Wood v. Corry Water-Works Co.

• Decision Date: 24 November 1890
• Citation: 44 F. 146
• Parties: WOOD et al. v. CORRY WATER-WORKS CO. et al.
• Court: U.S. District Court — Western District of Pennsylvania

44 F. 146

WOOD et al. v. CORRY WATER-WORKS CO. et al.

United States Circuit Court, W.D. Pennsylvania.

November 24, 1890

Samuel Dickson and R. C. Dale, for complainants.

George Shiras, Jr., and Johns McCleave, for defendant Farmers' Loan & Trust Company.

ACHESON J.

On the 29th day of March, 1886, the firm of Samuel R. Bullock & Co. and the Corry Water-Works Company, a corporation of the state of Pennsylvania, entered into a contract whereby the former agreed to construct for the latter water-works in the city of Corry, Erie county, Pa., according to certain plans and specifications, and to pay all the expenses, legal fees, and salaries, which might be needed to maintain and operate the works for a period of six months after completion, and to pay the first six-months interest,-- vix. $3,000,-- on the hereinafter mentioned mortgage bonds of the water company and, in consideration thereof, the water-works company agreed to issue and deliver to said Bullock & Co. $100,000 in bonds and $125,000 in the full paid-up non-assessable stock of the water-works company. Bullock & Co. proceeded to construct the water-works, and fulfilled their part of the contract, and the water-works company issued and delivered to them the bonds and stock, as agreed on. The bonds bear date April 1 1886, are each of the denomination of $1,000, and are payable to Samuel R. Bullock & Co., or bearer, on the 1st day of April, 1916, with interest coupons annexed payable to bearer semi-annually, and the bonds are secured by a mortgage, or deed of trust, of even date covering all the property, real and personal, rights, privileges, and franchises of the water-works company, executed and delivered by said company to the Farmers' Loan & Trust Company, (defendant in this suit,) a corporation of the state of New York, as trustee. The last-named company accepted the trust, and the mortgage, or trust-deed, was duly recorded in the county of Erie, Pa., on April 13, 1886. In the month of October, 1886, the National Water-Works Investment Company, a corporation of the state of New York, purchased from Samuel R. Bullock & Co. all of said bonds, together with $50,000 of their said stock, for the cash price of $90,000, which sum was paid to Bullock & Co. by said investment company upon the delivery of the bonds, and said bonds are still owned by that company. The water-works company made default in the payment of the interest on said bonds, due April 1, 1889, and thereupon, and in accordance with the terms of the mortgage, or trust-deed, the National Water-Works Investment Company, the holder of the whole issue of said bonds, elected, as it had the right to do, to declare the principal of the bonds to be due and payable; and, after such election, the default still continuing, the Farmers' Loan & Trust Company, the trustee, upon the written request of the holder of the bonds, took possession of the property embraced in the mortgage, or trust-deed, for the purposes therein declared; and, in further execution of the power thereby conferred, advertised, at public sale, and was about to proceed so to sell the mortgaged property and the rights and franchises of the water-works company, when the bill in this case was filed by the plaintiffs, R. D. Wood & Co., stockholders of the Corry Water-Works Company.

The main purpose of the bill is to enjoin the exercise by the Farmers' Loan & Trust Company of the power of sale given by the said trust mortgage, on the ground that the same is an invalid instrument, and conferred no estate or rightful authority upon the trustee. In support of this proposition, three reasons were assigned and urged by the plaintiffs' counsel at the final hearing, namely:

'First. Because the issue of bonds which it attempts to secure was an increase of the corporate indebtedness without the consent of the persons holding the larger amount in value of the stock obtained at a meeting to be held after sixty days notice. Second. Because the amount of mortgage bonds issued exceeded one-half of the capital stock paid in, the evidence in the cause showing, substantially, that nothing was ever paid in on account of the capital stock. Third. Because it appears from the evidence that, by the attempted issue of stock and bonds to Bullock & Co., under the construction contract, there was a fictitious increase of stock and indebtedness, which, by the terms of the constitution, are void.'

The plaintiffs rely upon the provisions of the corporation laws of the commonwealth of Pennsylvania, which limit the right of such a corporation to issue bonds secured by a mortgage to an amount not exceeding one-half the capital stock paid in, and require the previous consent of the stockholders at a meeting called for the purpose, and upon section 7 art. 16, of the constitution of the state, which provides:

'No corporation shall issue stocks or bonds except for money, labor done, or money or property actually received; and all fictitious increase of stock or indebtedness shall be void. The stock and indebtedness of corporations shall not be increased, except in pursuance of general law, nor without the consent of the persons holding the larger amount in value of the stock first obtained at a meeting to be held after sixty days' notice given in pursuance of law.'

Before approaching the consideration of the legal questions involved, certain matters of fact must be stated. It appears that the meeting of the stockholders of the water-works company, at which the issue of the mortgage bonds was authorized, was not called for that purpose, but to vote upon the proposition to increase the capital stock from $20,000 to $200,000. It is, however, shown that all the stockholders of the company except one,-- viz., Charles S. Wallace,-- were present at that meeting, and voted in favor of the issue of...