Terwilliger v. the Great Western Tel. Co.

• Citation: 59 Ill. 249,1871 WL 8036
• Parties: JEREMIAH TERWILLIGERv.THE GREAT WESTERN TELEGRAPH COMPANY et al.
• Decision Date: 30 September 1871
• Court: Supreme Court of Illinois

59 Ill. 249

1871 WL 8036 (Ill.)

JEREMIAH TERWILLIGER

v.THE GREAT WESTERN TELEGRAPH COMPANY et al.

Supreme Court of Illinois.

September Term, 1871.

OPINION TEXT STARTS HERE

APPEAL from the Circuit Court of Cook county; the Hon. E. S. WILLIAMS, Judge, presiding.

Messrs. E. & A. VAN BUREN, for the appellant.

Messrs. GOOKINS & ROBERTS and Mr. JESSE O. NORTON, for the appellees.

Mr. CHIEF JUSTICE LAWRENCE delivered the opinion of the Court:

In December, 1867, Selah Reeve, one of the defendants herein, united with six other persons to form a corporate company, under the act of 1849, to be known as the Great Western Telegraph Company. The articles of association were duly signed by them, and subsequently filed in the office of the Secretary of State, who issued the requisite certificate. By the terms of the articles, the capital stock was to consist of $3,000,000, divided into one hundred and twenty thousand shares of $25 each. Valentine F. Gardner, John Hall, and Dwight Johnson, all resident in the State of New York, were described in the articles as holding each one share; Josiah Snow, of Chicago, as holding one thousand shares; David A. Gage, of Chicago, one thousand shares; Hasbrook Reeve, of New York, one hundred shares, and Selah Reeve, of Chicago, as holding one hundred and seventeen thousand eight hundred and ninety-seven shares, thus making the entire number of one hundred and twenty thousand shares. This stock, which the corporators thus professed to hold, was purely fictitious. No money was paid by any of them, and the stock represented no value. Selah Reeve, who professed to hold nearly all of it, was insolvent, and a few months thereafter filed his petition in bankruptcy and received his discharge as a bankrupt.

On the 13th of January, 1868, the corporators met and elected a board of directors, consisting of Gage, Snow, Hall, Hasbrook Reeve and Selah Reeve. Gage was elected president.

On the 25th of March, 1868, a written contract was entered into between Selah Reeve, who had previously resigned his place as a director, and the company, through Gage as president, for the construction by Reeve of two thousand miles of line, on routes to be designated by the company. No time was specified for the commencement of the work or for its completion, and no rate of compensation per mile was fixed, but the company agreed, by the following stipulation, to transfer the entire stock to Reeve on the execution of the agreement:

“In consideration of the aforesaid covenants and agreements, to be faithfully kept and performed by the said contractor, the said Great Western Telegraph Company doth hereby covenant and agree to and with the said Selah Reeve, to issue and deliver to him certificates for shares in the capital stock of the said Great Western Telegraph Company, to wit: one hundred and twenty (120) thousand shares, on the execution of this agreement; the said shares to be owned and represented by the said Selah Reeve, in all meetings of the shareholders of said company, until such time as the same shall be subscribed, and fully paid for by other parties.”

Contemporaneously with the execution of this agreement, Reeve assigned to Snow, the secretary and treasurer of the company, the one hundred and seventeen thousand eight hundred and ninety-seven shares originally subscribed by him, in trust, to sell the same to such persons as either he or the company could procure to subscribe to the stock, at the rate of $10 per share, and to pay over the proceeds to Reeve under his contract with the company, or any contract supplementary thereto.

The next day a supplementary agreement was made and executed between Reeve, the company, and Snow as trustee. By this agreement an irrevocable authority is given to the trustee to sell stock, through the agents of the company, to subscribers at $10 per share, the company paying to the trustee the money thus received, less a commission of 50 cents per share to be allowed to agents, and the trustee paying it to Reeve as fast as he should construct the line, in sections of ten miles each, to the satisfaction of the company. This contract also specifies the rate to be paid per mile for the construction of the line. The agreement also provides, that the trustee shall represent all the stock assigned to him by Reeve, except so much as may be subscribed and paid for by other persons.

The rate of compensation to be paid Reeve, was, as shown by the evidence, largely in excess of the cost of construction.

The next step of these parties was to put their scheme in a position to command the public confidence, and enable them to procure subscriptions and money. To this end they proceeded, on the 30th of March, four days after the execution of the final contract between the company and Reeve, to elect twenty-two additional directors. These new directors were selected from well known citizens and men of business in Chicago, but they were not stockholders. Some of them afterwards did subscribe, but the greater part refused to do so, or to act as directors. Of the few who subscribed, we infer from the record, only one paid any money on his subscription.

The parties conducting this scheme, having thus placed themselves in a position to impose upon the public by the unauthorized use of names that would command confidence, proceeded to issue a prospectus, setting forth the organization of the company with these names as directors, stating that the company was established under State laws and an act of Congress, for the purpose of cheapening telegraphic correspondence in the West, and that the stock would be apportioned, according to population, to the cities and villages of Illinois, Wisconsin, Minnesota, Michigan, Iowa, Indiana, Missouri, Kansas, and Nebraska. The prospectus further stated, that the stock was $3,000,000, divided into shares of $25 each, and that on the payment of $10 on each share, a certificate of stock for $25 would be issued and no further assessments would be made.

Prior to the election of the twenty-two new directors the old board had adopted by-laws. The first of these by-laws provided, that the first annual meeting of the stockholders of the company should be held within ninety days, after two thousand miles of the company's lines had been equipped with wires. Another by-law provided for the election of directors whenever any number of shareholders, holding a majority of the shares, shall present a written request, addressed to the president, for a meeting of shareholders for that purpose.

The prospectus did not disclose the fact, that a contract for the construction of two thousand miles of line had already been made, and that all the stock, except an insignificant portion, had been placed, without payment, in the hands of a trustee of the contractor, with power to represent the same. Neither did the persons who were induced to become subscribers know, that until about $1,500,000 should be subscribed, their money could be controlled by this trustee, and that they would have no voice in the management of the company, even by voting for directors, until two thousand miles of line should be constructed, unless the trustee should choose to have an election called.

By means of this prospectus, and the solicitation of agents who received a commission, large amounts of money were subscribed. As the money came in, Reeve began to construct lines under his contract. Another prospectus was issued in 1869, in which it is stated that three hundred and thirty-three miles of line were in operation on the 31st of July, 1869, that the company owed no debt, and that the net earnings of the preceding quarter, on the Milwaukee division, were at the rate of eighteen per cent on its cost. This prospectus further stated that there were already over two thousand subscribers to the stock among business men over various routes.

The evidence shows, that up to the 30th of June, 1870, Reeve had built four hundred and seventeen miles and a half of line, for which he had been paid $126,550.90, and that he had also been paid $25,000 on work not completed.

It should be further stated, as a part of the history of this transaction, although not important in the decision of the case, that on the 27th of March, 1868,...