McGeorge v. Big Stone Gap Imp. Co.

• Decision Date: 19 August 1893
• Citation: 57 F. 262
• Parties: McGEORGE et al. v. BIG STONE GAP IMP. CO.
• Court: U.S. Court of Appeals — Fourth Circuit

57 F. 262

McGEORGE et al. v. BIG STONE GAP IMP. CO.

United States Circuit Court, W.D. Virginia.

August 19, 1893

F. S Blair, for complainants.

Bullitt & McDowell and St. John Boyle, for defendant.

GOFF Circuit Judge.

This suit was brought by William McGeorge, Jr., in his own right and as trustee, John C. Bullitt, Samuel Dickson, Joseph I. Doran, Joseph B. Altimus, George Burnham Charles C. Harrison, William Pepper, John H. Dingee, Samuel W. Colter, Jr., and Henry Lewis, citizens of the state of Pennsylvania, suing for themselves and all other creditors and stockholders of the Big Stone Gap Improvement Company who will become parties and contribute to the expense hereof, against the Big Stone Gap Improvement Company, a corporation created by the laws of the state of Virginia, a citizen of said state, having its principal office and place of business at Big Stone Gap, in Wise county, Va. On the 26th day of May, 1893, upon reading the bill, affidavits, and exhibits filed therewith, I granted an order appointing H. C. Wood and J. K. Taggart provisional receivers of all the property of the defendant, and I directed that notice of such action be served upon the company, and ordered that it appear on the 13th day of June, 1893, and show cause, if any it could, why such appointments should not be made permanent. An injunction also issued as prayed for. On the day ordered, defendant appeared by counsel, and tendered its demurrer and answer to the bill, together with affidavits and exhibits.

Prior to the filing of the same, John C. Bullitt, Samuel Dickson, and Joseph I. Dale, who are named as complainants in the bill, through counsel, stated to the court that their names had been used as such without their authority, and filed a motion to strike the same from the bill and record of this cause. On considering the same, it appearing that there had been a misunderstanding among several of the complainants about the use of said names, and a misconstruction of the authority given relative thereto, it was ordered that the names mentioned the stricken from the bill, and that as to said parties the suit stand dismissed; and for like reasons it was at the same time ordered that the names of Bullitt, Dickson, and Dale, as counsel for complainants, be withdrawn from the bill and record of this cause.

It is stated in the bill that the Big Stone Gap Improvement Company was organized under the laws of the state of Virginia, its object being to lay off and sell town lots. That about $1,000,000 in first mortgage bonds and $1,500,000 in capital stock were issued to the original holders of the lands that had been conveyed to the company, the complainants being part of them; and also that $1,000,000 in stock was retained by the company as treasury stock. That the present management of the company has exercised almost absolute authority over the affairs of the company since its organization. That the funds and assets of said company have been wasted, misappropriated, and diverted to purposes wholly foreign to that for which the company was organized, to the great loss and injury of complainants. That the company has defaulted for five years in the payment of interest on its bonds, and is also in default in the payment of state, county, and municipal taxes. That by the mortgage given on the property of the company the secure the issue of bonds it was provided that whenever $50,000 should accumulate from the sale of lots or otherwise, 5 per centum should be paid upon the principal of each and every bond; and the charge is made that this has not been done. That the management of said company, being largely interested in the South Atlantic & Ohio Railroad Company, donated $500,000 of the treasury stock of defendant company to said railroad company for the purpose of securing the completion of that road to Big Stone Gap. That the same was a misappropriation of the funds of the defendant. That part of said stock had been issued and delivered to the railroad company, and that the residue would be at once, if the present management of the defendant was continued, or any notice of this suit be given its officers. That the company is insolvent, and that its officers still pay themselves large salaries for the discharge of their respective duties, and that their continuance in the management of the same will increase its liabilities. That unless an injunction issues restraining them, and an order is passed appointing receivers, great and irreparable injury will result to complainants, who themselves, and through others represented by them, own over one-half of all the bonds and stocks issued by the defendant company. That many persons claiming to be creditors of the company have brought suits against it; and that it is for the interest of all creditors, stockholders, and persons concerned in the property that the court should take all the assets of defendant into custody, and administer them as a trust fund for the benefit of those entitled to share therein. The bill was sworn to. Numerous exhibits were filed, duly authenticated, and several affidavits as to the truth of the charges made were presented. On these allegations of mismanagement, waste, and misappropriation of assets, with the charge of irreparable damage, and the fear of an additional delivery of stock improperly donated, the injunction issued, and receivers were appointed.

The answer denies that the funds and assets of the company have been wasted, misappropriated, or diverted to purposes other than those for which it was organized. It claims that the donations made and the assistance rendered by the defendant to other enterprises were for the purpose of increasing the value of its property, and to carry out the object for which it was organized, and that they were so made with the assent of all the stockholders and bondholders, the complainants included. It admits that the company has failed to pay the interest due on its bonds since July 1, 1890, and that it has not paid certain taxes, but it denies all charges of fraud and mismanagement, and claims that the defendant's inability to pay is the result of its misfortune, caused by hard times, and the consequent depression of real estate. It claims that the assets of the defendant are valuable, and will, if time is given, more than pay all its liabilities. I do not think it necessary to here set forth all the claims, explanations, and charges in the answer contained. They will be, in effect, alluded to and disposed of, as I state the conclusion I have reached.

I find that the defendant was organized to purchase and sell lands in Wise county, Va., and, among other things, to erect buildings and sell or lease them; to grade and improve streets; to furnish gas, electric lights, and waterworks; to construct and operate street railroads; to lay out its lands into lots, streets, and parks, and improve and sell the lots; to erect, own, and operate furnaces, mills, and manufactories, and acquire by subscription or purchase the stock or bonds of any mining, manufacturing, water, gas, street-railway, or other improvement company within the territory owned by it; to issue and sell its bonds and secure the same by mortgages on its property; to subscribe to and hold shares in the capital stock of any railroad company or other corporation; and to do other things not necessary to be here mentioned. It was organized by an association of landowners composed of about 20 persons and corporations that had purchased lands at Big Stone Gap, expecting to profit by the advance in price occasioned by the building of railroads into the coal and iron fields adjacent thereto. The original cost to them of the lands averaged about $25 per acre, (excepting one small part thereof), and about 2,000 acres of the same was conveyed to the defendant, for which the grantors received $1,000,000 in first mortgage bonds, and $1,500,000 in full-paid stock of the company. It thus appears that the associated landowners, who in the manner I have described became the stockholders and bondholders of the defendant, received $2,500,000 in stock and bonds for lands that had cost them, with the exception mentioned, (and that immaterial,) about $50,000. It seems that there never was as much as one cent of cash capital paid in by any of the stockholders, the land alone constituting the capital; and that, subject to the $1,000,000 mortgage. The stock and bonds were apportioned among the former landowners according to a valuation of their respective holdings, agreed to by them, each stockholder receiving for every $1,500 of stock held by him one bond of the denomination of $1,000. The bonds were payable in the gold coin of the United States on the 10th day of May, 1898, and bore 4 per cent. interest per annum, payable semiannually. By the terms of the mortgage executed to secure the bonds it was provided that 75 per cent. of the amount of all sales of lots made by the company should be paid over to the trustee named therein, for the purpose of extinguishing the bonded debt, and the remaining 25 per cent. was to be used as an improvement fund by the company. It was also provided in the mortgage that as soon as $50,000 should accumulate in the hands of said trustee from the sale of lots or otherwise, a dividend of 5 per cent. should be paid on the principal of the bonds; and I may remark here that the charge in the bill that this dividend has not been paid is not true. It is shown by the evidence that the fund applicable to this dividend has been regularly set apart for that purpose, and paid to the bondholders, or on their account; and that they have now received in such payments, respectively, sums several times greater in amount than was paid out by them for the lands.

The company, after...