224 F. 39 | 9th Cir. | 1915
By September, 1912, Kissel, Kinnicutt & Co. with their associates, who were in control of the Railway Company, had taken over 1,325 of the 1,500 second mortgage bonds which they had agreed to purchase. They were still under obligation to take the remaining 175 at the stipulated price of $140,000. On September 25, 1912, a meeting of the directors of the Power Company and the Railway Company was held in New York. A resolution was adopted under which a written agreement was executed between Kissel, Kinnicutt & Co. and the Power Company and Mainland Bros, of Oshkosh, who formerly had dominated the Power Company. That agreement referred to the contract of the year before, recited that 175 of the bonds then agreed to be taken were still to be purchased; that Kissel, Kinnicutt & Co. were ready to complete their purchase, but were unwilling thereafter to take any additional bonds under their option ; that the Power Company would, in the course, of six months, need $250,000; that Kissel, Kinnicutt & Co. had offered to procure for the Power Company a loan of that amount in consideration of their being released from the obligation to take the remaining 175 second mortgage bonds; and that the Power Company had accepted the offer. Whereupon it was agreed that Kissel, Kinnicutt & Co. would procure a loan of $250,000, $100,000 of which was to be furnished immediately, and the remainder at any time within six months upon demand, the loan to be secured by the second mortgage bonds of the Power Company, equal at their face value to twice the amount of the loan, for which loan the Power Company was to sign a note, which should be due and payable at any time upon default of the payment of interest on any of the outstanding bonds of the company, or upon commencement of proceedings against it for the appointment of a receiver. The agreement further stipulated that the Power Company at any time upon demand of the Railway Company would exchange its first mortgage bonds up to $500,-000 for an equivalent amount of its second mortgage bonds so held by the Railway Company. Following that agreement, $220,000 was furnished to the Power Company by the Railway Company, and 440 of. the second mortgage bonds were turned over to the Railway Company as collateral. Thereafter an equal amount of the first mortgage bonds was substituted as collateral.
As to the 278 bonds, the facts are briefly as follows: In December, 1912, the Power Company desired to settle with Bates & Rogers, a construction company which had a contract for work on the Ox Bow plant. -That settlement was consummated at a meeting of the executive
The trial court concluded that the Railway Company should be recognized as having an equity in the group of 440 bonds corresponding to the consideration paid out, of which the Power Company had received the benefit, and ordered an accounting for the purpose of determining the extent of its equity, and upon such accounting found that the Railway Company had advanced $250,000, and no more, for which it was entitled to credit, and that from that amount should be deducted the $140,000 due the Power Company under the original contract, and that it be decreed an equitable lien upon the 440 first mortgage bonds for the balance of $110,000, with interest, and that it be decreed the right to receive the 175 second mortgage bonds contracted for. As to the Bates & Rogers transaction, the court held that it was not shown by the record that the Railway Company had parted with anything of value on account thereof, or has any substantial equities in the premises.
It is the contention of the appellants that the interveners’ bill cannot be maintained, for the reasons that the transactions by which the Railway Company acquired the 825 bonds were at most voidable, and that the interveners have no right to avoid them on grounds available to the company, namely, want of proper .corporate authorization, the common directorate of the Power and Railway Companies, and lack of benefit to the Power Company; that neither that company, nor its stockholders, nor any person in privity with it, was injured by the transactions, and that that company, its privies and successors in interest, have ratified the same, or are estopped to avoid them, and that the suit, regarded in the light of a proceeding by bondholders to cancel alleged fraudulent bonds as prejudicial to their own right to distribution, or on the ground of preference to directors, must fail, because the interveners expressly contracted for such use of the bonds in controversy, and received every consideration upon which they could be so used; that it was not illegal for the directors to prefer themselves, that the interven-ers have not objected to the transaction on the ground of preference, and that the said bonds did not give a preference but participation; and it is finally contended that, in any view of the case, the appellants are entitled to hold the 718 bonds as security for $250,000 and interest, and $20,000 on account of the settlement with Bates & Rogers.
“The mortgages provide for the security of the particular bonds they describe, and the company puts the bonds out from time to time as occasion requires. When a dealer finds such bonds not yet. due in the hands of the company, with the proper certificate of the mortgage trustee upon them, it has, I thirds, always been understood in the commercial world that he might buy in good faith with safety. The security has been considered a continuing one, and the bonds negotiable by the company, so as to carry the mortgage security until they have become commercially dishonored, or something else has been done to deprive the company of its power of putting them out. In my opinion a subsequent mortgage is not sufficient for this purpose, unless it in terms limits the lien of the prior mortgage to bonds actually out and provides against reissues.”
“We were being pressed for moneys for tbe corporate purposes of tbe company, and tbe necessity that we bad to provide money for making extensions and buying electrical apparatus, etc., to handle our business. * * * We bad a financial program that required that sum of money. I don’t remember in detail.”
“That a director of a joint-stock corporation occupies one of those fiduciary relations where his dealings with the subject-matter of his trust or agency, and with the beneficiary or party whose interest is confided to his care, is viewed with jealousy -by the courts, and may be set aside on slight grounds, is a doctrine founded on the soundest morality, and which has received the clearest recognition in this court and in others.”
While the directors of a corporation are not trustees for bondholders in the sense that they are trustees for stockholders, it does not follow that bondholders shall be denied protection against the acts of directors, the intention and effect of which is to depreciate the bonds, contrary to the terms of the mortgage under which they are issued. The first mortgage in this case conveyed to the trustee all property, real and personal, and all rights, franchises, and privileges, of the Power Company which it then owned, and which it might thereafter acquire. The
This is not the case of security given for money advanced only to keep the corporation a going concern. Back of the transaction and affecting its bona tides is the release of the bankers from an obligation under which the Power Company was entitled- to realize $140,-000. The right to relief in such a case is not limited to- the corporation or its stockholders. It extends to creditors, both secured and unsecured, and it is held that contracts made by directors who represent opposing interests, while not -void ab initio, are “voidable in a proper proceeding taken for that purpose by the corporation, its shareholders, or its creditors.” 10 Cyc. 791; Richardson v. Green, 133 U. S. 30, 10 Sup. Ct. 280, 33 L. Ed. 516.
In Thomas v. Brownville & R. R. Co., 109 U. S. 522, 3 Sup. Ct. 315, 27 L. Ed. 1018, the court said:
“Sucli contracts are not absolutely void, but are voidable at the election of tbe parties affected by tbe fraud.”
In McGourkey v. Toledo & Ohio Railway, 146 U. S. 536, 566, 13 Sup. Ct. 170, 180, 36 L. Ed. 1079, the court said:
“A contract of tbis kind is clearly voidable at tbe election of tbe corporation; and wben sucb corporation is represented by tbe directors against whom tbe imputation is made, and tbe scheme was in reality directed against tbe mortgagees, and bad for its very object tbe impairment of their security by tbe withdrawal of tbe property purchased from tbe lien of their mortgage, it would be manifestly unjust to deny their competency to impeach the transaction. The principle itself would be of no value if the very party whose rights were sacrificed were denied the benefit of it.”
See, also, Consolidated Tank Line Co. v. Kansas City Varnish Co. (C. C.) 45 Fed. 7; Bosworth v. National Bank, 64 Fed. 615, 12 C. C. A. 331.
It is but equitable, and it was within the power of the court below to decree, and we think it properly did decree, that the first mortgage bonds transferred to the Railway Company as collateral be held only for the sum of money thereupon advanced over and above the amount which the. bankers were then owing under their contract to purchase second mortgage bonds.
“Their claim was not good against a company that ought to be in the hands of a receiver.”
The result was that Bates & Rogers received in settlement of their claim second mortgage bonds of the face value of $25,000, 50 shares of the preferred and 100 shares of the common stock of the Railway Company, and its promise, unsecured, to purchase from them within 60 days from May 29, 1914, the $25,000 bonds at 80 and accrued interest. In consideration of that undertaking on the part of the Railway Company, it eventually acquired from the Power Company the 278 first mortgage bonds in controversy. The record does not show that the stock and second mortgage bonds so surrendered to Bates & Rogers by the Railway Company for the benefit of the Power Company were of any value, and, such being the: case, it was not error to hold, as the court below did, that there was no proof that the Railway Company had parted with anything of valúe in that transaction, or that it had in equity a lien upon the 278 first mortgage bonds.
We find no error. The decree, is affirmed.