Louisville, N.A. & C. Ry. Co. v. Louisville Trust Co. - 174 U.S. 552 (1899)
U.S. Supreme Court
Louisville, N.A. & C. Ry. Co. v. Louisville Trust Co., 174 U.S. 552 (1899)
Louisville, New Albany & Chicago Railway
Company v. Louisville Trust Company
Argued May 4-5, 1898
Decided May 15, 1899
174 U.S. 552
The Circuit Court of the United States for the District of Kentucky has jurisdiction of a suit brought by a corporation, originally created by the Indiana, against citizens of Kentucky and of Illinois, even if the plaintiff was afterwards and before the suit made a corporation of Kentucky also, and pending the suit became a corporation of both Indiana and Illinois by reason of consolidation with a corporation of Illinois, but the court cannot, in such a suit, adjudicate upon the rights and liabilities, if any, of the plaintiff as a corporation of Kentucky or as a corporation of Illinois.
A court of equity has jurisdiction of a bill by a corporation praying that its guaranty on a great number of negotiable bonds may be cancelled, and suits upon it restrained, because of facts not appearing on its face.
Under a statute authorizing the board of directors of a railroad corporation, upon the petition of a majority of its stockholders, to direct the execution by the corporation of a guaranty of negotiable bonds of another corporation, a negotiable guaranty executed by order of the directors, and signed by the president and secretary and under the seal of the first corporation, upon each of such bonds, without the authority or assent of the majority of its stockholders, is void as to a purchaser of such bonds with notice of the want of such authority or assent, but is valid as to a purchaser in good faith and without such notice.
This was a bill in equity filed April 9, 1890, in the Circuit Court of the United States for the District of Kentucky, by the Louisville, New Albany & Chicago Railway Company (hereafter called the "New Albany Company"), described as "a corporation duly organized and existing under the laws of the state of Indiana," against the Ohio Valley Improvement & Contract Company (hereafter called the "Construction Company"), the Richmond, Nicholasville, Irvine & Beattyville Railway Company (hereafter called the "Beattyville Company"),
and the Louisville Trust Company, all corporations of the State of Kentucky, and other citizens of Kentucky, of New York, and of Illinois, for the cancellation of a contract between the New Albany Company and the Construction Company, and of a guaranty endorsed by the New Albany Company, in accordance with that contract, upon bonds issued by the Beattyville Company, and held by the other defendants, and for an injunction against suits thereon. The Louisville Banking Company, a corporation of Kentucky, and other bondholders, were afterwards made defendants by a supplemental bill.
The bill alleged that the guaranty was fraudulently placed on the bonds of the Beattyville Company by a minority of the plaintiff's directors, who, as individuals, had secured the option to buy the bonds at a low price, and also averred that the guaranty was void for want of the presence of a quorum of the directors at the meeting which directed it to be executed, as well as for want of a previous petition in writing by a majority of the stockholders, pursuant to a statute of Indiana.
Pleas to the jurisdiction, asserting that the plaintiff was a corporation and a citizen of Kentucky, as well as demurrers to the bill for want of equity were overruled by the court. 69 F. 431, 432; 57 F. 42.
The case was afterwards heard upon pleadings and proofs, and, so far as is material to be stated, appeared to be as follows:
The New Albany Company, by articles of incorporation filed with the Secretary of State of Indiana in January, 1873, reciting its purchase at a judicial sale at New Albany of the railroad and franchise, and all the property, real and personal, of another railroad company, whose line of railroad ran from New Albany to Michigan City, in the State of Indiana, and expressed to be made "for the purpose of carrying out the design of the said purchase, and forming a corporation of Indiana," became a corporation under the statute of Indiana of March 3, 1865, which contained these provisions:
"The said corporation shall have capacity to hold, enjoy and exercise, within other states, the aforesaid faculties, powers, rights, franchises and immunities, and such others as
may be conferred upon it by any law of this state, or of any other state in which any portion of its railroad may be situate, or in which it may transact any part of its business, and to hold meetings of stockholders and of its board of directors, and to do all corporate acts and things, without this state, as validly and to the same extent as it may do the same within the state, on the line of such road."
Indiana Stat. 1865, p. 68, c. 20, § 5; Rev.Stat. § 3949.
"Any railroad company incorporated under the provisions of this act shall have the power and authority to acquire, by purchase or contract, the road, roadbed, real and personal property, rights and franchises of any other railroad corporation or corporations which may cross or intersect the line of such railroad company, or any part of the same, or the use and enjoyment thereof, in whole or in part; and may also purchase or contract for the use and enjoyment, in whole or in part, of any railroad or railroads lying within adjoining states, and may assume such of the debts and liabilities of such corporations as may be deemed proper. . . . Any railroad company incorporated under the provisions of this act shall also have power to consolidate with other railroad corporations in the continuous line, either within or without this state, upon such terms as may be agreed upon by the corporations owning the same."
Indiana Stat. 1865, p. 68, c. 20, § 7; Rev.Stat. § 3951.
On April 8, 1880, the Legislature of Kentucky passed a statute entitled "An act to incorporate the New Albany & Chicago Railway Company," which took effect upon its passage, and the first two sections of which were as follows:
"SEC 1. The Louisville, New Albany & Chicago Railway Company, a corporation organized under the laws of the State of Indiana, is hereby constituted a corporation, with power to sue and be sued, contract and be contracted with, to have and use a common seal, with the power incident to corporations, and authority to operate a railroad."
"SEC. 2. The Louisville, New Albany & Chicago Railway Company is hereby authorized to purchase or lease, for depot purposes in the City of Louisville or County of Jefferson, such
real estate as may be deemed by it to be necessary for passenger and freight depots and transfer, machine shops, and for all switches or turnouts necessary to reach the same, and is also authorized to connect with any railroad or bridge now operated or used, or which may be hereafter operated or used, in said County of Jefferson, and may build any such connecting lines, or lease or operate the same, and for all said purposes shall have the right to condemn all property required for the carrying out of the objects herein named, and may bond the same, and secure the payment of any such bonds by a mortgage of its property, rights and franchises."
The third section of that statute directed how proceedings for the condemnation of such real estate should be conducted in the courts of the State of Kentucky. Kentucky Stat. sess. 1879, p. 233, c. 858.
On May 5, 1881, the New Albany Company, describing itself as "a corporation existing under the laws of the State of Indiana" and as owning and operating a line of railroad from New Albany to Michigan City in the same state, and the Chicago & Indianapolis Air-Line Railway Company, describing itself as "a consolidated corporation organized and existing under the laws of the States of Indiana and Illinois" and as having in process of construction a line of railway extending from Indianapolis, in Indiana, to a connection with a railroad at or near Glenwood, in Illinois, so as to secure a connection with Chicago in that state, consolidated their stock and property under the laws of Indiana and of Illinois "so as to create and form a consolidated corporation, to be called and known as the Louisville, New Albany & Chicago Railway Company," by articles of consolidation, the third of which provided, in accordance with the statutes of Indiana, that
"the said consolidated corporation hereby created shall be vested with all the rights, privileges, immunities and franchises which usually pertain to railroad corporations under the laws of the respective states of Illinois and Indiana, wherein the lines of its railroad are situate, and shall also be vested with all and singular the rights, powers, privileges, immunities, capacities and franchises which before the execution
of these articles were lawfully possessed or exercised by either of the parties hereto,"
and the ninth of which provided that "the principal place of business and the general office of the consolidated corporation shall be established in the City of Louisville, Kentucky."
On April 7, 1882, the Legislature of Kentucky, by a statute entitled "An act to amend an act entitled An act to incorporate the Louisville, New Albany & Chicago Railway,' approved April 8, 1880," enacted that
"the Louisville, New Albany & Chicago Railway Company is hereby authorized and empowered to endorse or guarantee the principal and interest of the bonds of any railway company now constructed or to be hereafter constructed within the limits of the State of Kentucky, and may consolidate its rights, franchises and privileges with any railway company authorized to construct a railroad from the City of Louisville to any point on the Virginia line, such endorsement, guarantee or consolidation to be made upon such terms and conditions as may be agreed upon between said companies, or it may lease and operate any railway chartered under the laws of the State of Kentucky, provided, it shall not lease or consolidate with any two lines of railway parallel to each other."
Kentucky Stat. sess. 1881, p. 251, c. 870.
The New Albany Company was not shown to have formally accepted the statutes of Kentucky of 1880 and 1882, or to have ever organized as a corporation under those statutes. But the defendants, as evidence that it had accepted a charter of incorporation from the State of Kentucky, relied on the following documents:
(1) Two deeds to it of lands in Jefferson County, made and recorded in 1881, in which it was described as "of the City of Louisville, Kentucky."
(2) Two mortgages executed by it to trustees in 1884 and 1886, including its railway in Indiana and in Jefferson County, in each of which it was described as "a corporation duly created and existing under the laws of Indiana and Kentucky."
(3) A lease to it from the Louisville Southern Railway
Company, in 1888 (more fully stated below), in which it was similarly described.
(4) A petition (the date of which did not appear in the transcript) that an action brought against it in a court of the State of Indiana might be removed into the circuit court of the United States upon the ground that it was a corporation of Kentucky.
(5) Proceedings in 1887, in a court of Jefferson County, for the condemnation of lands in that county upon a petition in which
"the Louisville, New Albany & Chicago Railway Company states that it is a corporation, and that it is duly empowered by its charter by an act of the General Assembly of the Commonwealth of Kentucky to purchase, lease, or condemn in said state such real estate as may be necessary for railway, switches, side tracks, depots, yards, and other railway purposes, and to construct and operate a railroad in said state."
On March 8, 1883, the Legislature of Indiana passed a statute entitled
"An act to authorize railroad companies organized under the laws of the State of Indiana to endorse and guarantee the bonds of any railroad company organized under the laws of any adjoining state,"
the material provisions of which were as follows:
"SEC 1. The board of directors of any railway company organized under and pursuant to the laws of the State of Indiana whose line of railway extends across the state in either direction may, upon the petition of the holders of a majority of the stock of such railway company, direct the execution by such railway company of an endorsement guarantying the payment of the principal and interest of the bonds of any railway company organized under or pursuant to the laws of any adjoining state the construction of whose line or lines of railway would be beneficial to the business or traffic of the railway so endorsing or guarantying such bonds."
"SEC. 2. The petition of the stockholders specified in the preceding section of this act shall state the facts relied on to show the benefits accruing to the company endorsing or guarantying the bonds above mentioned. "
"SEC. 3. No railway company shall, under the provisions of this act, endorse or guaranty the bonds of any such railway company or companies, as is above mentioned, to an amount exceeding one half of the par value of the stock of the railway company so endorsing or guarantying as authorized under this act."
Indiana Stat. 1883, p. 182, c. 127; Rev.Stat. §§ 3951a-3951c.
On December 10, 1888, the New Albany Company took a lease in which it was described as "a corporation organized and existing under the laws of the State of Indiana and of the State of Kentucky," from the Louisville Southern Railroad Company, a corporation of Kentucky, of the railroad of the latter, running from Louisville to Burgin through sundry other places in Kentucky, and connecting at Versailles, in that state, with a railroad then being constructed by the Beattyville Company to Beattyville, and which would, if completed, extend the connections of the New Albany Company a considerable distance towards the Virginia line.
The Beattyville Company had, on October 11, 1888, made a contract with the Ohio Valley Improvement & Contract Company by which that company agreed to construct and equip its line of railroad, and, in consideration thereof, the Beattyville Company agreed to execute and issue to the Construction Company its first mortgage bonds for $25,000 a mile, dated July 1, 1889, and payable in thirty years, with interest at the annual rate of six percent, and to transfer to that company the subscriptions received from municipalities, and to issue to that company all its capital stock except what would have to be issued on account of such subscriptions.
On October 8, 1889, the board of directors of the New Albany Company, as appeared by its records, passed a resolution ordering the president and secretary to execute under the seal of the company a contract with the Construction Company, which contract described that company as a corporation of the State of Kentucky, and the New Albany Company as "a corporation organized and existing under the laws of the States of Indiana and Kentucky," and contained these stipulations:
"Fourth. The said New Albany Company agrees to and
with the said Construction Company that it will, from time to time, as the said first mortgage bonds are earned by and delivered to the said Construction Company, pursuant to the terms of their said construction contract, guaranty the payment by the said Beattyville Company of the principal and interest of the said bonds in manner and form following -- that is to say, by endorsing upon each of said bonds a contract of guaranty as follows:"
" For value received, the Louisville, New Albany & Chicago Railway Company hereby guaranties to the holder of the within bond the payment, by the obligor thereon, of the principal and interest thereof, in accordance with the tenor thereof."
" In witness whereof, the said railway company has caused its corporate name to be signed hereto by its president, and its seal to by attached by its secretary."
"Sixth. In consideration of the premises, the said Construction Company agrees to transfer and deliver to the said New Albany Company three-fourths of the entire capital stock of the said Beattyville Company, the said delivery to proceed pari passu with the guarantying of the said bonds by the said New Albany Company, $3,000 at par of the said stock being delivered for each $4,000 of bonds guarantied."
This contract was dated October 9, 1889, was signed in the name of each company by its president and secretary and under its corporate seal, and a copy of it was spread upon the records of the board of directors of the New Albany Company.
The charges of fraud against the directors who took part in that meeting were disproved, and the evidence failed to establish that the meeting was not in every respect a lawful one.
But no petition of a majority of the stockholders for the execution of the guaranty was presented, as required by the statute of Indiana of 1883, above cited. Nor was there any evidence that the stockholders ever authorized or ratified the contract between the New Albany Company and the Construction Company or the guaranty executed in accordance therewith.
Pursuant to that contract, and before March 12, 1890, the
stock of the Beattyville Company was delivered to the New Albany Company; a guaranty, in the terms specified in the fourth article of that contract, and bearing the signature of the New Albany Company, by its president and secretary, and its corporate seal, was placed on 1,185 bonds, for $1,000 each, of the Beattyville Company; and the bonds thus guarantied were put on the market by the Construction Company.
On March 12, 1890, the annual meeting of the stockholders of the New Albany Company was held, a new board of directors was elected, and the meeting was adjourned to March 22, 1890, when it was voted by a majority of the stockholders to reject and disapprove the contract with the Construction Company and the guaranty placed on the bonds of the Beattyville Company, as having been made without legal authority or the approval of the stockholders, and to empower the board of directors to take all proceedings necessary or proper to cancel such contract and guaranty and to relieve the company from an obligation or liability by reason thereof.
Many of the bonds so guarantied and put on the market, including one hundred twenty-five bonds purchased by the Louisville Trust Company and ten bonds purchased by the Louisville Banking Company, were taken from the Construction Company by the purchasers in good faith, and without notice or knowledge that there had been no petition of a majority of the stockholders for the execution of the guaranty, and forty-five of the bonds were purchased from the Construction Company by the Louisville Banking Company after the meeting in March, 1890, and with notice that the majority of the stockholders had not petitioned for, but had disapproved, the guaranty.
The Beattyville Company and the Construction Company went on with the work of constructing the Beattyville Railroad until the summer of 1890, when they both became insolvent, and their property passed into the hands of receivers.
The plaintiff, in its bill, tendered back the stock which it had received, and the stock was deposited in the office of the clerk of the court.
The circuit court entered a decree for the plaintiff against
all the defendants. 69 F. 431. The Louisville Trust Company and the Louisville Banking Company and other bondholders appealed to the circuit court of appeals, which reversed the decree of the circuit court and ordered the bill to be dismissed as to the Louisville Trust Company and the Louisville Banking Company, except as to the forty-five bonds held by the latter company, and, as to these bonds, ordered an injunction against suits on the guaranty against the plaintiff as a corporation of Indiana and Illinois, and that there be stamped on each of these forty-five bonds, under its guaranty, these words,
"This guaranty is binding only on the Louisville, New Albany & Chicago Railway Company, a corporation of Kentucky. It is not binding on the Louisville, New Albany & Chicago Railway Company, a corporation of Indiana and Illinois."
75 F. 433. The plaintiff applied for and obtained these writs of certiorari. 164 U.S. 707.