
    THOMPSON against THE ERIE RAILWAY COMPANY.
    
      Supreme Court, Fourth District;
    
    
      At Circuit, September, 1871.
    Action by Stockholders.—Corporation.—Mortgage Bonds. —Preferred Stock.
    An action cannot be maintained, either by a common or a preferred stockholder in a corporation, to restrain the corporation from making a contract which it has power to make, merely because it is detrimental to the interests of the plaintiffs.
    The corporation is not to be deemed a trustee for holders of its preferred stock.
    Holders of preferred stock in a corporation, entitled, by their contract and by the charter, to receive interest in preference to the payment of dividends on the common stock, and after payment of the mortgage interest, cannot be deemed prejudiced by the corporation’: issuing mortgage bonds consolidating prior and subsequent indebtedness.
    Trial by the court.
    This action was brought by John W. Thompson and William A. Wait against the Erie Railway Company and the Farmers’ Loan and Trust Company. As originally commenced, it included as defendants the directors of the Erie Railway Company.
    Before proceeding to trial the plaintiffs discontinued as to such persons, and amended their complaint, limiting its allegations to the two defendants above named.
    Said defendants at the same time amended their answer ; and the case proceeded to trial on pleadings and proofs.
    From the pleadings and evidence it appeared, that prior to 1859, a corporation, known as the New York and Erie Railroad Company, owned and operated a railroad from Jersey City to Lake Erie,' that it had mortgaged its property and franchises under five several mortgages, had outstanding against it judgments and contract liabilities amounting to over twenty-eight million five hundred thousand dollars, had suffered default in the payment of interest on its mortgage bonds, whereby, by the terms of said mortgages, the whole of the principal of said bonds issued had become due, and the said corporation thereby greatly embarrassed.
    During the year 1859, a receiver was appointed in a foreclosure suit on one of said mortgages, who took actual possession of said road. While matters were in this condition the parties interested in the said corporation and its property, to wit: its officers, stockholders and creditors, entered into an arrangement for a new railroad company, one of the conditions of which was, that the unsecured creditors of the old company should receive, in payment of their claims, stock in the new company, the interest on which should have preference in payment of interest over dividends on the common stock, out of the net earnings in each year, after the payment of the mortgage interest of said company.
    That proper legislation for that purpose having been had, in 1861 the said Erie Railway Company was organized upon the basis and conditions thus agreed, and the said company issued to the said unsecured creditors of the old corporation stock above described, and known as ‘£ preferred stock,” which was accepted by them as payment.
    The plaintiffs are severally holders of certain shares of this preferred stock.
    Under the arrangement for organizing the new company, the existing mortgages on the property and franchise of the old company were continued and their payment assumed by said new company, that the first of said mortgages would become due in 1879, but has since been extended twenty years. That the other mortgages will become due at intervals between 1879 and 1888, that since said arrangement, nearly one million dollars of the bonds secured by said previous mortgages has been paid; that the value of the property and franchise of the Erie Railway Company exceed in value the amount of the mortgage debt which existed against the road at its present organization, and also the present outstanding mortgage debt; that the fact that the said outstanding mortgage debt against the old company was distributed so as to become due and payable at different periods formed a material part of the inducement and consideration for the arrangement which resulted in the organization of the new company.
    The Erie Railway Company had, previous to the commencement of this action, made and executed a mortgage upon its property and franchise, its tolls and income, to the Farmers’ Loan and Trust Company, in trust, to secure the payment of thirty thousand bonds of one thousand dollars each, payable in gold fifty years from date, with interest payable semi-annually, in which said mortgage it is provided, in case of default for six months of the payment of interest on the bonds issued, the whole principal of such issue shall become due ; that said mortgage has been recorded in the several county clerk’s offices along the line of the road, and remains of record.
    That it appears from said mortgage, that the same was made for the purpose of consolidating the funded debt of said corporation and obtaining money and material necessary for completing its line of railway, enlarging its capacity and extending its facilities; that said railroad company is threatening to issue bonds, secured by said mortgage, in due form of law, to the number named in said mortgage, and put the same upon the market.
    
      That each of the existing mortgages against the old railroad company, contained a clause, providing “that if default should be made in the payment of interest, and so continue for six months, the whole principal should then become due and demandable.”
    That at about the time the new mortgage mentioned was made, the said Erie Railway Company were owing a floating debt of about six million dollars, and on sterling bonds about one million dollars due in 1875. That bonds, to about six million dollars, under said last mortgage, were made and signed, but not delivered, before the commencement of this action.
    The plaintiffs ask to have the said new mortgage removed from the records, and the several bonds made under it, together with the mortgage, cancelled. That said Erie Railway, its officers, &c., be forever restrained from executing or delivering, &c., any bonds under or secured by said new mortgage, and that the Farmers’ Loan and Trust Company be also forever restrained, &c., from certifying, selling, &c., any bonds or obligations under or purporting to be made under or secured by said mortgage.
    
      Frank Thompson and James Emott, for the plaintiffs.
    
      Thomas G. Shearman, David Dudley Field and William A. Beach, for defendants.
    I. The complaint must clearly be dismissed as against the Farmers’ Loan and Trust Company. The answer of that company did not admit that the plaintiffs were holders of any stock whatever in the company, nor that there was any such stock as the preferred stock described in the complaint ; and as no such proof was given by the plaintiffs upon these points, it is obvious that the action must instantly fall to the ground, so far as it concerns this defendant. The objection was raised immediately upon the close of the plaintiff’s case, and full opportunity was given them to obviate the difficulty, but they did not do so.
    II. So far as the action concerns the Erie Railway Company, it was conceded by the plaintiffs that the mortgage was a just and proper one with reference to the interest of its common stockholders, and the only grounds of -objection to It are (1) that it consolidates the old bonds falling due at various periods, none of them later than the year 1888, with new bonds to fall due in the year 1920, thus, as it is said, confusing the bonds which have a prior right over the plaintiffs, with bonds which have only rignts inferior to those of plaintiffs, and (2) that the mortgage contains an interest clause by virtue of which, upon a default in the payment of interest, the whole principal of the bonds may become due in six months. It was conceded that if the holders of preferred stock were mere stockholders, this action could not be maintained, but it was insisted that they held the treble position of stockholders, creditors and beneficiaries of the trust, the company being their trustee. These propositions will be considered separately ; and we shall further take occasion to show that, even if they were all conceded, this action has not a shadow of foundation.
    ■ III. The Erie Railway Company is not a trustee for its preferred stockholders. (1.) Those stockholders are part of the constituent elements of the company itself, and nothing is clearer in principle than that a corporation is not, and cannot be a trustee for its own stockholders as such, any more than an individual can be trustee for himself (Ang. & A. on Corp., § 313; Verplanck v. Mercantile Ins. Co., 1 Edw. Ch., 84; Hodges v. New England Screw Co., 1 R. I., 312). (2.) If it could be successfully claimed the Erie Railway Company was trustee for its preferred stockholders, it would be just as well claimed that it was a trustee for each of its other stockholders separately, because the only foundation of the claim lies in the fact that the company derives its title through purchase made by Messrs. Davis & Gregory, who were trustees not merely for the unsecured creditors of the old corporation, to whom the preferred stockholders claim to be successors, but also for the common stockholders of the old corporation, who were permitted to became stockholders in the new company upon the payment of a small assessment. The result of all this would be, that the Erie Railway Company could do nothing to which a single stockholder should object as diminishing his profits, and thus nine-tenths of the stockholders would be thwarted, and their will nullified by the perverse objections of the remaining tenth. (3.) But, in fact, the trust of Messrs. Davis & Gregory was entirely discharged by the organization of the Erie Railway Company. They were not made trustees for the purpose of holding the property forever, either in their own names or in the name of any other trustee, but simply for the purpose of purchasing the property sold under the foreclosure of mortgage, holding it until the unsecured creditors and stockholders of the old corporation could have time to organize a new corporation and take possession of the property. This trust was fully discharged, and the property transferred to the beneficiaries of the trust. Messrs. Davis & Gregory retained no share in it, except such as .they were entitled to by virtue of their claims as unsecured creditors or stockholders of the old corporation ; and neither they nor the other corporators associated with them, took or could take an interest to the extent of one dollar in the Erie Railway Company, or its property, beyond what they were entitled to as beneficiaries of the trust, and not as trustees. (4.) The plaintiffs in this case are not, and never wore, beneficiaries of the trust held by Messrs. Davis & Gregory. They never-were either creditors or stockholders of the NTew York and Erie Railway Company, the only parties in whose favor a trust was ever created. Neither do they pretend to have received an assignment of the rights, if any, which the unsecured creditors of the old corporation had against Messrs. Davis & Gregory. Even, therefore, if the persons to whom the preferred stock was originally issued in exchange for their surrender of unsecured debts could insist that they retained, notwithstanding this surrender, any rights as beneficiaries of a trust, these rights do not attach themselves to the preferred stock held by them, but would require a separate assignment, which the plaintiffs do not pretend has been made to them.
    IV. The plaintiffs and the preferred stockholders of¡ the Erie Railway Company are not its creditors in any. sense. (1.) It is admitted that they are not creditors for the principal of the amount represented by their stock, and the only claim made is that they are creditors to the extent of the annual dividend to be paid to them. As to this it is sufficient to say: (a.) It does not anywhere appear in the pleadings or evidence that these dividends have not been regularly and fully paid. (5.) It is admitted that these dividends are not due to them unless the company has net earnings sufficient to pay them, which is, of course, a matter of entire uncertainty, and there is, therefore, on the plaintiffs’ own showing, no present debt due to them, ■ and no certainty that anything will be due to them in the future. Is it not a most amazing perversion of language to call such persons creditors ? (2.) The preferred stockholders never were or could be creditors of the Railway Company. They formed a part of its first constituent elements. It was impossible that it should owe them anything, when the company itself had no existence until this stock was created, and when it did not assume the debts of any other person or corporation (Verplanck v. Mercantile Ins. Co., 1 Edw. Ch.. 84). (3.) The original holders of this preferred stock were creditors of the New York and Erie Railway Company, a corporation perfectly distinct from the defendant herein; and they, of their own free will, chose to become stockholders in the new corporation rather than to remain creditors of the old, in the well founded belief that the new company, freed from the embarrassments of the old, would be able to do more for them as mere stockholders than the old company could have done for them if they had continued to be creditors. If it had been contemplated that they would be creditors of the new corporation as well as of the old, the whole object of the scheme upon which the new company was formed, would have been nullified, and the complicated machinery by which the new corporation was formed, would have been a monstrous absurdity. (4.) But these plaintiffs never were creditors even of the old corporation. If the claims of such creditors are in existence at all, they still belong to the original holders of the preferred stock, a transfer of the stock not being sufficient to carry with it an assignment of the claims which the original holders of such stock might have had against the old corporation. The complaint does not pretend that any such assignment was made to the plaintiffs, and none such was made in fact. It will be seen by reference to the complain", that these two plaintiffs purchased their stock at a comparatively recent period, and were far from being the original holders of the stock. (5.) It is an impossibility that the ownership of stock in a corporation should make any one a creditor of the corporation. As well might it be said that a man owed money to himself, or owned his own promissory note, a claim justly exploded on the first occasion that it was set up (Schermerhorn v. Talman, 14 N. Y. [4 Korn.}, 93, 117). (6.) It has been expressly adjudged that holders of preferred stock are not creditors of the corporation. This was held, even where dividends were guaranteed on the preferred stock, which presented a much stronger case against the company than exists here (Williston v. Michigan Southern R. R. Co., 13 Allen, 400; Taft v. Hartford, Fishkill R. R. Co., 8 R. I, 310).
    Y. But even if we were to concede that the preferred stockholders are, as it is claimed, mortgagees of the net earnings of the Erie Railway or beneficiaries of a trust in such earnings, the plaintiffs would nevertheless have no cause of action. (1.) It is well settled that a creditor, not having pursued his claim to judgment, cannot bring an action to restrain his debtor from any disposition of his property whatever, even though such disposition be fraudulent (Reubens v. Joel, 13 N. Y. [3 Kern.], 48S ; Mills v. Northern Railway Co., Law Rep., 5 Ch., 621). (2.) If ihe preferred stockholders have a mortgage upon the net earnings, that mortgage was created by the charter of I860, and all persons dealing with the company must take notice of that charter, so that no subsequent mortgages could possibly gain a lien prior to that of the preferred stockholders, and if the railway were mortgaged to forty times its value, or sold twenty times in succession, neither the mortgagees nor the purchasers could dispute the right of the preferred stockholders to the regular payment of their dividends out of the net earnings. (3.) If the Erie Railway Company is a trustee of the preferred stockholders, then that trust being created by public statute, namely the charter of 1860, all persons are bound to take notice of that, and no one, whether by mortgage or purchase, can acquire a title to, or lien upon, the railway, free from that trust, but every mortgagee or purchaser must take the property subject to that trust (Day v. Roth, 18 N. Y., 
      448). (4.) Neither is there the least force in the objection that the bonds under the prior mortgages will be mixed and confounded with the new bonds, a. This objection is not set forth nor hinted at in the complaint. It is not alleged as a matter of fact that no discrimination will be made between these bonds, or that it wiE be impracticable to trace them out. If such were the case, it was incumbent upon the plaintiffs to' prove it, and they, have neither alleged nor proved it. It is a mere guess or surmise unsupported by evidence. b. It is obvious in the nature of things that the records of the two corporations must show which particular bonds were exchanged for bonds under the prior mortgages, and which were sold for cash. c. But if this were not so, the only result would be to place the preferred stockholders in a better position than that which they now occupy. Every holder of a prior mortgage bond, who exchanged it for a bond under the new mortgage, would necessarily waive the priority which he now has over the preferred stock, and would come in.as a subsequent mortgagee whose rights were necessarily inferior to the rights of the preferred stockholders, if, as the plaintiffs insist, they are mortgagees or beneficiaries of a trust. The result of the proposed exchange of bonds, therefore, assuming the plaintiff’s theory to be correct, would be to make the dividends on preferred stock a first lien upon the net earnings, superior to the claims of the entire mortgage debt of the company. Even if it were possible to conceive that the holders of bonds bearing seven per cent interest in currency, secured by the earlier mortgages, could exchange them for bonds bearing seven per cent, interest in gold under the new mortgage, and yet retain their right to be secured by the old mortgages, which is a palpable absurdity, yet the argument of the plaintiffs, conceding that they can only be injured by such a confusion of the bonds as shall make it impossible to tell which were issued in exchange for old mortgage bonds, and which for cash, is fatal to any inference that might be drawn for their benefit from even this supposition, since it is obvious that in case of such confusion, no holder of a bond under the new mortgage could identify his interest under the old mortgages. d. Nothing is better settled than that a mortgage once satisfied cannot be kept on foot to the prejudice of an intervening incumbrancer; and this, even though the payer of the mortgage took a new mortgage, eo instanti, to secure himself (Banta v. Garmo, 1 Sandf. Ch., 383; Marvin v. Vedder, 5 Cow., 671; Mead v. York, 6 N. Y. [2 Seld.], 449 ; Truscott v. King, Id., 147). Each proposition in the argument of the plaintiffs contradicted all the rest. Almost the entire argument for the plaintiffs consisted of these propositions : 1. That the preferred stockholders were mortgagees; 2. That the company had no power to make any mortgage which should prejudice the rights of the preferred stockholders; 3. That this want of power appeared upon the face of the company’s charter, and that it was therefore impossible for the company to do so ; 4. That the company would, nevertheless, perform this impossibility, unless restrained by injunction. (6.) The objection to the change of the time at which the mortgage debt of the company should fall due, is frivolous. It was pretended that the holders of the preferred stock would be able to pay the mortgage debt in installments, whereas they might not be able to pay it all at one time. Assuming this to be so, yet the mortgage debt as it at present stands, must all be paid between 1875 and 1888, whereas the consolidated mortgage provides for an extention of the time of payment to the year 1920. If the preferred stockholders are prepared to raise all the mortgage debt in installments before 1888, they can surely put that money but at interest, and be abundantly prepared to pay it off in 1920. (7.) Neither is there any force in the objection made to the interest clause. In the first place, it is not averred by the complaint that this interest clause is not contained in the prior mortgages, nor that it is unusual, or in any way wrongful or prejudicial to the preferred stockholders. In the second place, it was affirmatively shown that such a clause was contained in all the prior mortgages, and that in case of default in the payment of interest under any of these mortgages, they could be foreclosed and the railway could be sold. In the third place, such a clause is so invariably inserted in mortgages at the present day, that in a recent case, the English court of chancery, in a decree for a specific performance of an agreement to give a mortgage, directed the mortgage to contain a clause making it fall due at once in case of default in payment of interest, although the agreement was silent upon that subject (Seaton v. Twyford, 11 Law Rep., Eq., 591).
    YI. The claim of the plaintiffs, considered simply as stockholders, to restrain the issue of bonds under this mortgage and to have the mortgage canceled, is hardly capable of argument. Even as the complaint originally stood, no case was made out for the intervention of a court of equity, because the remedy of stockholders against the extravagance of directors must be found inside the corporation, and they cannot ask for the intervention of a court of equity unless they show a clear case of some act ultra vires on the part of the directors. But, as amended, the complaint does not contain a word of the charges of waste and fraud, upon which the plaintiff formerly relied. The only theory upon which the complaint can now be maintained on behalf of any class of stockholders, considered merely as stockholders, is, that a corporation, although expressly authorized by law to borrow money by the action of its directors, cannot take such action without the unanimous consent of its stockholders. This is too absurd for argument.
    VII. The action is utterly without foundation, and has been brought in bad faith for sinister purposes. After having for six months spread before the court charges of the most scandalous description, the plaintiffs have by their amendment, on the eve of the trial, confessed their inability to prove one of them, and having obtained an injunction upon the strength of these accusations, they suddenly abandon all of their case, except a few propositions of law which are self contradictory, and which were obviously argued only for the purpose of securing a few days more life to the injunction, which, as plainly appears by the terms of the original complaint, was itself obtained as a mere instrument of forcing a settlement of other suits brought by these plaintiffs. The complaint should be dismissed with costs.
   James, J.

This action is brought by the holders of preferred stock of the Erie Railway to restrain said company from issuing, &o., bonds secured by a mortgage made by itself to the Loan and Trust Company, in trust for that purpose, to have said mortgage removed of record and cancelled, and to restrain Loan and Trust Company from aiding in negotiating, &c., any of such bonds.

The first question arising is the power of the Erie Railway Company to do the acts complained of.

The statutes give every railroad corporation the power to borrow money for*fcompleting, furnishing and operating its road, to issue bonds for any amount so borrowed and to mortgage its corporate property and franchise to secure such bonds, or any debt contracted for the purpose aforementioned (Laws of 1850, ch. 140, subd. 10, § 28 ; 1 Rev. Stat., 599, part 1, ch. 18, title 3, § 1).

There was no proof in this case of the purpose for which the bonds secured by this new mortgage were to be issued, further than appeared on the face of said mortgage, viz : “to consolidate its funded debt, obtain the money and material necessary for perfecting its line of railway, enlarging its capacities and extending the facilities thereof.” Such purpose is within the scope of the powers given every railroad corporation to create a debt and secure the payment thereof.

For aught that appears in the case, the funded debt and other debts may have been incurred in constructing and operating the road of said corporation, and the excess of money sought to be obtained by said bonds may be necessary further to complete and operate the same. In fact, there was no proof before the court whereby it could say that the contemplated bonds and the mortgages affected the interests or rights of the preferred stock, or that it was an act not within the authority and power of such corporation.

If the power to make such mortgage, and issue bonds thereon, existed in the corporation, no suit to restrain such action would lie by a common stockholder.

This was substantially conceded on the argument; and plaintiffs, as holders of certain shares of the ‘£ preferred stock,” stand in no better condition.

Holders of “ preferred stock” have no special control over the corporation or its management.

Stockholders are the constituent elements of a corporation, and in this case there is no other difference between the two classes than this ; one is to be paid interest out of a certain fund, if raised, to the exclusion of the other, if such fund is inadequate to pay both.

The corporation is in no sense the trustee for the holders of preferred stock. Its duty is to each alike according to the conditions attached to the stock of each.

The grounds on which the plaintiffs place their case are not established. It is insisted, that consolidating the prior mortgage and subsequent indebtedness into one large debt, would be detrimental, that the prior .mortgages becoming due at separate intervals, and not all at once, was an advantage, that the interest clause in the new mortgage was dangerous and detrimental.

It may be that the directors of this corporation would be personally liable to those affected, should they divert or allow to be' diverted, the net earnings first applicable to the preferred stock, before the interest on such stock was paid. But it is not necessary to decide that question.

What mortgage interest may be paid by the company, before payment of interest on its preferred stock,. must depend on the construction to be given the conditions attached to such stock. Whatever rights attached to the preferred stock when issued, adhere to' it still. If at the time of issue, only interest on then existing mortgages was to be paid before interest on preferred stock, subsequent mortgage indebtedness will not affect that stock, nor the legal rights of its holders to payment of interest before payment of interest on mortgages given for such subsequent indebtedness ; otherwise, however, if it should be held that interest on all mortgages of said corporation, whether for indebtedness prior or subsequent to the issue of said preferred stock, was first to be paid from its earnings.

It can therefore make no difference to the plaintiffs’ rights whether the new mortgage consolidates the funded debts, or confuses or mixes prior with subsequent indebtedness.

Under one condition it would do no harm, under the other their rights would remain, and it behooves the managers of the corporation to see that those rights are not so confused as to be lost sight of.

The interest clause in the new mortgage, whereby, in case of default in the payment of interest, the whole principal of the bonds issued may become due in six months, is similar in substance to a clause contained in the previous mortgages, and hence the new mortgage effects no change in the rights of the holders of preferred stock.

My conclusions, therefore, are:

1. That the railroad corporation had power to issue its bonds for the purposes expressed in the mortgage, and to mortgage its property and franchises, in trust, to secure such bonds.

2. That such an action as the present could not be maintained by the holders of the common stock of said corporation, and the facts do not place the plaintiffs, as holders of “preferred stock,” in any better condition.

3. That there is no evidence in the case showing that plaintiffs would sustain injury by the acts sought to be restrained.

The complaint should be dismissed, with costs to the defendant the Erie Railway Company, and without costs to the other defendant, the Farmers’ Loan and Trust Company.  