111 N.E. 484 | NY | 1916
This is a stockholder's suit brought in the right of a corporation to restrain the issue of bonds. In 1898 the New York Central and Hudson River Railroad Company purchased about ninety per cent. of the stock of the Lake Shore and Michigan Southern Railway Company. It paid for the stock by the delivery of its own bonds. The sole security accompanying the bonds was a pledge of the stock for which they paid. The date of maturity was February, 1998, and the rate of interest was three and one-half per cent. per annum. The issue was known as "The New York Central and Hudson River Railroad Company 3½ per cent. Gold Bonds, Lake Shore Collateral." There was an agreement at the same time that no merger of the two railroads would be made without the consent of seventy-five per cent. in amount of the holders of these bonds. There was also an agreement that no lien would be created in connection with any consolidation except in subordination to the bonds, which in the event of a merger were to be secured by the property of the Lake Shore and Michigan Southern Railway Company as fully as they had previously been secured by its shares. In 1911 a plan was conceived to consolidate the New York Central and Hudson River Railroad Company, the Lake Shore and Michigan Southern Railway Company and other subsidiary railroads in a single corporation to be known as the New York Central Railroad Company. We do not attempt to state the plan in detail. A statement of the general scheme is sufficient for present purposes. The holders of these Lake Shore collateral bonds were asked to consent to the consolidation, give up the security of the stock, and accept the security of a mortgage on the property of the consolidated company. That plan did not meet with the approval of the bondholders, and the requisite consent of seventy-five per cent. in amount was not obtained. Another plan was then put forward. The bondholders were offered the right to exchange their *123 three and a half per cent. bonds for four per cent. bonds secured by a new consolidated mortgage. The consolidated mortgage was to refund and secure not only the Lake Shore collateral bonds, but also other bonds issued in the past by the corporations to be merged. Those who did not wish to make the exchange were to have the right to retain their three and a half per cent. bonds as a first lien upon the property. Those who made the exchange were to have the protection of the new mortgage, subject only to the lien of such three and a half per cent. bonds as were not exchanged. More than seventy-five per cent. in amount of the Lake Shore collateral bondholders consented to the consolidation upon these terms. The contract of consolidation was made; it has been approved by the public service commission; the new mortgage has been executed; and the plaintiffs, complaining of the increase of the rate of interest from three and a half to four per cent., ask that the bonds be declared illegal and the issue enjoined.
The plaintiffs say that by the increase of the rate of interest the defendants have violated section
We think an increase of the rate of interest as an incident to a readjustment of existing mortgages does not constitute the issue of bonds or other evidences of debt "as a consideration for, or in connection with, consolidation," within the meaning of this statute. That provision came into our statutory law by the enactment of chapter 94 of the Laws of 1880. The bill was proposed by a special committee on railroads appointed by the assembly in 1879. The report of that committee may be read in the assembly documents for 1880. It states the mischief and suggests the remedy. It shows that as an incident to many consolidations, stock had been issued far beyond the sum of the capital stock of the consolidated companies. It shows that bonds, convertible into stock, had been issued for fictitious debts or for unreal values. It proposes to guard against the recurrence of such evils by bills framed by the committee and appended to its report. The purpose was to see to it that a merger should not be used as a pretext for issuing stock which did not represent a real value or bonds which did not represent a genuine debt.
The debt secured by the new bonds and the consolidated mortgage in controversy here is genuine beyond debate. It is the same debt that was secured by the old bonds and the stock pledged as collateral. Unearned interest to become due in the future is not a debt (Epping v. City of Columbus,
We do not overlook the finding of the trial court that "a consideration received for the additional one-half per cent. interest promised on the new four per cent. mortgage bonds of the defendant railroad company is the consent to the consolidation given by the said holders of the Lake Shore Collaterals." The plaintiffs asked for a finding that this was "the sole consideration." The court found in effect that it was only part of the consideration. The finding on that subject is in reality a conclusion of law. The truth is that the bondholders gave much more than their consent to consolidation. They surrendered one security, and accepted another. The change of security made it necessary to refund the indebtedness, and the issue of bonds for that purpose is expressly authorized by statute (Railroad Law, sec. 142). The bonds being issued, their incidents may be varied. There is the same authority to change the rate of interest that there is to change the nature of the property covered by the mortgage. The thing that concerned the legislature was the underlying indebtedness, and not its incidents or accessories. *126
The argument is made that aside from the limitations of the Railroad Law, the increase of interest is unnecessary, and, therefore, wasteful. The trial court has found that the change from three and a half to four per cent. will involve an additional expenditure of $350,000 a year, but that "the savings consequent upon consolidation in the expense of operation, administration, accounting and taxes and in the cost of providing money for future capital requirements, will more than offset such increase in the amount of interest payment." This finding has been unanimously affirmed. There is nothing in the point that the companies should have gone ahead and merged without obtaining the consent of bondholders. The argument seems to be that the promise not to merge without the approval of seventy-five per cent. of the bondholders, was illegal under the laws of Illinois, where the Lake Shore and Michigan Southern Railway Company was organized. The laws of Illinois are not pleaded, and there is no charge in the complaint that the requirement of approval wasultra vires (Gordon Malting Co. v. Bartels Brewing Co.,
The judgment should be affirmed, with costs.
WILLARD BARTLETT, Ch. J., CHASE, CUDDEBACK, SEABURY and POUND, JJ., concur; COLLIN, J., not sitting.
Judgment affirmed. *127