Male v. Atchison, T.&S.F. Ry. Co.

• Decision Date: 10 December 1920
• Citation: 230 N.Y. 158,129 N.E. 458
• Parties: MALE v. ATCHISON, T. & S. F. RY. CO.
• Court: New York Court of Appeals Court of Appeals

230 N.Y. 158

129 N.E. 458

MALE

v.ATCHISON, T. & S. F. RY. CO.

Court of Appeals of New York.

Dec. 10, 1920.

Action by Francis S. Male, as trustee, against the Atchison, Topeka & Santa Fé Railway Company. Judgment of the Special Term sustaining a demurrer to the complaint and dismissing the complaint was affirmed by the Appellate Division (179 App. Div. 87,166 N. Y. Supp. 593), and plaintiff appeals.

Affirmed.

Appeal from Supreme Court, Appellate Division, First Department.

William G. Cooke, of New York City, for appellant.

S. T. Bledsoe and A. S. H. Bristow, both of New York City, for respondent.

ANDREWS, J.

The plaintiff owns $120,000 of the income bonds of the Atlantic & Pacific Railroad Company. Because of certain facts alleged in his amended complaint he claims that the defendant is liable for this sum. A demurrer was interposed to this complaint and sustained. The question before us is whether such action was right.

[1] At outset it should be noticed that certain allegations of the complaint need not be considered. They either state conclusions of law or are immaterial in that instead of pleading the facts they state what some one said or admitted in regard to them. Apart from them, however, it appears that the Atlantic & Pacific Railroad Company was authorized to build a railroad from Springfield, Mo., to the Pacific passing through Albuquerque. In fact but a few miles had been built in Missouri, and the company was insolvent. It did have, however, under its act of incorporation, certain land grants in New Mexico and Arizona-valueless until a railroad passed through them. The St. Louis & San Francisco Railway Company had a line in Missouri and Indian Territory with a branch which was to run to Wichita and there connect with the road of the Atchison, Topeka & Santa Fé Railroad Company. The lines of the latter company ran from the east to Albuquerque. It desired to extend thence to the Pacific, but had no available route. The Atchison and the St. Louis each owned slightly less than half of the stock of the Atlantic & Pacific.

With affairs in this condition, a contract between the three companies was made in 1880. It was agreed that the line of the Atlantic & Pacific should be guilt by the parties from Albuquerque to California. The purpose of this construction, it is said, was to furnish the Atchison an outlet to the Pacific Coast and was for its exclusive use and benefit. It was to connect with its lines at Albuquerque and was for 30 years to be operated as a through line for it. All business from the extension was to pass to the east over the Atchison Road. The construction westward was 581 miles long. It ran through a barren wilderness and was useless except as furnishing the Atchison an outlet to the Pacific. And in fact the road was built, equipped, and operated under the control and for the benefit of the Atchison, and the debts and obligations incurred in the name of the Atlantic & Pacific were for the benefit of the Atchison.

[2] The construction was to be and was financed by bonds of the Atlantic & Pacific. It is not claimed that their proceeds were diverted to the Atchison or that the proceeds were not received by the Atlantic & Pacific. Under such circumstances the bondholders were not creditors, legally or equitably, of the Atchison. No contractual relation existed between them. The bonds were sealed instruments, and on their face was the obligations of the Atlantic & Pacific. It received the proceeds from them. It used them to build a road the legal title to which it held. That the Atchison and the St. Louis owned a majority of the Atlantic & Pacific stock is immaterial unless they fraudulently misused their power. The companies were separate and independent corporations. Even as between them, while the contract may have been improvident, no cause of action is stated against the Atchison.

The bonds so issued by the Atlantic & Pacific consisted of $16,000,000 first mortgage bonds, afterwards held as collateral security for $16,000,000 of bonds guaranteed by the Atchison and the St. Louis, issued as a substitute for them, $5,600,000 of second mortgage bonds, and $12,000,000 of income bonds. These various issues were made between 1880 and 1887. The first mortgage and income bonds were delivered to and sold by the Atchison and the St. Louis, acting clearly as agents for this purpose of the Atlantic & Pacific. A large majority of the stock of the latter company continued to be held by the former companies so that they dominated and controlled the affairs of the Atlantic & Pacific. This is so as to the majority stockholders of every corporation. No consolidation is so effected. Pullman's P. C. Co. v. Missouri Pac. Ry. Co., 115 U. S. 587, 6 Sup. Ct. 194, 29 L. Ed. 499. In 1890, through its acquisition of practically all the stock of the St. Louis, the Atchison became the real and practical owner of seven-eighths of the stock of the Atlantic & Pacific.

In 1893 the Atchison and the St. Louis were in financial difficulties. Receivers, the same in both companies, were appointed. Again, the same men were named in proceedings to foreclose trust mortgages. They were directed to operate such other roads as had been operated as part of the Atchison system, and it is said this included the Atlantic & Pacific. Obviously they could not take possession of the latter road. It is not claimed that they did. But they held its second mortgage bonds and they caused an action to be begun to foreclose them. In this action they were again made receivers.

In 1895 the holders of the stock and bonds of the Atchison entered into a plan for reorganization. The plan was to allow the foreclosure suit against it to proceed to judgment and the property to be bought in by the reorganization committee. It was then to be conveyed to a new corporation, which should distribute its stock and bonds to the original stock and bondholders. This was done. The new corporation so formed was the defendant known as the Atchison, Topeka & Santa Fé Railway Company, or briefly as the new Atchison. Under this plan doubtless any nonassenting creditors of the old road would...