| U.S. Circuit Court for the Northern District of Illnois | Jun 18, 1895
On April 8, 1895, complainant, a
citizen of New York, filed Ms bill against the Lake Street, Elevated Railroad Company, an Illinois corporation, its nine directors, citizens of Illinois, and one John J. Mitchell, also, a citizen of Illinois. On April 20th complainant filed an amendment to Ms bill, and od May 3d a further addition, in the form of a supplemental bill, wherein he makes the Northwestern Railroad Company, the West Chicago Street Railroad Company, the Columbia Construction Company, the Union Elevated Railroad Company, and the City of Chicago parties defendant. Compláinant asks for an injunction and receiver, with other relief, and the defendants, or some of them, now question the sufficiency of the hill hy a demurrer. The capital stock of the Lake Street Elevated Railroad Company is $10,000,000, divided into 100,000 shares of $100 each. Complainant says “he is the owner of 10,000 shares of said stock,” and the theory of the bill,
On June 21), 1894, the Lake Street Elevated Railroad Company owned and operated an elevated road on Lake street, Chicago, from Market street to Fifty-Hecond, a distance oí seven miles. Besides this piece of road, the company had property then estimated to be worth $881,000. The company’s property was then subject to a mortgage to secure bonds aggregating $(>,500,000, and its fotal liabilities, figured as of the date last mentioned, aggregated some $7,500,000. On the 5th of July, 1894, a writing was made between complainant and the defendant Mitchell. The latter had acquired, in part by xmrchase from complainant himself, some 52,000 shares of the capital stock of the Lake Street Elevated Railroad Company. Mitchell, it seems, represented in his holdings of stock other persons not disclosed in the body of the writing. The purpose of the agreement was that the members of the combine should control and manage the corporation. It was agreed that complainant, 'Ziegler, should go upon the market and buy other shares, sufficient to- make the aggregate of all the stock in the pool (50,000 shares. In case the price paid by him should exceed $18 per share, the other members of the combine were to advance to Mm five-sixths of the excess; and in case the stock should cost less than $18 per share, then Ziegler was to account in the same proportion to the jjooI. It was stipulated that the said stock “should he voted as a unit in all matters pertaining to said company; and for the purpose of making the stock of said company more valuable, the said parties hereto each agree to contribute or pay such sum or sums of money as may be necessary towards the payment of present liabilities against said company, which said parties hereto may deem advisable or necessary to pay in order to add such value to1 said stock holdings, in the following proportions, namely, said Mitchell’s principals five-sixths (r>/o), an<I said- Ziegler one-sixth (Vo); and all moneys so advanced by said parties shall be so advanced upon like and equal terms, conditions, and securities therefor. Said Ziegler shall be entitled at his election to take one-sixth of any bonds sold by said railroad company coming to parties hereto and entitled to one-sixth (1/o) of all assets and benefits covered or acquired in said purchase, and in ca.se any sale is made of the stock represented by said Mitchell’s principals, or any part thereof, Ziegler shall be permitted at his election to join in the sale and have a pro rata, share of his stock sold at the same price and on the same terms as the said stock of said Mitchell’s principals is sold. In case any construction company is formed for the purpose of building any rail road or furnishing equipment for said Lake Street Elevated Railroad Company, or any contract let for such purpose, in which said 'Mitchell’s principals are interested, then said Ziegler shall be permitted at his election to stand in the same relations to such construction company or said contract as said Mitchell’s principals, and be entitled to share in the benefits and privileges of the same to the extent of one-sixth (1/o) thereof; and in case any purchase is made, or other line of railroad acquired, or in case of any sale or consolidation of said
By an arrangement made prior to this agreement, and as a condition of the purchase of said 52,000 shares of stock by Mitchell, the directors of said company, except Ziegler himself, resigned, and the directors who are named as defendants in this bill, except John Morris, were thereupon elected. Ziegler continued to be a director down to the month of January, 1895, at which time Morris was elected as his successor. On October 1, 1894, the Lake Street Elevated Railroad Company was licensed by the city of Chicago and the property owners interested to extend its road along Lake street east to Wabash avenue. . Construction contracts were, or a construction contract was, thereupon made, the materials for the superstructure were manufactured, and a portion of said extension from the Market street end had been completed- at the time of filing the amendment to the bill. On December 18, 1894, it is said in the bill the work of constructing said extension .“had progressed favorably.”
On the date last named, the said defendant directors voted to make a treaty between the Union Elevated Railroad Company, of the one part, and the Lake Street Elevated Railrqad Company, the Northwestern Elevated Railroad Company, the Metropolitan West Side Elevated Railroad Company, and the Chicago South Side Rapid Transit Railroad Company, of the other part. It was proposed that the Union Elevated Railroad Company should construct a line of elevated road from Lake street south on Franklin to Van Burén street; thence east on Van Burén to Wabash avenue; thence north on Wabash avenue to Lake street; thence west on Lake street to the place of beginning. The Metropolitan road might then connect with such loop at the southwest corner, the South Side Rapid Transit Company at the southeast corner, and the Northwestern Elevated Railroad Company at some point on Lake street. The said Union Elevated Railroad Company was to arrange with the Lake Street Elevated Railroad Company to use its extension on Lake street from Market to Wabash avenue as the north side of said loop. The Union Elevated Railroad Company was spoken of as lessor and the four other companies as lessees. The lessor was to obtain the consent of the prop
On the 28th of December, 1891, the Lake Street Elevated Railroad Company entered into a contract with the Union Elevated Railroad Company concerning the said Lake street extension. It was recited in the preamble to this agreement, that the Lake Street Company “is without the necessary means to complete the construction of its said
On the 27th of December, 1894, the directors of the Lake Street Elevated Railroad Company passed a resolution reciting in the preamble that the company would be unable to pay the interest which would be due on its bonds on January 1, 1895, and-unable to pay a
After the resolution of December 27th, and prior to that of December 31st, complainant, “through his representative in Chicago, protested against the acts of said board of directors, and called upon Mitchell and Ms associates, owners of said majority of stock in said Lake Street Elevated Company, and their representatives, the said board of directors of said Lake Street Elevated Railroad Company, to comply with said contract cf July 5, 1894, and contribute, with your orator, a sum necessary to meet and pay said January, 1895, interest coupons, and all obligations then matured, in the proportion of one-sixth (1/c) by your orator and five-sixths (5/e) by said majority stockholders; and, if the necessity existed, your orator would temporarily advance a sum sufficient to pay such immediately maturing obligations himself, which was not accepted.” How much, and upon what security, and for what time, and upon what other terms, Ziegler proposed to lend to the company, is not stated. I may add that the company had no interest in and could not enforce the agreement, or rather proposal, in the contract of July 5, 1894, by the members of the combine with each other to supply the company with money.
It is said in the bill that when complainant Ziegler sold Ms shares to Mitchell, and agreed to buy other shares and to enter the combine, as made in the paper of July 5, 1894, “it was represented by said Mitchell” that “the reorganization of said the Lake Street Elevated Railroad Company contemplated by the change of ov/nership would result in a large number of wealthy and influential persons becoming interested in the deal, and a new Impetus would be given to said railroad company, its lines of traffic extended, its down town facilities completed and improved, and the value of its stock enhanced, and the parties agreed that they would build the Lake Street road down Lake street as far as Wabash avenue, or give an equally good terminal, and that they would also build what is known as the ‘Humboldt Park
By the agreement of December 28th the Lake street extension is to be built without cost to the Lake Street Company, and said company retains complete ownership and possession. If said company shall choose to run its trains around the. other three sides of the loop, it must pay for the privilege at a rental to be fixed. Whether it has engaged to use the loop is at least doubtful. But each of the other companies must run its trains around 1he loop so that every company connecting with the loop becomes a feeder to the Lake street road: These roads are not competitors. The charter purpose—the legitimate and appropriate source of revenue,—is the passenger traffic. It is possible that the “sole rights” of the Lake Street Company in said Lake street might have been used as means for greater exactions from roads seeking terminals in the center of the city. But such “sole rights” were not given to the Lake Street Company as a mere instrumentality of barter with or of advantage over other like corporations. I am not able to say, especially in view of the financial condition of the Lake Street Company, as shown in the bill by matters already spoken of, that the deals of December 18th and 28th indicate fraud or unfairness on the part of the defendant directors toward said company. It is further stated that three of the nine directors of the Lake Street Company were also directors in the Northwestern Company, and that two of said three were directors in the Union Company.' Said contracts are not, merely for this reason, fraudulent, or voidable at the instance of the Lake Street Company. Rolling Stock Co. v. Railroad Co., 34 Ohio St. 450. Nor does it make out a case of fraud that the holders of a majority of the stock in the latter company may-have held stock in one or more of the other contracting companies. Nor do general unsupported averments that the six directors who are not shown to have held official relation to or interest in any of
On the 21st of February, 1895, certain persons interested in Ihe Lake Street Company organized a plan whereby the bonded debt of said company should be reduced or scaled down 25 per cent., and its mortgage debt 40 per cent. This was to be the voluntary act of the bondholders themselves, and the inducement was the sounder financial footing thus secured for the company, and a guaranty by the Northwestern Company of the mortgage debt when so reduced. But. in carrying out this policy ihe Lake Street Company engages—and this is 'the point of objection by complainant—that it will not issue any more bonds under the old mortgage except for the purposes of construction. This may have been unwise, but I do not detect fraud on the part of the defendant directors as against the Lake Street Company. It is said in the bill that the construction of the Humboldt 3’ark extension 1ms been abandoned by the defendant directors “In violation of (lie conditions of the contract entered into by said Mitchell for said majority stockholders.” But the company has no interest in said contract; and said Humboldt Park extension may be built later when the company is financially able to build it. Complainant: says further that he is “advised and believes that there is a, secret understanding and agreement by and between the officers and majority of the board of directors” of the Lake Street: Company and the Northwestern Company that, a perpetual lease shall be made transferring all the property of the former company to the latter. This unsupported averment, I taire it, amounts to nothing. In ihe supplemental bill complainant says “that he is advised and believes that said Northwestern Company has obtained, or is about to obtain, the consent of the city and of the property owners interested, to build its road south across Lake street, and he awns that: it. is the intention of Lauderback and those acting with him in the management of said Lake street road to suspend the construction of said Lake street road” till the said cross track of the Northwestern shall have,been so built at Fifth avenue across Lake street. He further avers “that said attempt to procure the right of way over and along Fifth avenue is in the interest of and part of the scheme of said Union Elevated Railroad Company to complete its loop line, as contemplated in said contracts of December 18 and 28,1894, whereby said "Union Company is a party to said fraudulent acts recited herein.” Hinco the “'contracts” last referred to do not involve fraud against: the Lake Street Company, and since in any case the two roads might: cross each other and on the same level at Lake and Fift.h avenue, I do not see that anything is added to the case by the averments quoted from the supplemental bill—even if it were law that an original bill which shows no cause of action can be made good by a supplemental bill.
On the 20th of January, 1895, the Lake Street Company agreed with tiie West Chicago Street Railroad Company that the latter, for the operation of its Lake,street surface road by electricity, might string wires to, but wholly underneath, the elevated structure of the
When the contract of July 5,1894, was made, Ziegler was himself a director in the Lake Street Company. He continued to be a director till the stockholders’ meeting in January, 1895, at which meeting Morris, who had actively represented Ziegler in the'affairs of the company since July, 1894, was elected. Morris was so elected at Ziegler’s instance, and as his representative, and pursuant to the combine contract. Said contract, as shown by the bill, still continues in force, and is still insisted on by Ziegler, and the theory of the bill is that the wrongs complained of have been done by the combine of which Ziegler himself has always been, and continues to be, a member, pursuant to the terms of the writing of July 5, 1894. If a stockholders’ meeting should be now had with reference to said alleged wrongs, all the stock in which Ziegler is interested would be voted in affirmance of said alleged wrongful acts, since said stock is part of the holding of the combine, and said holding must, according to the terms of the contract, be voted as a unit. Not only so, but the acts complained of, upon Ziegler’s interpretation of the same, seem to fall within the general description of what the combine might do as against the Lake Street Company by said combine agreement. The portions of the agreement here referred to have been quoted, and need not be again repeated. Even if said agreement be void, the fact of assent to the same on Ziegler’s part remains, and the point is that he is not in position to maintain a stockholders’ bill. It is, however, due to Mr. Ziegler himself, as well as to these defendant directors and to Mitchell, to say that, looking at the ultimate matters shown in tin's bill, and not to the conclusions drawn therefrom by the pleader, the controversy concerns the policy of the Lake Street Company rather than the integrity of its management; and, notwithstanding the wording of the writing of July 5, 1894, it is not at all probable that any wrong against the Lake Street Company was ever really intended by the parties to that writing. The demurrer is sustained.