McDonald v. Charleston, C. & C.R. Co.

• Decision Date: 07 November 1893
• Parties: McDONALD et al. v. CHARLESTON, C. & C. R. CO. et al.
• Court: Tennessee Supreme Court

24 S.W. 252

93 Tenn. 281

McDONALD et al. v. CHARLESTON, C. & C. R. CO. et al.

Supreme Court of Tennessee.

November 7, 1893

Appeal from chancery court, Washington county; John P. Smith Chancellor.

Suit by McDonald, Shea & Co. and others against the Charleston Cincinnati & Chicago Railroad Company and others for an enforcement of their claims. Various parties joined. From the decree for the disposition of the property of the railroad company and the construction company, the latter company and other parties appeal. Modified.

Lucky & Sanford, Webb & McClung, and Turly & Wright, for appellants.

Kirkpatrick & Williams, H. H. Carr, and Ingersoll & Peyton, for appellees.

WILKES J.

The complainants are railroad contractors, and constructed the Charleston, Cincinnati & Chicago Railroad across the state of Tennessee, and some portions of the line beyond the limits of the state. They made their contract for construction with the Massachusetts & Southern Construction Company. The latter is incorporated under the laws of Massachusetts to construct railroads, and specially this line of road, and had a capital stock of $250,000. Complainants filed their bill to have a lien declared in their favor upon the line of railroad constructed by them in Tennessee, and to have the amount of their debt against the construction company declared, and its payment enforced by a sale of the railroad. The railroad company entered into an informal contract with the construction company to build its line of railroad from Charleston, S. C., to the Ohio river, and agreed to pay it for such construction, in its own bonds and stocks, at the rate originally of $20,000 per mile of bonds, and a like amount of stock, which, by a subsequent agreement, was increased to $25,000 per mile of each, the contemplated cost of the road being $20,000,000. The work in Tennessee was done by complainants, and they insist that, under the Acts of 1883 and other acts, they are entitled to liens, as contractors and mechanics, upon so much of the road as is within the limits of the state. Bonds and stock of the road were issued to an amount exceeding seven millions of dollars, and a mortgage was executed upon the road and its property to the Boston Safe-Deposit & Trust Company, to secure the payment of such bonds. Both the railroad and construction companies became insolvent, and under the various pleadings, bills cross bills, answers, etc., filed in this cause, the rights of all the persons interested in both companies, so far as their assets in Tennessee were concerned, were submitted to the court, and passed upon as under a general insolvent proceeding.

Upon hearing of the consolidated cause, the chancellor, among other things, not necessary now to mention, decreed (1) that the two companies were insolvent, and must be wound up as such; (2) that the mortgage executed upon the railroad in Tennessee to secure the bondholders was invalid, for want of authority in the parties who attempted to execute the same; (3) that the contracts made by complainants to construct the road were virtually contracts with the construction company and railroad company as one and the same person, and that complainants were entitled to a lien upon the road in Tennessee to secure the amounts due them, which amounts were declared subject, however, to be modified as subsequent facts might warrant; (4) that a confessed judgment rendered in favor of the construction company against the railroad company, during the pendency of the insolvent proceeding, for the sum of $715,841.74, was not valid as against the creditors of the railroad company. The road was brought to sale so far as it lay within the limits of the state, realizing about $2,000,000, which was under the control of the court below, and was ordered to be paid out at follows: (1) To taxes on the property; (2) to costs and expenses of the receivership; (3) to amounts due for rights of way; (4) pro rata among the various lien creditors of equal dignity with the liens of complainants. Neither the railroad company nor the Boston Safe-Deposit & Trust Company nor the bondholders appealed, and it appears that the bondholders, through a reorganization committee, are now the owners by assignment of the complainants' claims.

The construction company appealed, and insists that the chancellor erred in holding that it and the railroad company were virtually one and the same, and that the contracts made by complainants are contracts with each as principals; its contention being that it (the construction company) was the principal contractor, and complainants but subcontractors under it, and only entitled to such rights as subcontractors would be entitled to under the laws of Tennessee. It appears that the construction company was organized before the railroad company, and mainly for the purpose of constructing this road; that it planned, originated, and organized the railroad company, controlled its stockholders, dictated its board of directors, took its stock and bonds, and floated them, thereby raising its only assets; that it expended the entire revenues of the railroad company; that the same president dictated, dominated, and controlled the affairs and operations of both companies; that the general manager treasurer, auditor, and every other active officer were the same person in each company at the same time. The informal contract entered into between the railroad company and the construction company contained no details, no specifications as to grades, curvatures, character or kind of rails, nor the class or kind of road to be built, except simply that it was to be a road of standard gauge, 4 feet 8 1/2 inches wide. The original contract provided that the construction company should have $20,000 of bonds, and a like amount of stock, for every mile of road constructed; but after a short time this agreement was changed to $25,000 per mile of each, and no reason whatever is shown for the increase, which was made to apply as well to the portion of the road already constructed as to that part yet to be built. The railroad company, though organized in 1886, had no books until 1889. It had no assets except its own stock and bonds, and these were issued of the construction company alone, and attempted to be floated by it. The subsidies granted by cities or towns were transferred by the railroad company to the construction company, and the railroad company never had a dollar except that raised by and through the construction company, and performed no corporate acts except to make the contract with the construction company, if it can be called a "contract," and to execute mortgages, issue its stock and bonds, and make contracts connected therewith, and to make consolidation agreements of its liens. We fail to find in any of the transactions between the two companies any evidence of independent dealing at arm's length with each other, but there is at most only the semblance of separate action, the relation...