I am unable to vote for the judgment of affirmance about to be pronounced. In view of the complicated state of facts contained in a lengthy record it is difficult to express within reasonable limits the grounds of dissent. The leading facts will bring out clearly the important question in this case.
The original plaintiff (now deceased and represented by his administrators) brought this representative action as a minority stockholder of the Houston and Texas Central Railroad Company on behalf of himself and all other stockholders similarly situated. This original company is hereafter referred to as Houston Company No. 1, and the new company formed under the same name in pursuance of a re-organization agreement as Houston Company No. 2. Houston Company No. 1, prior to 1885, owned and operated certain lines of railroad in the state of Texas with an aggregate capital stock of some $2,726,900, and a bonded indebtedness of more than $18,000,000, secured by seven mortgages; the portion of the road covered by each mortgage it is unnecessary to point out at this time; it suffices to say that only under one mortgage securing $1,500,000 could there be a sale of the property by reason of non-payment of interest. In 1883 a corporation known as Morgan's Louisiana and Texas Railroad and Steamship Company acquired a majority of the capital stock of Houston Company No. 1; later the Southern Development Company acquired a majority of the stock of Morgan's Company and thus secured the control of Houston Company No. 1.
The defendant Huntington was the president and in control of a corporation known as the Southern Pacific Company and a large controlling stockholder of the Southern Development Company. The result was that Huntington and his associates by means of their control of Morgan's Company elected the officers and directors of Houston Company No. 1; thereupon the stock belonging to Morgan's Company, which included a majority of the stock of the Houston Company No. 1, was transferred to the Southern Pacific Company. It *Page 386 is unnecessary to go into the details of the procedure that placed Houston Company No. 1 in the hands of a receiver under a judgment recovered upon defaulted coupons amounting to $600,000.
Foreclosure suits were instituted on the various mortgages and receivership extended to them, although six of those mortgages were not foreclosable to the extent of selling the property. The inability to sell led to the adoption of a re-organization agreement which resulted in a sale, by consent of majority of bonds, of the entire property to pay more than $19,000,000 of principal when only $1,500,000 was due under the terms of the mortgages.
A new corporation, the Houston Company No. 2, was formed and Olcott, the purchaser at the sale under the agreement, transferred to it the railroad property, except the lands he purchased which represented land grants to the old company by the state of Texas. Under trust indenture, executed by Olcott and Downs, a purchaser of some of these lands, they were to be sold and the proceeds applied to the payment of the bonds of Company No. 2, issued in place of bonds of Company No. 1. It thus appears that the holder of the majority of the stock of Houston Company No. 1, the Southern Pacific Company, participated in the re-organization proceedings and received substantial benefits thereunder. On the other hand, the minority holders of the stock of Houston Company No. 1, not being parties to the re-organization scheme, had no right to be heard, and were, indeed, subjected to terms that were essentially prohibitive. Houston Company No. 2 issued $10,000,000 of stock, and it was provided that the Southern Pacific Company, the holder of the majority of the stock of Houston Company No. 1, should receive the entire issue upon certain conditions, unless some portion of it was taken by floating debt creditors or holders of the stock of the old company. The re-organization agreement further provided that in the event a certain portion of said stock was not taken up, the Southern Pacific Company, or its appointee, upon providing such portions of the cash payments for interest *Page 387 and bonus to the holders of the first mortgage bonds and coupons, and for the necessary charges, etc., incurred as shall not have been provided for by the floating debt creditors, shall be entitled to the entire balance of stock of the new company not so taken, etc. If the stockholders availed themselves of the offer they were required to pay a sum sufficient to liquidate what the Central Trust Company should fix as their share of the expenses of the re-organization and the amount of the floating debt.
The Southern Pacific Company had to provide only for its share of expenses of the re-organization. The outside minority stockholder was required to do this and pay his share of floating debt in addition. The Central Trust Company fixed $73.00 a share as the assessment on stockholders for new stock, which was finally cut down to $71.40. The statement made that the terms imposed upon the minority stockholders were prohibitive is thus commented upon by the learned counsel for plaintiffs: "No stockholder paid the prohibitory assessment except one person who afterwards withdrew the payment. The Southern Pacific Company, while not by virtue of its control of a majority of the old stock, availing itself of the opportunity granted to stockholders, but rejecting the burdens of that opportunity, in its capacity as a direct party to the agreement, took the whole $10,000,000 of stock, free from the burdens imposed on stockholders."
Confronted by this situation and the decree of the United States Circuit Court for the Eastern District of Texas, what were the rights of the minority stockholders? The learned counsel for the plaintiffs claims that the Southern Pacific Company has acquired and now claims to hold for its own benefit, either directly or through the defendant Olcott, as its agent, the entire net property of Houston Company No. 1. It is conceded that the rights of the mortgagees of Houston Company No. 2 are not involved in this controversy. It is a contest between the Southern Pacific Company as a majority stockholder of the old company and the minority stockholders who are seeking to compel the due recognition of the legal rights *Page 388 of Houston Company No. 1 under the re-organization agreement. The claim is made that the bondholding creditors agreed to give the Southern Pacific Company, the majority stockholder of the railway company, the entire consideration of an agreement which was to be performed by the old railway company; that the minority stockholders are entitled to their share of such benefits of this composition agreement as should have gone to Houston Company No. 1. The counsel for plaintiffs states: "On this property we seek in this suit to impress a trust to give effect to the rights of the minority stockholders. And we seek also an accounting with the Southern Pacific Company."
This brings us to the question whether the plaintiffs can enforce these alleged claims in the present action. It is true there are allegations in the complaint that there was a combination between the Southern Pacific Company, the Central Trust Company and the defendant Olcott and others to ruin and defraud the minority stockholders. No proof of fraud was given at the trial, and the allegations are of no legal importance.
The learned Special Term, in its grounds for a short decision, stated that this action "is in effect a suit to set aside or avoid a decree of foreclosure and sale duly made and entered by the United States Circuit Court for the Eastern District of Texas." The learned Appellate Division, referring to this statement of the Special Term, says: "There is no attack made in this action upon the decree of the United States Circuit Court or the sale under the decree. * * * It is quite clear that to this cause of action the decree of the United States Circuit Court, under which the property was sold, was not a bar." The Appellate Division then dealt with the claim of plaintiffs on the merits, and held that no trust could be impressed in their interest as contended.
The counsel for plaintiffs argues that the cause of action now sought to be enforced rests upon four facts, either admitted or proved by defendants: (1) The plaintiffs' ownership of the shares of stock of Houston Company No. 1 and his representation of other stockholders; (2) control by the Southern *Page 389 Pacific Company of the majority of the stock of Houston Company No. 1; (3) the various legal proceedings in the Federal court in Texas terminated by the decree of foreclosure and the sale under that decree, and the reorganization under which the decree was reached; (4) the fact establishing the trust obligation resting upon the defendant, the Southern. Pacific Company, and its representative, the defendant Olcott, in favor of the minority stockholders of the railway company.
In drafting a bill in equity covering a complicated situation, many allegations are inserted that prove to be irrelevant and unnecessary on the trial, and oftentimes the prayer for judgment rests mainly upon the general request for such other or further relief as to the court may seem just and proper.
I am of opinion that on the uncontroverted facts in this record, set forth in the complaint and admitted by the answers, the learned Appellate Division erred in reaching the conclusion that, notwithstanding the decree of the United States Circuit Court for the Eastern District of Texas was not a bar to this action, there was no question of law presented for its consideration that entitled plaintiffs to judgment of reversal. This being the condition of the record, the unanimous decision of the Appellate Division has no bearing on the case.
It is unnecessary to state in detail the facts tending to show that the two reasons given by the Appellate Division for dismissing the complaint involve legal error. The plaintiffs' brief is very full in this connection. It is a conceded fact that the old company was practically insolvent unless measures were taken for its relief. It is also conceded that the rights of the defendants, the mortgagees of the new company, are not involved in this litigation. The question is whether the minority stockholders are entitled to work out through the Houston Company No. 1 their claim that by the terms of the re-organization agreement the Southern Pacific Company has been permitted to appropriate the whole consideration of an agreement to which the old company was a party and by which it was entitled to certain benefits. All the stockholders of the old company were vested with equal rights. *Page 390
The re-organization agreement became necessary by reason of the following situation: That out of a mortgage indebtedness of over $19,000,000 only the income mortgage, securing $1,500,000, was due, the remaining mortgages being unforeclosable after default in payment of interest. The bonds secured by the $1,500,000 were held by the trustees of the general mortgage as additional security for $4,305,000 issued under it. The general mortgage was not then due. Under the agreement declaring all mortgages due, pending suits to foreclose, the various mortgages were consolidated and carried to judgment. The suit to foreclose the income mortgage, the only one due by its terms, was filed as a cross bill in the consolidated cause. The result was that $17,521,000, the amount of principal represented by unforeclosable mortgages, was declared due and foreclosed in the consolidated action. It is clear that the bondholders of the old company secured an immense advantage by reason of rendering immediately due millions of mortgage indebtedness having years to run before payment could be demanded.
It cannot be assumed, as was done by the Appellate Division, that a foreclosure of the only mortgage due, securing $1,500,000, would have resulted in a situation as favorable to bondholders as was realized when the total indebtedness could be treated as due. It is apparent that any claim the minority stockholders have in equity and by way of lien against the Southern Pacific Company can only be worked out through the old company and in an action where all the parties in interest are represented, as in this case.
The Appellate Division, referring to the Southern Pacific Company, said: "The Southern Pacific Company was a large creditor of the corporation and as such became a party to this reorganization scheme. The fact that this creditor was also a stockholder of the company and controlled a majority of the stock is no reason why it should not protect itself as a creditor of the insolvent corporation. And all of its acts so far as disclosed by this record were entirely justified by its relation as creditor of the corporation." *Page 391
Counsel for plaintiffs very properly points out that there is no allegation or proof that the Southern Pacific Company was a creditor of the railway company, except as the Southern Development Company and Morgan's Company were creditors of the railway company and were controlled by the Southern Pacific Company. The record contains no issue as to the right of the Southern Pacific Company as a creditor. The re-organization agreement, referring to the Southern Pacific Company, party of the seventh part, states, "and the said Southern Pacific Company is interested in connecting roads in conjunction with which it desires such Houston and Texas Central Railway Company to be operated."
Counsel also states there is no proof that the Southern Pacific Company or the companies it controlled ever sued upon the floating debt or took judgment upon it or acquired or enforced any right under such debt. It is the plaintiffs' claim that the Southern Pacific Company has secured the $10,000,000 of the stock of the new company, being its entire stock, by reason of the fact that it owned and controlled a majority of the stock of the old company.
I am of opinion that the Southern Pacific Company in consenting as a majority stockholder to the scheme of the re-organization agreement did so as the representative of the old company and all of its stockholders, and the minority stockholders are entitled to their share of the benefits. What that share is can only be ascertained upon an accounting with the majority stockholder. The Southern Pacific Company upon such an accounting will be afforded the fullest opportunity to establish credit for any loss or expense to which it has been put in consequence of additional consideration moving from it in order to bring about the settlement with the creditors. Olcott and Downs bid in and hold title in their own names, the former to 4,340,339 acres, and the latter to 277,200 acres of land granted to the old company by the state of Texas. These parties purchased under the reorganization agreement and they are necessary parties to this action.
The present position of the plaintiffs is that the Southern *Page 392 Pacific Company occupies the same position towards minority stockholders as did the officers and directors of the old company. This position of the Southern Pacific Company prevents it from taking any advantage of minority stockholders. Furthermore, the plaintiffs ratify and confirm the composition agreement with creditors. They admit that the judgment of the United States Circuit Court for the Eastern District of Texas is final and conclusive.
The present position of the plaintiffs is not inconsistent with the finding of the trial court that the purchasers at the foreclosure sale acquired a good title. The Southern Pacific Company, the majority stockholder of the old company, received the entire issue, $10,000,000 stock of the new company, and plaintiffs seek after a full accounting and adjustment of mutual rights between it and them to impress a trust on the net property of the old company for the benefit of minority stockholders.
The rule governing conflicting rights between majority and minority stockholders is discussed in Farmers' Loan TrustCompany v. New York and Northern Ry. Co. (150 N.Y. 410). A very interesting discussion of the general principles governing in such cases is found in Ervin v. Oregon Ry. NavigationCo. (27 Fed. Rep. 625). (See, also, following cases: Jackson v. Ludeling, 21 Wall. 616; Menier v. Hooper's TelegraphWorks, L.R. [9 Ch. App.] 350.)
The judgment appealed from should be reversed, with costs.
CULLEN, Ch. J., GRAY, HAIGHT and WILLARD BARTLETT, JJ., concur with HISCOCK, J.; VANN, J., concurs with EDWARD T. BARTLETT, J.
Judgment affirmed. *Page 393