Marfield v. Traction Co.

• Decision Date: 21 June 1924
• Docket Number: 18167,18168,18166
• Citation: 111 Ohio St. 139,144 N.E. 689
• Parties: Marfield v. The Cincinnati, D. & T. Traction Co. Et Al. Missouri Province Educational Institute v. Ahrens Et Al. Kinsey v. Ahrens Et Al.
• Court: Ohio Supreme Court

144 N.E. 689

111 Ohio St. 139

Marfield v. The Cincinnati, D. & T. Traction Co. Et Al. Missouri Province Educational Institute v. Ahrens Et Al. Kinsey v. Ahrens Et Al.

Nos. 18166, 18167 , 18168

Supreme Court of Ohio

June 21, 1924

Corporations - Constitutional stockholders' liability attaches, how - Validity of stipulation waiving liability - Waiver by bondholder effective as to stockholder of consolidated corporations, when - Section 9038, General Code - Effect of consolidation of railroads.

1. The liability of stockholders for corporate debts created by section 3 of Article XIII of the Constitution of 1851 is a Part of the corporate liability which attaches to the stockholders not as individuals but as members of the corporation.

2. The corporation may at the time of creating corporate obligations stipulate for a waiver of such liability as a condition to the contract. Such waiver subsists in contract and it fairly made and supported by a valid consideration is enforceable and not contrary to sound public policy.

3. Where a railroad corporation in 1900 executes a bond secured by mortgage upon all Its real and personal property including after-acquired property and a condition is written therein that: "The holder of this bond shall have no recourse for its payment to any individual liability imposed by statutes or otherwise, upon any present or future stockholder or officers of said The Southern Ohio Traction Company; such liability being taken to be waived by such holder," and said railroad corporation is thereafter in 1902 consolidated in accordance with and under authority of Ohio laws with another ohio railroad corporation, such waiver though Dot by its terms an exemption to any corporation other than the Southern Ohio Traction Company, is nevertheless effective In favor of the stockholders to whom the stock of such consolidated company is distributed.

4. The failure to make said waiver applicable to the successors and assigns of the Southern Ohio Traction Company is supplied and said waiver is made applicable to the consol- idated company by the provisions of Section 9035 General Code.

5. The effect of a consolidation of two railroad corporations in accordance with the Provisions of Section 9027 et seq. is to merge the constituent corporations into a single organization thereby perpetuating the substantial existence of the constituent corporations.

On May 1, 1900, the Southern Ohio Traction Company, an Ohio corporation operating an inter urban railroad in this state issued mortgage bonds in the sum of $1,350,000, the bonds being made payable to a trustee and secured by a mortgage on all Of the real and personal property of the traction company, including after-acquired property. The bonds were purchased by numerous individuals and either by original purchase or transfer are now owned by the plaintiffs in this action and other persons not nominally plaintiffs, for whose benefit this proceeding is maintained.

The bonds contained a provision written therein as follows:

"The holder of this bond shall have no recourse for its payment to any individual liability imposed by statutes or otherwise upon any present or future stockholders or officers of said the Southern Ohio Traction Company; such liability being taken to be waived by such holder."

Thereafter on March 22, 1902, the Southern Ohio Traction Company consolidated with the Cincinnati & Northwestern Railway Company, another Ohio corporation, under the name the Cincinnati, Dayton & Toledo Traction Company. The consolidation agreement was, as required by statute, filed in the office of the secretary of state of Ohio, and contained among others the following pertinent provisions:

The capital stock was fixed at $5,000,000, in shares of $100 each; $2,000,000 of such stock was divided pro rata among the holders of the stock of the Southern Ohio Traction Company, and $1,000,000 among the stockholders of the Cincinnati & Northwestern Railway Company, the remaining $2,000,000 to remain in the treasury and to be disposed of for all lawful corporate purposes of the consolidated company. The agreement further provided for an authorized bond issue of $5,000,000, of which $1,200,000 was divided pro rata among the stockholders of the Southern Ohio Traction Company. Other portions of the authorized bond issue were to be used, if possible, to retire existing bond issues secured by underlying mortgages upon constituent properties of the Southern Ohio Traction Company. The aforesaid distribution of stock and bonds to stockholders of the Southern Ohio Traction Company, and the issue of stock to the stockholders of the Cincinnati & Northwestern Company, were in full payment of the assets of said companies, which were by that agreement transferred to the consolidated company.

The consolidated agreement further contained the following provision:

"The Cincinnati, Dayton & Toledo Traction Company assumes all of the debts, liabilities and contracts of the constituent companies, and is to pay off and extinguish all debts and liabilities of every kInd and nature of each constituent company."

Further facts, either appearing in the pleadings or judicially known to the court, are: That the persons who owned all of the stock of the Cincinnati & Northwestern Railway Company, at the time of the consolidation, had purchased that property for the sum of $110,000, and that by virtue of the consolidation agreement and the Ohio statutes under which the consolidation was effected, certain additions, improvements, betterments, and replacements were added to the property, and upon foreclosure of the mortgages upon the properties of the Southern Ohio Traction Company, those after- acquired properties were ordered to be included within the lien of the mortgages, and these bondholders therefore received substantial benefit therefrom.

These suits were begun in the court of common pleas of Hamilton county, by the plaintiffs for the benefit of all bondholders, against the stockholders of the Southern Ohio Traction Company, to recover upon their double liability as such stockholders, by virtue of Section 3, Article XIII of the Constitution of 1851, which provides as follows:

"Dues from corporations shall be secured by such individual liability of the stockholders, and other means, as may be prescribed by law; but, in all cases, each stockholder shall be liable, over and above the stock by him or her owned, and any amount unpaid thereon, to a further sum, at least equal in amount to such stock."

This provision continued in effect until November 3, 1903, when it was abrogated by constitutional amendment.

The Southern Ohio Traction Company did not become insolvent until 1916, and in the meantime large sums of money were paid to the holders of the bonds issued to the stockholders of the Southern Ohio Traction Company, in the sum of $1,200,000, as interest thereon, and while the exact amount does not appear, it was at least several hundred thousand dollars.

It further appears that durIng the time such interest was paid, no default hail been made in the interest on the bonds secured by the underlying mortgages, and so far as the record discloses, all conditions of those mortgages were being performed.

It further appears that no dividends were ever paid upon any of the stock issued to the stockholders of the consolidated company and that none of the principal was ever paid upon said bond issue of $1,200,000.

The bonds did not become payable until 1922, and this suit to recover on the stockholders' liability was brought within the statutory limitations of time thereafter.

Pleadings filed by bondholders alleging all the foregoing matters were demurred to by the stock holders, and the demurrers were sustained by the court of common pleas, and upon appeal the Court of Appeals rendered the same judgment. The cause has been admitted to this court upon allowance of a motion to certify.

Mr. Edgar W. Cist; Mr. Walter M. Schoenle, and Messrs. Thompson, Hine & Flory, for plaintiffs in error.

Messrs. Miller & Brady, amici Curiae, for plaintiffs in error.

Messrs. Ernst, Cassatt & Cottle; Messrs. Dinsmore, Shohl & Sawyer; Messrs. Pogue, Hoffheimer & Pogue; Mr. Ben L. Heidingsfeld; Messrs. Worthington, Strong, Stettinius & Hollister; Mr. W. C. Shepherd, and Messrs. Maxwell & Ramsey, for defendants in error.

Messrs. Tolles, Hogsett, Ginn & Morley, amici curiae, for defendants in error.

MARSHALL C. J.

These cases do not present a question of liability of stockholders where the indebtedness was incurred prior to November 3, 1903, and where the secondary liability has not been waived, but the question presented for determination is whether the waiver of liability at the time of the execution of the bonds and mort gage is valid and effective for any purpose, and, if so, whether it is effective in favor of the stock holders of the consolidated company, the Cincinnati, Dayton & Toledo Traction Company.

For the purposes of this discussion, it is admitted by the stockholders that, except for the waiver, they would be liable, and it is claimed that by reason of the waiver the exemption from liability extends not only to the stockholders of the Southern Ohio Traction Company, but also to the stockholders of the consolidated company as successor thereto.

It is asserted by the bondholders, on the other hand, that the waiver never had any validity in Jaw and that if they are found to be mistaken in this, the consolidated company has assumed the obligations of the bonds, and that the stockholders of the consolidated company are not within the terms of the exemption.

It will be our first task to inquire whether the waiver provision is valid.

It is claimed that the liability of...