Ryan v. Seaboard & R.R. Co.

• Decision Date: 12 September 1898
• Citation: 89 F. 397
• Parties: RYAN v. SEABOARD & R.R. CO. et al.
• Court: U.S. Court of Appeals — Fourth Circuit

89 F. 397

RYAN v. SEABOARD & R.R. CO. et al.

United States Circuit Court, E.D. Virginia.

September 12, 1898

Elihu Root, Wm. L. Marbury, D. L. Groner, and Stiles & Holladay for complainant.

Fisher Bruce & Fisher and Watts & Hatton, for defendants.

SIMONTON Circuit Judge.

The complainant, Thomas F. Ryan, a citizen of the state of New York, filed his bill of complaint against the Seaboard &amp Roanoke Railroad Company and Legh R. Watts, citizens of the state of Virginia, the Raleigh & Gaston Railroad Company, a citizen of the state of North Carolina, and Messrs. Hoffman McLane, Minis, Nippe, and Fisher, citizens of the state of Maryland. The bill is by a stockholder in the first-named corporation, in behalf of himself and other stockholders. After stating what is the Seaboard & Roanoke Railroad Company, it avers that it is in the control of eight subordinate railroad companies, constituting with it a system, designated by the style of the 'Seaboard Air Line.' Of one of these subordinate corporations, the Raleigh & Gaston Railroad Company, it owns a majority of the stock therein, and absolutely controls the election of its directors and other officers, and its operations, policy, income, and assets. The affairs of this Seaboard & Roanoke Railroad Company are managed by a president and six directors, elected by the persons in whose names shares of stock stand on the books of the company, according to a graduated scale of voting, whereby smaller stockholders have a much greater vote, in proportion to their holdings, than larger stockholders. That the annual meeting of the company, at which stockholders elected the president and directors, was approaching. That at the last meeting the defendant Hoffman had been elected president, and Messrs. McLane, Fisher, and Watts, with Moncure D. Robinson, Fuller, and Gordon, directors, of whom Robinson had died. That Hoffman had been continuously president since 1892, owning $20,800 of stock, and that since his election no dividends had been declared, although this had not been the case with his predecessors. That he controlled the elections by the use of proxies, which his position enabled him to solicit and obtain. That Messrs. Watts, McLane, and Robinson had been directors continuously during the presidency of Hoffman; McLane being a relative and occupying the same office room with him, Robinson being the owner of an unremunerative branch railroad, which he desired to lease to the Seaboard system at an exorbitant rental, and in which purpose he had succeeded, and Mr. Watts being the general counsel of the system and president of a bank in which it made a goodly part of its deposits. The bill further charged that President Hoffman was in the receipt of large salaries from divers roads in the system, and that he was a member of the firm of R. C. Hoffman & Co., a firm with no stock or material on hand, but which was the purchasing and selling agent of the system, by which means, acting as the middleman, it made very large profits illegitimately, greatly to the detriment of the interests of the system. It is not alleged or charged that either McLane or Mr. Watts shared in these illicit gains. In October, 1896, large purchases of stock of the Seaboard & Roanoke Company had been made, which threatened a change in the election of directors, and Messrs. Hoffman, McLane, Robinson, and Watts, in order to perpetuate the control they theretofore had in this system, devised a plan for pooling the stock. To this end a pooling agreement was prepared and circulated among the stockholders, whereby the signers agreed for five years not to sell or dispose of their stock, or to delegate the voting power thereof, to any person other than these three directors, without the written consent of three-fourths of the aggregate shares of the signers of this agreement, and further authorizing these directors to vote as proxy for all such of the signers of the agreement who should not be present in person at any meeting of the company. That this pooling agreement was signed by persons holding 8,321 shares, but that Louis McLane, chairman of the pooling committee, with the purpose of preventing any concert of action with them, has refused to give complainant the names of the subscribers. Notwithstanding this, he has obtained the names of some of them, which are set out in the bill. Among these is Theodore Cook, a citizen of the state of Pennsylvania. That McLane, on 24th October, 1896, requested the signers of this agreement to send him their certificates of stock, indorsed and assigned to him. That many did so and that some declined. That a very large majority of those who assented to this did so solely under the expectation that a pending offer of $125 per share would be accepted, and with no purpose of tying up the stock for five years or of perpetuating the power of Hoffman and his associates. That Theodore Cook, one of the signers of the pooling agreement, held certificate No. 754, for 153 shares. That he had indorsed a blank assignment thereon, and had sent it to McLane as requested. That afterwards he sold it to complainant for value. That complainant thereupon demanded the certificate from McLane, which demand was refused. That subsequently he learned that the committee did not have the certificate, but that the same had been illegally and fraudulently transferred to Louis McLane, chairman, had been without authority surrendered to the company for cancellation, and a new certificate for said 153 shares had been issued in the name of Louis McLane, the canceled certificate being now in the custody of the treasurer of the Seaboard & Roanoke Railroad Company, at Portsmouth, Va. That McLane and his associates claim the right to vote on these 153 shares. The bill then charges that this pooling agreement is revocable by each signing, in so far as it delegates authority to vote. That if it be attempted to be made binding it is contrary to public policy, and is void, for many reasons stated. That, if it ever was valid, it has been abrogated and determined because Messrs. Hoffman, McLane, and Watts negotiated a secret arrangement with persons holding 2,000 shares of stock, who were in the pool, and were dissatisfied, whereby their stock was purchased without the consent of three-fourths of the signers. That this purchase was not made with their own moneys, but with money of the Seaboard & Roanoke Railroad Company, and in the name of the Raleigh & Gaston Railroad Company,-- a misuse of the funds of the first-named company for an unauthorized purchase in the name of the last-named company. That, notwithstanding this purchase, the names of the vendors still appear on the books of the company as stockholders, and that the stock will be voted in their several names, thus violating the provision of the charter as to the graduated vote or stock. That all efforts of complainant to examine the books of the company so as to verify this fact have been refused and frustrated by the treasurer of the company. Besides this, the bill charges that there are some 1,600 shares, held by citizens of New York, associates of complainant, and that Hoffman and his associates have recently obtained an injunction out of the circuit court of the city of Portsmouth, restraining them from voting.

Upon these averments of the bill the complainant prayed: (1) That defendants be served with process. (2) That the cancellation of certificate No. 754, for 153 shares, be vacated, that the certificate issued in lieu thereof be erased and canceled, and that complainant be held the true owner of the shares represented thereby. (3) That the pooling agreement be declared null and void; that the pool be wound up; that McLane and Watts be enjoined from exercising any authority by virtue thereof; and, if necessary, that a receiver be appointed to take charge of the certificates lodged with McLane. (4) That the purchase of the 2,000 shares in the name of the Raleigh & Gaston Railroad Company be declared null and void; that Messrs. McLane and Watts be enjoined from voting on the 153 shares in certificate No. 754; that they be enjoined from voting on any shares in the pool; that they be enjoined from voting on any of the shares purchased in the name of the Raleigh & Gaston Railroad Company, either in the name of that company or in the names of the vendors of the stock.

Upon the presentation of the bill, a rule was issued to the defendants to show cause why the injunction prayed for be not granted, with the ordinary restraining order meanwhile. To this order was added:

'It being further made to appear to the court by affidavits that the complainant herein, as stockholder of the said Seaboard & Roanoke Railroad Company, has been denied the inspection of the corporate books, papers, and accounts, and that the officers thereof refused to voluntarily furnish any information whatever as to such corporate transactions, it is thereupon ordered and decreed that J. Alston Cabell, Esq., be, and he is hereby, appointed special master in this case, with full authority to administer oaths and to take testimony, either within or without the district, upon the application of either party, such testimony to be used upon the hearing of the motion for injunction. The said special master shall have full authority to compel the attendance of witnesses, and order the production before him of all books, contracts, records, vouchers, papers, and documents appertaining to the allegations set out in the bill. That he give proper notice of references. That he finish the examination with all convenient speed, and file his report.' Upon receiving notice of the filing of the bill and of the restraining order, the defendants filed separate pleas to the jurisdiction of the court. These pleas,

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