Preston v. Cincinnati, C. & H.V.R. Co.

• Decision Date: 28 August 1888
• Citation: 36 F. 54
• Parties: PRESTON et al. v. CINCINNATI, C. & H.V.R. CO. et al.
• Court: U.S. District Court — Southern District of Ohio

36 F. 54

PRESTON et al. v. CINCINNATI, C. & H.V.R. CO. et al.

United States Circuit Court, S.D. Ohio, Western Division.

August 28, 1888

Francis A. Riddle, Boyce & Boyd, Paxton & Warrington, and Otto Gresham, for complainants.

Jordan & Jordan and Taft & Lloyd, for respondents.

SAGE J.

This is a creditors' bill to subject the amount due to the defendant railway company from the defendant E. L. Harper and his co-defendants upon their subscriptions to the capital stock of said company, to the payment of complainants' judgments against said company, amounting to $255,938.48. The railway company was incorporated and organized in the latter part of the year 1881. On the 10th of December of that year defendant E. L. Harper subscribed for 2,500 shares of its capital stock of the par value of $100 each, and caused eight co-defendants-- as he states in his answer-- to subscribe for one share each, to enable them to become directors. Subsequently certificates representing 3,000 shares of the capital stock were issued by the company to defendant W. D Lee, at the special instance and request of defendant E. L Harper, and for his use and benefit. No money was paid upon any of the subscriptions, nor for the 3,000 shares issued to Lee for account of Harper, but they were regarded by him and by the company as fully paid for in the manner following: At the date of the organization of the company Harper was the owner of a narrow-gauge railroad which had been bought from an insolvent railroad company by purchasers who sold it to him, as he testifies, for 'about scrap-iron price.' It was some 20 miles in length, had never paid operating expenses, and was worth just about what the rails, which were light and worn, would bring for scrap-iron. On the 13th December, 1881, at the first meeting of the board of directors, Harper submitted a proposition in writing to broaden the gauge of this road to standard gauge, and extend it on the west to the Little Miami Railroad, at a point near Corwin, and on the east to Jeffersonville, on the Springfield Southern Road, say about 30 miles of railroad, and to sell the same to the company for $1,800,000 of the par value of the securities of the company as follows: $600,000 of its first mortgage bonds, $600,000 income bonds, and $600,000 of the capital stock, 'including subscriptions already subscribed.' A motion to accept this proposition, subject to ratification by the stockholders of the company, was promptly made and unanimously carried. Harper testifies that it was agreed with all the directors and all the stockholders, before the company was organized, that nothing was to be paid in cash upon the stock subscriptions, and that the directors 'were to assist in the organization, or be promoters in this enterprise,' for the purpose of enabling him to carry out his contract of October 12th with J. W. Preston & Co. and others, to organize said company, to change the gauge of his railroad to standard gauge, to extend the road as hereinbefore stated, to convey it to said company, to cause the company to issue its first mortgage bonds for an amount not to exceed in the aggregate $20,000 per mile of the length of the road and its extensions, and to issue income bonds not to exceed in amount the limit named for the first mortgage bonds, and to deliver to said J. W. Preston & Co. and others, in payment of their respective claims against him, $214,906 of said first mortgage bonds, and $107,453 of said income bonds. The judgments upon which complainants' bill is based were obtained upon bonds delivered by Harper in pursuance of said agreement, the bonds by their terms having become due by reason of the default of the company to pay the interest thereon. Upon the 2d of January, 1882, at a special meeting of the stockholders, all being present, the proposition made by Harper to the company, as above, was unanimously accepted. The only stockholders besides Harper were his co-defendants, who, at his instance, subscribed each for one share of the stock, with the understanding that they were to pay nothing for it, and that they were to become directors, and carry into effect Harper's plans and purposes, already stated. Harper widened the gauge of the road to standard gauge, extended it to the points named in his proposition, and conveyed it to the company, and the company issued and delivered to him the bonds specified; but, as the proposition recited that it was based on 30 miles of road, and the total length of the road was but 28 miles, the issue of bonds was $560,000 first mortgage and $560,000 income bonds.

The condition of the road is best stated by Ralph Peters superintendent of the Little Miami Railroad, an experienced and thoroughly competent railroad manager. In August, 1883, his company having been solicited to operate the road, he, with his general manager, passed over and inspected the entire line. He testifies that they 'found a very poor road,-- badly constructed, with heavy grades, only temporary work in the culverts and trestles; the embankments were narrow, and the cuts very narrow, the ditching in bad shape. It had been originally built as a narrow-gauge road. The gauge was widened out, the rails having been spread on the narrow-gauge ties, a few standard-gauge ties being put in, probably six to each rail, the balance of the ties under each rail being the original ties that were put in when the road was first constructed as a narrow-gauge. * * * The rail that was laid on that road was from thirty to forty pounds. It was entirely too light for the traffic of a standard-gauge road; that is, for the cars and locomotives of a standard-gauge road. They had no water stations, no station-buildings that amounted to anything, and seemed to have...