
    Josiah J. White, Resp’t, v. George C. Wood et al., Appl’ts.
    
    
      (Court of Appeals,
    
    
      Filed January 20, 1892.)
    
    1. Trustees—Railroad—Reorganization—Injunction.
    Defendants were a reorganization and purchasing committee, authorized by the agreement of the bondholders of a railroad to organize a new company and divide the stock among them in proportion to the bonds of the old corporation deposited by said bondholders with the Union Trust Company, of which bonds there were 994 outstanding. They did organize a new company under the Laws of Kentucky. Under the articles first filed the capital was to be two million dollars, and that amount was. to be issued as paid up stock to said bondholders, but these they abandoned and filed articles subsequently which provided for the same capital and that only $994,000, of stock was to be delivered to. the bondholders, leaving the balance to be disposed of by the directors of the new company. Defendants had received a note from the new corporation for repaying advances made by the defendants for actual expenses of the-committee in the performance of the trust. The court enjoined the payment of the note to them, and forbade their transferring the property from the old to the new corporation. Held, error.
    2. Same.
    There was no breach of duty on the part of the defendants as trustees, as the first application was withdrawn and in both cases the actual property to be represented by the stock to be issued to the bondholders was-precisely the same.
    Appeal from judgment of the supreme court, general term, second department, affirming judgment enjoining defendants from transferring the property of the Ghatteroi Railway Go. to the Ohio- & Big Sandy Railroad Go., and from collecting a promissory note for $56,800.
    
      Wheeler H. Peckham, for app’lts; Wm. J. Oaynor, for resp’t.
    
      
       Reversing 38 St. Rep., 338.
    
   O’Brien, J.

The judgment in this case is based upon acts of the defendants, claimed to be in violation of their duty as trustees and done in bad faith. The Ghatteroi Railway Company, a Kentucky corporation owning a railroad in that state, had issued one thousand bonds of $1,000 each, secured by two several mortgages-to the Union Trust Company of New York. There were 994 of these bonds outstanding when the company made default in the conditions of the mortgage, and it was foreclosed by suit in the-United States circuit court in Kentucky and the road and its equipment sold and purchased by the defendants for the benefit of the bondholders. The defendants, in making the purchase, acted, under the terms of a written agreement between themselves and the holders of the bonds, bearing date February 15, 1887. This agreement provided, among other things, that the bondholders-should deposit them with the Trust Company, subject to the order of the defendants, for use in the purchase of the property, and should receive therefor the receipts of the Trust Company. The-bonds were so deposited, the receipts given and used in the purchase of the property at the foreclosure sale. The agreement between the defendants and the bondholders, which prescribes at length and in specific terms the powers and duties of the defendants as the purchasing committee and trustees for the bondholders, also provided that in case the defendants purchased the mortgaged property they might sell the same within a fixed time, at a price-named, which was to be deposited with the Trust Company for the benefit of the bondholders, and that'the defendants should operate the road until the sale could be made, or a new corporation organized to take and operate the road. The defendants were authorized to organize a new corporation in case they failed to sell the road, and in that event it was provided that “ the stock of such company shall be issued to and divided among the holders of the-receipts issued by the Trust Company hereunder, in proportion to the number of bonds deposited, for which the receipts were issued, upon the surrender to the same Trust Company of such receipts.”

The defendants did organize a new company under the Laws of Kentucky, but did not deliver the whole authorized capital stock to the bondholders and, in this respect, it is claimed they failed to perform their duty as trustees under the agreement. There are some other clauses of the agreement, following the one-above quoted, which must be read with it in order to get a clearer idea of the question. It was provided that the defendants “ shall have full power and authority to make due provisions, in their discretion, in case of any defect of their express’ powers hereunder, and shall, nevertheless, proceed to carry out the true intent, meaning and purpose of this agreement, by conforming as-near as may be to the provisions thereof,” and further, “They shall determine all questions that may arise concerning the construction and effect of any provision of this agreement, which determination shall be final and conclusive in every case.”

The defendants, having failed to sell the railroad within the time designated, filed articles of incorporation in the proper county clerk’s office in Kentucky, but did not make publication of the same, as required by the laws of that state in order to create a corporation, and, in fact, within a month after such filing, notified the clerk that the articles were abandoned and new articles were-filed August 23,1889.

Under the articles first filed the capital stock was to be $2,000,-000, subject to be increased by a majority of the stockholders to any sum necessary to complete and equip the road, not exceeding $10,000,000. An amount not exceeding $2,000,000 of the stock was to be issued as paid up capital stock, in exchange for the Trust Company receipts issued upon deposit of bonds by the holders. By the articles of incorporation last filed, and under which the new corporation was created, the capital stock was. also fixed at $2,000,000, and the only material difference in the provisions of the two articles, in so far as concerns this case, was in the clauses providing for the issue of the capital stock.

The articles first filed provided for the immediate issue and distribution among the holders of the Trust Company receipts representing the surrendered bonds of not exceeding $2,000,000" of stock, in consideration of the c mveyance to the company, to be organized thereunder, of the mortgaged property by the defendants, while in the articles filed subsequently but $994,000 of stock was to be issued -and delivered to the holders of the receipts, in consideration of the conveyance by defendants of the property purchased at the foreclosure, and the residue of the stock might “ be disposed of from, time to time by the board of directors at its discretion, and is to be paid in from time to time upon calls by the board of directors.” The organization of the new company having been thus completed under this charter, the defendants conveyed to it the property purchased by them at the foreclosure sale by a deed dated August 20, 1889, acknowledged by the grantor on the same day, and by the grantee August 24,1889, and on this latter date delivered to the grantee. It was recorded in two counties of Kentucky, in one of them August 30, 1889, and in the other September 2, 1889, and this action was commenced August 26,1889. The plaintiff was the owner of twenty-seven of the bonds secured by the mortgage under foreclosure of which the defendants, as trustees for him and the other bondholders, acquired the road, and those bonds he surrendered as provided for by the trust agreement, and took in their place the trust company receipts, and was, therefore, entitled to his equitable proportion of the capital stock of the new company. He brought this action to restrain the transfer of the road to the new company by the defendants. On the trial the only evidence given by the plaintiff was the trust company receipts, which showed his interest in the sjibject matter of the controversy. The judgment, among other things, restrains the defendants from collecting a note given to them by the new company for $56,800. With reference to this note the allegation of the complaint is that it was given to the defendants by one Oollis P. Huntington upon an agreement with him, whereby the defendants, in violation of their trust duty, and for the purpose of benefiting themselves personally, agreed to procure for him, in consideration of said note, a majority in value of the bonds at fifty per cent par value, and thereupon turn the new corporation over to him.

The finding of the trial court is that the note was given to defendants by the new corporation “as part and parcel of the attempt of the defendants to so transfer the said franchise and property to the said new incorporation in violation of their said trust.” There seems to be no conflict in the evidence in regard to the consideration of the note, and that is to the effect that it was given to the defendants by the new corporation for the purpose of re-paying advances made by the defendants for actual expenses of the committee in the performance of the trust and one or two items of estimated expenses and, after paying those, the surplus, if any, represented by the note, was to be paid back to the corporation that made it. Nor is there any dispute as to the fact that the deed by defendants of the property to the new corporation was actually delivered to it before this suit was commenced. This is conceded in the opinion at general term. The judgment, therefore, enjoined the defendants from doing what had already been done and, aside from that-feature which impounds the note, in which the plaintiff has no interest whatever, the only effect that the judgment can have is, possibly, to enjoin the issue of the stock over and above the nine h undred and ninety-four thousand dollars, and as neither the new railroad corporation nor any of its . directors are parties to this action, it is difficult to see how it accomplishes even that. There does not seem to be any basis upon which that part of the judgment enjoining the transfer and the payment of the note can rest. But the more important question in the case is whether it has been shown that the defendants actually committed any breach of duty as trustees or in any material respect violated the trust agreement to the plaintiff’s damage. It is not found or claimed that the mere filing of the first articles of incorporation, in July, 1889, had the effect of bringing any new •corporation into existence.

It seems that, under the laws of the state where they were filed, no such result followed. Something more remained to be done before a corporate entity was created which was not done, and the .attempt to create a corporation by this filing was abandoned and new papers filed in their place which, it seems, resulted in the ■creation of the new corporation which the defendants are enjoined from conveying to.

The plaintiff, evidently, would not deem himself aggrieved at .all had the defendants proceeded under the articles first filed. 'Then he would have his share of two millions of stock; now he has only his share of $994,000 of stock. But although the stock in the first case would, on paper, express a larger interest in shares in the new road than that issued under the last articles, yet in both cases the actual property to be represented by the stock to be issued to the bondholders was precisely the same. When the bondholders of the old road became stockholders in the new one, they were to have their pro rata interest in the road which the defendants purchased for them and no more. Ho matter at what sum the new road was capitalized, whether at two millions or nine hundred and ninety-four thousand dollars, what the plaintiff was entitled to was the same proportion of the stock issued to represent the property purchased by the defendants as his twenty-seven bonds bore to the whole amount of the bonds secured by the mortgage foreclosed. Had the capital stock of the new corporation been fixed at the value of the property purchased by the defendants, then all the shares would go to the bondholders. In" executing that part of the trust which provided for the organization of a new corporation, to operate the road, the defendants were required to proceed according to the laws of the state- in which the property was and under which the corporation was to ■be created.

The express powers conferred on defendants by the. trust ■agreement were general, and all the details necessary to be considered, when a new corporation was to be brought into existence, were not specified, but notwithstanding this, the defendants were to go on and “carry out the true intent, meaning and purpose of this agreement by conforming as near as may be to the provisions thereof.” The precise question then is whether .the defendants, as trustees, disregarded the agreement and violated their duty, when organizing the new corporation, in providing for the issue to the bondholders of only $994,000 of stock instead of $2,000,000. The agreement required the defendants to. issue to the bondholders the stock of the new company. But. what did the parties mean by these terms ? Clearly the stock of the new company, within the contemplation of the parties, was. nothing else than the old road or, in other words, the property purchased at the foreclosure sale by the defendants. There was no other property in which the bondholders were jointly interested or which could be divided and distributed to them. Now the defendants in proceeding to discharge the duty of organizing a new corporation were bound, under the laws of Kentucky, to provide in the articles for the amount of capital stock authorized, and the times when and the conditions upon which, it was to be paid. The laws of that state authorizing the purchasers of railroads, at foreclosure sale, to become incorporated,, authorized the corporators to provide in the articles for the issue of paid up capital stock not to■ exceed “the original cost of the construction of the railroad and equipment purchased, and. such sum as may be necessary to complete the same.”

Now the paid up capital stock which the bondholders were entitled to receive could not exceed the original cost of the road purchased with its equipments. The defendants bid in the property at $750,000. In the articles they fixed its cost or value at. the amount of the original bonds, namely, $994,000, and provided for the issue to the bondholders of paid up stock to that amount,, in proportion to their original interest as represented by the receipts of the Trust Company. Had they intentionally fixed the amount of, paid up capital stock to be issued to the bondholdérs at less than the value of the property purchased, then the plaintiff would have a right to complain, but it is not suggested that the. defendants did that. But the new articles provided not only for the operation of the road, but also, in conformity with the laws of Kentucky, for the completion of it. This could not be done' without more capital, and so the articles provided that other stock, up to $2,000,000, might be issued by the board of directors and. sold for money or other proper consideration. The bondholders were not entitled to this stock unless they paid for it. The defendants fixed the capital of the new road at just what the capital of the old one was, and they fixed that part of it which was to be considered paid up, by the purchased property, at the amount, of the bonds used in its,purchase, and they say that they have the plaintiff’s proportion of that paid up stock to give to him whenever he will take it. That all the other holders of bonds for whoso benefit the defendants purchased the property have taken the stock and ratified the defendants’ acts. When we consider the broad powers contained in the trust agreement conferred upon the defendants, to some of which we have referred, and the laws of the state under which the defendants were to act, we think they are not liable, providing that they acted in good faith. If the provision in the articles incorporating the new railroad for the issue to the bondholders of paid up stock to the extent of $994,-■000 was the result of an honest construction of their powers under the laws of the state where the corporation was to he created, it would be unjust to hold them liable upon some narrow or technical construction of the agreement or the meaning of the law that they were obliged to act under. Shaw v. Railroad Co., 100 U. S., 605; Hollister v. Stewart, 111 N. Y., 644; 20 St. Rep., 941.

The complaint alleges and the trial court found that they did not act in good faith, but on the contrary acted in bad faith, and to this finding the defendants excepted. "We have carefully examined the record, and are unable to find any evidence in it to uphold the finding, and we are referred to none by the plaintiff's counsel. He stated on the trial that he relied on the case made by the pleadings, but they nowhere contain any admission ■of bad faith on the part of the defendants. On the contrary, they gave evidence at the trial that they acted in good faith.

The judgment should, therefore, be reversed and a new trial granted, costs to abide the event

All concur, except Peckham, J., not voting.  