1. It needs no particular form of words to create a trust, so
there be reasonable certainty as to the property, the objects, and
the beneficiaries. P.
254 U. S.
208.
2. If the subject of a trust be a legal interest in property and
capable of legal transfer, the trust is not perfectly created
unless the legal interest be actually vested in the trustee. But it
is not necessary that the trust be expressed in the same instrument
that transfers the title; various instruments may be read together
in order to ascertain the intention to establish one.
Id.
Three railroad companies agreed that they would contribute in
stated proportions to establish a terminal for the common use of
themselves and of such other railroads as they might admit, that
the title should be in a trustee, that they would share the cost of
maintenance and operation in proportion to their use of the
terminal, and that a depot company might be formed to take
permanent control and issue its mortgage bonds to them for their
respective contributions to the purchase and improvements. Later
they caused to be formed a terminal railroad company with broad
corporate power to which they conveyed, by absolute deeds, the
property they had acquired for the terminal. The bonds and stock of
the terminal company were declared to be issued to them "in
payment," but recitals and provisions of its articles, and
resolutions attending the transfer, evinced that the main object
was not to abandon, but to effectuate the plan of the original
agreement. A subsequent contract between the four companies fixed
terms for management of the property,
Page 254 U. S. 197
for performance of the terminal service and division of the cost
among the three railroads according to use, permanently allotted
the stock among them, authorized one of them to sell one-half its
allotment to any outside railroad, acceptable to a majority of
them, which might then be admitted as a party to the agreement, but
provided that, with such exception, admission of an outside company
to the use of the terminal should require consent of all three.
Held:
3. That the terminal Company took the title in trust to maintain
and operate the property and to exercise all its corporate powers
for the common use and benefit of the three railroad companies,
their successors and assigns, and such other companies as might be
admitted by them to a proprietary participation in the terminal.
Pp.
254 U. S.
202-206.
4. That the subsequent contract was a modification only of the
original plan, and inconsistent with a purpose to treat the
terminal company as an independent entity subject only to
contractual obligations and remit the proprietary companies to the
ordinary rights of stockholders. P.
254 U. S.
208.
5. That, as between the proprietaries and others having notice,
the stockholding interest was restrained to the full extent
necessary to give effect to the trust, and the shares, representing
the right to participate in the trust, could not be regarded, while
the trust continued, as having an independent exchange value. P.
254 U. S.
210.
6. That the fiduciary character of the terminal company extended
to its officers and directors. P.
254 U. S.
211.
7. That, where stock in the terminal company was sold by one of
the proprietary companies to fiduciaries, officers, and directors
of the terminal company for value, to enable them to sell it to
some company capable of participating in the use of the terminal,
the successor of such vendor company was not estopped from denying
that the vendees acquired a substantial and valuable interest in
the terminal company. P.
254 U. S.
213.
8. That, where a successor of two of the proprietary companies
bought terminal shares from such individuals, and afterwards,
through its directors, transferred to one of them and to another
officer and director of the terminal, in settlement of a loan,
equivalent shares of the terminal and enough more to make more than
a majority of the terminal stock, still retaining an interest, it
was not estopped to dispute their claim of full ownership, or from
asserting its rights under the trust and seeking relief against any
inequitable use of the shares so transferred. P.
254 U. S.
214.
Page 254 U. S. 198
9. That, in the absence of express authorization, agents deputed
by the proprietary companies to vote their stock in the terminal
company, including the presidents of two and the vice-president of
the other, were without power to amend its articles so as to do
away with the trust or seriously impair the rights of the
proprietaries under it. P.
254 U. S. 215.
10. That the absence of any reference to the trust in deeds and
mortgages of the property, including the terminal shares, of the
proprietary companies, and in contracts made by the terminal
company in discharging its functions, was not persuasive evidence
against the existence of the trust. P.
254 U. S.
218.
11. That, where the articles of the terminal company were in
form amended so as to deprive the proprietary companies, as it was
claimed, of their exclusive ownership and control, and in effect to
discharge the trust, and the validity of the amendments was
unchallenged for 17 years, and where certain individuals, for
value, acquired from proprietary companies bonds and a majority of
the shares of the terminal company, and held them many years,
during which the property increased in value, the successors of the
proprietary companies were not estopped, or barred by laches, from
asserting the trust against such individuals, it appearing that the
latter were and remained officers and directors of the terminal
company, with constructive and actual knowledge of the trust, and
were not misled, that the amendments were not authorized or
ratified by the proprietaries, that, although their officers
acquiesced in certain internal changes in the terminal company
directed by the amendments and in the
de facto
distribution of its stock, there was no substantial departure from
the trust in the management and possession of the property, and it
appearing further that no claim that the trust had been repudiated
was made until shortly before the suit. Pp.
254 U. S.
219-222.
12. That the fiduciaries holding such shares were estopped to
avail themselves of incautious, negligent, or mistaken acts of
officers of the proprietary companies in order to obtain an
advantage for themselves at the expense of those companies. Pp.
254 U. S.
221-222.
13. That the shares held by such fiduciaries represented no
value or interest which they could set up against the
proprietaries, and that the latter, upon repaying what the former
had paid for them, with interest, were entitled to have the shares
surrendered and cancelled, and meanwhile to have any sale,
assignment, transfer, or voting of the shares prevented by an
injunction. P.
254 U. S.
223.
14. That, under contracts of the parties, earnings derived from
switching
Page 254 U. S. 199
and other terminal services and privilege should be credited, as
they accrued, to the proprietaries in proportion to their use of
the terminal --
i.e., to wheelage. P.
254 U. S.
225.
254 F. 927 reversed.
The case is stated in the opinion.
MR. JUSTICE PITNEY delivered the opinion of the Court.
This was a suit in equity brought in the year 1907 in the
Circuit (now District) Court of the United States for the Southern
District of Iowa by the Chicago, Milwaukee & St. Paul Railway
Company and the Wabash Railroad Company against the Des Moines
Union Railway Company. By an amended bill, the individual
defendants, Frederick M. Hubbell, Frederick C. Hubbell, and their
firm of F. M. Hubbell & Son, were brought in, and afterwards
the Wabash Railway Company, having succeeded to the rights of the
Wabash Railroad Company, was substituted as a complainant in its
stead. Jurisdiction depended entirely upon diverse citizenship of
the parties.
Complainants own and operate lines of railroad extending to the
City of Des Moines, Iowa, and connecting there with a joint
terminal property, legal title to which is held by the defendant
Des Moines Union Railway Company (hereinafter called for
convenience the terminal company), in which complainants hold a
minority of stock, the Wabash Company an eighth, the other
complainant a quarter,
Page 254 U. S. 200
while the Messrs. Hubbell hold five-eighths. Complainants assert
that the terminal company holds its property in trust for their
use, and that they are the sole beneficial owners, having an
equitable tenancy in common, and being entitled to the joint use of
the property in perpetuity, exclusive except as other railroads may
be admitted to participate in such use with their consent. This is
the principal matter in controversy. Intimately connected with it
is the question of the validity as against complainants of the
Messrs. Hubbell's claim to ownership of five-eighths of the capital
stock. A subordinate issue relates to the disposition of what are
called "surplus earnings," acquired by the terminal company from
outside parties during the operation of the terminal under an
agreement made in the year 1889 between the terminal company and
the predecessors of complainants, and which expired in 1918.
Complainants base their principal contention upon a trust
alleged to have been established under and pursuant to an agreement
made January 2, 1882, between three companies then engaged in the
construction of as many railroads converging at Des Moines, and
through the incorporation of the terminal company in the year 1884
for the express purpose of acting as trustee for the three
companies, and the conveyance to it by them of the terminal
property, followed by the working agreement of 1889, from all of
which it is contended that the terminal company has from the
beginning held, and still holds, all its property subject to a
trust under which the three railroad companies and their successors
and assigns, and such other railroad companies having lines
terminating at Des Moines as may be admitted with their consent,
are entitled to have the terminal property maintained and operated
for their use and benefit at the actual cost of the terminal
service performed. Complainant Chicago, Milwaukee & St. Paul
Railway Company is the remote
Page 254 U. S. 201
successor of two of the three companies, owning what may be
called the Northern and the Northwestern lines. Complainant Wabash
Railway Company is the remote successor of the original company
that owned the third, which may be called the St. Louis line. The
bill of complaint prayed for a decree declaring and establishing
the trust, an accounting for all income and profits received by the
terminal company for switching or handling traffic at the terminal
for companies other than complainants and their predecessors, and
for rentals of real estate and the like, and specifically and
generally for other appropriate relief. The defenses set up in the
answer and attempted to be supported by the proofs are, briefly,
that, by the deeds of conveyance made to the terminal company, it
took title not as trustee, but absolutely and for its own sole use
and benefit; that whatever relation may have arisen from the
provisions of the original articles of incorporation, whether
fiduciary or merely contractual, was substantially modified, and,
if fiduciary, terminated, by amendments adopted April 8, 1890,
alleged to have been thereafter recognized by complainants and
their predecessors as valid and so treated by defendants and all
others concerned; that complainants, by their conduct and that of
their predecessors, are estopped from setting up the equitable
title alleged, and have been guilty of laches barring relief in
equity; hence, that they are not entitled to assert any right or
interest in the terminal property except such as arises from their
ownership of a portion of the stock of the terminal company and
from the provisions of the agreement of 1889, and that, by the
proper construction of that agreement, the so-called surplus
earnings are the property of the terminal company, and not of
complainants.
Upon final hearing, the district court made a decree from which
both sides appealed to the circuit court of appeals, where it was
held (one judge dissenting) that
Page 254 U. S. 202
the terminal company had complete and absolute title to the
terminal property; that complainants, except as holders of its
stock or bonds, had no interest in it, nor voice in the control or
management; that, by the true construction of the 1889 agreement,
complainants were entitled to the surplus earnings until May 1,
1918, and that thereafter the rights of the parties respecting the
use of the terminal were only such as sprang from their nature as
carriers and their physical and business relations to each other
and to the terminal, by reason of which the terminal company must
furnish them with reasonable terminal facilities at reasonable
charges to be agreed upon, or, in default of agreement, to be fixed
by the proper public tribunal. 254 F. 927.
Cross-writs of certiorari bring the resulting decree here for
review.
The facts are intricate, and the evidence so voluminous that any
detailed recital of it would be unduly tedious. It is sufficiently
referred to in the prevailing and dissenting opinions delivered in
the circuit court of appeals, and we will content ourselves with
touching upon the salient points. The case involves no abstruse
legal or equitable doctrine; the application of familiar principles
to the facts as they are developed will direct us to the proper
outcome.
The agreement of January 2, 1882, was made between the three
railroad companies and two individuals in whose names certain
titles had been taken for the benefit of the companies. Its
principal provisions were that terminal facilities in Des Moines
should be purchased, constructed, and maintained at the joint
expense of the three companies and held and used in common; that
the expense of acquisition should be borne one-half by the St.
Louis Company, one-quarter by each of the others;
"that a depot company may be organized and may take permanent
charge of the property upon the terms herein set forth, and
Page 254 U. S. 203
that said company may issue and deliver to the companies,
parties hereto, its mortgage bonds to the amount of their
respective portions of the cost of the said purchases and
improvements. . . . The title to said property shall be and remain
in a trustee to be named by agreement of said companies, but
subject to the joint use and occupation of all of said railway
companies upon the terms herein described."
The St. Louis Company was to be charged with police control,
supervision, and maintenance of the terminal, and the expense
thereof (including taxes) apportioned between it and the other
companies according to the use they should respectively make as
evidenced by the wheelage; spur tracks were to be built connecting
the terminal with factories and other sources of trade in and about
the city, but if either of the companies should deem the
construction of any such track not advantageous, the question of
constructing it and which of the three companies should pay for it
was to be determined by arbitration; any railroad company having a
line not extending to Des Moines, but having effected an
arrangement for running its trains into the city over the line of
either of the three companies, was to be entitled to the use of the
terminal facilities upon paying a fair sum for rental and a
proportion of the maintenance account, the rental to inure to the
three companies in the same proportion as the original outlay, and
the sum due for maintenance to be determined in the same manner as
in the case of the three companies; railroad companies having lines
extending into Des Moines might be admitted to the use of the
terminal by agreement of all three companies; differences arising
under the agreement were to be referred to arbitration.
The terminal company was organized by representatives of the
three companies under articles of incorporation dated December 10,
1884, which recited the 1882 contract in full, with special
emphasis upon the provision that a
Page 254 U. S. 204
depot company might be organized to take permanent charge of the
property, and declared that the new company was organized for this
purpose, as well as others that were expressed. The articles
contained apt provisions to comply with the laws of the State of
Iowa so as to enable it to construct, own, and operate a railway
in, around, and about the city, with depots and everything else
useful and convenient for the operation of railways at the terminal
point, and with all the powers conferred upon corporations for
pecuniary profit. Its corporate existence was to continue for 50
years, with the right of renewal. It was expressly declared:
"All the powers exercised by this company shall be in accordance
with the terms and spirit of the aforesaid contract entered into on
the 2nd day of January, A.D. 1882."
There was a provision that the written assent of the three
companies should be necessary before the terminal company should
lease or otherwise dispose of the use of any part of its franchises
to any other railroad company. The capital stock was to be
$1,000,000, divided into shares of $100 each, and paid in as the
board of directors might determine, with authority to the board to
receive in payment the property and franchises in Des Moines held
by the three companies and their trustees. Four members of the
board of directors were to be nominated by the St. Louis Company,
two members by each of the other proprietary companies, and no
stockholder to be eligible for membership in the board unless so
nominated. This provision to apply to and be enjoyed by any grantee
or assignee of either of the three companies. No contract, lease,
or other agreement amounting to a permanent charge upon the
property of the corporation to be entered into unless first
approved by the three companies or their assigns and by more than
three-fourths of all the stockholders.
January 1, 1885, each of the three companies held a
stockholders' meeting at which formal resolutions were
Page 254 U. S. 205
adopted reciting the contract of January 2, 1882, and the
organization of the terminal company as contemplated in that
contract and in order to carry out its purpose, each company
thereby accepting and ratifying, so far as its interests were
affected, the articles of incorporation of the terminal company as
in substantial accord and compliance with the terms and conditions
of the contract, and authorizing its officers to transfer to the
new company all its right, title, and interest in the terminal
property in exchange for a proper share of the bonds and stock of
the terminal company.
On the same day, the board of directors of the terminal company
adopted resolutions accepting the transfer, management, and
operation of the terminal property, appointing a committee to
confer with the three railroad companies with respect to the terms
and price at which the terminal property and franchises should be
conveyed to it, and to procure from them
"such conveyance and transfer as may be necessary to fully
invest this company with the title, control, and management of said
properties provided for in said contract of January 2, 1882,"
and authorizing the issue of all its capital stock and not
exceeding $500,000 of bonds to be secured by mortgage of the
properties so to be conveyed; the bonds and stock to be used in
paying for the property, maintaining, operating, and improving it,
and purchasing other property necessary to carry out the objects of
the company.
Due, apparently, to the financial embarrassment of the original
Wabash Company, which dominated the St. Louis and the Northwestern,
terminal matters remained in abeyance until November, 1887, when
deeds were authorized, and, between that time and the following
April, were made by the companies and the individual trustees with
the effect of vesting in the terminal company complete legal title
to the properties that had been acquired for the purpose of
establishing the terminal. The
Page 254 U. S. 206
deeds were absolute in form. The terminal company, by amendment
of its articles, increased its capital stock from $1,000,000 to
$2,000,000, and authorized the making of a mortgage, which
afterwards was given as of date November 1, 1887, to the Central
Trust Company of New York as trustee, to secure an issue of
$800,000 of 5 percent bonds for the purpose of paying for its
property and completing improvements thereon, the mortgage covering
all its real estate, rolling-stock, etc., then owned or thereafter
to be acquired.
Until May 1, 1888, the terminal property continued to be
operated by the St. Louis Company under the original agreement; on
that date, the terminal company took possession, and ever since
then has continued to operate it and render terminal service
thereon to the three railroad companies and their successors, as
well as to other companies admitted from time to time under special
agreements.
Upon a review of all the evidence, construing the writings in
the light of the circumstances and the manifest purpose and intent
of the parties, we are clear that the effect of the transactions
thus far recounted was to establish a trust in the full and proper
sense of the word, the terminal company being invested as trustee
with complete legal title, but without beneficial ownership, and
subject to a duty to maintain and operate the property and exercise
all of its corporate powers for the common use and benefit of the
three railroad companies, their successors, and assigns, and such
other companies as might be admitted by them to a proprietary
participation in the terminal.
The gist of defendants' argument to the contrary is that the
incorporation of the terminal company and the conveyance of the
property to it by deeds absolute in form manifested a substantial
change of plan from that embodied in the contract of January 2,
1822, stress being laid
Page 254 U. S. 207
upon the fact that the powers of a terminal railway company as
acquired under the articles of incorporation were much more
extensive than those of a depot company, and it being contended
that the provisions of the articles respecting the control of the
terminal company and the resolutions providing for the transfer of
the property to it, the form of the deeds themselves, and the
issuance of stock and bonds to the proprietary companies in
payment, demonstrated a purpose to invest the terminal company with
title for all purposes. But the main object of establishing a joint
terminal at the common expense and for the common use of the three
companies and to retain their proprietary interest in it while
confiding its maintenance and operation to their trustee is so
manifest that all the proceedings are properly to be construed as
designed to give effect to it, and seeming inconsistencies and
ambiguities resolved accordingly. The provision of the articles
that "all the powers exercised by this company shall be in
accordance with the terms and spirit of the aforesaid contract" is
not merely contractual, but amounts to a declaration of trust, and,
together with the other evidence, shows clearly that the powers
were procured from the state expressly to enable the company the
better to fulfill the purposes of its existence as such trustee,
and not to set it up in business on its own account. The
substitution of the terminal company with more elaborate powers in
place of the depot company contemplated at the beginning shows a
development and modification of the original plan, but no departure
or substantial change. The particular stipulations contained in the
articles respecting the control of the terminal company were
intended not as a substitute for, but as safeguards of, the trust.
The absolute form of the conveyances, and the issuance of stock and
bonds "in payment," were intended to give credit to the company in
its dealings with outside parties and to render its bonds more
readily salable, but they constituted the
Page 254 U. S. 208
mere mechanism for carrying into effect the main purpose of the
parties, and, as between them, were controlled by that purpose and
by the articles and resolutions that manifested an express
declaration of the trust. All the circumstances, and what we have
quoted from the resolution of the terminal company directors, show
that the title was conveyed for the purpose of enabling that
company to control and manage the terminal in furtherance of the
objects of the 1882 agreement.
It needs no particular form of words to create a trust, so there
be reasonable certainty as to the property, the objects, and the
beneficiaries.
Colton v. Colton, 127
U. S. 310. But if, as here, the subject of the trust be
a legal interest in property and capable of legal transfer, the
trust is not perfectly created unless the legal interest be
actually vested in the trustee.
Adams v.
Adams, 21 Wall. 185,
88 U. S.
192-194. Hence, the necessity in this case of deeds
conveying the fee to the terminal company. But it is not necessary
that the trust be expressed in the same instrument that transfers
the title. Various instruments may be read together in order to
ascertain the intention to establish one.
Loring v.
Palmer, 118 U. S. 321,
118 U. S.
340.
The agreement of May 10, 1889, between the terminal company of
the first part and the three proprietary companies of the second
part, fixed the terms upon which the property should be managed and
the terminal service performed for a period of 30 years to date
from May 1, 1888. It constituted a working arrangement for that
period, but did not, in terms or by implication, set aside the
trust or place a time limit upon it. It provided that, for the
terminal service, the proprietary companies should make payments,
in proportion to the wheelage of each, to cover interest upon the
mortgage bonds, the cost of maintenance, repairs, taxes, and
insurance, and the cost of operating the terminal, including all
expenses (except the operation of engine houses, care of engines,
and repairs
Page 254 U. S. 209
thereto, which were separately dealt with), after deducting any
amounts which other railway companies might be obliged to pay for
the use of the property. Engine house expenses were to be
apportioned according to the number of engines of each company,
engine repairs to be charged to the company for which the work was
done. The agreement contained other provisions of permanent effect,
providing for the allotment of the stock of the terminal company to
the proprietary companies and declaring the terms upon which
outside companies might be admitted to ownership of the stock or
the use of the property. It recited that the proprietary companies
were entitled to the stock in the proportion of one-half to the St.
Louis Company, one-fourth to each of the others, and provided for
the issuance of certificates accordingly, and that these should
express upon their faces that they were not transferable without
the consent in writing of all the proprietary companies, except as
to shares issued to qualify directors. And there was a provision
that the St. Louis Company might sell one-half of its stock, or
one-quarter of the whole, to such railroad company as might be
acceptable to a majority of the proprietary companies, in which
case the purchasing company might be admitted as one of the parties
to the agreement upon the same terms and conditions as those
stipulated for the other parties of the second part, and that,
except as thus provided, other railroad companies should not be
admitted to the use of the terminal property without the consent of
all the parties of the second part.
Here again, we have a further modification of some of the
details of the original plan, but in respects altogether consistent
with the continuance of the trust; inconsistent, indeed, with a
purpose to treat the terminal company as an independent entity
subject only to contractual obligations and remit the proprietary
companies to the ordinary rights of stockholders. Their
contributions to the original cost
Page 254 U. S. 210
of the property having been secured by mortgage bonds according
to the plan of 1882, provision was now made for distributing the
entire capital stock according to the original proportions,
one-half to the St. Louis, one-quarter to each of the two other
companies, but with certain material restrictions upon the ordinary
rights of stockholders expressed in the agreement and others
necessarily implied.
Since, from the very nature and terms of the trust, all the
property and franchises of the terminal company were to be held for
the benefit of the proprietary companies, and all its corporate
powers exercised in the administration of the joint terminal for
their common use, the stockholding interest in the terminal company
necessarily must be modified, as between the parties, to the extent
necessary to give full effect to the trust. In the hands of the
proprietors of the connecting lines, the stock was the evidence of
their right to participate in the benefits of the trust, in the
control and management of the terminal company, and in the use of
the terminal, but such use, in the nature of things, must be
proportioned not according to the magnitude of their respective
stock holdings, but according to their respective traffic
requirements. And since the terms of the trust required that these
connecting lines should have the entire beneficial use of the
property upon paying the cost of the terminal service, there was no
room for a profit from the operations of the terminal company out
of which dividends could be paid. Except in the theoretically
possible but extremely improbable event of an abandonment of the
terminal (as to the effect of which no opinion need be expressed),
it is plain that, as between the parties to the trust and others
having notice of it, the stock could have little or no exchange
value except to a company owning or operating a railroad line
connecting or capable of connecting with the terminal. In the hands
of others having notice of the trust, the stock represented no
substantial
Page 254 U. S. 211
property interest. Some recognition of the anomalous status of
the stockholding interest is to be found in the acts of the parties
above set forth, especially in the provisions of the agreement of
1889. The amount of stock provided for shows that it was deemed
probable that eventually the property would have a value in excess
of the original cost represented by the bond issue, or that value
might be given to the stock through liquidation of the bonds or
otherwise, and that, upon a sale of a participation in the terminal
property and facilities to an outside railroad company evidenced by
a transfer of stock in the terminal company, some return could be
got for such increased value. The apportionment of the original
issue, and the stipulations of the 1889 agreement, recognized that
the St. Louis Company, as representative of the original Wabash
Company, was equitably entitled to preference in any profits that
might be derived from such a sale to an outside company. And
evidently it was then anticipated that there would be four
proprietary companies, each holding one-fourth of the stock, with
equal representation in the board of directors.
We are not here concerned with any question pertaining to the
rights of the bondholders. It may be assumed that, if necessary for
their protection, the mortgage would be treated as conveying the
entire estate, both legal and equitable, in the terminal property.
No express provision appears to have been made for paying off the
principal of the bonds. Whether the beneficiaries of the trust, as
between themselves, were or are entitled to have provision made for
discharging the principal by including periodic amortization
charges as a part of the cost of operating the terminal is a
question that we need not consider.
Nor are we at this moment concerned with any question that might
arise if stock of the terminal company had come or should come to
the hands of a
bona fide purchaser for value without
notice. The principal controversy
Page 254 U. S. 212
arises from the fact that defendants F. M. Hubbell and F. C.
Hubbell have become the holders of five-eighths of the capital
stock, upon which fact, together with the alleged effect of the
amendments to the articles of incorporation adopted April 8, 1890,
defendants rest the insistence that the proprietary companies have
lost their right to control the action of the terminal company,
that the Messrs. Hubbell as stockholders are entitled to control it
and to have dividends out of its profits, and that, from and after
the expiration of the 1889 agreement, complainants have no right to
the use of the terminal except upon terms to be agreed upon by the
terminal company as controlled by the Messrs. Hubbell.
It is important, therefore, to consider the circumstances under
which their stock was acquired and the amendments adopted.
Obviously the fiduciary character of the terminal company
extended to its officers and directors, as to all others concerned
in its management, charging them with a duty to uphold the trust
and imposing upon them the usual disability about reaping a
personal advantage at the expense of the beneficiaries. And it is
clear and undisputed that the Messrs. Hubbell acquired their stock
with full notice of all essential facts pertaining to the trust;
they themselves at all times material were officers and directors
of the terminal company, and acted in a fiduciary capacity in
everything relating to its affairs. Mr. F. M. Hubbell was an
officer and director of that company at the beginning and
continuously thereafter, especially active in its management, and,
during a period which included the important transactions in
question, he also was a director and officer of each of the
proprietary companies and their trusted representative in respect
to terminal matters at Des Moines. Mr. F. C. Hubbell became a
director of the terminal company in January, 1890, president two
years later, and has been such continuously since.
Page 254 U. S. 213
In the year 1886 and thereafter until and during the year 1890,
the property of the Wabash system, including the stock of the St.
Louis Company with control of its part of the stock of the terminal
company, was in the hands of a purchasing committee as trustees for
the Wabash bondholders. In February, 1890, F. M. Hubbell obtained
from this committee an option for the purchase of $135,000 of the
terminal company bonds and a quarter interest in its capital stock
for $135,000, accepted the option, made over to General Dodge a
half interest in it, and Hubbell and Dodge each received one-half
of the specified bonds and one-eighth of the outstanding capital
stock, with a guaranty on the part of the purchasing committee that
the St. Louis Company would approve the transfer (as it afterwards
did, through its board of directors) and that the committee would
consent to such change in the articles of incorporation of the
terminal company as would permit one director to be nominated by
any person or company holding one-eighth of the stock. At this
time, Gen. Dodge was president of the terminal company and also
president and principal stockholder of the Northern Company;
Hubbell, besides his relation to the terminal company, was
president of the Northwestern Company and its controlling
stockholder. In correspondence between Mr. Hubbell and the
purchasing committee antecedent to this transaction, they warned
him that it would be necessary to confine a sale of stock "to such
railway companies as would be interested in the station;" and he
assented to this, acknowledging that
"it would be prejudicial to sell any of this stock to outsiders,
and I understand it, as you do, that the stock cannot be sold
without the consent of the different railroad companies who now
form the terminal company."
Later, Hubbell acquired from the purchasing committee $50,000 of
the bonds and an additional eighth interest in the capital stock of
the terminal company for $57,736, being
Page 254 U. S. 214
par and accrued interest for the bonds and 15 percent of par for
the stock, upon the understanding expressed in writing that an
eighth interest should be "sufficient to represent a proprietorship
in the company, according to the understanding we had when you were
here" -- evidently meaning that the eighth retained by the
purchasing committee should carry with it a proprietary interest
and influence in the terminal not limited in proportion to the
amount of the stock.
Defendants insist that, because the purchasing committee sold
the stock to Hubbell and Dodge for a valuable consideration, they
must be taken to have dealt with it as having substantial value,
and that since, in afterwards making report to the board of
directors of the Wabash Company, with an account of their financial
transactions, the committee included their receipts from sales of
the stock and bonds of the terminal company, and the directors
approved the account, complainant Wabash Railway Company is
estopped from denying that Hubbell and Dodge acquired a substantial
and valuable interest in the terminal company. We deem it clear,
however, that the intent of the purchasing committee, known and
assented to by Hubbell and Dodge at the time, was merely to enable
the latter to sell the three-eighths interest to some railroad
company capable of participating in the use of the terminal.
Whether consistently with their fiduciary relations or not, they
took advantage of this opportunity in the following year, when the
Northern and Northwestern companies were consolidated and they sold
to the consolidated company the stock in question, apparently and
presumably at a profit over and above what they paid the purchasing
committee for it. There is no foundation for the suggested
estoppel.
The title now asserted by the Messrs. Hubbell to five-eighths of
the terminal company stock was derived not directly from the Wabash
purchasing committee, but from
Page 254 U. S. 215
the consolidated Northern and Western company. That company, in
addition to the three-eights transferred to it by Hubbell and
Dodge, had the two quarter-interests originally owned by those
companies, making seven-eights in all. In October, 1893, the
consolidated company pledged to F. M. Hubbell & Son
five-eighths of the terminal company stock (2,500 shares) as
security for a debt. The stock was transferred to the Hubbell firm
on the books at that time, and so remained down to the institution
of this suit, except as to five "qualifying shares" placed in the
names of individuals but controlled by the firm. On January 29,
1894, the indebtedness was settled between the directors of the
consolidated company and the Messrs. Hubbell upon terms that
included a purchase by the latter of the 2,500 shares of terminal
company stock at ten percentum of its par value. Passing for the
moment certain special grounds of attack upon the title they thus
acquired to these shares, it is obvious that they took them subject
to all qualifications arising out of the trust that pertained to
the property and franchises of the terminal company.
The quarter interest in the terminal company stock retained by
the consolidated company afterwards passed from it to the
complainant Chicago, Milwaukee & St. Paul Railway Company,
which acquired at the same time the Northern and Northwestern
lines. That company took with notice of the claim of the Hubbells
to a five-eighths interest, but this does not estop it from
disputing the validity of their claim, nor from setting up, as in
this suit, whatever beneficial participation in the trust
respecting the terminal property may be incident to its ownership
of one-fourth of the stock of the terminal company, together with
connecting lines of railroad, and asking for relief against any
inequitable use by the Hubbells of the five-eighths interest
claimed by them.
As to the amendments to the articles of incorporation: these are
alleged to have been adopted at a meeting of
Page 254 U. S. 216
the stockholders of the terminal company held April 8, 1890.
Their purport was, briefly, to omit from the articles the copy of
the contract of 1882 recited therein the declaration that the
powers exercised by the company should be in accordance with the
terms and spirit of that contract, and the requirement that assent
in writing of the proprietary companies should be necessary before
any disposition of the franchises of the terminal company should be
made; to set aside previous proceedings respecting the amount of
capital stock to be issued to the proprietary companies and provide
for the distribution of a much decreased amount ($400,000 par,
instead of $2,000,000), but in the same proportions as before, the
remaining capital stock ($1,600,000 par) to be issued only by
resolution of the stockholders adopted by vote of more than
seven-eighths of all the stock theretofore issued, and to eliminate
the former method of selecting directors and provide that they
should be elected by the stockholders, but that it should require
the votes of more than seven-eighths of all the stock to elect a
director, and that, as to all matters except the ordinary operation
of the property, the directors could act only upon unanimous vote
of the eight members of the board. One of the articles adopted
purported to repeal, strike out, and expunge the proceedings of a
stockholders' meeting held December 10, 1884, at which the original
articles of incorporation were adopted.
It is plain enough, and is conceded, that the corporation could
not, by merely altering its own internal organization, affect the
interests of its
cestuis que trustent. It is as evidence
of a modification of the agreement between the stockholders of the
terminal company -- themselves beneficiaries of the trust -- that
the amendments are invoked. So regarding them, the question is, by
what authority and with what intent were they adopted? The
stockholders' meeting was attended by six individuals (including
the two Hubbells), and two others by proxy, each of
Page 254 U. S. 217
whom assumed to represent, and in a general sense did represent,
one or the other of the three proprietary companies. F. M. Hubbell
himself was president of the Northwestern Company, and assumed to
represent it. Others present were the vice-president of the
Northern and the president of the St. Louis Companies. The evidence
fails to show that those present had express authority to act for
the proprietary companies in amending the articles, and action of
this kind -- materially affecting the property interests of the
three companies in a matter so vital as the ownership and control
of an important terminal -- was so far out of the usual or ordinary
course of business that authority to represent their corporations
in assenting to it was not to be implied as coming within the
general scope of their duties. Nor did either of the proprietary
companies, by any formal corporate action, accept or ratify the
amendments.
Moreover, it affirmatively appears, and both courts below in
effect found, that there was no actual intent on the part of any of
the parties concerned to affect the substantial rights or equities
of the proprietary companies, or to terminate, repudiate, or
substantially modify the trust respecting the terminal property. It
does appear that some of those active in proposing the amendments,
and assuming to act for the proprietary companies in assenting to
them (there is a question whether they actually were adopted by a
proper vote of the stockholders, but we do not go into this), were
under the impression that the contract of 1882, recited in the
articles of incorporation, already had been abrogated and the trust
set aside by the issuance of the terminal company's bonds and
apportionment of the stock to the proprietary companies in payment
for the property conveyed and by the making of deeds absolute in
form; that both in respect to the ownership of the property and the
management of it under the contract of 1889, the original
arrangement had been abandoned, and
Page 254 U. S. 218
that it was desirable to amend the articles so as to make them
conform to the situation actually existing.
Clearly, this was a mistaken impression, as will appear from
what we have said. It was a mistake not, indeed, as to any mere
matter of fact, nor, on the other hand, as to any pure question of
law, but rather as to the existing legal rights, interests, and
relations of the parties resulting from antecedent transactions.
Whether it was such a mistake as to furnish ground for a
cancellation of the amendments in equity is a question into which
we need not enter.
See Snell v. Insurance Co.,
98 U. S. 85,
98 U. S. 90;
Griswold v. Hazard, 141 U. S. 260,
141 U. S. 284;
Utermehle v. Norment, 197 U. S. 40,
197 U. S. 56;
Philippine Sugar Co. v. Philippine Islands, 247 U.
S. 385,
247 U. S. 389;
Pom.Eq.Jur. ยงยง 841-849. For the fact that those who assumed to act
for the proprietary companies, in assenting to the amendments, were
mistaken as to the existing legal situation, so that the
amendments, if given effect according to their terms, instead of
bringing the articles into conformity with the situation already
actually existing, would materially change the situation to the
disadvantage of the proprietary companies by putting an end to an
important trust contrary to their actual intent as parties
beneficially interested, is a cogent reason for holding, as we do,
that authority on the part of agents to assent to such amendments
is not to be implied where it was out of the ordinary course of
business and express authority was not conferred.
In support of the contention that the terminal property was not
subject to any trust either before or after the amendments,
defendants cite a series of contracts in which the terminal company
asserted its ownership without qualification, and of conveyances,
mortgages, etc., by the proprietary companies recognizing the legal
title of the terminal company to its property and asserting in
themselves only a title to shares in the terminal company. But,
when a trust is once established and acknowledged, it does
Page 254 U. S. 219
not need to be constantly reiterated or confessed. None of the
instruments referred to is in anywise inconsistent with the trust,
the contracts of the terminal company were made in the very course
of its administration of the trust, and the mortgages and
conveyances of the proprietary companies dealt with legal titles
only, their equitable interests in the terminal passing without
mention as incidental to their ownership of the stock together with
the connecting lines.
The majority of the circuit court of appeals held that the
control of the proprietary companies was relinquished by reason of
the amendments and the conduct of the parties at the time and
thereafter, upon this theory: that, although the amendments were
neither previously authorized nor afterwards formally accepted or
ratified by the three companies, yet, since their executive
officers were aware of and approved the action of the meeting,
since Hubbell was encouraged to purchase the bonds and stock, the
value of the stock being wholly prospective, since, after the
amendments, the stock of the terminal company was issued in
accordance therewith and directors elected by the new method, the
railroads making no attempt to exercise their right of naming
directors in certain proportions as before, since for seventeen
years, the railroads acted, as it seemed to the Court, in harmony
with the amended articles, not questioning their validity until
this suit was commenced, they could not, after such delay, enforce
their rights in a court of equity against defendants who, to their
knowledge, had acted upon the belief that such rights did not
exist, and had acquired and held property which had largely
increased in value in the interval. It was held that this result
had come to pass although the railroads never had intended it, that
the sale of a part of the Wabash stock by the purchasing committee
to Hubbell and Dodge, then influential in the two other roads,
would seem at the time a mere rearrangement of the interests of
Page 254 U. S. 220
the three companies in the terminal company, but that the effect
of the amendments was a severance of the control of the roads over
the terminal company, and subsequent events confirmed this, so
that, when the Hubbells disposed of their interests in the Northern
and Northwestern to the Milwaukee, retaining for themselves a
majority of the terminal holdings, the result was that the
railroads themselves had gradually let slip that exclusive
ownership and control which at the beginning they had so much
valued and so carefully guarded.
Convinced that the relation of the parties was fiduciary, and
not merely contractual, we are unable to accept the view thus
outlined. It would require a clear case to warrant a court of
equity in declaring that the trustees of an express trust, in the
very course of their administration of the trust, had acquired a
dominant interest in the trust property, and in effect a discharge
of the trust, through mere inattention or even negligence -- not
raising an estoppel or amounting to laches -- on the part of the
parties beneficially interested or of their executive officers.
Conduct merely equivocal, or apparently inconsistent with a
vigilant insistence upon the obligations of the trustee, is not
sufficient to discharge a trust. The
cestui que trust is
entitled to rely upon the fidelity of the trustee until plainly put
on guard against him. And the trustee is at all times disabled from
making a profit for himself out of any dealings in the trust
property without the express consent of the
cestui que
trust.
Nothing appears to create an estoppel against complainants.
Neither they nor their predecessors have misled defendants to their
disadvantage. The purchasing committee accepted a money
consideration from Hubbell and Dodge for the transfer of a block of
stock. But the purchasers had more complete and intimate knowledge
of the situation than the committee had, and were specially put on
notice, as the correspondence shows. Indeed, their
Page 254 U. S. 221
knowledge of the true nature and office of the terminal company
constituted adequate notice. And again, when the Messrs. Hubbell
reacquired the same three-eighths with an additional one-quarter
interest from the consolidated Northern and Western Company, they
were, as before, chargeable with full notice of all the facts out
of which the equities of complainants arise.
The question of laches presents more difficulty, but, after
mature consideration, we are convinced that it must be resolved in
favor of complainants. Acquiescence by the executive officers of
the proprietary companies in the changed situation resulting from
the amendments of April 8, 1890, is stressed by counsel for
defendants, as it was in the majority opinion of the circuit court
of appeals, it being pointed out that, after the amendments,
directors were elected in in the new mode, and that, in an
agreement of ratification dated July 31, 1897, made for the purpose
of giving recognition to the participation of the Wabash and of the
consolidated Northern and Western Company in the obligations of the
1889 agreement, it was declared that so much of that agreement as
related to the issuance and distribution of the capital stock of
the terminal company was no longer binding, and the stock was held
in specified proportions, including "F. M. Hubbell & Son, 2,500
shares." This was a recognition of their status as
de
facto stockholders, but not a concession that the fiduciary
character of the terminal company had been changed, or that the
stock possessed any quality or value other than was consistent with
the nature and terms of the trust. The parties acted in harmony
with the amended articles so far as the internal organization of
the company was concerned, but the company remained in possession
of the property as before, and continued to manage it in accordance
with the terms of the agreement of 1889. Such possession was as
consistent with a continued recognition of the trust as with the
opposite, and it does not appear
Page 254 U. S. 222
that at any time until shortly before the bill was filed,
defendants contended that the amendments amounted to an express
repudiation of the trust, or that the terminal company would be
free from obligation at the expiration of the agreement. Prior to
this, there had been a difference about the disposition of the
"surplus earnings," but this was no more than a question about the
proper construction of the working agreement.
It seems to us the court below attributed undue weight to the
conduct of the executive officers of the proprietary companies
indicating acquiescence in a supposedly changed situation resulting
from the amended articles. It would not be surprising if
occasionally there was a failure to appreciate fully and accurately
the rights and obligations growing out of the trust. But the
Messrs. Hubbell, because of their fiduciary relation, are estopped
from laying hold of the incautious, negligent, or mistaken acts of
the executive officers as a ground on which to build up a profit or
advantage for themselves at the expense of the proprietary roads
which were their
cestuis que trustent.
Upon the whole case, it is our conclusion that the trust with
respect to the terminal property continues substantially as it was
established at the incorporation of the terminal company; that this
company holds all its property and franchises -- whether conveyed
to it at the beginning or acquired since -- in trust for the
purpose of carrying out, in substance, the terms and spirit of the
contract of January 2, 1882, with such minor changes as have been
agreed upon since, and is bound to exercise all its powers
(including its power to renew the corporate charter) in furtherance
of the trust; that the amendments of April 8, 1890, were
unauthorized by the proprietary companies, and had no effect in
discharging or modifying the trust; that complainants are the sole
beneficial owners of the property and franchises of the terminal
company, and they and their successors and assigns, and such
other
Page 254 U. S. 223
railroad companies owning or operating lines of railroad
extending to or near Des Moines as may be admitted to a proprietary
interest by consent of complainants and their successors and
assigns are (as between the present parties and their successors)
entitled to the sole beneficial use of the terminal property upon
paying the cost of the terminal service, including interest upon
the mortgage debt and other proper charges, after crediting all
revenues derived from other sources, and without profit to the
terminal company, and that, from and after the expiration of the
1889 agreement, complainants were and are entitled to have a
similar working arrangement renewed from time to time perpetually,
its specific terms to be agreed upon between themselves or
judicially ascertained if they are unable to agree.
Complainants are entitled to a decree establishing the trust,
with all appropriate incidental relief. We do not attempt to lay
down the particular provisions of the decree. These may be settled
by the district court upon the going down of the mandate.
To consider, next, the status of the Hubbell stock: the title
acquired by them from the consolidated company is attacked by the
Chicago, Milwaukee & St. Paul on the ground that it was
acquired by inequitable means, the Hubbells being at the time in
control of the board of directors. It is attacked by the Wabash on
the ground that the consolidated company could not, in equity, pass
the stock to the Hubbells, and thus impair the interest in the
terminal company then held by the St. Louis Company, to which the
Wabash has succeeded. We have not found it necessary to consider
whether these contentions ought to be sustained as independent
grounds of substantive relief, or to what extent they would be
affected by the agreement of July 31, 1897, in which the
consolidated and the Wabash Companies apparently gave recognition
to the ownership of the stock by the Hubbells.
We pass this, because convinced that, as incidental to the
Page 254 U. S. 224
principal relief granted and necessary to give full effect to
it, complainants are entitled upon equitable terms to have the
Hubbell shares (including all "qualifying shares" controlled by
them) surrendered for cancellation. Our reasons, briefly, are as
follows: the issuance of the stock to the Messrs. Hubbell, and the
clause of the 1897 agreement relating to it, already have been
considered with other evidence cited by defendants to show an
assent to or acquiescence in a modification or abandonment of the
trust, and are found insufficient for the purpose. Hence, this
stock, being, like all other stock of the terminal company,
subordinate to the trust that dominates all its property and
franchises, does not represent, in the hands of the Hubbells, any
property interest that they are entitled to set up as against the
proprietary companies. When they acquired it, and at all other
times material, they themselves were and still are acting in a
fiduciary relation to the trust; hence they cannot be heard to
assert any right in the stock that is inconsistent with the trust.
Manifestly it would be inequitable for them to sell it to a
bona fide purchaser who might claim (even though
unsuccessfully) to hold it exempt from the trust. They may have
expected to sell it at a profit to one of the proprietary
companies, or, with their consent, to an outside company or
companies qualified to participate in the beneficial use of the
terminal property under the trust. But, because of their fiduciary
character, they are debarred in equity from trafficking in the
trust property in this or any other way without the express consent
of the beneficiaries; they would be bound to account for any profit
that might accrue, and any seeming consent on the part of the
beneficiaries to waive such profit in advance, not amounting to a
termination of the fiduciary relation, is in its nature revocable.
The Hubbell stock therefore representing no legitimate proprietary
interest as against complainants, serves merely to evidence a
voting power and to qualify its holders to act as directors
Page 254 U. S. 225
and officers of the terminal company; in short, to participate
in a fiduciary employment without profit beyond compensation for
the value of the services rendered. But complainants, being the
sole present beneficiaries of the trust and equitable owners of the
terminal property, are entitled equity to a controlling voice in
the choice of directors, and especially to have the management of
the trustee company, now and hereafter, freed from the domination
of a stock interest that represents no property interest in the
concerns of the trust. To guard against such alien control and at
the same time prevent the danger of the Hubbell stock's getting
into the hands of
bona fide holders who might set up
rights under it which the present holders are debarred in equity
from asserting -- in short, to avoid undue jeopardy to the trust --
complainants are entitled to have this stock surrendered, retired,
and cancelled, and, until surrendered, to an injunction against any
sale, assignment, or transfer of it or any part of it, and against
the exercise of any voting power thereon, but upon terms that
complainants shall repay to the Messrs. Hubbell the amount they
paid to the consolidated Northern and Western Company for it,
viz., $25,000, with interest thereon from January 29,
1894. How this should be apportioned, as between complainants, has
not been discussed. It may be settled by the district court.
The issue as to the surplus earnings relates to a considerable
accumulation of moneys received by the terminal company from
sources outside the proprietary companies. Possibly it may have
become a moot question, in view of the result we have reached upon
the main matter; but, as this is not altogether clear, we will
dispose of the issue as raised. The agreement of 1889 provided
that, in making up the net cost of maintenance and operation
chargeable to the proprietary lines on a wheelage basis, there
should be deducted
"the amount if any which other railway companies may be under
obligation to pay by virtue of contracts
Page 254 U. S. 226
for the use of said property or parts thereof."
In the course of time, the terminal company received not only
payments from outside railroad companies under contracts
technically for participation in the use of the terminal property,
which have been credited to complainants and their predecessors
according to their wheelage, but, in addition, substantial sums
from railroad companies and others for switching and other terminal
services and for rent of portions of the property and privileges
thereon. Receipts of the latter character were called "surplus
earnings." For a period of nearly two years after the making of the
1889 agreement, they were included in the credits given to the
proprietary companies. This was done at first by the accounting
officers of the terminal company under the general direction of its
president and executive committee. In February, 1891, the practice
was approved by action of the board of directors. About a year
later, the board resolved that, until its further action, sums
received as rents of real estate and all switching charges should
not be thus credited, but should be used as a cash capital "with
which to purchase supplies and pay current bills which come in
before it receives its monthly revenue from the tenant companies."
Thereafter, the surplus revenues were not again credited to the
proprietary companies.
We concur in the opinion of the circuit court of appeals that,
by the fair construction of the 1889 agreement and the practical
construction placed upon it by the parties at the beginning -- a
construction entirely consonant with the terms of the trust --
complainants and their predecessors were entitled to credit for the
surplus earnings as they accrued, each company to a share
proportioned to its wheelage, and that the 1897 contract did not
change this. It was decreed that these earnings belonged to
complainants, and that there should be an accounting to ascertain
the part due to each upon a wheelage basis. As to this, the only
question that occurs to us is whether the accounting
Page 254 U. S. 227
should include sums that have been appropriated out of these
earnings and devoted to capital expenditures for acquiring
additional property and for permanent improvements, sometimes,
apparently, with approval of complainants or their predecessors,
sometimes without. This would hardly seem to be of serious
consequence in view of the result we have reached upon the main
issue. It is chiefly of interest to complainants, but they have not
argued the question, declaring indeed that the entire controversy
as to the surplus earnings would be material only should this Court
decide that complainants had no proprietary interest in the
terminal company. Defendants have assigned error to so much of the
decree of the circuit court of appeals as awards the surplus
earnings to complainants, but have not furnished data enabling us
to draw an accurate line between those that were and those that
were not disbursed for permanent improvements, or between those
disbursements that were approved and those that were not. Unaided
by counsel, we hardly could be expected to unravel the somewhat
obscure evidence bearing upon these points. We must therefore
content ourselves with simply affirming that portion of the decree
which relates to the surplus profits.
The main portion of the decree as attacked by complainants must
be reversed, and the cause remanded to the district court for
further proceedings in conformity with this opinion.
As to costs, the decree of the courts below apportioned them
one-half to complainants and one-half to the terminal company. We
leave this disposition undisturbed. The entire costs in this Court
should be paid by defendants Frederick M. Hubbell and Frederick C.
Hubbell.
No. 66. Decree reversed.
No. 67. Decree affirmed.
Cause remanded to the district court for further proceedings
in conformity with this opinion.