BROWN 1'. DULUTH, M. & N; RY. CO.
satisfy the general and indefinite language of the newspaper and more, probably, than most people would have expected. It is apparent that the defendant and his associates formed the plaintiff corporation for the purpose of honest and legitimate speculation in real estate. In futherance of their scheme they acquired the land and laid out the townsite in question. It was not intended to be a mere paper town, nOi' did the promoters of the enterprise intend to cheat or deceive anybody in the of the lots therein. It is obvious they had the utmost faith in the future growth and prosperity of the town, and that the lots they were selling were really worth the prices for which they were sold. The .defendant at roe time could have sold the lots he purchased at a considerable advance. But there came a period of depression in the business of selling lots in this town. The decline in the prices of the lots was not the result of any fault of the company, but resulted from causes beyond its control, and was probably due to the same general causes which produce fluctuations in the prices of lots in other· towns ·of like character. It became apparent that those who had bought lots at the prices that ruled before the depression set in would sustain a loss on their investments unle'3S there was a reaction in prices, of which there was no immediate prospect. In this condition of affairs the defendant abandoned the town, and left the state, and, it· is evident, was anxiOlllS to get rid of his purchase. His former associates, or some of them, remained to meet and carry out the obligations of the company and continue its business. The company is still a going concern, and apparently has faith that the town will in the end prove to be all its founders predicted for it in the beginning, and that at most the only mistake made was in fixing the era of its prosperous growth a little too early in its history. Whether this hope is well founded or not, the defendant has no equity to be relieved from paying for lots purchased at prices which he him· self assisted in fixing, and casting the burden of their depreciation in value, if any, upon the company of which he was a charter member, and which owes duties and obligations to lot O'Wners and its stockholders, which it appears to be discharging in good faith to the ex· tent of its ability. The decree of the court below is affirmed.
BROWN v. DULUTH, M. & N. RY. 00. et aI. (Circuit Court, D. Minnesota. February 18, 1893.)
RAILROAD COMPANIES-OVERCAPITALIZATION-CONSTRUCTION CONTRACT.
Laws Minn. 1887, c. 12, § 1, prohibiting any railroad company or officer thereof from selling or disposing of shares of its capital stock, or issuing certificates therefor, unless such shares shall have been fully paid, or issuing any stock or bonds, except for money, labor, or property received and applied for the purpose for which the corporation was created, does nC?t forbid the issue of first mortgage bonds and full-paid stock by a railroad company in payment for the construction of its road, if the amount issued does not unreasonably exceed the value actually receiVed. The assignment of railroad stock issued in pursuance of a fraudulent scheme, to which the assignor was a party, places the assignee in. no bettt!f
SAME-FRAUDULENT ISSUE OF STOCK-RIGHTS OF PURCHASER
J'EDElUL REPORTER j
position .1:MJl his assign()r was, and equity' will not aid such assignee seekIngrellefl>t .1nJ1Jllction as tp acts of t4e directors and In relation to other stock of the same lind which he asks Ul have Cll-Dceled. .. CORPORA .. Ari 'of railroad stoclt,who'has not registered his stock, nor obtained ireoognition as a stockholder, cannot bring suit In 1)ehalf of himself and to restrain the action of the oftlce1'8 of the corporato be ultra vlresand illegal.
In EqUity.· :aill by William' S. Brown against the Duluth, Missabe & Northern' Company and others to enforee corporate rights and restl'ain'theoorporation from acts alleged to be ultra. vires. injunction aina Ml!Itraining order dissolved. C.Spooner, for complainant. Lusk, H. (}. Stone and J. II. Shaw. for defendants.
District Judge. The original' bill was .1l.led January 23, 1893,. a restraining order was granted, and an order to show cause why a preliminary injunction should not On the return day of the order, February 10, 1893, an amended bill was filed. The purpose of the original and amended bill is to enforce corporate rights, and to .restraih the corporation from ultra vires acts, and the specific relief for an accl)unting, and for a decree resf,raining the .directors, and each of them, and the said other defendants, from voting upon and exercising the rights of stockholders by virtue of certain stock alleged to have been illegally secured by the. directors, .and directing the said defendants, or such of them as hold said stock, to surrender up the same for cancellation; and that a proposoo issue of stock by the corporation, alleged to be a bonus, may be restrained, and that a proposed issue of bonds under a contract attached. as Exhibit C to the amended bill, or under anymodiftcation of the same, or under any issue or sale of bonds for the purpose alleged to be of putting out corporate stock Without receiving par value for the same be restrained, and that the defendants, directors, officers and other defendants, naming them, may restrained from contracting to issue, sell, or give away the stock now held or ownOO by them. The complainant claims to be a stockholder of the defendant corporation, the Duluth, ':Missabe & Northern Railway Company, and brings the suit on behalf of himself and other' stockholders of the corporation. At the heariD.g a motion to dismiss for want of jurisdiction was made, and a demurrer ore tenus It is urged that there is no equity in the original or amended bill, and that the complainant has no right to institute this suit. The defendant .company was i:qcorporated under the general laws of the state of Minnesota., M;:l.y.26, 1891, to constrUct a railroad commencing at a point on t4e narvigable waters of Lake SuperiQr, or St. Louis bay, or St. Louis river, or at .a point on some railroad connecting with the said waters, running thence in a northerly direction to some PQint on the northern boundarY line of the state of Minnesota. On January 29, 1892, the company entered into a contract with Donald Grant to build and construct a portion of its line of railrQad. By the terms of this construction contract the company was to place in the hands
BROWNv. DULUTH, Y. & N. RY. :CO.
of a trustee bonds and stock as follows: Nine hundred thousand dollars, face value, of its first mortgage bonds, guarantied by the Mountain Iron Company, a mining company located on the defendant company's road, and a party of the third part to this construction oontract; also $945,000, face value, of its full"paid common stock; and the party of the third part agreed to put in the hands of the trustee $200,000, face value, of its full-paid common stock; and the Biwabick Mining Company, party of the fourth :P8l't to this contract, agreed to put up also $200,000, face value, of its full-paid common stock; and when Donald Grant completed the road all the stock and securities should be delivered to him. On the same day, Foley Bros. & Guthrie, a firm of railroad contractors, D. W. Grant, and Albert S. Chase, a brother of the president of the defendant railroad company, joined with Donald Grant in a copartnership, and assumed the performance of his construction contract, and agreed to build the r.oad for the $900,000 bonds and $333,333 stock, and all the stock to be put up by the two mining companies. By the terms of the copartnership the parties thereto agreed to furnish money for the construction of the road as follows: Each of the parties thereto, except Albert S. Chase, one fifth, and the said Chase two fifths, and the securities received for the construction were to be divided between the parties in the same proportion. A further contract was made with Donald Grant for the construction of a branch line of the company's road, and assumed by the copartnership on the same terms. The compensation for building it was $300,000 in bonds and $300,000 in stock. The contracts were completed, and the securities turned over, in the autumn of 1892, and Foley Bros. & Guthrie received for their interest in the partnership construction contracts $240,000 in bonds and $126,666 of common stock of the railway company. This common stock the complainant purchased January 12, 1893, for the sum of $9,720 in good faith, as he claims. It is alleged that the Duluth, Missabe & Northern Railway Company and Donald Grant and Albert S. Chase and all of the directors of said railway company conspired and confederated together by means of the said construction contract to issue a large amount of stock of said corporation as fully paid up, without receiving in fact any consideration for the same, and that it was well known that the construction of the road would not cost to $580,000, and that, in pursuance of the conspiracy, A. S. Chase represented his brother and others directors of the company in the partnership contract with Donald Grant and others, and by means of the partnership contract and the original contract with Grant a scheme was devised to evade a statute of the state of Minnesota, (chapter 12, enacted in 1887,) and that by this scheme the amount of $611,667 of the common stock of the railway company, apparently a profit to Donald Grant on his construction contract, was intended to be and actually was divided between the directors of said corporation. The first seCtion of this statute enacts as follow!:
"Section 1. That it shall not be lawful for any railroad company existing by virtue of any laws of this state, nor for any officer of any such company, to sell, dispose of, or pledge any shares of the capital stock of such company.
nor to ISS1le of shares In the capital stock of such company, until the shares 1'0 sold, disposed of, or pledged, and the shares for, )Vhich such cerMeates to be issued, shall have been fully paid; nor issue any stock or bonds except for money, labor, or property actually received and applied for the purpose for which said corporation was created; and,all fictitious stock, dividends,and otherfict1tious Increase of the capital stock or indebtedness of any such shall be void; and if any ofiicer, or officers of any such pledge, or dispose of any share or certificates of company shiLllissue, shares of the capital stock of such company in violation of the provisions of this act, suchofiicer or ofiicers so doing shall be deemed guilty of a misdemeanor, and, upon a conviction thereof, ,shall be punished as hereinafter provided. The provisions of this act shall apply as fully to the stock of consolidated railroad companies existing in whole or in part within this state as to original consolidated companies exis1;1ng as aforesaid."
This statute was enacted to prevent "watered stock," so called,. from being issued and :Unposed upon the market. Whether the scheme for building this road. set forth in the construction contract and the partnership contract was intended to enrich the llirectors, and enable them to receive a pro:ftt in stock without any consideration there"" for, it is not to determine. If a suit can be maintained by a stockholder to avoid the disaster to the corporation and the public of such a contract' and' such an. alleged scheme, the complainant is under in a situation to bring it. Foley Bros. & Guthrie,lthe assignors of the, complainant, from whom he purchased his stock, was f\ member of the copartnership, of Donald Grant and others, anclJn the Qf, copartnership the conf"itruction contract of, Grant with is recited, .and Foley & Guthrie knew that '945,000 othommon stock at one time and $300,000 at another of company were required to be placed' in the hands of theti0Istee to be delivered to Grant on the completion of the construction contracts. They received their stock out of these blocks of stock, a:J;ld it apart ,this stock which it is claimed by the, complainant is issued anq held by the dire«tors and other defendan.ts, and which he seeks to have canceled. Foley Bros. & Guthrie participated ,in the benefits of this alleged fraudulent s«heme, and they would not be to complain of it. The complainant" as their tral).sferee, is in no better situation than they are. He bas nO greater rights than his transferrers, as regards a remedy the transaction. The maxim "in pari delicto" applies, and a court of equity will not aid him. He cannot bring suit in b!,:half of other stockholders against the corporation or other parties paJ;1:icipating in the issue, as his own title is tainted with the same fraud. Again, a part of the relief sought is to restrain a proposed issue of stock by the corporation, alleged to bea bonus, and a proposed issue of bonds under a contract annexed as Exhibit C to the amended bill, or any modification of it, or the issue or sale of bonds for the purpose of, putting out corporate stock without receiving parvalue for the same; and that the directors and holders of the stock tainted with the alleged fraudulent scheme under the construction and be restrained from selling it. It is urged by counseltoJ3lliltain the motion for an injunction on this bra.nQh of the case that the complainant, though his assignors may
BROWN 'V. DULUTH, M. & N. RY. CO.
have sold to him stock which is a part of a fraudulent issue, and of which they had notice, yet, as a stockholder, he can enforce corporate rights to prevent threatened illegal acts in the future, and by his amended bill he seeks to prevent the corporation and its directors and officers from carrying out the terms of a contract which are in violation of the statute above recited, and therefore contrary to public policy, and are also disadvantageous and injurious to the corporation and stockholders. The contention on the part of the defendants is that the contract referred to is a real bona fide transaction for the purpose of constructing the entire railroad contemplated by its charter, and to carry out legitimate corporate purposes. The contract complained of is attached to the amended bill of complaint, and is too long to embody in this opinion. Briefly it provides for the sale of $2,000,000 of a new issue of first mortgage bonds at 80 per cent. of their par value, and a delivery to the purchasers simultaneously and pro rata with the delivery of the bonds an amount of the capital stock of the railway company equal to per cent. of the par value of the bonds purchased; that is, $666,666.66 par value of stock. In substance, the company is to receive $1,600,000 cash for $2,000,000 face value of bonds and' $666,666.66 face value of commolD. stock. The bonds and stock are to be delivered as the installments of cash are received, and the entire amount is to be expended in building the road and for le-gitimate corporate purposes. The contract provides in detail for the expenditure of the money received by the company, and furnishes approximate estimates of the cost of structures and rolling stock· and ore docks necessary to equip the road, and enable it to sllccessfully engage in the business contemplated by its organization. The questions presented in the argument on this branch of the case are: (1) Is such a contract forbidden by the statute supra? (2) Can the complainant bring a stockholders' suit to prevent the corpo· ration from. carrying out the contract? This statute was not intended to prevent or interfere with the usual method of raising money to build railroads; or for any legitimate corporate purpose. It is not to be construed as obstructive to the extent of restricting and hampering corporations in their internal management, and embarrass them in procuring means to carry out the legitimate purposes of the corporation; and 'unless it appears that, under the guise of building its road, bonds and stock of the defendant company are to be issued and put upon the market fraudulently that do not and are not intended to represent money and property, this corporation is not prohibited from entering into a real transaction based upon a present consideration, and having reference to legitimate corporate purposes. Beach, Corp. p. 909, and authorities there cited. Such a transaction is not a scheme or device to evade the statute. It may be that an amount of corporate bonds and stock turned over by a corporation is so much in excess of the expenditures to be made by the recipients of the same that a court would hold that the statute prohibited such atransaction; but, if the purpose of the corporation in issuing bonds and stock is to build its road, and no unreasonable amount is issued beyond the value actually received or provided for, the statute, in my opin·
"Theproblbitlon against the issue. of the stock or bonds tor money or proPertY 'actiiaJ11 received or labor done, 'and against fictitiouS increase ot stock or' lJidebMdness; was intended to' protect "against spoliation, and togD4rd,the Public against secUliij,es that wereabsollltely worthless. One ot the that waS! sought to be remedied 18 thellooding of the market with stQck and bonds that do not represent anything whatever ot substantial value." ' .
fon;dOOlfJlot Assaidbythecourlin RailroadOo.v. Dow, 120 ! Slip. Ct. Rep. 482: . . . '
.the Court recUITing to the language employed in the ArkanS8B constitution, which is substantially like the¥ipnesota statute, that such a, provision does not necessarily indicate a purpose the validity of every issue of stock or bonds by a corporation depend upon the inquiry whether the money, property, or labor actuaJ1J': therefor was of equal value in the market with the stock or bonds so issued. I am of the opinion that this contract is not forbidden by the statute, and that the allegations of threatened wrong acts.by directors are not sufficient, as stated in the amended bill, .to make it illegal. . However, if it should be conceded that the contract is one which ought not to pe sanctioned· by a court of equity, the second question must I have considered the question involved as if the right ofcom.plainant to bring this stockholder's suit was clear. Has he, on the facts stated in the original or amended complaint, the right, as a st.Qckllolder, to institute this suit to restrain the corporation from alleged ultra vires and illegal acts? '. A membership in this corpoflil,tion consists in the ownership of shares thereof recognized by the corporation. The complainant claims membership by acquiring col'pQrate stock by transfer, but, not having registered his stock, and obtained recognition by the corporation as a stockholder, he can claim no other rights than those: which the assignment vests in, him. . Undoubtedly, as between himself and his assignors, the purchase of the certificate gives him all the rights of ownership, and entitles him to demand that he shall be registered by the corporation; but. until he has caused a transfer to be made upon the ,books of. the corporation, his title, as between the corporation and himself, is not perfected, and he neither has the, rights nor is subject to the liabilities of membership. He may bring a suit, under circumstances, to protect his individual. interests in the corporate property, but he cannot in the management of the corporation, and enforce corporate,rights.to restrain threatened wrongs on the corporate interests. He brings this suit in behalf of himself and his associate stockholders. Not being a stockholder himself recognized by the corporation, he is personally precluded from doing this. In Heath v. Railway Co., 8 Blatchf. 347, 392, 410, it was held by the court that one Burt, who waa not a stockholder, was improperly joined as a complainant. See, also, Ramsey v. Erie Ry.Oo., 7 Abb. Pro (N. S.) 156, and Hersey V. Veazie, 24 Me. 9. In view of this decision, the complainant here has no. standing in court to enforce the corporate rights alleged in the amended bill, and the motion for an injunction. is denied, and the restraining order discharged. Let an order be entered to that effect.
COMMISSIONERS OF MAHONING COUNTY.
YOUNG v. COMMISSIONERS OF MAHONING COUNTY et aL (Circuit Court, N. D. Ohio, E. D. December 5, 1892.) No. 4,699.
EJECTMENT-OCCUPYING CLAIMA,NT'S LAW-WHO MAY CLAIM BENEFITS.
Rev. St. Ohio, I 5786, suM. 2, enumerates, among the persons entitled to the benefit of the occupying cla1mant's law, any person who holds "by deed * * * from and under a person claiming title as aforesaid, * * * by deed duly authenticated and recorded." Held, that one clalmlng title by a deed from a grantor who held under a deed must, to secnre the benefits of the law, show that both deeds were conveyances in fee; but he is not presumed to know of defects in the title of the more remote grantor, and it is immaterlal that such grantor, being a municipal corporation, held only a base fee, which had in fact been theretofore determined by an abandonment of the use to which the lands were dedicated. Beardsley v. Chapman, 1 Ohio St. 118, apillied. A city by deed in fee conveyed certain lots to a building committee in trust, empowering them, in their discretion, either to sell the lots and convey a fee simple to the purchaser, to exchange the lots for others, or to use them for the erection of a courthouse, and then donate them to the county commissioners. The building committee erected a conrthouse upon one of the lots, and then conveyed the same by deed in fee to the commissioners. Held, that the title could not be considered as passing directly from the city to the commissioners, so as to deprive the latter of the benefits of the occupying clalmant's law upon ejectment under title paramount, for the committee was not a mere conduit for passing the title, but was invested with a discretion as to the use of the lots, and therefore with authority to exeIclse the attributes of ownership.
is to be ascertained, not by their cost, but by the added value which they
SAME-VALUATION OF IMPROVEMENTS.
Under the occupying claimant's law of Ohio, the value of improvements
give to the real estate for the use and enjoyment thereof by the lawful owner. Van Bibber v. Williamson, 87 Fed. Rep. 756, followed. The common-law rule (existing in Ohio) that the omission of the word "heirs," in the granting and habendum clauses of deeds to natnral persons, vests in the grantee a life estate only, is subject to an exception when upon the face of the deed it appeara that the conveyance is made in trust for a use, the full performance of which requlres the vesting of a fee in the trustee; and where a city by such a deed conveys lots to a building committee in terms empowering them, in their discretion, either to sell the lots and convey a fee simple to the purchaser, to exchange the lots for others, or to use them for the erection of a courthouse, and then donate them to the county commissioners, such deed must be held to convey a title commensurate with the purposes of the trust, namely, a fee simple. Rev. St. Ohio 1880, § 4106, requlrlng that every deed shall be signed and sealed by the grantor or maker, does not apply to deeds made by municipal corporations, and their deeds, if executed according to the mode prevailing at common law, are sufficient to pass title. Therefore a deed in which the testatum clause reads as follows is sufficient: "In witness whereof the said city of Youngstown and the city council have caused William M. Osborn, mayor aforesald, to subscribe his name, and have caused the corporate seal of Bald city to be affixed, to these presents. William M. Osborn, Mayor. [City of Youngstown Seal.]" Sheehan v. Davis, 17 Ohio St. 571, followed. TifIin v. Shawhan, 1 N. E. Rep. 581,48 Ohio St. 178, distinguished.
SAME-WORDS OF INHERITANCE.
Statement by TAFT, Circuit Judge:
T'.ais was an action in ejectment by Young against the commissioners of Hahonlng county to recover lot No. 96 on the original plat of the town 01