89 F. 794 | U.S. Circuit Court for the District of Northern Iowa | 1898
This case is now before the court upon the issues arising upon the intervening bill filed by William H. Doane, Lucius H. Bigelow, and Edward P. Griswold, who by order of court of February 1,1896, were allowed to intervene for the protection of their rights in the suit brought by the Old Colony Trust Company, trustee, against the Dubuque Light & Traction Company, for the purpose of foreclosing a trust deed executed by the latter company, under date of June 1, 1893, upon certain street-railway properties In the city of Dubuque, low’a, comprising what are usually called the Iowa Street and the Eighth Street Lines. The first-named line is also called in the evidence the Allen & Sweeney Line, from the name of the firm that originally built the same. The title to this property passed to a corporation created under the name of the Dubuque Electric Railway, Light & Power Company (which, for convenience, will be designated as the “Power Compilin'”), which executed a trust deed upon its property and franchises to the Bay State Trust Company, under dale of March 1, 1890, to secure its mortgage bonds to the amount of $285,000. On May 5, 1892, a bill was filed in this court on behalf of W. K. Richardson and others against the Power Company, the Bay State Trust Company, and others, in which proceedings Horace Poole was appointed receiver of the Iowa Street Line; and on December 7, 1892, the Bay State Trust Company filed its cross bill, as trustee, asking a foreclosure of the trust deed executed to it, on the ground that the Power Company had defaulted in the payment of the interest on its mortgage bonds; and on the 19th of January, 1895, a decree was entered foreclosing (he trust deed, and ordering a sale of the property covered thereby. Prior to the appointment of the receiver, in May, 1892, the Power Company had become indebted to the Thomson-Houston Company and the Edison Electric Company for supplies furnished in equipping and maintaining its line; and when these companies were merged into the General Electric Company, in June, 1892, the latter company became thereby a heavy creditor of the Power Company, and, being thus interested, it undertook the reorganization of the property, which was rendered necessary by the impending foreclosure
“We ascertained about the outstanding obligations of the property, and communicated with a number of the creditors, to find out on what basis their claims could be handled. We also made an arrangement with the people representing the holders of first mortgage bonds, by which a reorganization could be carried through, and the property put on a good financial basis; and those efforts at reorganization resulted in an agreement between the bondholders of the Power Company and the Thomson-Houston Electric Company and a trust company in Boston.”
This agreement, which bears date August 31, 1892, recites:
That the Power Company is in the hands of a receiver. “That the Electric Company proposes to reorganize said railway company, and put its property in first-class repair and condition, including the addition of such machinery and apparatus as may be needed, at a cost of more than $50,000, provided the property is sold by the receiver, and can be purchased at a price that will warrant such an expenditure, and the bondholders will assent to a cancellation of the present first mortgage bonds they hold, and take in lieu theredf bonds of the reorganized company, as hereinafter set out.”
And thereupon the bondholders agreed to unite with the trustee in obtaining a decree of sale upon the foreclosure of the trust deed to the Bay State Trust Company, and to place their bonds in the hands of the Old Colony Trust Company for exchange for the new bonds to be issued; the Electric Company agreeing to bid at the foreclosure sale an amount sufficient to cover the bonds, the prior liens, and the costs and expenses, and, if it became the purchaser at the sale, to immediately organize a new company to take the property, which new company was to authorize an issue of bonds to the amount of $400,000, to be secured by a mortgage on the property, present or after acquired, of the company, of which issue $100,000 were to remain in the hands of the trustee, to be certified and used only for improvements or betterments, or in the purchase of other railway property, and the remaining $300,000 were to be certified and used — First, in retiring the old issue of bonds, dollar for dollar; and, second, the balance left after payment of the old bonds was to be delivered to the Electric Company in payment of claims held by it against the Power Company, in payment of the repairs, improvements, and extensions necessary to put the purchased property in good working order and condition, and in payment of such other creditors of the Power Company as the Electric Company might name. In pursuance of this plan of reorganization, as already stated, the Bay State Trust Company filed its bill praying for a foreclosure of the trust deed held by it; and on the 19th day of January, 1893, a decree of foreclosure was entered in this court, under which the property was sold at master’s sale on March 1,. 1893, the sale being approved by the court on April 12, 1893; and the receiver, under an order of court entered April 29th, delivered
“Whereas, the said Electric Company is largely interested in the property formerly owned by the Dubuque Electric Railway, Light & Rower Company, and has, by virtue of an agreement with the bondholders thereof, control of the reorganization thereof, and has in pursuance of such agreement organized the Dubuque Light and Traction Company, which is desirous of purchasing the property of the Eighth Street and West Dubuque Street Railway of Dubuque, Iojva, a corporation under the laws of the state of Iowa; and whereas, a contract has this day been entered into between one O. H. Olson and said parties of the second part: Now, therefore, in consideration of the premises, and the agreements on the part of the parties of the second part, the said Electric Company guaranties the delivery of the bonds and stock, and the performance of the other conditions of the agreement, on the part of said Olson, as therein provided.”
It may be here said that it is not questioned that Olson had no personal interest in the property that was being dealt with, and he acted as the representative or alter ego of the Electric Company; and therefore he need not be further referred to, as the Electric Company assumed the responsibility for all action taken in his name. So, also, it appears that C. B. Bouton’s interest has been purchased by Mr. Griswold; and hence he is not interested in the litigation now pending, and did not become a party to the intervening petition filed in this case.
From the record it further appears that substituted articles of incorporation of the Dubuque Light & Traction Company were adopted and filed for record in the recorder’s office at Dubuque under date of May 31, 1893; the board of directors being composed of George K. Wheeler, W. J. Ballard, James S. Cummins, and John L. Martin; Mr. Wheeler being the president of the company, and Mr. Cummins acting as secretary. Mr. Wheeler testifies that from 1893 to 1897, both inclusive, he was chief engineer of the General Electric Company. Mr. Ballard testifies that since June 1, 1892, he has been, and is, collection manager of the Electric Company. Mr. Martin testifies that from June 1, 1892, to January 1, 1894, he was manager of the Central Station lighting department of the Electric Company at Chicago. And from the record it appears that Mr. Cummins was in charge of the legal business of that company at Chicago. None of these gentlemen resided in Dubuque, ánd it does not appear that they had any actual pecuniary interest in the Dubuque Light & Traction Company; and as it further appears that by resolution of the board of directors of the Traction Company, dated July 20,1893, 4,550 shares out of the total of 6,000 shares of the capital stock of the Traction Company were issued to the Electric Company, it is entirely clear that the Traction Company was wholly and completely under the control of the Electric Company. It further appears that in carrying out the plan of reorganization a trust deed dated June 1, 1893, was executed by the Traction Company, conveying to the Old Colony Trust Company all its property, then owned or after acquired, in trust to secure its
In the intervening bill filed herein it is averred that, in order to induce Messrs. Doane, Bigelow, Griswold, and Bouton to sell the Eighth Street Line, the General Electric Company represented to them that, by virtue of an agreement with the bondholders of the Bower Company, it had organized the Dubuque Light & Traction Company, and had arranged for the transfer to the Traction Company of the properly formerly owned by the Bower Company, and for the execution of a mortgage or trust deed, already drawn, covering said property, as well as all after-acquired property, to secure' a total issue of $400,000 of first mortgage bonds of said Traction Company, with 6 per cent, interest, payable semiannually; that, of
The next question that naturally arises is whether these allegations of fact are sustained by the proof; that is, does it appear that these representations were in fact made to the interveners for the purpose of indue,ing them to sell-the Eighth Street Line, in order that it might be combined .with the Iowa Street Line, and pass under the control and management of the Traction Company. It would sub-
With respect to the statements touching the improvements that were to be made in.carrying out the plan of reorganization of the Iowa Street Line, it is claimed by defendants that these cannot be deemed to be false statements, justifying a rescission of the contract for the sale of the Eighth Street Line, because they were in the nature of promises to be performed in the future, for which an action for damages is the sole remedy. These representations, however, were as to the then existing purpose and intent of the General Electric Company with reference to the improvements that were to be made in carrying out the plan of reorganization; and the falsity of the statement lies in the fact that the evidence shows, not only that the Electric Company did not make the improvements it had promised to do, but that it did not intend to make them when the representation was made. Thus, in Edgington v. Pitzmaurice, 29 Law Rep. 479, which was an action for damages on the ground of deceit or false representations, it was said in the opinion of the court:
“It was argued that this was only the statement of an intention, and that the mere fact that an intention was not carried into effect could not make the defendants liable to the plaintiff. I agree that it was a statement of in-, tention, but it is nevertheless a statement of facts.”
In the concurring opinion of Bowen, L. J., in this case, it is said:
“A mere suggestion of possible purposes to which a portion of the money might be applied would not have formed a basis for an action of deceit. There must be a misstatement of an existing fact, but the state of a man’s mind is as much a fact as the state of his digestion. It is true that it is very difficult to prove what the state of a man’s mind at a particular time is, but, if it can be ascertained, it is as much a fact as anything else. A misrepresentation as to the state of a man’s mind is therefore a misstatement of fact.”
The main reliance of the defendant With respect to this branch of the case is the claim that the General Electric Company did substantially perform all that it represented it would perform in the
It is furthermore claimed on behalf of the Electric Company that it has expended' in repairing and improving the property the sum of $64,253. The evidence shows that, instead of furnishing new material such as was necessary to put the property into proper condition, the Electric Company furnished second-hand machinery, which had been discarded hj the street-railway companies at Cincinnati and Denver'; and the facts developed in the evidence fully justify the conclusion that, while much material was furnished and work done, the street-railway lines in question were not put into first-class order and condition. The representation made to the interveners was that the General Electric Company would put the Iowa Street Line into first-class order; but the contention now is that the only obligation resting upon the Electric Company was to furnish the articles described in a contract signed by the General Electric Company and the Dubuque Light & Traction Company, which bears date June 10, 1893, and for which the Traction Company agreed that the Electric Company was to receive $50,000 of the first mortgage bonds of the Traction Company, and notes of the Traction Company to the amount of $12,385. The evidence shows that this contract was prepared for execution on May 3, 1893,— that being the original date thereof, — but when the deal with the interveners was entered into, and the completion of the organization of the Traction Company was.postponed, the signing of this equipment contract was postponed until June 10th. The interveners were left in ignorance, however, of the fact that there was a contract already drawn up, to be signed by the General Electric Company and the Traction Company, — the latter being officered by employés of the Electric Company, — whereby the Electric Company could claim payment for the repairs and improvements it was about to put on the property; disregarding the promise and representation it had repeatedly made, that the, Iowa Street Line, as part of the reorganization plan, was to be put into first-class working order. Under the arrangement and representations made
“The general principles applicable to eases of fraudulent representation are well settled. Fraud is never presumed, and. where it is alleged, the facts sustaining it must be clearly made out. The representation must be in regard to a material fact, must be falso, and must be acted upon by the other party in ignorance of its falsity, and with a. reasonable belief that it was true. It must be the very ground on which the transaction took place, although it is not necessary that it should have been the sole cause, if it were proximate, immediate, and material.”
In Plow Co. v. Carson, 18 C. C. A. 606, 72 Fed. 387, it is stated:
“Nothing is more deceitful than half the truth. This and many other like misrepresentations made by the officers of the appellants were not mere*806 exaggerations of the value of the stock or assets of this corporation. They were fraudulent misrepresentations of material facts that were actually within their knowledge, or that the appellee had a right to presume, from their relation to the corporation, were within their knowledge. They constituted fraud, resulted in damage, and warranted the conclusion which the master reached. A vendor who makes a false statement regarding a fact material to the sale, either with knowledge of its falsity, or in ignorance of its falsity, when, from his special means of information, he ought to have known it, and thereby induces his vendee to purchase, to his damage, is liable in an action at law for the damage the purchaser sustains through the misrepresentation, or to have the sale rescinded in a suit in equity, at the option of the purchaser.”
The evidence in this case demonstrates that the representations made to the interveners were material. They were concerning matters peculiarly within the knowledge of the General Electric Company. They were made for the purpose of inducing the interveners to sell the Eighth Street Line. The interveners had a right to rely thereon, and did in fact rely thereon, and were thereby induced to sell the Eighth Street Line. And it also is proven that the representations so made were false, within the knowledge of the General Electric Company; and as it is proven that the Traction Company was organized by the General Electric Company for the purpose of carrying out the purposes of the Electric Company, and its board of - directors was composed of employés of the Electric Company,' and, furthermore, as it took the title to the Eighth Street Line through the contract made by the Electric Company with the interveners, it follows that it stands in no better position than the Electric Company.
It thus appears that, as against the Electric and Traction Companies, the interveners have established a right to demand a rescission of the contract whereby they were induced to transfer the Eighth Street Line, unless some one or more of the matters of defense pleaded by the defendants are of such a nature as to preclude the granting of a- decree of rescission. On behalf of defendants it is claimed that relief cannot be granted, because the suit should have been in the name of the Eighth Street & West Dubuque Street-Kailway Company. The evidence shows that the misrepresentations were made to Doane and his associates, who were the owners of the stock in the Eighth Street Line; and the contract of May 4, 1893, which is the one sought to be rescinded for fraud, was not signed by the Eighth Street Company, but by Messrs. Doane, Griswold, Bigelow, and Bouton, in their individual capacity. Furthermore, the Eighth Street Company is made a party to the suit, and therefore all the parties who can possibly have an interest in the litigation are before the court.
These facts are a sufficient answer, also, to the point, made by defendants, that the intervening petition and the proof do not show the facts necessary to be shown in order to enable a stockholder to maintain a suit to enforce a right belonging to the corporation, under the requirements of equity rule 94. The reasons leading to the adoption of this rule are fully given in Hawes v. Oakland, 104 U. S. 450, and Huntington v. Palmer, Id. 482; the purpose being to prevent the wrongful exercise of the jurisdiction of the federal courts by bringing a suit in the name of a stockholder when the jurisdiction
It is next contended on behalf of defendants that the delay in bringing this suit for rescission amounts to laches which will defeat-the relief sought, and that it must be held that the parties, by their action, have affirmed the contract. The rule governing the defense of ladies is thus stated in Galliher v. Cadwell, 145 U. S. 368, 12 Sup. Ct. 873:
“The eases are many In which this defense has been invoked and considered. It is true that, by reason of their differences of fact, no one case becomes an exact precedent for another, yet a uniform principle pervades them all. They proceed on the assumption that the party fo whom laches is imputed has knowledge of his rights, and an ample opportunity to establish them in the proper forum; that by reason of his delay the adverse party has good reason to believe that the alleged rights are worthless, or have been abandoned; and that, because of the change in condition or relations during this period of delay, it would be an injustice to the latter to permit him to now assert them. * * * They all proceed upon the theory that laches Is not, like limitation, a mere matter of time, but principally a question of the inequity of permitting the claim to be enforced, — an inequity founded upon some change in the condition or relations of the property or the parties.”
In Townsend v. Vanderwerker, 160 U. S. 171, 16 Sup. Ct. 258, it is said:
“The question of laches does not depend, as does the statute of limitations, upon the fact that a certain definite time has elapsed since the cause of action accrued, but whether, under all the circumstances of the particular case, plaintiff is chargeable with a want of due diligence, in failing to institute proceedings before he did.”
In- this case it does not appear that the position or relation of the General Electric Company, of the Traction Company, or of the bondholders who exchanged the bonds of the Dubuque Electric Light & 1'ower Company for the bonds of the Traction Company has been changed in any substantial particular during- the period that intervened before the petition for rescission was filed, in January, 1896. So far as the owners of the bonds of the Power Company are concerned, under the plan of reorganization, to which they were parties, they had agreed to take in exchange for the bonds of the Power Company an equal amount of the bonds of the Traction Company, secured by a mortgage on the Iowa Street Line; and if the Eighth Street Line is now freed from the lien of the trust deed to the Old Colony Trust Company, and the bonds issued to the interveners are returned for cancellation, together with a repayment of the expenditures made on the Eighth Street Line over
On behalf of the Old Colony Trust Company it is urged that, granting that the interveners have shown themselves entitled to a rescission of the contract in question as against the General Electric Company and the Traction Company, there are equities and rights existing in favor of the bondholders, and especially of the persons who purchased the bonds of the Traction Company after their issuance, and before the petition asking a rescission was filed, which must be considered in determining the character of the relief that will be decreed in the case. It is true that while the holders of the bonds of the Traction Company, which they received in exchange for ar, equal amount of the bonds of the Power Company, do not occupy (he position of innocent purchasers for value of the property of the Eighth Street Line, yet they do hold bonds secured by the trust deed upon the combined lines, and furthermore they were not actual participants in the wrongdoing of which the interveners complain; and therefore they are in a position to ask reasonable protection from the court in the final disposition of the case. Moreover, it appears that before the petition for rescission was filed a number of the bonds held by the Electric Company were sold, with a large amount of other securities, to an unincorporated company or association, known as the Street Railway & Illuminating Properties; and thus third parties have acquired rights that must be considered. As the interests of the bondholders would unquestionably be affected if the decree of the court should now require a separation of the combined properties, there is much reason in the contention that the relief granted should take the form of a decree for damages against the wrongdoer, rather than a decree requiring a return of the interveners’ property, which cannot be accomplished wiiliout injuriously affecting Hie interests of the bondholders. On behalf of the Electric and Traction Companies it is contended that, if good reason exists for refusing a return of the intervener’s property in kind, then this proceeding, being in equity, must be dismissed, and the parties be relegated to an action at la.w for damages on the ground of deceit. If the conclusion reached had been that there was no equity in the claim of the interveners, but that the only remedy open to them was an action for damages, it might well be that the court would dismiss the case in equity, without prejudice to their bringing an action at law. That, however, is not the conclusion reached by the court in this case; but, on the contrary, the holding is that the interveners have made out a case entitling them to rescind the contract for the transfer of the Eighth Street property on the ground of fraud, and therefore the jurisdiction in equity is beyond question. As against the defendants, the decree to be entered is one of rescission, to the effect that the transfer of the Eighth Street property was wrongly obtained, and that it is open to the interveners to reclaim the property. It has, however, been made to appear on behalf of third parties that they have obtained interests in the property which will be seriously affected if the court should now attempt to separate the street-railway lines.
“If a court of equity obtains jurisdiction of a suit for the purpose of granting some distinctively equitable relief — such, for example, as the specific performance of a contract, or the rescission or cancellation of some instrument, — and it appears from the facts disclosed at the hearing, but not Known to the plaintiff when he brought his suit, that the special relief prayed for has become impracticable, and the plaintiff is entitled to the only alternative relief possible, — of damages, — the court then may, and generally will, instead of compelling the plaintiff to. incur the double expense and trouble of an action at law, retain the cause, decide all the issues involved, and decree the payment of rnei'e compensatory damages.”
In the federal jurisdiction it is well settled that, if a court of equity rightfully takes jurisdiction over a subject-matter of litigation, it may retain it until complete justice is reached, although there may arise in the progress of the case some matter of which a court of law would have cognizance. Thus, in Tayloe v. Insurance Co., 9 How. 390, it was said:
“As the only real question in the case is one which a court of equity must necessarily have to decide, in the exercise of its peculiar jurisdiction, it would be an idle technicality for that court to turn the party over to his remedy at law upon the policy. And, no doubt, it was a strong sense of this injustice that led the court at an early day to establish the rule that, having properly acquired jurisdiction over the subject-matter for a necessary purpose, it was the duty of.the court to proeeed and do final and complete justice between the parties, where it could as well be done in that court as in proceedings at law.”
As it cannot be questioned that this court, sitting in equity, had full and complete jurisdiction over the principal matter submitted upon the petition of intervention, to wit, the question whether ■ the interveners were entitled to rescind the contract for the sale and transfer of the Eighth Street property, and, as the court finds' that the interveners are entitled to rescind such contract and transfer, it is clear that it is the duty and within the power of the court to mold the final relief granted in such form as to meet the exigencies of the case, having due regard to the rights of all who may be affected by the decree, whether parties to the record or not, and that in the performance of this duty the court, while granting a decree of rescission in favor of the interveners, may require the interveners to take a-judgment for the money value of their property, if it appears that the property itself cannot be returned without serious injury to other parties, who were not participants in the wrong whereby the interveners were induced to enter into the rescinded contract. In form, therefore, the decree will require the interveners to deposit with the clerk of the court all the bonds and stock of the Traction Company received for the transfer of the Eighth Street property; will adjudge the interveners to be entitled,