Rothchild v. Memphis & C.R. Co.

• Decision Date: 10 February 1902
• Docket Number: 966.
• Citation: 113 F. 476
• Parties: ROTHCHILD v. MEMPHIS & C. R. CO. et al.
• Court: U.S. Court of Appeals — Sixth Circuit

113 F. 476

ROTHCHILD v. MEMPHIS & C. R. CO. et al.

No. 966.

United States Court of Appeals, Sixth Circuit.

February 10, 1902

A bill was filed in the circuit court for the Western district of Tennessee by the complainant, who is a stockholder in the Memphis & Charleston Railroad Company, on behalf of himself and all other stockholders desiring to become parties complainant, against the Memphis & Charleston Railroad Company and the Southern Railway Company. The purpose of the bill is to have the title of the Southern Railway Company to the property and franchises of the Memphis & Charleston Railroad Company, purchased at a foreclosure sale, declared to be held in trust for the benefit of the shareholders of the Memphis & Charleston Railroad Company. The bill states That in January, 1892, nearly if not all of the lines of the Southern Railway Company in the state of Tennessee were owned and operated by the East Tennessee, Virginia & Georgia Railway Company. That said last-named corporation owned as its main line a railway extending from Chattanooga, Tenn., via Morristown, to Paint Rock, N.C., where it connected with the lines of railroad forming the Richmond & Danville Railroad system, and such main line furnished said Memphis & Charleston Railroad at Chattanooga its main connection and outlet for the business of the Mississippi valley and beyond, which it received at Memphis. In addition thereto, prior to said 1st of January 1892, said East Tennessee, Virginia & Georgia Railway Company had acquired and owned 106,264 shares of the capital stock of the Memphis & Charleston Railroad Company, the same being a majority of all its shares. By means of such ownership said East Tennessee, Virginia & Georgia Railway Company controlled said Memphis & Charleston Railroad Company. It elected its board of directors, a majority of whom were officers and directors of said Tennessee company. Its operating and traffic departments were under the control of the same persons, who were in control of the operating and traffic departments of the East Tennessee, Virginia & Georgia Railway Company, and it was entirely subordinated to said East Tennessee, Virginia & Georgia Railway Company, and under its control as a part of its system. That said East Tennessee Virginia & Georgia Railway Company, through the ownership of large blocks of its stock, was closely allied with the Richmond & West Point Terminal Railway & Warehouse Company, having a majority of its directors in said last-mentioned company. And it alleges: That said last-mentioned company owned all of the capital stock except 22 shares of the Richmond & Danville Railroad Company, and that during the month of July, 1892, said Richmond & West Point Terminal Railway & Warehouse Company, said Richmond & Danville Railroad Company, said East Tennessee, Virginia & Georgia Railway Company, and the Memphis & Charleston Railroad Company were put into the hands of receivers in the several United States circuit courts having jurisdiction. That at the time the various bills were filed the complainant in the suit against the Memphis & Charleston Railroad Company was the chairman of the board of directors of the East Tennessee, Virginia & Georgia Railway Company, and filed the bill as a creditor in behalf of himself and all other creditors and stockholders. That the receivers took possession without resistance to their appointments, and that subsequently, on the 25th of November, 1893, the Central Trust Company of New York filed its bill against the Memphis & Charleston Railroad Company to secure an issue of $2,264,000 of bonds. That, in order to reorganize and bring all of the railroad companies hereinbefore mentioned under the ownership and control of one corporation, a committee was appointed, who had incorporated, under the laws of Virginia, the Southern Railway Company, with authority to receive, hold, and operate the properties intended to be acquired. Under the sale of the property of the East Tennessee, Virginia & Georgia Railway Company the Southern Railway Company, with their other assets, acquired the 106,264 shares of the stock of the Memphis & Charleston Railroad Company, above mentioned. This sale was duly confirmed on the 14th of July, 1894, and the bill alleges that the Southern Railway Company has ever since owned said stock, and thereby controls the corporate action of the Memphis & Charleston Railroad Company, occupying a trust relation to the minority stockholders, and could take no action in regard to the Memphis & Charleston Railroad Company or its property, except as trustee for the equal benefit of itself and all its fellow stockholders therein; that the Southern Railway Company, being in the position of a tenant in common with the other stockholders, set about acquiring the property of the Memphis & Charleston Railroad Company for its own use, to wipe out the interest of the minority stockholders therein; and that, if the Southern Railway Company had used its power as a majority stockholder for the purpose of having the Memphis & Charleston Railroad Company refund its debt at a lower rate of interest, and operate its property to the best advantage, said railroad company could have saved to the stockholders a large part of the face value of their stock. But the bill alleges that, instead of so doing, the Southern Railway Company entered into an agreement, for its own benefit, with the holders of the securities of the Memphis & Charleston Railroad Company to have the property sold and bought in by the Southern Railway Company, instead of operating its lines in this plan the Southern Railway Company, instead of operating its lines in a way calculated to promote the business of said Memphis & Charleston Railroad Company, which was dependent thereon, and although such manner of operation would have been to the interest of the business of the Southern Railway Company as a common carrier, it so operated its other lines as to decrease the earnings of the Memphis & Charleston Railroad Company, and cut it off from business, and seriously embarrass the operations of its receivers, which conduct was for the sole purpose of decreasing the value of the Memphis & Charleston Railroad so that it could be obtained at the lowest possible price; that while the Memphis & Charleston Railroad was in the hands of receivers, although its earnings were sufficient to have paid and kept down the interest on the mortgage bonds and prevented the maturity thereof, said earnings were used by the receivers at the instance of the parties controlling the East Tennessee, Virginia & Georgia Railway Company, and afterwards the Southern Railway Company, to thoroughly repair and put in use Said memphis & Charleston Railroad, and the charges were, in the main, reported as operating expenses, so as not only to greatly enhance the intrinsic value of the property, but at the same time to create the impression that its earning capacity had greatly diminished, and also to suffer its bonded debt to become entirely in default; that a decree of foreclosure in the suit wherein the Central Trust Company of New York was complainant was entered, under which the property of the Memphis & Charleston Railroad Company was sold on the 26th of February, 1898, and the property was purchased by the Southern Railway Company for $2,500,000, the upset price named in the decree, and, said sale being confirmed by the court, the Southern Railway Company became the owner of the said Memphis & Charleston Railroad and all its property and franchises. The bill sets out that the Southern Railway Company, being incorporated under the laws of the state of Virginia, has no power to operate the Memphis & Charleston Railroad, nor to own its stock; that the Memphis & Charleston Railroad does not connect with any line of railroad owned by the Southern Railway Company, and that its ownership, operation, or lease, or the ownership of a majority of its capital stock, would be without the authority of the laws of the states in which its railroad lies, and from which the franchises to operate the same are derived, and that the sale is therefore illegal and void; that the said Southern Railway Company holds the property so purchased by it as a trustee for itself and for all other stockholders of the Memphis & Charleston Railway Company has lawfully expended in the purchase of the same, and in payment of preexisting debts.

The answer of the defendant Southern Railway Company denied every material allegation of the bill through which it was sought to charge it with conspiracy, fraud, or misconduct, actual or constructive, and alleged that neither the complainant nor any of his associate stockholders were billing or ever offered to pay or bear any of the obligations of the Memphis & Charleston Railroad Company; that that railroad company from the 15th day of July, 1892, until the sale mentioned in the bill of complaint, was in the hands of receivers of the federal court, and that at the sale, it having complied with the laws of Tennessee...