Union Trust Co. of Maryland v. Carter

• Decision Date: 14 April 1905
• Citation: 139 F. 717
• Parties: UNION TRUST CO. OF MARYLAND v. CARTER et al.
• Court: U.S. Court of Appeals — Fourth Circuit

139 F. 717

UNION TRUST CO. OF MARYLAND v. CARTER et al.

United States Circuit Court, W.D. Virginia.

April 14, 1905

William H. White, Fielder C. Slingluff, Charles H. Tuttle, Bradley W Palmer, and Julien T. Davies, for complainant.

John D Horsley, Mark W. Potter, J. Norman Powell, Edgar H. Gans James Byrne, and Elihu Root, for defendant Carter.

John D Horsley and J. S. Lemmon, for Clinchfield Corporation.

GOFF Circuit Judge.

The bill in this cause was filed by the Union Trust Company of Maryland, a corporation organized under the laws of the state of Maryland, a citizen of that state, against George L. Carter, a citizen of the state of Virginia, and a resident of the Western District thereof, and Clinchfield Corporation, a company organized under the laws of the state of Virginia, doing business in said Western District. The complainant, suing as a stockholder of the defendant Clinchfield Corporation, asks the court to set aside a contract alleged to have been made on the 19th day of December 1904, between that corporation and the defendant Carter, by which, in consideration of the sum of $2,600,000 cash, payable on the 1st day of January, 1906, with a discount at the rate of 6 per cent. if paid earlier, or, in the alternative, for the expenditure of $500,000 upon the properties of the Clinchfield Corporation, and the giving to it of a certain issue of bonds provided for in the contract, the Clinchfield Corporation sold to the said Carter all of the property and assets owned by it. This contract was authorized and executed by the board of directors of the Clinchfield Corporation, of which board Carter was a member. He, after presenting his proposition to purchase, withdrew from the meeting of the directors, and they then favorably considered his offer, and sold all the properties owned by the Clinchfield Corporation to him. The board of directors consisted of seven members, the other six voting unanimously in favor of making said sale.

The properties of the Clinchfield Corporation so sold consisted of all the stock of the Crane's Nest Coal & Coke Company, a corporation of Virginia, owning a large amount of land in fee simple, as well as the mineral rights connected with other lands. Carter was to take the properties subject to different mortgages on various portions thereof, amounting to $550,000; also all the stock of the South & Western Railway Company, a consolidated corporation of the states of Virginia, Tennessee, and Kentucky, the holdings of which consisted of about 64 miles of railroad in operation, of approximately 80 miles of a partially graded railway bed, and of certain rights of way, which property was to be taken by Carter, subject to a mortgage of $600,000; and all the stock of the South & Western Railway Company, a corporation of North Carolina, whose only property was a franchise; and certain terminal properties situated at Southport, in the state of North Carolina.

In order to understand the questions involved, and to better appreciate the decision that will be given concerning them, a further description of the properties of the Clinchfield Corporation, and of the circumstances under which that company became the owner thereof, is necessary. On March 6, 1902, Carter, for the purpose of forming a syndicate which would promote the enterprise, gave to the Union Trust Company of Maryland an option of purchasing for $2,368,700 all of the capital stock of certain coal and railroad companies. Payment was to be made by the purchaser assuming incumbrances on the property to the extent of $1,165,000 and by paying $1,203,700 to Carter in cash. After the giving of this option, and before the organization of the Clinchfield Corporation, the coal properties embraced in the option were, with the assent of the parties in interest, consolidated under the name of the Crane's Nest Coal & Coke Company, and the railway properties (except the South & Western Railway of North Carolina) were consolidated under the name of the South & Western Railway. After Carter gave the option mentioned, he, with certain other persons, entered into a syndicate agreement with said Union Trust Company, by which they subscribed $2,368,700 to be paid to said company for the purpose of acquiring the properties described therein, it being understood that the trust company was to act as syndicate manager. It may be well to note here that the property described in the option differed from the property which the Clinchfield Corporation sold to Carter in this respect: Between the date of the giving of the option and the formation of the Clinchfield Corporation Carter build 26 miles of railroad, and acquired certain terminal property at Southport, N.C., and when the corporation was formed he conveyed said railroad property to the South & Western Railway and the Southport property to the Clinchfield Corporation. It appears that from the time the syndicate was formed until in June, 1904, many attempts to sell the properties mentioned were made, but without success; that negotiations were had with the Seaboard Air Line Railway, and that at one time strong hopes existed on the part of the syndicate that said company would purchase the properties; that efforts were made to sell them to the Southern Railway Company; that thereafter the properties at different times and places had been offered for sale, but that the syndicate had been unable to find a purchaser; that in the meantime the complainant, as syndicate manager, becoming involved, was placed in the hands of a receiver, the result being that some of its subscribers lost confidence in its ability to manage; that a new syndicate was suggested by those in interest, to which the properties should be conveyed, in the hopes that an advantageous sale might then be effected; that a consultation by Carter and those representing him with the syndicate management and those concerned with it took place, with the result that it was agreed that, instead of a new syndicate, a corporation should be formed with additional capital, and that then a further and united effort would be made to either sell or develop the properties. In furtherance of this understanding, the Clinchfield Corporation was incorporated on June 27, 1904, with a maximum authorized capital stock of 30,000 shares of the par value of $100 each. The obligations of each member of the syndicate under the syndicate agreement were exchanged for pro rata subscriptions to the capital stock of said corporation, of which 23,500 shares were issued. To this corporation the properties mentioned formerly held by Carter and then by the Union Trust Company syndicate were conveyed.

The Clinchfield Corporation was organized under the laws of the state of Virginia, the charter thereof having been prepared under the direction of Carter and the subscribers to said syndicate. Among other provisions of the charter is this:

'The subscribers to and holders of the stock of the company, or any of them, * * * shall not, until January the 1st, 1910, be permitted to cast any vote, or participate in any way in the control and management of said corporation and its business, but the entire control and management of said corporation shall be until that date vested in the directors thereof, who shall be the parties whose names are signed thereto.'

It was further provided in the charter that the directors 'shall have the power to make by-laws, rules and regulations for the government of the corporation and management of its affairs, and to do any and all acts which the stockholders might do, were not their power in this regard vested in the directors. ' Each share of stock issued by said corporation contained therein this clause:

'By provision of the charter of the Clinchfield Corporation, the holders of the stock thereof have no right to vote in the management and control of its affairs until January the 1st, 1910, except through the action of the directors, as indicated in said provision.' Every subscriber to the stock of the Clinchfield Corporation, including the complainant, signed an agreement which contained these words:

'In accordance with the provisions of the charter authorizing the affairs of said corporation to be controlled and managed by the incorporators and their successors to be chosen by them, until January 1st, 1910, we respectively waive any right we may have to insist upon any organization, annual or other meetings of the stockholders until that day.'

The charter also provides that:

'The said directors may at any time obtain the views of the stockholders upon any question, and for that reason may call a meeting of the said stockholders by mailing a notice of the time and place thereof to each person whose name appears on the books of the company as a stockholder, at his last known post-office address, at least ten days before the date of such meeting, which notice shall state the questions upon which it is desired to obtain the views of said stockholders. But the action of said stockholders' meeting shall be advisory merely, and the said directors shall not be bound to approve the same.'

Of the stock of the Clinchfield Corporation, 1,300 shares were subscribed for by the Union Trust Company of Maryland, 7,360 shares by George L. Carter, the remaining shares having been taken either by other subscribers of the syndicate or by subsequent applicants. The incorporators and first board of directors were James Clark, Miles White, Jr., J. Southgate Lemmon, A. A. Phlegar, and George L. Carter. At a meeting of the directors on November 10, 1904, their number, under the terms of the charter, was increased from five to seven, Henry H. Kingston and F. J. Lisman then being elected members thereof.

In complainant's bill, it is alleged that on the...