
    Robert L. Cutting et al., Plaintiffs, v. The Baltimore & Ohio Railroad Co. et al., Defendants.
    (Supreme Court, Richmond Special Term,
    July, 1901.)
    Implied trust — Eor the minority arising out of a foreclosure instigated by the majority stockholder — Consideration — Equities in the absence of actual fraud.
    Where a controlling1 majority stockholder in and the guarantor of the second mortgage bonds of an insolvent rapid transit company failed to pay the interest on the bonds from lack of proper resources and, upon a premeditated foreclosure and sale resulting from the default, bought the property in nominally by a new company, took all the new stock and, in lieu of paying the purchase price, issued bonds of the new company for those foreclosed, it was held that because of the irregularity of the transaction an implied trust in the new stock arose in favor of the minority stockholders to the extent of their interest in the old stock, and this notwithstanding the trifling value of that stock.
    But that, as no actual fraud was shown, the minority, to entitle themselves to the new'Stock, must within twenty days pay the majority stockholder their pro rata share of certain moneys it had paid, after the judgment in foreclosure and before the sale therein, for interest on the bonds foreclosed and, further, that the majority stockholder had as against them a lien for unsecured and unpaid advances theretofore made by it to the rapid transit company and also a lien for income bonds of the ¡latter company which the majority stockholder held at the time of the judgment in foreclosure, and that, to secure this lien, the minority stockholders must deposit their new stock with the majority stockholder and pledge it.
    Action to impress a trust in favor of minority stockholders.
    
      Blair & Price, for plaintiffs.
    Guthrie, Cravath & Henderson, for defendants.
   Marean, J.

The defendant was owner of the majority of the stock (fifty-one per cent.) of the Staten Island Rapid Transit Railroad Company, and was in control. It had also guaranteed the second mortgage bonds of that company. As guarantor, it had no duty touching the payment of the interest toward minority stockholders; its only obligation in that regard was toward holders of the bonds. It was only as majority stockholder that it owed to minority stockholders any duty to pay the interest, and that duty was conditioned upon the possession in the assets of the company of the requisite funds.

The defendant was also a .creditor without security of the said company for a large sum presently due, and while, had defendant chosen, it could, by making default in other directions, have probably paid the interest falling due July 1, 1898, and so have prevented foreclosure, the assets of the company did not, without default elsewhere and without defendant’s foregoing its own right of payment of its claim, afford the means of paying such interest. The defendant allowed such interest to go unpaid and actively instigated the foreclosure, based upon the default, with the purpose and intent of becoming the purchaser at the sale. 1

‘After the entry of the judgment of foreclosure, defendant, out of its own funds, paid the interest falling due July 1, 1898, January 1, 1899, and July 1, 1899, and thereupon a sale under the judgment was had indirectly, but really, to defendant, the nominal title being taken by a new company, to wit, the Staten Island Eapid Transit Eailway Company, defendant taking all the stock, and in lieu of payment of the purchase, money the foreclosed bonds were then taken up in exchange for a new issue of the same amount by the new company, bearing interest from July 1, 1899, at four per cent.

Under these circumstances, the defendant holds forty-nine per cent, of the stock of the new company in trust for the minority stockholders of the old company. At one time, I entertained some doubt whether the substantial want of value of the old stock did not lead to a contrary conclusion. But I think not. The minority stockholders were entitled to whatever chances of value their stock might have in the vicissitudes of the future, and in the most desperate chance there is probably a fractional certainty, however attenuated. But the lack of substantial value is a material fact when the ethical character of defendant’s conduct comes to be considered in determining how it shall be treated in connection with the enforcement of the trust. The Staten Island Rapid Transit Railroad Company was hopelessly insolvent. Beyond the first and second mortgages, amounting to $3,500,000, it had outstanding an issue of income bonds amounting to $4,500,000, upon which the company had never been able to ■pay a penny of interest. Two million, three hundred and thirty-two thousand dollars of this issue were held by defendant.- Besides, the company was indebted to the defendant on open account, as above mentioned, to. the amount of $1,114,032.60. The company had never paid a dividend. It is urged by plaintiff that the income bonds were void, but, each stockholder having accepted his pro rata share of the issue, they are all estopped. ■ Only creditors could have questioned their validity. There is no reason to suppose that the defendant saw any actual value in the property loaded down with these incumbrances, and desired to obtain it for that reason. It is more than probable that it apprehended a necessity, in order to put it upon anything like a solvent basis, to forgive its own outstanding account, and that all the holders of income bonds would have to forgive their claims. But they could not control the income bonds which they did not hold, and why should they forgive their own claims against the company for the benefit of minority stockholders ? I am satisfied that, while the defendant was technically wrong in the course which it took to bring about the inevitable liquidation, and that equity will, therefore, imply a trust, that, nevertheless, it will impose equitable conditions and not apply those harsh and punitive rules which are appropriate to eases of actual wicked fraud?

The plaintiffs are entitled to a transfer of the same number of shares of the new company as they hold of shares in the old company upon payment, within twenty days, of their pro rata share of the moneys paid by defendant, as above stated, for interest on the second mortgage bonds, subject, however, to defendant’s lien for the payment of plaintiffs’ pro rata share of the income bonds held by the defendant, as- above stated, and of the defendant’s open account aforesaid, such lien to he secured by pledge with the defendant of the stock transferred.

But, in case the plaintiffs shall not, within twenty days after the entry and service of an interlocutory judgment for the above relief, make the said cash payment, then the complaint will be dismissed, with costs.

The following simple case illustrates the view' which I have taken. Suppose A, who is insolvent, owns a piece of real estate subject to a mortgage, having no other property, and B holds a second mortgage upon it for an amount, without any reasonable doubt, largely in excess of the value of the equity. A goes abroad, leaving B in charge of the property as general agent. B’s mortgage falls due and his interest is in arrears. The income is insufficient to pay 'interest on the first mortgage unless bills for repairs are allowed to go unpaid, and unless B foregoes his own interest and principal. B pays the bills for repairs and pays his' own interest, but allows the interest on the first mortgage to be in default, and instigates a foreclosure and buys at the sale, which is a fair public sale, in his own name, for just the amount due on the first mortgage and costs, his second mortgage being nominally cut off. Equity probably impresses a trust upon the property in B’s hands for the benefit of A, though the end reached was the same as would have been reached by a foreclosure of B’s own mortgage, but must not A pay B what B paid at the sale, and must he not take the land allowing in some way a lien for the amount due on B’s second mortgage? (So adjusted, of course, that it will be a lien only after an amount equal to the old first mortgage.)

The plaintiffs’ proposition is that in the case supposed B must lose his. second mortgage altogether and that A, instead of merely getting back his own, will make a profit. I think equity gives him only indemnity.

Judgment accordingly, with costs. Costs against plaintiffs are awarded to defendants Lewis, Staten Island Rapid Transit Railway Company and Standard Trust Company.

Ordered accordingly.  