Continental Trust Co. v. Toledo, St. L. & K. C. R.

86 F. 929 | U.S. Circuit Court for the District of Northern Ohio | 1898

TAFT, Circuit Judge.

The first question to be considered is whether the issue by the defendant company of ¡¡¡>9,000,000 of bonds to B. H. Kneeland, under the contracts of January 23, 1886, was in violation of the Revised Statutes of Ohio, and especially section 3290 thereof.

Beciion 3286'provides that a railroad company in Ohio may issue bonds, convertible or otherwise, bearing a rate not exceeding 7 per cent, per annum, to an amount not exceeding two-thirds of its capital stock, and that it may secure the bonds issued for such purpose by mortgage on its property.

Beetion 3287 provides that a company may borrow money, at a rate not exceeding 7 per cent, per annum, for any purpose that the same may lie needed in its business, and execute bonds or promissory notes therefor in sums of not less than $100, and it may secure the payment of sucli bonds and notes by a pledge of its property and income; but the aggregate indebtedness authorized by this and the preceding section shall not exceed the amount of the capital stock of the company.

Sed ion 3288 provides that the mortgage may include the personal as well as the real property of the company.

Section 3289 provides how the mortgage shall be recorded.

Section 3290, which is the particular section here involved, is as follows :

“The directors of the company may sell, negotiate, mortgage or pledge such bonds or notes, as well as any notes, bonds, scrip, or certifica tes for the payment of money or property which the company may have theretofore received, or shall hereafter receive, as donations, or in payment of subscriptions to the capital stock, or for other dues of the company, at such times and in such places, either within or without the state, and at such rates and for such prices at not less Otan seventy-five cents on the dollar, as in tine opinion of the directors will best advance tbe interests of tbe company; and if such notes or bonds are thus sold at a discount without fraud, the sale shall be as valid in every respect, and the securities as binding for the respective amounts thereof, as if they were sold at their par value.”

There is no express restriction in the statutes of Ohio upon the price at which such stock, common or preferred, of a railroad company, shall be sold, except when it is purchased by a director.

Were th'e bonds of the company sold for less than 75 per cent, of their par value? I have read with care all the evidence which has been produced in this case, aggregating, possibly, 5,000 pages of typewritten evidence, in order to determine how much in money’s worth the company received for the $9,000,000 of bonds which were issued by it to Kneeland, the contractor. Under the contract, Kneeland received $9,000,000 of bonds, $11,250,000 par value of common stock, and $1,000,000 par value of the preferred stock. If we find what was actually spent in constructing the road, and in paying off the underlying liens, and in meeting the other obligations of the contract assumed by Kneeland, including that paid by him as interest on the bonds during the period of construction, and deduct therefrom the value of the common and preferred stock which he received, together with the amount received by him from the net earnings of the road during the period of construction, and the amount received by him from the sale of old material .taken from the narrow gauge, we shall have in the remainder what the company received for its issue of $9,000,000 of bonds. The evidence shows that Kneeland disbursed at Toledo through his cashier, Crowell, for construction, $3,509,317. It was claimed that in this construction Kneeland did more than his contract required. I do not think, from an examination of the evidence and the proper construction of the contract, that this claim can be sustained. However this may be, it is clear that by the settlement of June, 1891, Kneeland waived all his claims for extras, so that the company got the benefit of this expenditure as if it were under the contract. For iron bridges, fences, and other betterments, Kneeland expended approximately $500,000. For steel rails, he expended' $1,528,179. The interest which he was obliged to pay on the bonds, issued between July 1, 1886, and June 1, 1891, aggregated $1,766,-465. This result I have reached by actual calculation of interest upon the bonds as they were delivered to him, allowing a reasonable time for his sale of them or disposition of them by way of collateral after he received them. It includes the $260,000 of interest which he stipulated to pay and did pay in June, 1891. Kneeland! makes a general statement, unsupported by memoranda, that the net earnings paid the interest. This is wholly erroneous. He did not receive in net earnings more than $1,220,000, and probably he received much less. At the time of the compromise, in June, 1891, it was agreed between the parties that $100,000 would complete the road according to Kneeland’s contract, and the company withheld enough of the bonds and the stock to secure this acknowledged indebtedness from Kneeland. Of the underlying liens, which aggregated $1,100,000, and which Kneeland had agreed to pay, he paid $(550,247. He paid out in cash for equipment $1,314,071. His contract required him to spend 82-|- per cent, of $1,800,000, or $1,-485,000, and this is what counsel for the company concedes to have been spent, but I can find no evidence of more than the sum stated. These items aggregate $9,368,279. To this, must be added a reasonable contractor’s profit, which, considering the risk and expense attendant upon the execution of such a contract, I cannot fix at less than ten per cent, of the foregoing expenditures, or $936,827, The benefits received by the company, therefore, are $10,305,106. To assist him in paying the sums thus expended, the contractor received, under the contract, from old material, a sum he estimates at $200,000. He received no net earnings for the years ending June 30, 1887, and June 30, 1888, with which to pay interest. The net earnings for the year ending June 30, 1889, are not given in evidence, but, in view of the amount of gross earnings, which was $764,000, and in view of the then condition of the road under construction, they certainly could not have exceeded $200,000. The net earnings for the year ending June 30, 1890, were $470,352, and for the year ending June 30, 1891, were $549,962. The amount of common stock was $11,250,000. Counsel for the company and the intervening petitioners claim that this was worth 15 per cent, of par. I think that the stock had no such value, and that Knee-land could at no time have sold all his holdings at that price. But, assuming that he could, he received in common stock money’s worth to the amount of $1,687,500. Taking the estimate of the same counsel, the money’s worth of the preferred stock of the par value of $1,000,000 received by Kneeland was 30 per cent, of par, or $300,000. This makes a total of $3,407,814. Deducting this from - the value of the benefits received by the company, it leaves a» remainder of $6,897,292 as the consideration which the company received for $9,000,000 of bonds, or something more than 76 */m per cent, of par.

The foregoing, stated in tabular form, is as follows:

Paid out by Kneeland:

Construction disbursed through Crowell.$ 3,609,31 T

Steel rails . 1,528,179

Iron bridges, etc. 500,000

Allowed by Kneeland for completion of road. 100,000

For interest on bonds down to June 1st, 1891. 1,766,465

For equipment . 1,314,073

For lien claims prior to mortgage. 650,247

Profit — 10% on cash paid out. 936,827

§10,305,106.

Received by Kneeland:

Old material (est.). § 200,000

Net earnings year ending .Tune 30, ’S9 . 200,000

Net earnings year ending June 30, ’90. 470,352

Net earnings year ending June 30, ’91. 549,962

Value of common stock. 1,687,500

Value of preferred stock...». 300,000

- $ 3,407,814

Balance consideration for §9,000,000 bonds.$ 6,897,292

—or 76 <s/io per cent, of par.

This calculation has been made on the hypothesis that under the compromise of June, 1891, Kneeland enjoyed the benefit of the net earnings for the six months from January 1, 1891, to July 1, 1891. He 'expressly agreed in the contract of compromise to pay the interest on the bonds for that period, but it seems probable that he did not receive either the earnings or credit for them, because, by the terms of the compromise, the road was to be considered as delivered to the company and accepted by it as of December 30, 1890. If this be true, then the consideration received by the company for the $9,000,000 of bonds, as stated above, would be increased $279,981. There are other expenditures of Kneeland, such as compensation to the trustees and bondholders’ committees, which inured to the benefit of the company, and probably ought to increase the above estimate of the value of the consideration received by the company from Kneeland for its bonds. In addition to this, Kneeland failed to complete his contract in regard to the underlying liens, which liens to the amount of at least $450,000 remain unpaid. Now, the company did not receive this benefit, but it has a claim against Kneeland for this amount. Surely, the validity, under section 3290 of the Revised Statutes of Ohio, of a contract for the sale of bonds, and of the bonds delivered under such a contract, is not to be destroyed because the contractor in his performance may have fallen short of the requirements of his contract, if the company in good faith insisted on performance, and only failed in obtaining its right because of the insolvency of the contractor. On the whole, therefore, a careful examination of all the evidence discloses to my entire satisfaction that the company actually received under the contract more than 75 per cent, of par for its bonds, and is entitled to receive and would receive, were Kneeland able to pay his debts to the company, a considerably higher percentage than this for them.

The argument is pressed upon the court that in calculating the amount which the company received for the bonds it should divide the value of the benefits received by the company in the ratio of the par value of the. bonds, the common stock, and the preferred stock received by Kneeland, and fix the consideration paid by the contractor for the bonds as that part of the total money’s worth given by Kneeland to the company which bears the same ratio to the total money’s worth as the par value of the bonds bears to the total par value of all the securities, including the bonds delivered to Kneeland. The total par value of the securities was $21,250,000, and the prop-i-osition is that the court is to say that, of the benefits received by the company under the contract, it received for its bonds only 9/2i of the whole, and thus that the company got for its bonds something less than 50 per cent, of their par value. This is not a fair •or equitable way in which to treat an executed contract. The sections of the statute under consideration impose no limit upon the price at which the stock of the company might be sold. But it is said that it is a rule of general corporation’ law that stock must not be sold át less than par. I have considered the question of the validity of the stock and bonds under this contract of January 23, 1886, in a former opinion in this case (82 Fed. 642, 656), where I readied tbo conclusion that under the decision of the supreme court of the united States in Railroad Co. v. Dow, 120 U. S. 287, 7 Sup. Ct. 482, the contract was not illegal, so far as the stock was concerned, though the amount of value received therefor was not equal in money value to the par value of the stock. Whether the stockholders might be liable, as against creditors, to pay any sum as an assessment upon the stock, though on its face full paid, is a question not before the court. It snfaces to hold that stock issued under a contract like that of (he reorganization plans in Railroad Co. v. Dow, and in this ease for material and labor of a value less than the par of the stock, is neither illegal nor void. Counsel for the company and the intervening petitioners in their brief concede that the common stock was worth but 15 per cent, of par, and the jireferred stock but 30 per cent., when Kueeland received them. Why, then, give them a value in the contract which they did not have? It is clear to a demonstration that if from the value of the total consideration received by the company under the contract is deducted the value of the preferred and common stock at market rates, what remains is the amount received by the company for its bonds. Tins accords with the substantial verities of the transaction. The bonds were secured by a mor (gage upon the entire property of the company, and, unless the bonds were well secured, neither the preferred stock nor the common stock was worth anything. It is palpable that both the company and the contractor regarded the bonds as the main source from which he was to obtain the money with which to perforin his contract. To hold that, in a contract like this, the parties intended to treat the different securities of equal value is to be blind to Uie plainest facts.

We come now to the second question, whether §4,445,000 of the bonds which were issued to Kneelaud «luring the life of the contract of partnership between Mm and Quigley are to be held null and void, under section 3813 of the Revised Statutes of Ohio, providing that “all capital stock, bonds, notes or other securities of a company, purchased of a company by a director thereof, either directly or indirectly, for less than the par value thereof, shall be null and void.” Kueeland testified that the coniract of partnership between him and Quigley was really made January 23,188(5, at the time when the contract of construction was made between him and the trustees of the old bondholders, but that it was not formally reduced to writing un til its date, July 6, 1886. Kneeland’s statement is contradicted by the recitals of the written contract itself, in which, after mention of the contracts of January 23, 188(5, occurs the following:

“Whereas, the party of the first part fKneeland'I, owing to the complicated and hazardous character of the contracts above referred to, having been unable to associate with, himself therein sucli persons as he desired and anticipated, and now finds himself alone, and in danger of failure to accomplish all he has undertaken, and for these reasons, and to better carry out the great work in hand, finds it necessary to avail himself of the extended acquaintance and groat knowledge and experience possessed with respect to the railroad property by the party of the second part LQnigloy]: Now, therefore, in consideration of the premises and other valuable and sufficient considerations hereto him moving, the party of the first part hereby associates with himself the party of the second part as full partner equally in all the contracts above mentioned.”

It is urged by counsel, and pointed out by Kneeland, in bis earnest desire to carry back tbe date of tbe contract of partnership with Quigley, that be signed tbe contracts of January 23, 1886, for himself and associates, as a circumstance corroborating bis statement. that’Quigley was then associated with him. Tbe foregoing recital, however, takes away any significance which that circumstance might otherwise have. Moreover, it appears that long after Quig-ley and Kneeland were separated, and when he had no partner at all, Kneeland continued to sign receipts, “S. H. Kneeland and Associatesshowing that the term “Associates,” as signed by him, should be given no especial weight. The question which the court has here to decide is whether it will believe Kneeland as a witness or believe the recital of the contract signed by Kneeland and Quig-ley when the contract was made. The contract was a secret contract, delivered in an envelope by Kneeland and Quigley to S. G. Ingersoll, counsel for Kneeland, to be held by him for them both. There would appear to be comparatively little motive for misstating in it the fact as to the time when the partnership began. In the present litigation there is apparently a very strong motive for Kneeland to state that Quigley was interested with him from the beginning. The personal feeling of Kneeland against Quigley and the large bondholders and preferred stockholders of the road has evidently become bitter. After the road was received by the company from Kneeland, and began its operations, differences as to the policy to be pursued arose. Indeed, the controversy had arisen between the same parties before the completion of the contract. Kneeland charges the bondholders, especially J. 0. Have-meyer, H. 0. Armour, and J. M. Quigley, with having intentionally brought the road to a condition in which a receivership was necessary, by refusing to consent to the imposition of the second mortgage with which to raise money to buy additional rolling stock. I have read Kneeland’s testimony with care, and I am bound to say that the desire which he has to defeat the bonds which he himself sold so influences him in his evidence as to malee his memory not altogether trustworthy. I think it much safer to credit the statement which he and Quigley together made in July, 1886, as to the time when, and circumstances under which, this partnership agreement was made. Kneeland’s attitude in this case, in attempting to defeat the bonds which he sold in the open market to innocent purchasers, does not, under the circumstances, commend him as a witness to the court. It may be said that he is not a party to this issue. He is, however, the largest common stockholder, and is a director and the president of the company. He has elected the directors who are seeking to impeach the legality of the bonds by voting the very stock which, if the bonds are void for the reason asserted, is equally void. It is on his testimony and at his instigation that the attack is made upon the validity of the bonds based on his partnership contract with Quigley. That contract was a corrupt and disgraceful one, and a party to it who would bring it to light for the purpose of defeating the bonds sold by him to innocent persons cannot complain if no more credit is given him than the' corroborating circumstances require, especially when after producing it be contradicts the express recitals in the face of the contract. The circumstances shown by the record confirm the view that the contract was made at the day of its date. Under the contract of January 28, 1886, the bonds were to be delivered to the contractor by two trustees, one to be selected by Kneeland and the other by the bondholders’ committee. Kneeland selected K. Or. Ingersoll, who was his attorney, and the bondholders selected White, who, Kneeland says, was a mere clerk and puppet of Quig-ley. With these trustees, and with a chief engineer who was an appointee of Quigley and Kneeland, rested Uie whole supervision of Kneeland’s execution of the contract. The trustees were not selected until after the organization of the consolidated company. It is perfectly evident that Kneeland’s purpose in making his contract with Quigley was to bribe him to influence White to liberality in delivering the bonds, and to prevent too great strictness in guarding the interests of the company. Quigley was the president of the company. He was the chairman of the bondholders’ committees, and knew more about the work to be done and the road as it was than any one. If he could be kept quiet, there would certainly be no (rouble either with White or with any of the narrow-gauge bondholders who were the real partios in interest opposed to Knee-land. The contract as drawn was loosely drawn, but it was an onerous one for the contractor if strictly construed. Its burdensome character was much more apparent to Kneeland in the summer of 1886 than it had been in the preceding January, before he knew the extent of the heavy lien claims against the old narrow-gauge road which he had obligated himself to pay. Quigley knew all about these claims, and could doubtless prove of much assistance to Kneeland in fighting and adjusting them. This situation makes it altogether likely that the contract: was really made when it was signed, that is, after the organization of the company, and after it had become certain that Quigley would have in his complete control the delivery of the bonds under the contract, so far, at least, as the trustee for the company and the narrow-gauge bondholders was concerned, and after the need for the services of Quigley in adjusting, fighting, and reducing prior lien claims had become apparent to Kneeland. There is in the record the sworn testimony of Quigley that the contract was made at the day it is dated, and not before, and that: lie had no interest in Kneeland’s contract prior to that time. Counsel for the company and intervening creditors object to the consideration of this evidence on the issues between the bondholders and the company, because it was brought out on the issue between the company and the preferred stockholders. More than this, they say that, if evidence taken on the issue between the company and the preferred stockholders is to be considered, then the evidence of Tv. Of. Ingersoll upon the same point corroborates Kneeland. In-gersoll’s statement is entirely consistent with Quigley’s having no interest in Kneeland’s contract until the time when the contract was reduced to writing. His memory of dates is exceedingly vague, and can have no weight at this length of time after the transactions. It is not necessary to decide whether Quigley’s and Ingersoll’s evidence can be here considered, because, whether it is admissible or not, I must reach the same conclusion.

The question, therefore, is whether the contract of July 6, 1896, between Kneeland and Quigley, makes the bonds issued to Knee-land and sold by him in the market bonds purchased from the company by Quigley. It must be premised that the contract for the purchase of bonds by Kneeland from the company was a lawful one, and had been fully entered into before Quigley attempted to acquire any interest in it. The evidence also shows that, during the time before Kneeland and Quigley quarreled and severed such relation as they had, the bonds were actually delivered by the trustees to Kneeland under the construction contract, and were sold by him. and that Quigley never had any custody of them for himself and Kneeland.

The claim on behalf of the company is that section 3313 renders bonds purchased by a director at less than par nothing but waste paper, even in the hands of subsequent innocent purchasers; and this, although the interest of the director may not be known to any one except himself and the person in whose name the bonds are bought.. If the statute is to be thus construed, it is so highly penal and so capable of inflicting the grossest hardships upon innocent persons that its operation ought not to be extended beyond the letter. Under a strict construction, it may well be questioned whether one who acquires an interest in a construction contract with a railroad company after it has been made and- its terms have been fixed, and without the knowledge or consent of the company, can be said to be a purchaser from that company of the bonds subsequently earned by performance of the contract. He derives all his rights in the contract by assignment from the original contractor, and his title to the bonds must be-traced through the same person. It is said, however, that the language of the statute is, “purchased by a director directly or indirectly.” These words mean that, if the contract of purchase is originally between the director and the company, the effect of the statute shall not be evaded through the mere use of another’s name by the director in making the purchase. Certainly, a purchase from one who has in good faith bought bonds from the company is not an indirect purchaser from the company, within the statute.

But it is not necessary to discuss or to decide the question whether a third person acquiring an interest in Kneeland’s contract of construction by lawful agreement would become a direct or indirect purchaser of bonds from the company, because it does not arise here. Quigley, by his agreement with Kneeland, acquired no interest whatever in the bonds to be delivered by the company to Kneeland under the construction contract. The contract was absolutely void, because corrupt, vicious, and ■ against public policy. Neither Kneeland nor the company could have held Quigley to any liability under that contract, nor could Quigley have compelled Kneeland to account to him for any profits or bonds received thereunder. It is well settled that a secret contract made by one with an agent of another to pay the agent a commission on transactions with liis principal, effected through the agent, is against public policy and void, and that the agent cannot recover commissions thus stipulated for. Rice v. Wood, 113 Mass. 133; Smith v. Townsend, 109 Mass. 500; Railroad Co. v. Pattison, 15 Ind. 70; Lloyd v. Colston, 5 Bush, 587; Lynch v. Fallon, 11 R. I. 311; Everhart v. Searle, 71 Pa. St. 256; Scribner v. Collar, 40 Mich. 375; Carpener v. Hogan, 40 Ohio St. 203; Wald’s Pol. Cont. (2d Ed.) 244, note z. See, also, Citv of Findlay v. Pertz, 31 U. S. App. 340, 355, 13 C. C. A. 559, and 66 Fed. 427.

In Rice v. Wood, 113 Mass. 133, 135, the court said:

“Conlraets which arc opposed to open, upright, and fair dealing are opposed to public policy. A contract by which one is placed under a direct inducement to violate the confidence reposed in him by another is of this character. If the plaintiffs were guilty of injustice to the owner of the real estate, by placing themselves under an inducement to part with it at less than its full market value, they should not be allowed to collect the promised commissions on the sale of the stock, which was the consideration for which they put themselves in such a position. No one can be permitted to found rights upon his own wrong, even against another also in the wrong. A promise made to one in consideration of doing an unlawful act, as to commit an assault or to practice a fraud upon a third person, is void in law; and the law will not only avoid contracts the avowed purpose or express object of which is to do an unlawful act, but those made with a view to place, or the necessary effect of which is to place, a person under wrong influences, and offer him a temptation which may injuriously affect the rights of third persons. Nor is it necessary to show that injury to third persons has actually resulted from such a contract, for in many cases where it had occurred this would be impossible to be proved. The contract is avoided on account of its necessarily injurious tendency.”

In City of Findlay v. Pertz, 31 U. S. App. 340, 355, 13 C. C. A. 559, and 66 Fed. 427, Judge Lurton, speaking for the circuit court of appeals of this circuit, said:

“Any agreement or understanding between one principal and the agent of another, by which such agent is to receive a commission or reward if he will use his influence with his principal to induce a contract, or enter Into a contract for his principa], is pernicious and corrupt, and cannot be enforced at law. This principle is founded upon the plainest principle of reason and morality, and has been sanctioned by the courts in innumerable cases.”

See, also, Wald’s Pol. Cont. (2d Ed.) note a1 by Mr. Wald, and cases cited.

Of course, it makes no difference in the application of the principle whether the reward is for inducing a contract with a principal or for relaxing the watchfulness due the principal from his agent in enforcing a contract already made.

It follows that the Quigley-Kneeland contract was void, and conferred on Quigley no interest whatever in Kneeland’» contract with the company. All bonds delivered by the company, therefore, belonged to Kneeland alone, and were therefore lawfully issued to him, and the persons to whom he sold or delivered them took his lawful title to them. This is even true of the 180 bonds after-wards delivered by Kneeland to Quigley at the so-called settlement of their partnership. Quigley had no claim upon Kneeland arising out of their corrupt agreement, and what he gave to Quigley was therefore without consideration. But what he gave was bonds theretofore lawfully delivered to him under the construction contract. Whether Kneeland could recover these bonds from Quig-ley, or would be prevented from doing so on the ground that they were in pari delicto, is not now important. It is certain that whoever is the owner of the bonds holds lawfully issued obligations of the company. Every holder of the bonds delivered to Kneeland during the pendency of the so-called partnership can trace his title to the company without using the corrupt partnership contract as the link by which the company issued the bonds. The contract between Kneeland and the company was complete before the void partnership agreement was made. Hence the rejection of that agreement as null and of no effect leaves the bonds with their, origin untainted by illegality. I have said that Knee-land’s construction contract was lawful. I do not mean to say that it might not at the time have been rescinded by the company for Kneeland’s fraud in bribing Quigley to permit a lax execution of it. However that may be, until rescinded it was valid. After its complete execution, after a full settlement, and after the lapse of time since, certainly there could be no rescission. The illegality of the partnership agreement, and its ineffectiveness to vest any right or interest in the construction contract in Quigley, existed wholly without reference to section 3318 or its application, and hence may properly be regarded as a condition of the situation, when it is claimed that section 3313 operated to destroy the validity of the bonds delivered to Kneeland. In this view, bonds delivered to Kneeland under the valid construction contract were not purchased by Quigley, because the pretended contract from which it is said that his interest in the bonds arose could vest no interest in any one.

The next question is whether those bonds are void which were subscribed for and bought by Havemeyer, Stout, Harbeck, Quigley, and Brown when directors, under an agreement with Kneeland by which they paid $1,000 cash for one bond and ten shares of stock. Of these bonds, Havemeyer bought 88, Stout 443, Harbeck 10, Quigley 261, and Brown 13, or 815 in all. The bonds were not bought from the company. They were bought from Kneeland. The bonds in question had been issued in accordance with the construction contract by the company to the trustees, Ingersoll and White, to be delivered to Kneeland. They were part of the first 2,000 bonds which were to be delivered to him at once. He appointed White his personal agent and trustee to receive them for him from Ingersoll and White, trustees, and to accept subscriptions for them,' on the terms above stated, from all holders of narrow-gauge' bonds, to the extent of their holdings of those bonds. 1,362 bonds were subscribed for, of which 815 now under consideration were part. It is said that these directors are to be regarded as indirect purchasers from the company because, as directors, they issued the bonds under the contract of January 23, 1886, at a time when they had an agreement with Knee-land by which he was to sell to them the bonds and stock to be issued to him under his contract at less than par. Kneeland says the subscription agreement was really part of the contract of January 23, 1886. The narrow-gauge bondholders had expected to receive in exchange for their bonds second mortgage bonds of the new company. They were obliged to take preferred stock. To make up for tiie difference iii the value between tlie bonds surrendered to Kneeland and the preferred stock they were to receive in exchange Therefor, Kneeland offered them a bonus of common stock of the same par value as any new bonds which they would pay par for in cash. I cannot say, from reading the evidence, that the eommon-¡stock bonus allowed by Kneeland to this class of creditors oh cash subscriptions for bonds at par exceeded in value the concession made by the naiTow-gauge bondholders in receiving preferred stock for their old bonds. I cannot find, therefore, that the narrow-gauge bondholders who availed themselves of this subscription opened by Kneeland did not in fact give him par for his bonds. If that is true then the directors here involved in fact paid par for the bonds, and are not: within the statute.

Another reason for holding that the subscription privilege did not involve a purchase of the- bonds at less than par by the directors is that the obligation of the company to comply with the contracts of January 23, 1886, did not arise from any action of the directors. The act of consolidation, and the transfer of the narrow-gauge road to it: by operation of law from the constituent companies, imposed on it the obligation of those contracts. The ease is this then: Ila,ve-meyer, 8tout, Harbeck, Quigley, and Browm, together with all other bondholders of their class, made contracts with Kneeland by which it was agreed that Kneeland should make a construction contract with a consolidated company to be formed out of three constituent companies, and as a term of those contracts Kneeland agreed that of the bonds and stock to be received by him from this construction contract he would sell a certain amount at a certain price to them. The construction contracts became binding on the consolidated corporation when formed, and afterwards the persons named became directors, and received the bonds and stock from Kneeland on the terms agreed. Though they received the bonds and stock when they were directors, they took them, not from the company, but from Kneeland, under contracts binding on all parties at the time they became directors.

The proposition that the contracts of January 23, 1886, were binding on the consolidated corporation, without action by its board of directors, is much contested by the counsel for the railroad company and the intervening creditors. The form of the contracts of January 23, 1886, and of the contracts with the constituent company, are peculiar, in that in both of them Kneeland agrees licit the consolidated company shall rebuild the road, and the bondholders in the former and the constituent companies in the latter agree that the consolidated company shall issue the particular securities in payment of the same. In the former, in certain parts, it is made clear that Kneeland is himself to do the work of construction, and is to receive the bonds, certain preferred stock, and the common stock. In the latter this is stated with less definiteness, and yet it is perfectly manifest, from tin' similarity of the provisions, that each constituent company is adopting, so far as it mav properly do, the contracts of January 23, 1886, and is accepting the conveyance of its part of the railroad for the purpose and with the intent to carry out the plan of reorganization, and to put in force the agreements contained in those two contracts. Indeed, knowing, as the corporations must be charged with knowing, that Kneeland held the title to the railroad upon conditions of the contracts of January 23, 1886, neither constituent company could accept title to the part conveyed to it without also assuming the obligations of the contracts of January 23, 1886, so far as they affected it and the consolidated corporation of which it was to be a constituent. <rWhen, however, the contract is made in the name and on behalf of the projected corporation, and is treated as a proposal to such corporation, to be acted upon by it when it comes into existence, then, in the absence of other controlling circumstances, acceptance of benefits under the contract justifies the inference that the corporation has accepted or adopted it.” Alger, Prom. Corp. § 208; Battelle v. Pavement Co., 37 Minn. 89, 33 N. W. 327; Mining Co. v. Quintrell, 91 Tenn. 693, 20 S. W. 248. But it is said that by the express provision of the contracts with the constituent companies it was Kneeland, and not the companies, who agreed that the consolidated corporation would rebuild the road and do the other things, and that the constituent companies only agreed that the consolidated company should issue the bonds; but, even so, the constituent companies necessarily consented that the reconstruction should be carried on by agreeing that it should be paid for, because, where one agrees to pay another for work, there is an implied obligation on the part of the one to permit the work to be done.

It seems to me clearly to follow that by express agreement, and, if that is not specific enough, by necessary implication, the constituent companies, in accepting title to the railroad which Kneeland held, subject to the conditions of the contracts of January 23,1886, assumed the obligations of those contracts. The effect of the consolidation is declared by statute to be the vesting of all the property'of the constituent corporations in the consolidated company, and the imposition upon it of liability for all the contracts of the constituents immediately upon the organization of the company by the election of the first board of directors. Rev. St. Ohio, § 3384; Compton v. Railway Co., 45 Ohio St. 592, 16 N. E. 110, and 18 N. E. 380; Railway Co. v. Ham, 114 U. S. 595, 5 Sup. Ct. 1081. When then the first board of directors of the consolidated company was elected, and before it organized or took any action, the contracts of January 23, 1886, were binding on that company.

We thus reach the conclusion that the bonds issued by the railroad company to Kneeland are all of them valid, and that they are not affected either by section 3290 or by section 3313. The findings of fact and the propositions of law upon which this is founded have made it unnecessary to consider the points made by counsel for the bondholders, (1) that these sections do not apply, and were not intended to apply, to the bonds of consolidated railway corporations of Ohio and other states; (2) that the sections render bonds issued in violation of them not absolutely void, but voidable only, at the option of the company, and that the company is estop-pod to avoid them now; and (3) that the bonds are negotiable, and arc in the hands of innocent holders for value, and that the statutes were not intended to defeat the claims of such owners.

The only remaining question as to the bonds is whether they are to be defeated because of Kueeland’s fraud in its performance by giving Quigley an interest in the contract. It is probable, as already said, that the company might have rescinded the contract vt itli Kneeland if, during its performance, it had learned of the corrupt agreement between Kneeland and Quigley; but the relation between them after one year of construction, and three years before the completion of the road, ceased, and Kneeland was allowed to continue to the end, receiving his bonds and stock and spending large sums. Finally, in 1891, after bitter controversies had arisen, a. full compromise between Kneeland and the company was effected, and a,l] differences were settled. It does not appear that the work of Kneeland was so faulty in construction that fraud in performance can be charged, or that the company had not full information as to the character of the work done when it ac-cepiod it as a compliance with the contract. It would be too late now, therefore, even as against Kneeland, and a fortiori as against his vendees, to impeach the validity of the bonds for failure or fraud in the consideration.

The remaining question to be decided arises between the common and preferred stockholders. The latter claim a right to the distribution to them of the surplus, if any, after payment in full of the bonds and all the other debts of the company out of the proceeds of the sale of the road, in preference to the common stockholders, and they, therefore, ask that they be giveti in the decree for sale the right’ to complete any bid they may see fit to make, after depositing cash to the amount of the bonds and other debts, by depositing their preferred stock. The basis of the claim is a sentence in the certificates of preferred stock which is as follows: “This stock constitutes a lien upon the property and net earnings of the company next after the company’s existing first mortgage.” Counsel for the company and the common stockholders main lain — First, that There was no power in the consolidated company to give such a ¡(reference as to capital to preferred stockholders; second, that, if such power existed, it was not in fact exercised., because the language of the sentence quoted was not the language of the company; third, that, if it was, it does not give a preference, in distribution of capital as between) preferred and common stockholders; and, finally, that, even if it does, it is not for this court to wind tip the company and distribute its assets, but it must, on sale of the road, turn over the surplus, if any, after payment of the debts, to the company who is a party hereto, for such a liquidation of its debts and distribution of its assets and settlement of its affairs as may be provided by law. ño far as the power of this company to issue preferred stock with this provision is concerned, I think it is settled for this court bv the decision in Hamlin v. Trust Co., 47 U. S. App. 422, 437, 24 C. C. A. 271, and 78 Fed. 664. If the question is to be reconsidered, it must be reconsidered in that court. That court beld that, in the absence of a prohibition in the I'ocal law or charter, such a preference might be given in preferred stock. No such prohibition in the local law or charter has been called to my attention. The court of appeals decision also construes the language, and declares that it does give a preference as to capital. Upon the question of fact whether this language was inserted fraudulently or without authority I have no doubt. Undoubtedly the fo’rm of the certificate was left by the directors to Kneeland, representing the common stock, and Quigley and the bondholders’ committees, representing the preferred stock. Knee-land and Quigley conferred about it, and so did Quigley and his colleagues on the bondholders’ committees. The certificates were issued in November, 1886, and Kneeland admits that he knew their form then. The stock was listed on the New York Stock Exchange soon after that time, at the request of the directors of the company. From that time until this litigation, not a step was ta.ken to correct the form of the certificate. These facts prove to my mind conclusively that the form of the certificate was as agreed upon by Kneeland and Quigley, and the memories of witnesses as to what were the various forms proposed for the certificates under discussion at the time, and what was the one actually agreed upon, have not the slightest weight with me to overcome the inference to be drawn from the facts above stated.

The final objection, however, made to the request of the preferred stockholders to be allowed to complete their bid by use of the preferred stock, seems to me to be a fatal one. Such a clause in a decree is, in effect, a distribution of the assets of the company among the stockholders, and would necessarily work to the prejudice of those creditors whose claims are not to be paid under the decree for sale. Are there not or may there not be such creditors? In the foreclosure proceeding only judgment creditors are parties. Such a provision in a foreclosure decree would utterly ignore the rights of creditors whose claims are not reduced to judgment. Nor does the creditors’ bill necessarily include all creditors of the company. The advertisement for creditors of the company under the creditors’ bill only invited, and only could invite, those to come in who wished to participate in the distribution of the proceeds of the sale between creditors, but it did not advise them that the surplus, if any, after sale of the property and payment of claims of those who made themselves parties, was to be divided among the stockholders. Those creditors who have chosen not to come in have the right to rely on this court’s paying over the surplus to the company, to whom they can look for payment. Their failure to come in under the creditors’ bill, which is a proceeding quasi in rem, only excludes them from any claim against the property, but it does not bar their claims against the company on a winding up, and for a distribution of the surplus realized by the comi>any on the sale of the property under the creditors’ bill. For this reason, the application of the preferred stockholders for leave to use preferred stock to complete their bid must be denied.

The application of 8. Dana Rose for leave to file an intervening petition as a preferred stockholder is denied. He sought to come in under the leave granted the Hamlins to bring in other preferred stockholders by advertisement, to unite with them in their answer and cross bill; but he attempted to tile a different pleading, and to enlarge the grounds for invalidating the bonds. He does not show that he has not bought his stock just for the purpose of becoming a party to the litigation. He delayed his application until a few days before the time for taking evidence on all issues had closed. He offered to abide by and rest his case on the evidence already taken. Under all the circumstances, he must be content to become a party to the Hamlin answer and cross bill. He is too late to introduce new issues. His application is denied, and his intervening petition, filed without leave, is stricken from the files.

In the view I have taken, it has not been necessary for me to consider whether the defenses to the bonds argued and based on sections 3290 and 3313 of the Ohio Statutes have been properly raised upon the pleading's. Whether they have been properly pleaded or not, they must fail.

A decree for sale will be entered on the foreclosure bill. One has been prepared by counsel for complainant, the Continental Trust Company. It will be entered with some slight alterations. The counsel for Stout & Purdy, the complainants in the creditors’ bill, may prepare a'decree for sale on the creditors’ bill, and it will also be entered. The case will be referred back to the master 1o report his findings of fact and conclusions of law upon the amount and validity of the claims filed by creditors coming in under the advertisement on ihe creditors’ bill, except as to the claim of the bondholders, the validity and amount of which will be fixed in the decree for sale, and except as to the judgment claim of Stout & Purdy, upon which the creditors’ bill is founded. This reference to the master will not delay proceedings under the decree for sale.