Northern Pac. Ry. Co. v. Boyd

• Decision Date: 09 March 1910
• Docket Number: 1,729.
• Citation: 177 F. 804
• Parties: NORTHERN PAC. RY. CO. et al. v. BOYD.
• Court: U.S. Court of Appeals — Ninth Circuit

177 F. 804

NORTHERN PAC. RY. CO. et al. v. BOYD.

No. 1,729.

United States Court of Appeals, Ninth Circuit.

March 9, 1910

[Copyrighted Material Omitted] [Copyrighted Material Omitted] [Copyrighted Material Omitted] [Copyrighted Material Omitted] [Copyrighted Material Omitted]

Francis Lynde Stetson, Charles W. Bunn, Charles Donnelly, and Edward J. Cannon, for appellants.

George Turner and R. L. Edmiston, for appellee.

Before GILBERT, ROSS, and MORROW, Circuit Judges.

GILBERT Circuit Judge (after stating the facts as above).

The first question to be considered is whether or not the railroad company ever became liable for the payment of the Coeur d'Alene Company's debt to the appellee. The appellee presents several grounds on which it is asserted that liability exists. One of them is that the lease constituted a diversion and appropriation by the railroad company to its own use of the assets of the Coeur d'Alene Company, such as to make it liable to the creditors of the latter company to the extent of the assets so diverted and appropriated. It was on this ground that the court below held that the railroad company became chargeable with the debt. Upon a careful consideration of the question, we are not convinced that there was error in that conclusion. On August 1, 1888, an agreement was entered into between the railroad company and Daniel C. Corbin, who was then the president of the Coeur d'Alene Company, and who owned and controlled a majority of its capital stock. He signed the agreement in his individual capacity, and not as president of the company. The agreement provided that Corbin should cause a lease to be executed to the railroad company of the property and franchises of the Coeur d'Alene Company for a period of 999 years; that the rental therefor should be the payment by the railroad company of the interest on an issue of $825,000 of bonds, $360,000 of which were to be retained by the trustee to provide for the redemption of an issue of an equal amount of bonds then outstanding against the property; that, in addition thereto, the railroad company should pay to the Coeur d'Alene Company $20,500, the expenses incurred by that company in making surveys, contesting the right of way, and in work done on a line between Wallace and the summit of the Bitter Root Range, and should also purchase from the navigation company all construction and operating materials and supplies on hand, at their cash cost; and that Corbin should cause to be transferred to the railroad company at least 51 per cent. of its capital stock, 'full paid and nonassessable.' There was no provision whatever in the agreement as to the disposition of the remainder of the bonds.

On September 8, 1888, the board of directors of the Coeur d'Alene Company had a meeting, at which a resolution was adopted in which it was recited that, whereas, the issue of stock and bonds of the company had been found insufficient properly to construct, complete, and equip the line of its railroad and its boats and vessels, there should be issued a series of general first mortgage bonds of the company to the amount of $825,000, of which $360,000 were to be used to retire the bonds already outstanding, and the remainder 'for the purpose of making good the deficiency above set forth,' and that a mortgage should be executed to secure said bonds. On September 14, 1888, the lease was executed. It recites that the board of directors of the Coeur d'Alene Company, for the purpose of repaying money owing by it, and used in the construction of its railroad, has authorized the issuance of bonds, $360,000 thereof to be retained by the trustees to retire the outstanding bonds of that amount, $465,000 thereof having been first certified by the trustee, to be, with the coupons thereto belonging, by it redelivered to the company.

The lease provides that the annual rental received shall consist of the entire net earnings of the property after paying all expenses of operating the same, and carrying on the business thereof, including all taxes and assessments, payments on incumbrances, interest and sinking fund, all mortgage bonds, and the expenses of repairing and replacing the railroad and premises. It also provides that the lessee shall pay all cost and expense of operating, maintaining, and transacting the business of the demised property, or in any manner connected with, arising out of, or appertaining to the business and the operation or management thereof, and shall indemnify the lessor from and against any and all charges, cost, expenses, suits, damages, demands, and claims of any and all kinds whatsoever, arising out of or in any manner appertaining to or connected with the maintenance, operation, or management of said demised property during the existence of the lease.

The appellant contends that the $465,000 of bonds were issued, certified, and delivered to the Coeur d'Alene Company to be used in the payment of its debts. The appellee contends that they were issued and delivered to Daniel C. Corbin for and on behalf of himself and his associates as the consideration for the 5,100 shares of stock which he delivered to the railroad company. This is a crucial question in the case, and one upon which the evidence is not altogether clear. It is shown from the books of the trustee that on October 29, $200,000 of the bonds, and on the following day $265,000 thereof, were delivered to D. C. Corbin, 'president of the Coeur d'Alene Company. ' Corbin was called as a witness for the appellee. He was then 70 years of age, and his memory as to transactions which occurred 23 years before was uncertain. He testified, however:

'I think the agreement was that the Northern Pacific undertook to pay, if there was any indebtedness. We certainly did not. I made the sale, and it was, so to speak, I turned over the stocks to the Northern Pacific Railway Company, and got the price that was to be paid for it. After that I had nothing to do with it. I immediately left the company, and I do not remember that I had anything to do with it except when I was in New York. ' (This must have been at the time when he received the bonds.)

He further testified, in answer to the question whether he or his associates received any benefit from the general first mortgage:

'No, I should think not. I presume it was used, probably to pay us, I presume. I know we got our money.'

Again he testified:

'I do not think we received any bonds unless possibly we might have received bonds with an agreement for somebody to take them off our hands and pay us the money, because I never had any bonds. * * * If they ever came into my hands, they just passed through my hands. I never had any, I am quite sure of that.' M. P. Martin, formerly assistant general auditor of the railroad company, in answer to the question, 'Where did these $465,000 bonds go; who got them?' said:

'I suppose the promoters of that enterprise did. Q. That is, Mr. Corbin and his associates? A. Yes, sir. His rights and so on were worth something. Q. He did get that when he sold out as part of the consideration for the sale of the road? A. He and his associates certainly ought to get it. There were some other things. He had some surveys, I believe, that the Northern Pacific (paid) for, and also some stock of material that the Northern Pacific paid for.'

The testimony so far, it is to be admitted, leaves it uncertain whether the bonds were turned over to the company to be used in payment of its debts, or were delivered to Corbin and his associates in payment for their 5,100 shares of stock. But it seems clear that, unless the railroad company paid for the stock in the manner so indicated, it never paid for it at all. Counsel for the appellant contends that the consideration for the stock was the guaranty of the railroad company to pay the bonds and the interest thereon. But this does not impress us as an adequate explanation of the transaction. In the agreement between Corbin and the railroad company, it was stipulated that the payment of the interest and principal of the bonds by the railroad company was to be the rental for the use of the demised property, and there is nothing in the testimony or in any of the instruments to show that the railroad company's guaranty was to be the consideration for anything other than for the use of the property. At the time when the lease was made, the Coeur d'Alene Company owned and was in possession of a property, the value of which evidently largely exceeded the company's indebtedness. Before and at that time the property was producing net earnings of 8 per centum upon $1,000,000 of capital stock. During the first 21 months of the term of the lease, the net earnings were $176,000. The cost of the property is not definitely shown, but it would seem from the testimony of Corbin that it was something above the amount realized on the first mortgage bonds of $360,000. Corbin was unable to state whether the total cost was less or more than $400,000, and we may assume that it was approximately that sum. The 5,100 shares of stock transferred to the railroad company were valuable, therefore, and it is not conceivable that the owners thereof would have parted with them without receiving in return a substantial equivalent. That the stock was valuable is further shown by the fact that the railroad company, after it had acquired the majority thereof, purchased the remainder at a cost of $250,000. After the lease the Coeur d'Alene Company possessed nothing subject to execution, save its interest in the rental reserved. By April 3, 1889, all of the directors and officers of the Coeur d'Alene Company had resigned and their places had been filled by officers and employes of the railroad company. The president of the railroad...