
    Cornelius MacArdell and Others, as Administrators, etc., of Cornelius MacArdell, Deceased, Suing on Behalf of Themselves and Other Stockholders of the Houston and Texas Central Railway Company, Similarly Situated, Who May Come in and Contribute to the Expenses of This Action, Appellants, v. Frederic P. Olcott and Others, Respondents.
    
      Action by minority stockholders of an insolvent railroad company, to impress a trust upon its property purchased at a mortgage foreclosure sale thereof—a decree in an action, sustained upon a mortgage set up by a cross bill — the purchasers held to repi-csent the creditors and not the stockholders of the insolvent mortgagor company — such position not changed by the fact that a creditor held a majority of the stock of the insolvent mortgagor company.
    
    The Southern Pacific Company owned a majority of the stock of a railroad company known as the Houston Company No. 1, and was also a large creditor of that company. The Houston Company was insolvent, and had defaulted in the payment of the interest due on bonds secured by several trust mortgages executed by it. Only one of said trust mortgages contained a provision authorizing the sale of the mortgaged property for a default in the payment of interest upon the bonds. D.uring the pendency of actions brought to foreclose the trust mortgages, which did not contain a,provision authorizing a sale of the mortgaged property for a default in the payment of interest, an agreement was assented to by a majority of the bondholders of the mortgagor company which contemplated the foreclosure of the various mortgages, the purchasing of the mortgaged premises at the foreclosure sale and the organization of a new company to which the mortgaged property should be transferred, and the issuance by the new company of bonds to take the place of those issued by the old company.
    The trustees named in the mortgage containing the provision authorizing a sale of the mortgaged premises for a default in the payment of interest then filed a cross bill in the pending foreclosure actions, and the consolidated action resulted in a decree foreclosing the several mortgages and directing the sale of all the mortgaged property.
    Upon the sale, one Olcott, who was a trustee for the bondholders under the' reorganization agreement, purchased all of the mortgaged premises except a branch railroad and the lands appurtenant thereto, which branch was purchased by one Downs. The foreclosure sale was confirmed by the court and conveyances in accordance therewith were executed to Olcott and Downs. The new corpo- ■ ration, called the Houston Company No. 2, contemplated by the reorganization . agreement, was organized, to which Olcott transferred the property conveyed to him.
    Thereafter minority stockholders of the Houston Company No. 1 brought an action to obtain an adjudication that the title to the property purchased at the foreclosure sale by Olcott was charged with.a trust in favor of the stockholders of the Houston Company No. 1. Such claim was based upon the theory that,. owing to the absence of a provision in the trust mortgages before mentioned authorizing the sale of the property upon default in the payment of the interest due upon the bonds, no decree of foreclosure could have been obtained except by consent of the Houston Company Ho. 1 and that this consent was given by the Southern "Pacific Company which held a majority of .the stock of the Houston Company Ho. l in fraud of .the rights of the minority stockholders, and. that, as Olcott purchased' with notice of the rights of such minority stockholders, the property was subject to a lien in favor of such stockholders. Held, that the action could not be maintained;
    That, assuming that the decree of foreclosure could not be obtained in the action to foreclose the mortgages containing no power of sale on default in the payment of-interest, a decree of foreclosure was properly entered under the mortgage which did contain such a power of sale and as to which it did not appear ' that the Houston Company Ho. 1 had any defense;
    That Downs and Olcott, the purchaser's at the foreclosure sale, represented .the creditors of the Houston Company Ho. 1 and were not trustees for .the Houston Company Ho. 1 or for its stockholders;
    That the-fact that the Southern Pacific Company owned a majority of the stock of the Houston Company No. 1 did notprevent it from protecting itself as a creditor of that company, and that all of its acts were entirely justified by its relation as creditor; , ■
    That Olcott acquired, as against the Houston Company Ho. 1 and its stockholders, absolute title to-the property conveyed to him under the foreclosure sale.
    Appeal by the plaintiffs, Cornelius MacArdell and others, as administrators, etc., of Cornelius MacArdell, deceased, suing.on' behalf of themselves and other stockholders of the- Houston and Texas. Central Railway Company, similarly situated, etc., from a judgment of the Supreme Court in favor of the defendants, entered in the office of tile clerk of the county of Hew York on the 2.5tli day of August, 1903, upon the decision o| the court, rendered after a trial at the Hew York Special Term, dismissing the plaintiffs’ complaint upon the" merits..
    
      H. Snowden Marshall, for the appellants.
    
      Adrian H. Joline, for the respondents Olcott and Central Trust Company.
    
      Gordon Knox Bell, for the respondent Farmers’ Loan and Trust Company.
   Ingraham, J.:

The record in this case is quite voluminous, and I will not attempt .to do more than state the general nature of the action and the conclusion at which we have arrived.

There was a railroad in the State of Texas, organized and existing under the laws of that State, known as the Houston and Texas Central Railroad Company, which is designated in the complaint as Company Ho. 1. This company, prior to the year 1885, owned and operated a line of railroad in that State having a capital of 77,269 shares of stock at the par value of $100 each, of which the plaintiffs owned 900 shares. This railroad company had received from the State of Texas a grant of the public lands, and had between 1866 and 1881 issued several series of bonds amounting to upwards of $18,000,000, secured by mortgages upon its railway and these lands that prior to the' year 1883 a corporation organized under the laws of the State of Louisiana, known as the Morgan’s Louisiana and Texas Railroad and Steamship Company, was the owner of a majority of the stock of the Houston Company Ho. 1; that in 1883 the Southern Development Company, a corporation existing under the laws of the State of California, acquired a majority of the stock of the Morgan Company and thereby obtained the control of the Houston Company Ho. 1; that the defendant Huntington was the president of and in control of a corporation known as the Southern Pacific Company, and also a large stockholder and in control of the Southern Development Company; that Huntington and his associates, by means of the control of the Morgan Company, elected the officers and directors of the Houston Company' Ho. 1, and thereby obtained control of that company; ■ that subsequently the stock belonging to the Morgan Company, which included a majority of the stock of the Houston Co. Ho. 1, was transferred to the Southern Pacific Company, and thus the Southern Pacific Company secured control of the Houston Company Ho. 1; that in January, 1885, when the coupons of the bonds of the Houston Company, due on that date, were presented for payment, they were purchased by and transferred to the Southern Development Company, and in 1885 the. Southern. Development Company obtained a judgment against the Houston Company Ho. 1 for upwards of $600,000, upon which judgment an order was made by the United States Circuit Court for the eastern district of Texas appointing receivers to take possession of all the property, real and personal, of the Houston Company Ho. 1, and such receivers took possession of the property and thereafter operated the road; that on January 21, 1886, the trustees named in the first mortgage upon the Houston Company Ho. 1' main lines, filed a bill to foreclose the mortgage in the United States Circuit'Court for the eastern district' of Texas, to which answers were interposed by the railroad company. Subsequently the Farmers’ Loan and Trust Co'mpany, as trustee of a subsequent mortgage, also filed a bill in the same court- to foreclose its .mortgage, and on May 7,1885, orders Were entered extending the receivership appointed in the action brought by the Southern Development Company to these foreclosure actions. These actions were subsequently consolidated, but no further proceedings appear to have been taken in them until the year 1888. For several years prior to the year 1888 - the operation of the Houston Company Ho. 1 had been unsuccessful; in no year had its earnings been sufficient to pay its operating expenses, taxes and interest on its mortgage bonds, so that besides the mortgage - indebtedness there had accumulated a large unsecured indebtedness amounting to about $3,000,000. The /company was hopelessly insolvent and was in the hands of receivers. > In the mortgages, to foreclose which actions were pending, there was no provision authorizing a sale of the property upon a default in the-payment of in tersest,. but in a mortgage to secure what was called income and indemnity bonds there was the following provision: “ Seventh. That in case ' the said company shall at any time make default in the payment of the interest or principal falling due on any,of the iionds or coupons issued under 'this indenture, after due presentment of the same at the place for payment thereof, and shall constitute [continue] in such default for a period of sixty days, it shall thereupon be the duty of said parties of the second part herein, and of either of them, their . rights,: power and authority herein being joint and several, on the . application of the holder or holders of such bonds or- coupons so in default, or any of them, to ¡proceed to enforce this indenture for the, security of said bonds, and to that end to make sale, at public auction to the highest bidder for cash, before the court-house door in the city of Houston, Texas-, of all and singular, the said premises herein conveyed and assigned, without any exception-or reservation whatsoever," after advertising the time, place and terms of such -sale, for at least sixty days in a newspaper published in the city of Hew York,in one published in the ;city-of. Houston and in one published in the (city of Galveston, .to be published-at least once a week in each of said newspapers during said sixty days, said premises as herein conveyed to be sold in mass, in bulk and not in parcels or any part thereof separately, such sale to be made, however, subject to the said prior' mortgages hereinbefore referred to, and to the legal rights under said mortgages.”

Ho action, however, had then been commenced to foreclose this mortgage, and the bonds issued under it had apparently been acquired by the trustees of a subsequent mortgage, and were held by the trustees as security for the bonds issued under that subsequent mortgage.

This being the situation, an agreement for the reorganization of the Houston Company Ho. 1 was submitted to the bondholders by the Central Trust Company, of which the defendant Olcott was president, and who became a trustee for the bondholders under that agreement. Thereafter a large percentage of the bonds secured by the various mortgages of the Houston Company Ho.- 1 was deposited with the trustee. This agreement for the reorganization of the road contemplated -a foreclosure of the various mortgages, the purchase of the mortgaged premises at a sale under a decree of foreclosure by the purchasing trustee, the Central Trust Company, and the organization of a new company to which the property was to be transferred, the issue by the new company of bonds in place of the bonds secured by the various mortgages which had been given by the Houston Company Ho. 1, and the reorganization agreement provided that the capital stock of the new company was.to be of the par value of $10,000,000, and that the holders of the stock of the Houston Company Ho. 1 were to have the right to a proportionate amount of that stock by contributing a proportionate amount of the floating debt o,f the old company and the expenses of foreclosure and reorganization. In the event that the stockholders refused to provide their fro rata share, the said stock was to be transferred to the Southern Pacific Company, or its appointee, upon that company providing the amount necessary for the cash payments to be made for interest and bonds to the bondholders of the first mortgage bonds and coupons, and for the necessary charges, liabilities and expenses incurred by the trust company in carrying out the provisions of this agreement, the Southern Pacific Company to guarantee the payment of principal and interest on the bonds to be issued by the Houston Company No. 2. - This agreement having been assented to by a majority of all the bonds issued, proceedings were taken to obtain a decree of foreclosure under which the property "of the railroad and the lands covered by the various mortgages could be sold. A cross bill was filed by the trustees in the mortgage issued to secure the income and indemnity bonds in the consolidated action to which these trustees were parties. Proof was taken in the consolidated action necessary to obtain a decree of foreclosure. The case was then brought on for hearing .before the. United States Circuit Court for the eastern district of Texas; which resulted in a decree entered on May 4, 1888, directing a sale of the railroad and the lands and other property secured by the several mortgages, and under that decree all of. said property was sold, the defendant Olcott being the purchaser of the property covered by the mortgages, except the branch'Toad known as the Waco and Northwestern Division and the land grants secured by the building of that division, and this division and lands were purchased by the defendant Downs. That sale was subsequently confirmed by the court and conveyances executed under the decree vesting the defendants Olcott and Downs with all of the property of the Houston Company No. 1. -The Waco and Northwestern Division seems to have been conveyed - subject to a prior mortgage which was foreclosed, but the main line and the lands purchased by Olcott were sold, free and clear of all incumbrances, and Olcott thus acquired a title to that railroad and the lands conveyed to him. Olcott thus having acquired title to the railroad and the lands, proceeded to carry out the provisions of the reorganization agreement. A new company, called the Houston Company No. 2, was organized, and to that corporation Olcott transferred the road that he had acquired at this purchase under the decree of the United States Circuit Court, retaining the legal title to the lands which he had acquired at the sale under the decree of foreclosure. He subsequently executed and delivered indentures of trust, by which these lands were ^o be held for the benefit of the hólders of bonds of Company No. 2, issued in lieu of the bonds of Company No. 1, the proceeds of these lands when sold to be applied to the redemption of these bonds.

There is no attack made in this action upon the decree of the United States Circuit Court, or the sale under that decree. The ground upon which the plaintiffs aslc for judgment is that although the title to all of the property purchased at the sale under that decree vested in the defendant Olcott, 'that property was held by him charged with a trust in favor of the stockholders of the Houston Company Ho. 1, and it is to enforce this trust that the action is brought. This claim is based upon the allegation that, these various mortgages of Houston Company Ho. 1 containing no provision by which the principal of the bonds should become due, on a default in payment of the interest, no decree of foreclosure could have been obtained except by consent of the Houston Company Ho. 1, and that this consent was given by the Southern Pacific Company, the owners of a majority of the stock of the Houston Company Ho. 1, in fraud of the rights of the minority stockholders; that the decree that was entered was in effect a consent decree to which the bondholders were not entitled, and that as Olcott purchased all of the property with notice of the rights of the minority stockholders of the Houston Company Ho. 1, the principal in his hands is in some way subject to a lien in favor of the stockholders of Company Ho. 1, and that light the plaintiff as a stockholder on behalf of himself and all others similarly situated seeks to enforce.

It is quite clear that to this cause of action the decree of the United States Circuit Court under which the property was sold was not a bar. The complaint recognizes the full force and effect of that decree, and that by it Olcott acquired a good title to all the property purchased; but what is claimed is, that he acquired that title charged with a trust in favor of the stockholders of Company Ho. 1 upon the principle that when a trustee purchases property of his cestui que trust the benefit of the purchase inures to the beneficiary, and the legal title, while held by the trustee, is subject to the right of the beneficiary to compel the trustee to account for it or its value. Courts of equity have always prevented a trustee from- obtaining a benefit ■ by dealing in the property of a beneficiary, and charged property that has been purchased by a trustee with a trust in favor of the beneficiary, no matter in what form or under what circumstances the trustee acquired title to the trust property. In this case, the plaintiffs’ claim is based upon allegations that a majority of the stockholders occupying a relation of trust and confidence towards the minority stockholders consented to this decree, by which the .corporation of which the plaintiffs were stockholders was divested of its property and the defendant Olcott has acquired, a substantial interest in that property by virtue of this consent^ in trust for the majority stockholders, without paying any consideration therefor.

It appears that under one of these mortgages of the Houston Company Ho. 1, there existed a right in the mortgagees to sell the property upon default in the payment of interest upon the bonds secured by .that mortgage. Assuming that this decree could not have been obtained in the action to foreclose the first and general mortgages, when the trustees in the mortgage which contained the power of sale on default in the payment of interest filed their cross-bill to foreclose and the company was proved and conceded to be totally insolvent, the trustees of that mortgage had a right to have a decree directing a sale of the mortgaged premises, and it is quite apparent that no defense that the company could have interposed to this cross-bill could have been successful, and under the admission in the pleadings and. upon the undisputed facts the bondholders were entitled to have the property sold. It is clear that this decree was obtained without the consent of the• Houston Company Ho. 1. It apparently was a decree by default, but it does not appear that the Houston Company had any defense.' This being the case, the sale was ordered and the property Was purchased by Olcott and Downs. How, upon no • principle can Olcott and Downs be held to be trustees for Company Ho. 1 or its stockholders. They represented the creditors of the corporation; and the fact that the South-, • ern Pacific Company was a party to the reorganization agreement does not make Olcott representing the creditors a trustee for the Houston Company Ho. 1,. or its stockholders. The Southern Pacific Company was a large creditor of the corporation, and as such became a party to this reorganization scheme. The fact that this creditor was also a stockholder of the company, and controlled a majority of the stock, is no reason why it should not protect itself as a creditor of the insolvent corporation ; and all. of its acts, so far as is disclosed by this record, were entirely justified by its relation as creditor of the corporation. Assuming that Olcott was charged with the knowledge of the fact that the Southern Pacific Company was the owner of a majority of the stock of the corporation and controlled it, there was nothing in the situation that could possibly place Olcott in a position of trustee for the insolvent corporation, or its stockholders, or for the Southern Pacific Company as the majority stockholder. This action is not to impress a lien upon the stock of the Houston Company which was subsequently acquired by the Southern Pacific Company, but to impress a trust upon the. .property that was covered by these various mortgages of Company No. 1, owned by a purchaser who had purchased it as representing the creditors. Whatever right Olcott had to retain these lands as against the bondholders for whom he acted in purchasing the property at the sale under the' foreclosure decree, a right which he has never claimed, when that sale was confirmed and the property by the conveyance under the decree vested in him, it certainly divested the Houston Company Ho. 1 of all title to the property; and Olcott acquired, as against the Houston Company Ho. 1 and its stockholders, absolute title thereto, discharged of all claims or demands of every kind and description in favor of that corporation or its stockholders. Whether that decree was regular is not in question. The court had jurisdiction of the subject-matter. . All parties interested were before it. The title acquired under its judgment was good as against all the parties to the action in which the judgment was entered, and as the purchaser under that decree stood in no trust relation to the Houston Company No. 1 or its stockholders, and was under no obligation to act for or protect it or. them, his title to the property cannot be impeached by. any party to that action who was bound by the decree entered in it.

I have thus indicated the views that I take upon the legal questions presented upon this appeal, and, if I am correct, it follows that the plaintiffs had no cause of action, and for that reason the judgment should be affirmed, with, costs.

O’Brien and McLaughlin, JJ,, concurred; Yan Bbunt, P. J., , and Hatch, J., concurred in result.

Judgment affirmed, with costs.  