Macon, D. & S.R. Co. v. Shailer

• Decision Date: 05 December 1905
• Docket Number: 1,504.
• Citation: 141 F. 585
• Parties: MACON, D. & S.R. CO. ET AL. v. SHAILER ET AL.
• Court: U.S. Court of Appeals — Fifth Circuit

141 F. 585

MACON, D. & S.R. CO. ET AL. v. SHAILER ET AL.

No. 1,504.

United States Court of Appeals, Fifth Circuit.

December 5, 1905

Appeal from the Circuit Court of the United States for Western Division of the Southern District of Georgia.

W. E Kay, Alex C. King, Minter Wimberly, and Frank H. Scott, for appellants.

Marion Erwin, M. P. Callaway, Saml. Bosworth Smith, and W. D Carswell, for appellees.

The bill in this case was filed November 26, 1904, by Robert A Shailer, a citizen of Massachusetts, as a minority stockholder of the Illinois & Georgia Improvement Company, on behalf of himself and other stockholders similarly situated etc., to set aside a sale of the stocks and bonds of the Macon, Dublin & Savannah Railroad Company, incorporated under the laws of Georgia, made by said improvement company to the Atlantic Coast Line Company, a corporation of the state of Connecticut, for the sum of $1,000,000, to enjoin the Coast Line Company from voting the stock or controlling the said railroad company, to appoint a receiver for the said railroad, and to foreclose the first mortgage of the said railroad company. The Illinois & Georgia Improvement Company was incorporated in the state of Illinois with a capital of $1,000,000, divided into 10,000 shares of $100 each. Shailer alleges himself to be the holder of 126 shares. To the bill Ira E. Dupree became by intervention a party plaintiff, claiming to own 40 shares. The Macon, Dublin & Savannah Railroad Company (called herein 'railroad company ') is a Georgia corporation owning and operating a railroad from Macon, Ga., to Vidalia, Ga. The Illinois & Georgia Improvement Company is chartered as a construction company, with power, among other things, to build railroads, receive railroad securities therefor, and sell the same, and repeat like operations of construction and dealing in securities. The improvement company, pursuant to its chartered powers, became and was at the times hereinafter stated the owner of $2,040,000 par value of the shares of the capital stock, and $1,380,000 par value of the first mortgage and $500,000 par value of the second mortgage bonds of said railroad company. Said stocks and bonds were all of the stocks and bonds of said railroad company. In order to raise money which was expended in building and equipping parts of the railroad of said railroad company, said improvement company made two loans, one for $750,000, secured by a collateral trust agreement conveying to the American Trust & Savings Bank, an Illinois corporation (called herein 'Savings Bank '), $2,040,000 of the capital stock, and $1,380,000 of the first mortgage bonds of said railroad company, and one for $150,000, secured by a like agreement conveying to said savings bank the entire issue, $500,000, of second mortgage bonds of said railroad company. Said securities were delivered to said savings bank in pledge under the terms of said collateral trust agreements, and were thereafter so held by the said bank.

The debts secured were represented by a series of negotiable notes of $1,000 each, held by a number of bona fide purchasers for value before maturity, and the holders thereof were entitled to the security of the trust deed and pledge held by said savings bank. The earnings of the railroad company never were sufficient to pay the interest maturing on either issue of the bonds. By agreement with the improvement company, the coupons on said railroad company's bonds were not detached or presented for payment. The improvement company kept the interest paid up on its outstanding notes which were secured by said collateral trust and pledge. The improvement company had for a considerable time been endeavoring to sell the stocks and bonds of said railroad company. January 15, 1901, the stockholders of the improvement company, in a meeting at which complainants' stock voted affirmatively, directed the board of directors to either sell or pledge these securities to raise money. February 14, 1901, the stockholders again authorized the directors to sell these securities. The ineffectual efforts of the president to sell the securities were from time to time reported to the stockholders. In May, 1904, the loans of the improvement company were maturing, and it was necessary that something should be done to raise money to meet its debts. Its creditors had notified the improvement company that the debts could not be extended. Ineffectual efforts were made to get the stockholders to put up the money on the credit of the securities of the railroad company. The savings bank, as trustee, after waiting until September 23, 1904, filed its bill in the circuit court of Cook county, Ill., to foreclose its collateral trust agreements, alleging that disputes existed between the holders of the notes evidencing the debts secured, as to certain priorities of payment claimed by some of said holders. This bill prayed an ascertainment of said debts and the sale of the pledged securities by a public judicial sale. On September 27, 1904, G. D. Mackay, a member of the firm of Vermilye & Co., brokers, offered W. G. Elliott, who was president of the Coast Line Company, to sell to him and associates the entire stocks and bonds of said railroad company for $1,000,000 cash. Mackay was authorized to make the sale by Joy Morton, president of the improvement company, and the sale was made on September 27, 1904, at the price named.

September 28, 1904, a check for $50,000 was deposited to the order of said savings bank with the North American Trust Company in New York. October 5, 1904, a memorandum of sale was drawn up, reciting the sale of said securities to said Coast Line Company by said improvement company for $1,000,000. This was signed by the improvement company, the owner and pledgor, through its president, and a consent thereto, so far as it had any interest, was signed by said savings bank, the pledgee. October 27, 1904, the balance of said purchase money was paid. November 30, 1904, the board of directors of the improvement company ratified and approved said sale and the disposition of said securities. On October 31, 1904, the aforesaid bill, filed by the savings bank in the circuit court of Cook county, was dismissed.

The bill attacks said sale of said securities and seeks to set it aside upon the grounds, to wit, that the sale was made by the savings bank, the pledgee at private sale, at an inadequate price, and that said pledgee occupied a dual position as trustee and creditor (being the owner of some of the aforesaid notes), and especially after filing its bill in Cook county circuit court could not in equity make such sale; that the sale as made or consented to by the improvement company was illegal, because a private sale for inadequate consideration made by the president, who was also vice president of the savings bank, without authority from either the stockholders or directors of the company; that the sale was of all the assets of the improvement company, and could not be made, except by unanimous consent, as it was a practical dissolution of the company; that, if such sale was necessary to pay debts, it must be by a vote of shareholders and at public auction. It is charged that the Coast Line Company knew all the facts before it finally paid for said securities. Subsequent to the filing of the bill, to wit, on February 20, 1905, the annual meeting of the shareholders of the improvement company was held. At said meeting complainant sought to have the shareholders disapprove said sale and direct the recovery of said securities. This was voted down, and, instead thereof, the sale was in all things ratified and approved by the shareholders by a vote of 4,498 4/10 shares for, to 641 shares against; the total shares outstanding being 7,146 3/4. On July 11, 1905, the presiding judge passed an order continuing a restraining order previously issued, in force until the final hearing and refusing to appoint a receiver.

The appellants took an appeal and assign errors as follows:

'(1) Because it appears by the bill of complaint that complainant Shailer is the owner of only 126 shares, and intervener Ira E. Dupree of only 40 shares, of stock out of a total of 7,000 shares of stock in the improvement company; that the matters and things complained of set forth a sale of property as the property of said corporation; that any cause of action that may exist to set aside or revoke said sale, or in anywise interfere therewith, is a right of action belonging to said corporation; that complainant does not set forth in his said bill any demand made upon said corporation or its board of directors to bring this suit, or any good and sufficient reason in law why such demand hath not been made, neither does said bill show any effort to obtain any action on the part of the shareholders of said company in regard to the alleged wrongs complained of, and complainant therefore hath no standing in this court to maintain this suit.

'(2) Because the said matters and things complained of, to wit, the sale of said stock and securities, are not an act ultra vires of the corporation, but are acts intra vires, and the said bill of complaint doth not show that the said corporation, or its said stockholders, if application were made to them, would not ratify such act if otherwise without authority, or any effort by complainant to ascertain whether the said stockholders would or would not ratify the said act; wherefore the said complainant is without any standing in this court in equity.

'(3) Because the court erred in rendering the said order and decree of July 11, 1905, for that it appears by said bill of complaint that the acts complained of are acts within the power of said corporation, and such which, if not authorized, can be

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