243 F. 450 | N.D. Iowa | 1917
(after stating the facts as above). A large amount of testimony has been taken upon these respective claims, and it is stipulated by the parties that such testimony shall be used in the determination of each of said intervening claims. The controlling facts disclosed by the testimony are practically without dispute, some of them being matters of record.
The defendant Crooked Creek Railroad & Coal Company, which will be called the defendant, was incorporated under the law of Iowa, its first charter expiring November 8, 1895, when it was renewed for a period of 20 years, which expired November 8, 1915. The purpose of its incorporation, as stated in its charter, was the construction and operation of a short line of railroad, some 18 miles in length, from Webster City, in Hamilton county, Iowa, to Lehigh, in Webster county, the operation of certain coal mines, and the manufacture of brick and tile and other clay products from the lands owned by the company..
“This agreement grants to Homer Loring an option and right to purchase, at any time within four months from the date of this agreement, all of the railroad property of said Crooked Creek Company, for the sum of ÍÓ112.5C0. payable in first mortgage bonds of a new corporation to be organized by said Homer* Loring, the payment of which bonds is to be secured by a first mortgage covering the railroad property, and an extension from said present: line of railway to a junction with the Ft. Dodge, Des Moines & Southern Railroad Company, at or near Gypsum City, Iowa.”
Attached to the option is a list of the railroad property owned by the defendant company covered by the option.
On September 1, 1909, said agreement was extended for a period of six months. On August 18, 1910, all of the stockholders of the defendant company and Homer Loring entered into another agreement, whereby the stockholders, as parties of the first part, set over and assigned to the party of the second part (Homer Loring) all of the shares of the capital stock of the Crooked Creek Railroad & Coal Company, after the assets of said company, other than its railroad properties, have been transferred to, and its liabilities, other than current items, assumed by, a new corporation as thereinafter set forth. The capital stock of the defendant company is to be paid for by the issuance of $112,500 cf bonds, to be secured by a mortgage to be executed upon the property of the Crooked Creek Railroad & Coal Company, and such additions to such property as shall be made by the said Liotner Loring.
On the same date, August 18, 1910, ati agreement was entered into by and between George E. Burnham and Charles L. Burnham, president atid secretary, respectively, of the Crooked Creek Railroad & Coal Company (and stockholders in said company), as representing all the then stockholders o f said company, parties of the first part, and Homer Loring, party of the second part. This agreement refers to an agreement between the stockholders of the Crooked Creek Railroad & Coal Company and Homer Loring of the same date, and provides for certain things to be done by the said Homer Loring in the way of improv
“Tlie said, parties of the first part herein (George ®. Burnham and Charles L. Burnham), or their successors in office, may designate a majority of the directors of the Crooked Creek Railroad & Coal Company, its successors or assigns, and two of the general officers, to wit, president and secretary, and that he (Homer Loring), the said party of the second part, his heirs, executors, administrators or assigns, will elect or cause to be elected such majority of The directors and officers so nominated by said parties of the first part.”
f September 27, 1910, an agreement between all of the stockholders of jthe defendant railroad company, after referring to the agreement of August 18, 1910, recites the desire of the stockholders to provide for the payment of the liabilities of the defendant railroad company; and further provides that the first four directors to be selected under the arrangement are designated as F. Paul Stone, Minnie M. Wilson, George E. Burnham, and Charles L. Burnham; and George E. Burn-ham is to be elected as president and' Charles L. Burnham as secretary of the company. It is further provided that F. Paul Stone, Minnie M. Wilson, George E. Burnham, and Charles L. Burnham are to represent their several interests under and pursuant to the terms of said two .agreements dated August 18, 1910; and the stockholders agreed, upon the delivery to them of their proportion of the first mortgage bonds representing the sale of their stock, to pay the then liabilities of the Crooked Creek Railroad & Coal Company, other than current items, together with 3 per cent, of $112,500, to George E. Burnhami, as commission for making the sale to Poring.
From these negotiations, and others shown by the testimony, it appears that a sale of the Crooked Creek Railroad property, or the stock of that company, to Plomer Loring, of Boston, was agreed upon by the stockholders in 1909. Mr. Loring was then in control of the Ft. Dodge, Des Moines & Southern Railroad Company, and he was to make or cause to be made some improvements in the road, and extend it to a connection with the Ft. Dodge, Des Moines & Southern -Railroad at or near the city of Ft. Dodge, in Webster county. He was also to form a new corporation, and the stockholders of the defendant company were to receive for their stock in that company bonds of the new corporation to an amount equal to' their stock, to' be secured by a first mortgage or trust deed upon the property of the new corporation. This arrangement progressed so far that the entire stock of the Crooked Creek Company was delivered to Loring, but was not transferred to him upon its books. For some reason not clearly appearing, but probably because of the financial condition of the Ft. Dodge, Des Moines & Southern Company, this deal with Mr. Loring was never finally consummated, and it seems to have been abandoned. In the latter part of December, 1910, another deal was consummated between said stockholders and Mr. Loring, whereby the defendant company was to issue its bonds up to $300,000 or more, to be secured by a first mortgage or trust deed upon the property of that company, the stockholders agreeing to pay its indebtedness to that date, and were to receive the bonds of the company so to be issuéd and secured in the amount of $112,500 in lieu of the stock of that company then owned or held by them. Pursuant, to
It xnay he here said that the original stock of the defendant company actually isstxed and outstanding consisted of 2,250 shares, of the par value of $100 each, which represented the value of the road and certain coal and other lands owned or acquired by it; but later a corporation called the Lehigh Coal & Land Company was organized by the stockholders of the defendant company, or some of thexn at least, to which its assets other than its railroad property wex e transferred, thus leaving as the property of the defendant company its railroad properties alone; and through some arrangement between the stockholders the capital stock of the defendant company Avas reduced 50 per cent., or to $50 per share, thixs making the 2,250 shares of the capital stock of the defendant company at the time of the issuance of the bonds in January, 1911, of the par value of $112,500, and by a vote or resolution of the stockholders the directors were authorized to issue $300,000 or more of bonds to be secured by the mortgage or trust deed in suit, as before slated.
First, for the complainant,'that the bonds were authorized in good faith to pay for the stock of the Crooked Creek Company, and were and are valid obligations of the defendant company secured by the mortgage or trust deed in suit, which was duly recorded before any of the alleged indebtedness of the interveners was incurred, and therefore the prior lien upon its property.
Second, for the interveners it is urged (1) that the original agreement between the stockholders and Homer Loring, had it been fully consummated, would have been in effect a dissolution of the Crooked Creek Railroad Corporation, and a distribution of its assets among its stockholders, who were in fact the legal owners of such property, to the exclusion of its creditors, other than such stockholders (if they can be considered as creditors of the corporation), and void under the Iowa statute (sections 1620, 1621, Code of Iowa 1897); (2) that inasmuch as that agreement was never in fact consummated, but abandoned, the subsequent agreement between the stockholders and Mr. Loring, whereby the bonds of the defendant company actually issued to its stockholders and secured by the mortgage in suit, was in effect an attempt to substitute the bonds of the company for its capital stock, and make tire stockholders to whom such bonds were delivered creditors of the company secured by a first mortgage upon all of its property, which would be in fraud of all creditors of the defendant company prior and subsequent to the issuance of such bonds.
It further appears, without substantial dispute, that after the issuance of the bonds the owners of the stock of the defendant company to whom they were so issued, and for whose benefit the present foreclosure suit is prosecuted, were the same persons, except perhaps it be the holders of the $4,000 of bonds. A mortgage may be shortly defined as the conveyance of an interest or estate in property by way of pledge for the security of a debt, to become void upon its payment. The legal ownership is vested in the creditor; but, in equity, the mortgagor remains the actual owner until he is debarred by his own default or by a judicial decree. 4 Kent’s Com. 136 (marg.); 2 Wash. Real Property,
In Railroad Company v. Howard, above, it is said, beginning on page 409 of 7 Wall. (19 L. Ed. 117):
“‘Equity regards the property of a corporation as held in trust for the payment of the debts of the corporation, and recognizes the right of creditors to pursue it into whosesoever possession it may be transferred, unless it has passed into the hands of a bona Me purchaser ; and the rule is well settled that stockholders are not entitled to any share of the capital stock nor to any dividend of the profits until all the debts of the corporation are paid. Assets derived from the sale of the capital stock of the corporation, or of its property, become, as respects creditors, the substitutes for the things sold, and as such they are subject to the same liabilities and restrictions as the things sold were before the sale and while they remained in the possession of the corporation. Even the sale of the entire capital stock of the company, and the division of the proceeds of the sale among the stockholders, will not defeat the trust nor impair the remedy of the creditors, if any debts remain unpaid, as the creditors in that event^-may pursue the consideration of the sale in the hands of the respective stockholders, and compel each one, to the extent of the fund, to contribute pro rata towards the payment of their debts out of the moneys so received and in their hands.”
In Louisville Trust Co. v. Louisville, etc., Ry., 174 U. S. at page 683, 19 Sup. Ct. at page 830 [43 L. Ed. 1130], above, Mr. Justice Brewer, speaking, of railroad mortgage foreclosures, said:
“We may not shut our eyes to any facts of common knowledge. We may not rightfully say that the contract of mortgage created certain rights, and that when those rights are established they must be sustained in the courts, and no inquiry can be had beyond those technical rights. We must, therefore, recognize the fact—for it is a fact of common knowledge—that, whatever the legal rights of the parties may be, ordinarily foreclosures of railroad mortgages mean not the destruction of all interests of the mortgagor and a transfer to the mortgagee alone of the full title, but that such proceedings are carried on in the interests of all parties who have any right's in the mortgaged property, whether as mortgagee, creditor, or mortgagor. * * Assuming that foreclosure proceedings may be carried on to some extent at least in the interests and for the benefit of both mortgagee and mortgagor (that is, bondholder and stockholder), we observe that no such proceedings can be rightruiiy carried to consummation which recognize and preserve any interest in the stockholders without also recognizing and preserving the interests, not merely of the mortgagee, but of every creditor of the corporation. In other words, if the bondholder wishes to foreclose and exclude inferior lienholders or general unsecured creditors and stockholders he may do so, but a foreclosure which attempts to preserve any interest or right of the mortgagor in the property after the sale must necessarily secure and preserve the prior rights of general creditors thereof. This is based upon the familiar rule that the stockholders’ interest in the property is subordinate to the rights of creditors, first of secured and then of unsecured creditors. And any arrangement of the parties by which the subordinate rights and interests of the stockholders are attempted to be secured at the expense of the prior rights of either class of creditors comes within judicial denunciation."
I am therefore of the opinion that the claims of the respective interveners, without priority as between themselves, are prior in equity to the claims of these bondholders, upon the property of the defendant company, who are also stockholders of such company, and decrees may be prepared accordingly.
It is so ordered.