Macardell v. Olcott

• Citation: 189 N.Y. 368,82 N.E. 161
• Parties: MacARDELL et al. v. OLCOTT et al.
• Decision Date: 29 October 1907
• Court: New York Court of Appeals

189 N.Y. 368

82 N.E. 161

MacARDELL et al.

v.OLCOTT et al.

Court of Appeals of New York.

Oct. 29, 1907.

Appeal from Supreme Court, Appellate Division, First Department.

Action by Cornelius MacArdell and others, as administrators, etc., against Frederic P. Olcott and others. From a judgment of the Appellate Division (93 N. Y. Supp. 799,104 App. Div. 263), unanimously affirming a judgment of the Supreme Court dismissing plaintiff's complaint on the merits, plaintiffs appeal. Affirmed.

Edward T. Bartlett and Vann, JJ., dissenting.

Edward M. Shepard and H. Snowden Marshall, for appellants.

Adrian H. Joline, for respondents.

HISCOCK, J.

The appellants' intestate was the minority holder of a large amount of the capital stock of the Houston & Texas Central Railway Company, which will be called the ‘Houston Company.’ The respondent Southern Pacific Company, indirectly and through its control of other corporations, was the holder of a majority of the stock of said company. In substance, the appellants claim upon this appeal that the Southern Pacific Company, on a foreclosure sale of the property of the Houston Company under and in accordance with a reorganization plan to which the former company was a party, acquired property, to wit, the capital stock of the reorganized company, which, because of its relation as majority stockholder, it should be decreed to hold as trustee for the proportionate benefit of the appellants as minority stockholders, and that since, upon uncontroverted facts, this relief has been denied, a new trial should be granted.

Before reaching the merits of this claim, appellants are compelled to avoid what purports to be a unanimous affirmance by an Appellate Division of a judgment dismissing their complaint upon the facts. This they seek to do by the argument, in the first place, that because of special circumstances the decision of the Appellate Division is not to be regarded as unanimous; and, secondly, that, even if the decision be regarded as unanimous, the decision of the trial court shows that it did not pass upon the issues involved in this action, and they are, therefore, still open for consideration by this court. I think that the appellants must fail in their contention upon these latter points. But, if this is not so, I think that they must fail upon the merits upon this appeal, for the reason that their present claims to relief are based upon a theory so absolutely and widely at variance with that upon which their action was commenced and tried that we cannot make them a basis for a new trial. In order that we may consider the questions of law which are involved it will be necessary to make a review of the facts, which at best will be somewhat extended, although there is practically no dispute concerning them.

The Houston Company was the owner of a railway consisting of three divisions, with rolling stock, and also the beneficiary of extensive land grants. It has executed to various trustees seven mortgages securing nearly $20,000,000 of bonds. It also had a floating indebtedness of about $3,000,000. Most of these mortgages-and the prior ones-covered, respectively, only one or two divisions of the road. None of them, with the exception of one securing an inconsequential amount of bonds, contained express provision for foreclosure and sale for the entire principal amount of bonds upon a default in payment of interest, or of other provisions short of a default in the payment of said principal; but they did contain provisions that the trustee might enter and take possession of the road until satisfaction was secured of payments in default. The road failed to meet its obligations under these mortgages, and foreclosure of several thereof was commenced. The company served answers, taking advantage of the provisions of the mortgage, which prevented a sale for the entire principal amount of the bonds. In addition, suit was commenced against the company on a large amount of floating indebtedness, and receivers therein appointed. In short, and without unnecessary recapitulation of all the details, the affairs of the road were in a most unfortunate and much confused condition, with a practical deadlock between various conflicting interests which prevented a solution and betterment of the situation. Under these circumstances a reorganization agreement was entered into between the Southern Pacific Company, which, as I have already stated, was indirectly the majority holder of the stock of the Houston Company, the bondholders secured by the various mortgages referred to, and various other parties; the Houston Company itself and plaintiffs' intestate not being parties thereto. This agreement in its general outline provided for a foreclosure and sale of the land and railroad property belonging to the Houston Company, and the transfer of this property to a new corporation to be organized, and which should issue bonds to replace the old ones outstanding, of which latter, however, the principal amount and rate of interest should be scaled down, and the execution of mortgages upon the railroad property and lands to secure all or part of these new bonds. Said agreement also provided for the issue of $10,000,000 of capital stock of the new corporation, and it is in connection with this new capital stock that the appellants now make complaint against the Southern Pacific Company and seek to hold it as a trustee for their benefit.

It was provided in respect to this stock as follows: First, that the stockholders in the old company, respectively, should be entitled to a pro rata share of the capital stock of the new company upon payment of a like respective pro rata amount of the money necessary to pay the reorganization expenses, and the amounts to be paid to old bondholders in connection with the reduction of the principal and rate of interest of their bonds, and the $3,000,000 of floating indebtedness; second, that if and so far as the stockholders did not see fit to exercise this privilege the floating debt creditors should be entitled to their respective pro rata shares of the new capital stock upon payment of like respective pro rate shares of the same reorganization expenses and the amounts to be paid old bondholders as above indicated; third, that if and in so far as old stockholders and floating debt creditors did not avail themselves of the right to take new capital stock, the Southern Pacific Company should be entitled to take the same, providing for the expenses of reorganization and the payments to old bondholders above mentioned. It will be noticed that the substantial difference between the rights of the Southern Pacific Company and of plaintiffs' intestate in respect to acquiring stock in the new company was that the former was not compelled to provide for the payment of floating indebtedness of the old company, while the latter was compelled to contribute thereto. It is, however, to be noted in this connection, as bearing somewhat upon the merits, that the Southern Pacific Company was to guarantee the new bonds to be issued, and that it was the majority stockholder, and in control of corporations holding about $2,300,000 of the $3,000,000 of the floating indebtedness.

After this agreement was made, suits upon remaining mortgages were commenced against the Houston Company, and such proceedings taken in them and in the old suits that thereafter, without opposition upon the part of said company, upon a trial had in the United States Circuit Court of Texas, a judgment of foreclosure and sale was rendered as upon a default upon the principal of the outstanding bonds for a sale of the entire property of the mortgagor, including the lands granted to it. These lands were bid in by the defendant Olcott, and thereafter a new corporation was formed, and the provisions already recited with respect to the transfer to it of the property of the old company, the issue of new bonds, and the execution of new mortgages were carried out. The defendant Olcott still holds title to so much of the lands as have not been sold, and, as seems to be assumed upon all sides, in trust for the benefit of the new corporation, if there by any equity over and above the mortgages executed thereon. Neither the minority stockholders of the old company nor the floating debt creditors exercised the privilege secured to them, respectively, under the reorganization agreement of taking stock in the new corporation, and the result was that the Southern Pacific Company secured the entire issue upon the terms already recited. While not especially material, it appears that the amount which appellants' intestate would have been compelled to contribute per share as a condition of taking the new stock would have been a substantial sum. The important facts developed down to this point in the history of the railroad company and of subsequent proceedings, which are especially emphasized in the present claims of the appellants, are that the Southern Pacific Company was indirectly the majority stockholder and in control of the Houston Company; that the reorganization agreement made by the Southern Pacific Company and others, which contemplated a foreclosure and sale, was followed by the cessation of opposition upon the part of the Houston Company to such foreclosure and sale, and subsequently by a sale of all of its property; that the Southern Pacific Company by such reorganization agreement secured to itself, upon more advantageous terms than were offered to other stockholders, the right to acquire all the capital stock of the new railroad company, and which capital stock represented all of the rights and equity which the old company and its stockholders had in the property originally belonging to it, and which property, by means of the foreclosure and sale, had been transferred to the new company which issued the capital stock. Thereafter this action was commenced, and because of the view, already indicated, that it does...