34 F. 582 | U.S. Circuit Court for the District of Eastern Michigan | 1888
The above-entitled causes were heard together. The first is filed by complainants on behalf of themselves and other holders of provisional certificates, as hereinafter explained, to compel the Flint & Pore Marquette Railroad Company and its directory to recognise them in full as stockholders in said company, and to issue to them regular
The material facts of this case, as disclosed by the bill, answer, exhibits, and proofs, are these: The Flint & Pere Marquette Railway Company, a corporation existing under the general railroad laws of Michigan, in 1872, executed to W. W. Crapo, Andrew G. Pierce, and Publius Y. Rogers, as trustees, its consolidated trust deed or mortgage upon its franchises and property of every description, (except certain laird grants derived from the United States through the state of Michigan, which had been previously conveyed in special parcels, and by separate trusts to secure certain bonds of the company,) for the purpose of securing the payment of an issue of bonds, as provided for therein, to the amount of $6,657,000, to be known and designated as “Consolidated Bonds” of said railway company. Between four and five millions of these consolidated bonds were actually issued, on which the company made default in the payment of the interest thereon; and in June, 1879, said trustees filed their bill in the United States circuit court for the Eastern district of Michigan, at Detroit, for the foreclosure of said consolidated trust deed and mortgage by a sale of the property and franchises covered thereby. Shortly before the commencement of this suit, Jesse Hoyt, as president, and II. C. Potter, as secretary, of said railway company, issued a circular to the stockholders and others interested, notifying them that foreclosure proceedings were about to be instituted, explaining the situation of the company affairs and informing them “that a plan for purchase and reorganization will be prepared by a committee of the consolidated bondholders at an early day.” Such committee, composed of H. A. V. Post, as chairman, Francis Hathaway, A. G. Brower, H. H. Fish, and Loum Snow, Jr., was appointed by the bondholders about the time of, or soon after, the institution of the foreclosure proceedings. This committee issued the reorganization scheme made Exhibit A to the bill of complainants, which, so far as need be noticed, was as follows:
*585 “(3) The new company to issue reorganized first mortgage six per cent, bonds, having thirty years to run, ancl redeemable, at the pleasure of the new company, at par and accrued interest. This mortgage to be used only to fund the past due and maturing interest on the prior bonds, and for such permanent construction and improvement as may be deemed desirable by the board of directors of the now company. (4) Preferred seven per cent, stock shall be issued, sufficient in amount to represent the par value of the outstanding consolidated bonds and the past due coupons to May 1, 1879, inclusive. This preferred stock shall always be entitled to one vote 1’or each and every share. Payment of dividends of seven per cent., or any part thereof, on this preferred stock, will be contingent on the net earnings of the company, and without accumulation. (5) Common stock shall be issued, sufficient in amount to represent tiie outstanding common stock of the old Flint & Pere Marquette IL 1Í. Co., and this stock shall not be entitled to vote until the new company shall have earned and paid, for five successive years, seven per cent, annual dividends on the preferred stock. (6) The preferred and common stock of the new company will be issued to the purchasing committee, who will deliver, or causo to be delivered, to the representatives, for the time being, of the holders of the eight per cent, consolidated bonds, and of the holders of the common stock of the old company, who may join in this scheme of reorganization, the amount pro rata to which they arc entitled, as near as may be, and the purchasi ng committee will dispose of fractions for the benefit of the parties entitled thereto, in such manner as they may deem most expedient and equitable. (7) The benefit of these proceedings shall accrue only to those who shall deposit their securities and common stock with this committee within the time limited by them; it being understood that they may extend the same from time to time, as seems to them proper for the interests of all concerned. (8) The purchasing committee will issue certificates and stock that they may be entitled to.” “(12) The general principles in this scheme, and the order of priority, and the respective amounts of these organization securities and stocks, being substantially maintained, the purchasing committee may change this scheme to meet any exigencies that may arise. ”
The defendants in their answer deny that this was the scheme actually adopted by the committee, and insist that the bondholders in fact agreed upon another and different plan, which did not contain any recognition, or make any provision for the common stockholders of the railway company. While there is some conflict in the testimony on this point, the decided weight of the evidence establishes to the satisfaction of the court that the reorganization scheme, as set out above in Exhibit A, was the one which the committee adopted, recognized, and acted upon. It was under this scheme that the consolidated bonds and stock certificates of the Flint & Pero Marquette Company were delivered by the holders thereof to the depositaries designated by the committee, and authorized to receive and receipt for the same. While the committee were engaged in getting the stock and consolidated bonds deposited under this reorganization scheme, and pending the foreclosure proceedings in the circuit court, the Flint & Pere Marquette Kail way Company, the only defendant therein, by a conveyance, bearing date August 23, 1879, surrendered to W. W. Crapo and Oliver Prescott, trustees under the several land-grant mortgages, its equity of redemption, and all its right, title, and interest in the surplus lands and land funds then held or thereafter received by said trustees, after satisfying and discharging prior trusts, as an addi«
“(1) Such lawful claims as may be made under the trust deed dated April 6, 1862, and the bonds secured thereby, and referred to in the bill as the first (land) trust; (2) such lawful claims as may be made under the trust deed of September 25, 1866, and the bonds secured thereby, referred to in the bill as the second (land) trust; (3) such lawful claims as maybe made under the trust deed dated September 4, 1868, and the bonds secured thereby, referred to in the bill as the third (land) trust deed; (4) such lawful claims as maybe made under the trust deed and the bonds secured thereby on the Bay City Branch, amounting in the whole for principal, besides interest, to $175,000; (5) such lawful claims as maybe made under the trust deed and mortgage dated September 4,1868, and the bonds secured thereby, referred to in the pleadings as the Flint & Holly bonds; (6) such lawful claims as maybe made under the trust deed and mortgage, dated January 2, 1871, and the bonds secured thereby, referred to in the pleadings as the Holly, Wayne & Monroe*587 bonds; (7) such claims as maybe outstanding and unpaid against the receiver heretofore authorized, and such as maybe hereafter authorized by this court.”
The lino of railway, as described in the bill, with all its property, rights, franchises, including things in action and equitable rights, together with the trusts as to the surplus lands and land funds, conveyed by the trust deed of August 28, 1879, were sold August 18, 1880, by a special master commissioner, duly appointed by the court, after advertising the salo as directed bv the decree; and said Post, Pish, Snow, Brower, and Hathaway, as the purchasing committee under the aforesaid scheme of reorganization, became the purchasers at the price of $1,000,000, which, under the terms of the decree, was paid chiefly with consolidated bonds as cash. The sale was reported to the court, and the purchasing committee thereupon presented their petition to the court., setting forth that their said purchase was made pursuant to a scheme of reorganization before then agreed upon; that said purchasers and their associates had reorganized a corporation by the name of the “Flint & Pore Marquette Railroad Company,” to take charge of, manage, and operate the railroad property so purchased under the decree, etc.; and praying that the special master commissioner might be ordered, and directed to make a deed upon said sale direct to said newly-organized corporation. This order, after confirming the commissioner’s report of sale, was passed by the court, and the special master commissioner, by deed bearing date September 28, 1880, formally conveyed and transferred to the new corporation, the Flint & Pore Marquette Railroad Company, all the property, rights, franchises, trusts, etc., so sold, as aforesaid. After the sale by the master commissioner, the purchasing committee, to whom the franchises, privileges, equitable rights and trusts were struck off, together with their associates, under date of August 31, 1880, filed with the secretary of stare at Lansing, Mich., a “certificate of reorganization and articles of association of the Flint & Pero Marquette Railroad Company, successor to {he Flint & Pero Marquette Railway Company.” These articles of association, which constitute the charter, or organic law, of the now corporation, after reciting the aforegoing steps and proceedings, leading up to its formation, certify and declare, among other things not material to be noticed, as follows:
“Clause 2. The purpose for which said corporation is organized is to use, maintain, and enjoy, manage, and operate the said railroad and other property and franchises as aforesaid, including the right of using and enjoying the railroad, built, as aforesaid, and in use; and also for the purpose of extending such spurs and branches from time to time, as may be found useful and necessary for the purpose of developing and increasing the traffic of said road, and as may be authorized byl aw.
“Cl. 3. The present property of the corporation hereby organized consists of all the property of every kind and description, including franchises and rights sold and purchased under said decree, as aforesaid.
“Cl. 4. Tile capital stock of the corporation hereby organized shall bo the sum of ten million dollars, in shares of one hundred dollars each, divided into two classes, to-wit: First, preferred stock, which shall consist of the sum of six million and five hundred thousand dollars, divided into sixty-five thousand shares, each share being the sum of one hundred dollars; second, com*588 mon stock, consisting of three million five hundred thousand dollars, divided ■ into thirty-five thousand shares of one hundred dollars each. And it is agreed that the rights of the holders of said preferred stock and said common stock shall be as hereinafter stated, to-wit: The holders of said preferred stock shall be entitled to receive from the earnings of said railroad company hereby organized, dividends to the amount of seven per cent, per annum, payable semi-annually or annually, as may be directed by the board of directors; provided the net income, after paying interest on prior bonds, repairs, expenses of equipment and renewals, shall be sufficient for that purpose, or such portions thereof as the said net income shall amount to. In ease there shall be anysurplus of net income after the payment of said dividend of seven per cent, upon the preferred stock, the same shall, stand undivided until the next dividend day, and so from time to time and from year to year, until such time as the holders of said preferred stock shall receive five consecutive annual dividends of seven per cent., or semi-annual or quarterly dividends equivalent thereto. In case, on any dividend day, the net income as aforesaid shall not be sufficient to pay seven per cent, annual dividend to the holders of said preferred stock, such holders of preferred stock shall have no right to have the dividends made up out of subsequent earnings; it being the intention that there shall be no accumulation of claims against the company for dividends for such preferred stock. We further certify and declare that the said common stock shall not be issued, nor any portion thereof, until after the preferred stock shall have received five consecutive annual dividends of seven per cent, from" the net income, as aforesaid, or other dividends equivalent thereto; nor shall said common stock be entitled to any representation at any meeting of stockholders until the same shall have been issued. When five consecutive annual dividends of seven per cent., or, in lieu thereof, semi-annual or quarterly dividends equivalent thereto, shall have been paid upon the preferred stock, then the common stock shall be issued and delivered to parties who may hold certificates issued upon the surrender of the common stock of the old Flint & Pere Marquette Kail way Company, or other certificates which may be issued by this company m lieu thereof; and, if there shall be any surplus of common stock it shall be the property of the company hereby organized. After the common stock shall have been issued, as above provided, the preferred stockholders shall be entitled to receive from net earnings seven per cent, dividends each year before the common stock shall be entitled to participate; and after the payment of the seven per cent, to the holders of the preferred stock, any surplus of net earnings that may remain shall be paid as dividends; ratably, to the holders of the common stock, not exceeding seven per cent, in any one year. Should the net income be greater than sufficient to pay a dividend of seven per cent, upon the whole amount of stock, both preferred and common, such surplus shall be divided ratably among the holders of the preferred and common stock. Should the net income of the company, after the common stock shall have been issued, be insufficient to pay the dividends hereinbefore provided for in any single year, such deficiency .shall hot be made up out of the earnings of the subsequent year or years, and .this shall apply both to preferred and common stock.”
¡By the sixth article it is expressly declared that “the undersigned purchased said property at the sale under said decree in trust for themselves and others interested, pursuant to a scheme of reorganization heretofore agreed upon.”
At the first meeting of the board of directors of the new corporation, held September 7, 1880, a resolution was adopted authorizing and directing the president and secretary to issue engraved or lithographed cer-
“Certificate for Common Stock, when the same hill shall be issued.
“State of 'Michigan.
“The Mint é Fere Marquette ttaiiroad Company.
“INCORPORATHI) AUCJUCT ill, 1880.
“This certificate will entitle-to-shares of the common stock of the Flint & Pore Marquette "Railroad Company, when such stock shall be issued. Said common stock consists of 35,000 shares of $100 each, but will have no vote nor voice in the management until issued in accordance with the plan of organization, viz., when the preferred stock shall have received five consecutive annual dividends of seven per cent., or semi-annual or quarterly dividends equivalent thereto. This certificate is negotiable, and may be transferred on tho books of the company in the city of New York on the surrender hereof. .By order of the board of directors.
“Dated Bast Saginaw,-, 1886. "VVm. W. Guapo, President.
“II. O. P0TT.un, Jr., Secretary.
“A. S. Apgaii, Transfer Agent.”
While the capital stock of tho foreclosed company consisted of 35,000 shares of $100 each, making §3,500,000, only $8,238,200, or 32,982 shares of stock, had been actually issued. Of this actual issue there wore deposited with the various depositaries designated by the reorganization committee, for the purpose of sharing in the reorganization scheme^ and in pursuance of notice from the committee, stock certificates to the amount of $3,266,500, for which receipts were given by the several depositaries receiving the same, and for which the certificates in the form above stated, as directed by the board at its first meeting, September 7, 1880, wore given in exchange. It appears from the testimony of I Jr. H. C. Potter, whose relations to, and long connection wiih, the foreclosed company placed him in a position to know the fact, that when tlie foreclosure proceedings were commenced, and while the reorganization scheme was being arranged, the holders, or those interested in the old stock, were the same parties, or very largely so, who controlled the consolidated bonds that were in default, and prior bonds. This is an important fact, and should not be lost sight of in considering the questions involved in this case. It will be noticed that by tho fifth and sixth clauses of the reorganization scheme both the preferred and common stock, or certificates therefor, were to ho issued in favor of those who .should join in tho plan adopted, immediately upon the formation of the now'.company, although the common stock was not entitled to vote until the preferred stockholders had been paid seven per cent, annual dividends, for five successive years. This provision for the issuance of the common stock is changed by tho fourth clause of the articles of reorganization, which declares “that said common stock shall not be issued, nor any portion thereof, until after the preferred stock shall have received five consecutive annual dividends of seven per cent, from tho not income, as aforesaid, or other dividends equivalent thereto.” In explanation of
On the part of the complainants it is claimed that the preferred stock,, as provided for in the articles of association forming the new company, was unauthorized by the laws of Michigan; and on the'part of defendants it is insisted that the provision in reference to the issuance of common or unpreferred stock was invalid, because founded upon no consideration moving from the old stockholders, or to the new company, and because that provision was in contravention both of the letter and spirit of the Michigan statute against stock watering, (act of 1859,1 How. St. § 3409 ;)
The objection of a want of consideration for the provision in reference to the common stock, cannot, for many reasons, avail the defendants; because there was ample consideration in the mutual agreements of the consolidated bondholders and the stockholders, under which the latter surrendered their certificates, and not only assented to the foreclosure, but, by the conveyance of August 28,1879, provided an additional and valuable security in the shape of the surplus lands and land-grant funds held by Crapo and Prescott, trustees. The courts have not hesitated to recognize and give effect to such compromise arrangements between bondholders and stockholders in respect to corporations being foreclosed. In Sage v. Railroad Co., 99 U. S. 343, Mr. Justice StkoNü, speaking for the court, says:
“Let it be conceded that the new organization must be for the benefit of the holders of the first mortgage bonds, how can we say it is not for the benefit of those holders that entirely subordinate interests are conceded to junior lien creditors, and to the stockholders of the former corporation? How can we say that such a concession was beyond the discretion with which the agents of the bondholders — that is to say, the majority — were clothed? Such concessions are generally made in reorganizations of railroad companies, and they are regarded as beneficial to the joint lienholders. They prevent delay and expenditures arising out of litigation between creditors, which are sometimes almost ruinous, and they lessen the risk of redemptions. ”
"It is sometimes so far within the power of stockholders and unsecured creditors to embarrass and delay proceedings for the foreclosure of the mortgage and sale of the property that it is expedient for the mortgage creditors to arrange for a reorganization, and give up something of their own security l'or the sake of avoiding litigation and delay.” Jones, By. See. § 614.
But, aside from the aforegoing considerations, which sufficiently dispose of the objection of a want of consideration for the provisional certificates or unpreferred stock, it should ho borne in mind that Lhe common stock in the old company was hold largely by the consolidated bondholders, who, while accepting preferred stock for their bonds, naturally enough assented to the provision for the common stock. After the formation of the new company, its directors, selected alone by and from the preferred stockholders, issued the provisional certificates for common stock, which are not only recognized by the corporation, but become the subject of sale and transfer in the market; and now, after the original .holders of these certificates, consisting to a considerable extent of the present directory, have disposed of their holdings, and when the present holders thereof seek to have their rights thereunder recognized and en
We come next to the main controversy in this case, which relates to the right of complainants, as holders of the provisional certificates for un-preferred shares, to have regular certificates of stock issued to them by the Flint & Pere Marquette Railroad Company. This right is claimed on tlie ground that the event or contingency on which the provisional certificates holders were to become actual stockholders of the common class has, in the view of a court of equity, happened. It is not claimed in the bill that the preferred stockholders have, in fact, received 7 per cent, annual dividends for five successive years. It is alleged that tin-dividends actually paid on the preferred stock were 5i per cent, in 1881, 61' per cent, in 1882, 7 per cent, in 1883, 7 per cent, in 1884, and 4 per cent, in 1885; but it is charged the failure of the directors to declare and pay the the full 7 per cent, dividends each year for each of said
The defendants admit that the holders of preferred stock have been recognized as the only stockholders entitled to any voice in the management and control of the corporation since the time of its reorganization, and that the directors elected by them have had charge of the company and its management; but they deny that the holders of said preferred stock unlawfully combined together. They admit that they have refused to permit the complainants to send their agents into the offices of the defendant company, there to interfere with its business by an examination in detail of the transactions of the corporation; but state that the printed annual reports of the company were open to their inspection. They state, on information and belief, that the accounts of the company have been properly kept as such, and that “no greater amount has been
The fourth article of the certificate of reorganization, forming a part of the defendant company’s charter, was intended" to define the legal relations and relative rights of the two classes of stockholders therein described, and to designate, as between them, the funds of the' corporation out of which dividends on preferred stock were to be paid. By that provision of the charter, which is obligatory upon the corporation and its directory, the funds applicable to the payment of dividends on the preferred stock was the net income of the company, “ after paying interest on prior bonds, repairs, expenses of equipment and renewals.” Any surplus of net income, after the payment of said dividend of 7 per cent, upon the preferred stock, was to stand undivided until the next dividend day, and so on, from year to year, until such time as holders of said preferred stock should receive five consecutive annual dividends of 7 per cent., or semi-annual or quarterly dividends equivalent thereto. There was to be no accumulation of dividends on preferred" stock'. When five consecutive annual dividends, or, in lieu thereof, semi-annual or quarterly dividends equivalent thereto, shall have been paid upon the preferred stock, then the common stock, with the right to vote, was to be issued and delivered to parties who held the certificates issued upon the surrender of the common stock of the old Flint & Pere Marquette Railway Company, or other certificates, which the new company may have issued in lieu thereof. Any surplus of the common stock Avas to remain the property of the neAv corporation. At the first meeting of the board of directors under the new organization, a resolution was formally adopted, September 8, 1880, defining the policy of the company, as folloAA's:
“Resolved that the board of directors define their policy to be in conformity to the articles of association; that, under the head of operating expenses, only such improvements and additions shall be included as are necessary, in the judgment of the directors, to keep the property up to the proper standard of efficiency, and that such portion of additions and extensions beyond this, as tli© board decides, shall be provided for out of funds other than net earnings; that the stockholders are entitled to the benefit of all net earnings after paying expenses and coupons.”
This resolution Avas never repealed or modified; and, read in the light of the reorganization scheme, Avhich provided for the issue of reorganized first mortgage 6 per cent, bonds, “to be used only to fund the past due and maturing interest on the prior bonds, and for such permanent construction and improvement as may be deemed desirable by the board of directors of the new company,” it may fairly be regarded as a correct contemporaneous construction of the meaning and intention of article 4 of the charter, in respect to the duty of the new company and of its management, not only in making proper expenditures, but in keeping proper accounts, as between construction and permanent improvements, or additions and extensions, on the one hand, and operating expenses on the
But the position is broadly assumed in the answer and in the argument of counsel for defendants that the board of directors, being charged with the power and duty of managing the corporate property and franchises for the best interests of the company, and for the benefit of the public, had the right; and were entitled to dispose of and apply the net earnings of the,company in the same way, or in as unrestricted manner, as they would have had if the charter had contained no such provisions as are found in article 4, and there had been but one class of stockholders; and that their discretion in appropriating net income for construction purposes, as they saw proper, and in withholding the same from dividends. could not, at the instance or upon the complaint of the contingent shareholders, be controlled by the court. Can this proposition be sustained without practically nullifying, or destroying article 4 of the charter? We think not. The reorganization scheme contemplated a fund applicable to construction and equipment other than earnings, and
It may be true, as argued by defendant’s counsel, that the preferred stockholders could not have compelled the board of directors, selected bjr themselves, to declare larger dividends than were declared and paid from 1881 to 1885, inclusive, as held by the supreme court in New York. Railroad v. Nickals, 119 U. S. 296, 7 Sup. Ct. Rep. 209, and similar authorities, which rest upon the principle that, in the absence of charter provisions controlling or modifying their usual powers, courts will not generally review or control the discretion of directors on the subject of making or withholding dividends, when honestly and fairly exercised. But the present does not fall within that class of cases, nor is it controlled by them, because the rights here asserted are charter rights, imposing charter duties, binding and obligatory upon both the company and its managing officers, and operating as restrictions and limitations upon the general discretion of the directory in dealing with the net income of the road as between the preferred and unpreferred stockholders. The question in the present case is not, therefore, what regular stockholders, having a voice or vote in the selection of the corporate management, may demand and enforce in the way of having dividends declared and paid; but it is -whether the contingent shareholders, having no voice in the corporation or its direction, are entitled to have the company and its di
With tliis limitation upon the company and its directors in the way of expending earnings as between the two classes of shareholders, we may next consider what net income applicable to dividends were earned or received during the years 1881 to 1885, inclusive, and the maimer in which the management of the company has dealt with or disposed of the same, or, generally, whether the company could reasonably and properly have declared and paid full 7 per cent, dividends during each of said years. As to the surplus lands and proceeds of land sales in the bands of Crapo and Prescott, these wore undoubtedly equitable assets of the defendant company corporation, acquired under the trust conveyance of August 23, 1879, and the foreclosure sale, purchase, and reorganization in 1880. Subject to the prior mortgage lien, or liens on said lands, and land proceeds, the company was the beneficial owner thereof, and held the equitable title to the same. In respect to these surplus assets it had something more than the simple right to call the trustees to an accounting. It ivas the real equitable owner of the property; and the surplus thereof after satisfying prior incumbrances, belonged to the corporation, just as it held its other property subject to mortgage. As tlie obsolute owner of this equitable title and right in said surplus lands and proceeds arising from the same, whatever the company received from that source was as much a part of its income or revenues as if it had been derived from any other source, such as receipts from operating its road, or rents collected for the use of its ears or other property. Income is not limited to the gain which results from business and labor, but it includes as well the proceeds derived from the use or sale of property. Now, what is the situation of these land assets, and what revenues have been actually derived therefrom during the years in question, or could have been received from that source, without impairing or interfering with the rights of creditors? When the new company acquired its right to these lands and assets, the prior charges thereon amounted to about $2,000,000. Of those prior bonds remaining on January 1, 1881, (Report of company for 1880, p. 21,) there were §1,704,000 of 8 per cent, land-grant bonds,
Next, as to the steel-rail account. At the close of 1880 the mileage on the main line of the road was 317.17 and 90.40 miles of sidings. Of the main line 200 miles were laid with steel rails. At the close of 1881 there were 345.16 miles in the main line and 111.29 in sidings and sfrars, 283 miles of which were laid with steel rails (being an increase of 83 miles) during 1881, (page 5, annual report for 1881.) At the close of 1882 the main line and sidings amounted to 485.62 miles
Again, in 1883 two steamers owned by the company were enlarged and made more efficient, at a cost of $40,286.44, which was paid out of and charged to earnings. This change was made in the steamers to meet the demands of a new class or character of business, which sprang up shortly before, across Lake Michigan to Milwaukee. It was an addition of substantial and permanent character, which increased the value of the steamers to that extent, and the cost of the change should, in the opinion of the court, be charged to construction. It was actually charged to operating expenses, and taken out of earnings. This should be corrected by crediting that amount back to earnir.gs for the year 1883. In 1884 there was a charge against expenses for depreciation on these steamers amounting to $6,000. In 1885 there was a like charge for depreciation, and also a charge of $2,500, as depreciation on dining-halls, the three charges making §14,500. These sums were not actually expended out of earnings, but were estimated and charged against operating expanses. This was not proper, bio depreciation account was cither kept or warranted by the charter as between the two classes of stockholders, and, no expenditure having actually been made to meet such depreciation, the estimated amount thereof could not properly be deducted from earnings, or net income. U. S. v. Railway Co., 99 U. S. 459. The sum of $6,000 should therefore be credited back to earnings for 1884, and §8,500 for 1885. '
In the spring of 1884, $142,000 ivas expended, under the orders of the board of directors, for 8 now freight engines and 200 coal cars. The funds for ibis purchase were raised by loan, which was paid off by the company at the rate of $3,000 per month, and the sum so paid, in addition to interest on the loan, was charged to operating expenses, and withdrawn from earnings. See Reports for 1884, pp. 8, 23, for 1885, p. 8. This was clearly an improper charge against operating expenses. The outlay was not for the repair or renewal of old, but for the purchase of new, equipment, and should have been charged to construction. Fifteen thousand dollars were thus wrongfully charged in 1884, and $86,-000 in 1885. These amounts should be credited to earnings for said years, respectively, and be charged to construction account.
During the years 1882, 1883, and 1884, earnings were charged with interest on temporary loans to the extent of $24,958.90. Whether tlmso constitute a proper charge against net income or earnings, under the provisions of article 4 of the charter, admits of considerable question; but in the view which the court, takes of other items of the company’s accounts, as between construction and operating expenses, it is not necessary to pass upon the point. So, too, in reference to the sum of $4,225.28, charged to profit and loss on an old claim brought over from
Amount over from 1880 and applicable to dividends, - $133,084 69
Bet earnings, as reported by company, for 1881, $244,037 94
Add: Premium on bonds sold that year, - 107,257 25
Belaying track with steel rails, - - 133,779 09
Spurs and main line sidings, - - 45,430 00
Balance on Co. securities not ered., - 2,357 50
532,861 78
Total applicable to dividends, - $665,946 47
Less 7 per cent, dividend on $6,500,000 of preferred stock, 455,000 00
Surplus carried to January 1, 1882, - $210,946 47
1882.
Surplus for 1881 brought over to 1882, $210,946 47
S'et earnings reported for 1882, - $438,989 89
Add: Premium on bonds sold 1882, 34,702 50
Relaying track with steel rails, 31,224 56
Spurs and sidings made out of earnings, 9,640 00
Bal. of dividend on Co. stock, 647 00
- 515,203 95
Total applicable to dividends in 1882, $726,150 42
Less 7 per cent, dividend on $6,500,000 preferred stock, 455,000 00
Surplus carried to 1883, $271,150 42
*611 1883.
Surplus from 1882, - $271,150 42
Net earnings reported for 1883, - $488,799 13
Add: Premium on bonds sold in 1883, 12,136 50
lielaying track wit'll steel rails, 65,000 00
Spurs and sidings made out of earnings, 16,960 00
Enlargement of steamers, 40,286 44
623,182 07
Total applicable to dividends in 1883, - $894,332 49
Less dividend of 7 per cent, on $6,500,000, - 455,000 00
Surplus carried to January, 1884, - - $439,332 49
1884,
Surplus from 1883, - - - - $439,332 49
Net earnings reported for 1884, - $400,303 40
Add: Premium on bonds sold 1884 - 9,945 00
Belaying track witli steel rails, 10,000 00
Spurs and sidings made with earnings, 11,460 00
Equipment renewals, - 15,000 00
Depreciation on steamers, charged to expenses, 6,000 00
452,708 40
Total applicable to dividends in 1884, $892,040 89
Less 7 per cent, dividends on $6,500,000, 455,000 00
Surplus carried to January 1, 1885, - $437,010 89
1885.
Surplus from 1884, ------ $437,040 89
Net earnings reported for 1885, - $272,451 77
Add: Belaying track with steel rails, - 9,996 35
Spurs and sidings made with earnings, - 5,400 00
Equipment and renewals charged to expenses, 36,000 00
Depreciation of steamers and dining-hall, 8,500 00
Dividend on Co. securities, - - 4,740 00
337,088 12
Total applicable to dividends in 1885 - - - $774,129 01
Less 7 per cent, dividend on $6,500,000, ... 455,000 00
Surplus January 1, 1886, .... $319,129 01
If, as the experts testify, the expenses of work trains engaged in construction, and freight on material used for construction, should be charged to construction account, and corrections were made in that respect, the annual balance, after deducting the 7 per cent, dividend, would be still larger than as above given. It thus appears that, independently of the surplus land funds, the earnings or net income of the road, if the accounts between construction and operating expenses bad been properly kept, in conformity with the provisions of the charter, and according to the rights of the two classes of stockholders, as therein defined, were amply sufficient, after paying interest on the company’s
The court, having been compelled carefully to examine the evidence, which is quite voluminous, and analyze the company’s accounts, so as to determine the rights of the parties, and being fully satisfied from this investigation of the accounts that the aforegoing statement in respect to the yearly income applicable to dividends is substantially correct, it is not deemed necessary to refer these matters to a special master for a report, and thereby further delay the final disposition of the case. The conclusions of the court on this branch of the case are that complainants are entitled to the relief sought; that they are entitled to be admitted into the defendant company as regular stockholders of the common or unpreforred class; that this right accrued to them and to others similarly situated on January Í, 1886; that á sufficiency of surplus land funds is in the hands of the land trustees, and subject to the control of the company to pay, or make good, the deficiency of 14 per cent., or $95,110, on dividends for 1881; 4 per cent., or $31,710, on dividends for 1882; and 3 per cent., or $190,260, on dividends for 1885, upon the preferred capital stock actually issued, amounting to $6,342,000; and the defendant company should be required to pay over to the preferred stockholders, pro rata,, out of said surplus land funds or other funds a tits disposal, said annual deficiencies, so as to make up to said preferred stockholders their full 7 per cent, dividends for five consecutive years, and thus comply with the conditions, as the company and its management should have done, on •which the provisional certificate holders were entitled to bo admitted; and, further, that the defendant company, its officers and agents, should be enjoined from depriving complainants, or those in like state with them, of their rights as common stockholders, in voting or otherwise, and from applying the income and earnings of the company, without the consent of said common stockholders, to improvements of a permanent character; all of which is accordingly ordered and decreed, with the further direction that the defendant corporation, its officers and directors, bo ordered to issue regular certificates for common or unpre-ferrod stock in the company to complainants and other holders of provisional certificates, severally, according to their respective holdings of
’ In the case of Parker et al. v. Flint & Pere Marquette Railroad Company and the Port Huron & Northwestern Railway Company el al. the same provisional certificate holders as in the other suit seek on behalf of themselves and others with like interests to restrain the Flint &'Pere Marquette Company from purchasing the stock and franchises of the Port Huron & Northwestern Railway Company, alleging that such purchase is not authorized. by law; that it would be ultra vires; that it would involve a very large expenditure of money, inasmuch as the Port Huron & Northwestern Railway Company is a narrow-gauge road, in bad condition, and would require heavy outlays to render it of any practical benefit to the' purchasers, and that such outlays and expenditure would be drawn from earnings and income of the Flint & Pere Marquette Railroad Company, which, under article 4 of its charter, should be applied to dividends; and, generall}'’, that the purchase would deplete the revenues of the latter road, seriously affect their rights, and that they should, if it is legal, have a voice and vote on the question of such purchase. The Port Huron & Northwestern Railway Company filed an answer, sajdng, in substance, that negotiations were pending for the purchase or acquisition of its road by the Flint & Pere Marquette Company; that the method of effecting that would be such as would be legal under the laws of Michigan, without explaining what method Avas proposed. The Flint & Pere Marquette Company demurred, and thereby admitted the allegations of the bill. On the argument questions were raised as to the character of this suit, which sought, in addition to restraining said purchase, the same general relief sought in and by the first case. The court is of the opinion that the Port Huron & Northwestern Railway Company Avas neither a necessary or proper party to the litigation or questions involved in either of these suits; that this last bill was properly a supplemental bill. It Avas filed Avithout leave, as required by equity rule 57; but it was filed November 28, 1887, for the purpose of enjoining a transaction which was about to occur, as alleged, on November 30, 1887, so that the provisions of rule 57 could not be conformed to. This bill Avill be dismissed as to the Port Huron & Northwestern Railway Company, with costs. The court will now order it to stand, and to be treated as a supplemental bill in the original suit, as may be done under the authorities. Story, Eq. PI. §§ 882-905; Neale v. Neales, 9 Wall. 1; and Graffam v. Burgess, 117 U. S. 195, 6 Sup. Ct. Rep. 686.
The Flint & Pere Marquette Railroad Company admits the allegations of this supplemental bill by its demurrer, and thus presents the legal question Avhether, under the Havs of Michigan, it can purchase the stock and franchises of the Port Huron & Northwestern RailAvay Company; and, if so, can it, as against the common or unpreferred stockholders, apply its income, either in paying for the interests purchased, or in improving and altering the property so acquired? It is now Avell settled that the proposed purchase of the stock, property, and franchises of the Port Huron & Northwestern Railway Company, as alleged in the supple
In the opinion of the court the preliminary injunction should be granted on the case made out by the supplemental bill, admitted by the demurrer, and disclosed in the course heretofore pursued by the company’s management towards the common stockholders. The demurrer of de
11 Sec. 3409. That it shall not he lawful for any railroad company existing hy virtue of any of the laws of this state, nor for any officer of any such company, to sell, dispose of, or pledge any shares in the capital stock of such company, nor to issue certificates of shares in the capital stock of such company, until the shares so sold, disposed of, or pledged, and the shares for which such certificates are to he issued, shall have been fully paid; nor issue any stock or bonds except for money, labor, or property actually received, and applied to the purpose for which such corporation was created;, and all fictitious stock dividends and other fictitious increase of the capital stock or indebtedness of any such corporation shall be void; and, if any officer or officers of any such company shall issue, sell, pledge, or dispose of any shares or certificates of shares of the capital stock of such company, in violation of the provisions of this act, such officer or officers so doing shall be deemed guilty of a misdemeanor, and upon conviction thereof shall be punished as provided by law in case of issuing false or fraudulent railroad stocks. The provisions of this act shall apply as fully to the stocks and officers of jons,olidated railroad companies, as existing in whole or in part within the state, as to. sriginal unconsolidated companies existing as aforesaid. ”