place, was null and void for still another reason--The North Missouri Railroad Company did not owe the St. Louis & North Missouri Company anything when the $4,000,000 second mortgage bonds were issued. This last company was and still is largely indebted to the railroad company for $5,000,000 of full paid stock taken by it in the railroad company and never paid for. It is plain that if the St. Louis & North Missouri Company owed the railroad company $5,000,000 on account of stock taken, and then advanced $1,800,000 to complete the road and bridge, as their bonds to the State required, they still remain indebted to the railroad company $3,200,000, after crediting the amount advanced, and, therefore, that there could have been no consideration for the $4,000,000 bonds which the directors caused to be issued to themselves and partners.

(a) Directors have no power to issue full paid stock at less than par. All stockholders must be on perfect equality, and it is not only against public policy, but it is a fraud on other stockholders as well as creditors, to issue new stock at less than par value. Brice's Ultra Vires, (Am. Ed.) 153; Sturgess v. Stetson, 1 Biss. 246; Neuse Riv. Nav. Co. v. Newburn, 7 Jones' Law (N. C.) 275.

(b) Every stipulation made by directors with third parties, permitting stock to be taken on terms more favorable than other stockholders have had, is void. The subscription is valid, but the stipulation for discrimination among stockholders is inoperative. Mann v. Cook, 20 Conn. 178; N. A. & S. R. R. Co. v. Fields, 10 Ind. 187; E. I. & C. R. R. Co. v. Posey, 12 Ind. 363. The rule applies with peculiar force to cases where directors attempt to admit themselves as stockholders on terms of special favor. The same is true even when the papers executed at the time of the subscription show the kind of preference intended and attempt to make the terms a condition of the subscription. P. & S. R. R. Co. v. Biggar,34 Pa. St. 459; Graff v. P. & S. R. R. Co.,31 Pa. St. 498; Minor v. Bank, 1 Pet. 65; Upton v. Tribilcock, 91 U. S. 47; La. & M. Plankroad Co. v. Mays, 29 Mo. 64; Swartout v. M. A. L. R. R. Co., 24 Mich. 390; Mann v. Cook, 20 Conn. 178; U. M. R. R. Co. v. Eastman, 3 N. H. 141; Sanger v. Upton, 91 U. S. 60; Henry v. V. & A. R. R. Co., 17 Ohio 187; Chandler v. Brown, 77 Ill. 331; Pacific R. R. Co. v. Seely, 45 Mo. 217. The pretended agreement not to enforce the State's lien cannot serve as a consideration for the $4,000,000 bonds. That lien, when it was assigned to Roe and others, who received it secretly for the directors with whom they were in partnership, i. e., for “The St. Louis & North Missouri Company”--became, as a lien, extinct--it could never be enforced. The agreement not to enforce it was worth nothing. When a trustee acquires a lien, such as an execution or deed of trust, against the trust property, it becomes forever incapable of enforcement. The trustee simply has an equitable claim to reimbursement out of the trust property. Story's Eq., § 1211; Perry on Trusts, § 602; Story's Eq. Jur., § 1212; Hill v. Frazier,22 Pa. St. 320; Jamison v. Glascock, 29 Mo. 191; Hawley v. Mancius, 7 John. Ch. 184; Rogers v. Rogers, Hopkins Ch. 515; Lingle v. Hogan, 45 Mo. 109; McAllen v. Woodcock, 60 Mo. 180; Page v. Naglee, 6 Cal. 241; Harrison v. Mock, 10 Ala. 185; Boyd v. Hawkins, 2 Dev. Eq. 215; Harris' Estate, 1 Grant's Cases 273; Green v. Winter, 1 John. Ch. 26; Gillet v. Gillet, 9 Wis. 194; Quackenbush v. Leonard, 9 Paige 334; Re Oakley 2 Ed. Ch. 478; Port v. Russell, 36 Ind. 65; Critchfield v. Haynes, 14 Ala. 49; Gunter v. Janes, 9 Cal. 643; Jones v. Dawson, 9 Ala. 672.

(c) Each of the foregoing objections derives additional force from being associated with all the others. The selling trustees were purchasers. Not only so, but they united in the purchase with the directors who were under a similar disability. Then they purchased under a deed of trust that they had illegally executed to secure bonds which they had issued to themselves while the railroad company not only did not owe them one dollar, but while they owed the company $3,200,000. Add to this the aggravating circumstances that these measures were planned and executed secretly--without the knowledge of outside stockholders, and for the...