North Chicago St. R. Co. v. Chicago Union Traction Co.

• Decision Date: 17 December 1906
• Docket Number: 27,508,27,509.
• Citation: 150 F. 612
• Parties: NORTH CHICAGO ST. R. CO. et al. v. CHICAGO UNION TRACTION CO. et al. WEST CHICAGO ST. R. CO. et al. v. SAME.
• Court: U.S. District Court — Northern District of Illinois

150 F. 612

NORTH CHICAGO ST. R. CO. et al. v. CHICAGO UNION TRACTION CO. et al.

WEST CHICAGO ST. R. CO. et al. v. SAME.

Nos. 27,508, 27,509.

United States Circuit Court, N.D. Illinois, Northern Division.

December 17, 1906

Henry S. Robbins, for complainants.

Clarence A. Knight and Hopkins, Peffers & Hopkins, for defendant bondholders.

Sears Meagher & Whitney, for Union Traction Co. and its receivers and Consolidated Traction Co.

Ritscher Montgomery, Hart & Abbott, for Equitable Trust Co.

SANBORN District Judge.

These ancillary bills are brought by the North Chicago and West Chicago Companies and their stockholders to enforce causes of action belonging to the receivers of said companies, which the receivers decline to prosecute; they being made defendants. The main purpose of the suits is to redress the alleged fraud of the late Charles T. Yerkes, who, as president and managing director of the North and West Companies, is charged to have built suburban street railways with the funds and upon the credit of said companies, and with taking to himself and certain of his associates nearly all the stock of the corporations created to build the suburban roads, instead of securing it to his cestuis que trust, the North and West Companies. This stock so taken by him was afterwards exchanged for stock in the defendant Chicago Consolidated Traction Company (being a consolidation and successor to seven of the suburban companies), and later exchanged for bonds of the Consolidated Company secured by mortgage. The purpose of the bills is to obtain this Consolidated stock as valid shares, cancel the bonds and mortgage-- or, if this is impracticable on account of bona fide holdings, to have the bonds delivered to North and West Companies. Another purpose of the bills is to cancel two operating agreements made between North and West and the Consolidated Companies, alleged to give the latter the valuable right to use the tracks of North and West in the business district of Chicago, and thus injurious to the North and West Companies.

Demurrers to the bills were put in by all the defendants and overruled by Judge Grosscup. All the defendants except John B. Parsons (lately brought in) and Henry G. Foreman filed their answers, and complainants have been taking proofs in support of the bills before a master; their proof being now (December, 1906) nearly complete. The original defendant, Yerkes, claimed the right to plead, but Judge Grosscup required him to answer. Before the time expired he died. The suits were revived against Owsley as executor, who answered, but claimed and was accorded the right to an argument on his right to file a plea or pleas, setting up defect of parties plaintiff, estoppel, release, and laches. The Foreman pleas were filed in proper time, so that his right to file and have a hearing on at least one plea is clear, under U.S. v. California & Oregon Land Co., 148 U.S. 31, 13 Sup.Ct. 458, 37 L.Ed. 354. Parsons likewise, if he decided to enter a general appearance, has the full right to plead, answer, or demur to the bills as amended. Owsley having answered, his right to file a plea is different from that of Foreman and Parsons; but the court may exercise a discretionary power, especially if Parsons and Foreman stand on their clear right to plead, instead of answering, to allow Owsley to plead, and, if any plea tendered by him is deemed valid, to sustain it, permitting the evidence already taken to stand if complainants elect to take issue on such plea.

The Chicago Union Traction Company and its receivers, the Consolidated Company, and the Equitable Trust Company, after having fully answered the bills, after the argument on the Foreman and Owsley pleas, applied for leave to plead also. Later still the defendant bondholders (except Parsons) applied for leave to plead, answer, or demur anew, for the reason that complainants had amended their bills by bringing in Parsons as a bondholder, and putting him in the same position as Owsley, Furbeck, and other bondholders. They insist that any amendment to the bills, however unimportant, gives all the defendants the right to plead as fully as to the original bills, relying on the rule laid down by Daniell and certain federal cases. At the same time the same defendants move to compel complainants to annex to their bills a certain instrument forming part of an agreement stated in the bills, on the ground that the bills, having stated an agreement, and annexed part of the instruments constituting it, may be compelled to complete the statement of the agreement by attaching the rest. All these questions are now before the court, depending primarily on the record made by the bills, amendments, and proposed pleas, and on certain other facts cited to enable the court to fully understand the situation, in order to be enabled to exercise a proper discretion. Sufficient of the record will be stated to sustain the conclusions reached.

The North and West Companies were organized in 1886 and 1887, and from their organization down to June 30, 1899, controlled and operated a large system of street car lines on the North and West sides in Chicago, having a practical monopoly, by reason of the location of their tracks, of the street car business in such portions of the city. During this period Charles T. Yerkes was president and managing director of both companies, the stockholders reposing such unlimited confidence in his integrity and business ability that he was allowed to exercise practically exclusive control and management of the corporate affairs, the boards of directors taking no part in actual management. Under these circumstances it was the duty of Yerkes to refrain from placing himself in a position where his personal interest would conflict with his duties to the companies, and to abstain from profiting personally at their expense; but, disregarding this duty, said Yerkes in the year 1894 devised a scheme of building and equipping, with the funds and upon the credit of the North and West Companies, electric railways in the territory north and west of that covered by the roads of complainants, and appropriating to his individual use the profits accruing therefrom.

The bills then go on to state the organization of seven suburban street railroad companies, with an aggregate capitalization of $11,000,000. These companies were merged on February 1, 1899, into the defendant, the Chicago Consolidated Traction Company. These seven companies are called the 'subsidiary companies.' It is alleged that Yerkes caused the roads of these feeders, or subsidiary companies, to be built and equipped with the moneys and upon the credit of the North and West Companies, and then took over to himself, but in the name of another person, all the stock of the subsidiary companies which he and certain associates admitted into the scheme appropriated to their own use and benefit. The theory of the bills is that this stock, having been obtained by Yerkes and associates in a fiduciary capacity as trusted agents of the North and West Companies, in equity vested in the companies by virtue of the fiduciary relations existing, and became the property of the companies as soon as they learned of the situation and decided to affirm the transaction and claim the stock; that Yerkes and associates, having used the funds and credit of the companies to get this stock, and being their agents and fiduciaries, took the stock for the companies and held the legal title thereto in trust for them; and that the companies as soon as they were able to act in an independent manner in their own right, after ascertaining the real facts, asserted their rights and brought these suits to have the stock turned over to them and to have the Consolidated Company bonds, in exchange for which the stock was given up by Yerkes and associates, canceled, so as to give them the profits of the transactions which Yerkes was able to put through, through his position as trusted agent on the credit and with the money of the North and West Companies, and which transactions Yerkes could not have otherwise successfully prosecuted.

The bills pray, first, that the North and West be decreed to be the owners of all the consolidated railroads, because built with their moneys or credit; but, if this be not granted then that they be decreed the owners of all the stock of the Consolidated Company, or such part thereof as Yerkes and his associates held when it was exchanged for bonds. They further pray that the Consolidated Company mortgage for $6,750,000 be held void, as a cloud on title, and that all the bonds be held void. An account is also asked against Yerkes in case the bonds and mortgage be not set aside as to bona fide holders for moneys received for stock before the bonds were issued; that he surrender to a receiver to be appointed all bonds still owned by him, pay to the receiver all moneys received by him for the sale or pledge of any of the bonds, and all moneys received by him for said stock; and that the receiver be decreed to pay the moneys and bonds to the North and West in proper proportions; and that a receiver for the Consolidated Company may be appointed. It will be seen that the seven companies which were merged into the Consolidated, and the Consolidated Company itself, are treated in the bills as valid and subsisting corporations, and not as identical with the corporations of the North and West. The stock of the Consolidated is treated as valid, as well as the bonds, in the event that the mortgage cannot be set aside by reason of the bonds or some of them being held by holders for value in due course. It appears from the bills that the Consolidated stock was all 'water,' nothing being paid for it, and that the Consolidated did not get a...