
    (69 Hun, 378.)
    HART et al. v. OGDENSBURGH & L. C. R. CO. et al.
    (Supreme Court, General Term, Third Department.
    May 9, 1893.)
    Consolidation of Corporations—Rights of Bondholders.
    Act 1869, authorizing the consolidation of railroad companies, provides-that the old corporation shall continue in existence to preserve the rights, of creditors. Laws 1880, c. 73, authorizes the Ogdensburgh & Lake Champlain Railroad Company to issue bonds, and provides that holders of such, bonds shall have the right to vote “in the election of directors of said company.” Plaintiffs were holders of bonds issued under said act, called “income mortgage bonds.” The interest was payable yearly out of the-net earnings, if sufficient, and, if there were no net earnings, then no interest was payable; the amount of such net earnings to be determined' by the board of directors. The mortgage securing the bonds was given, subject to the right of the company to retain the free and uncontrolled use, enjoyment, possession, and management of the premises, rights, and property thereby granted. Held, that plaintiffs were not entitled to an injunction against the consolidation of the company with another company having a connecting line of railroad, on the ground that it would deprive-them of their right to vote for directors, and that it would be impossible to determine the net earnings of the old company, as there could still bean annual election of directors of the old corporation, the contract expressed in the bonds and mortgage not contemplating that their powers, should always remain the same, and since the consolidation, being on a basis of valuation of the properties of the two companies, would not interfere with the determination of the net earnings of the old company.. Herrick, J., dissenting.
    
      Appeal from special term.
    Action by William T. Hart and others against the Ogdensburgh •& Lake Champlain Railroad Company and another. From a judgment vacating an injunction granted on plaintiffs’ ex parte application, they appeal.
    Affirmed.
    For former reports, see 20 N. Y. Supp. 918, and 22 N. Y. Supp. 401.
    The following is the opinion of Mr. Justice KELLOGG at special term:
    A motion is made herein by defendant to set aside an injunction granted -on plaintiffs’ ex parte application. On this motion no dispute exists as to the facts. The admissions of defendant’s counsel and the moving and opiposing papers present the case on its merits, and, so far as plaintiffs are concerned, in an aspect as favorable, at least, as they could be presented upon trial. The sole question involved may be said to be one of construction of :a contract,—whether or not the defendant has obligated itself to the plaintiffs not to .consolidate with any other railroad company, as provided by the Laws of 1869, more recently amended. By chapter 73 of the Laws of 1880 the Ogdensburgh & Lake Champlain Railroad Company was authorized to ■issue $4,500,000 in bonds, to be used in the purchase, exchange, or retirement ■of its preferred stock, and in payment of its outstanding bonds, and in making improvements to its property, and was authorized, with the consent of •a majority of its stockholders, to secure such issue of bonds by a mortgage upon all its property, franchises, etc. It was further provided by this act that the bonds so issued should possess the anomalous quality of investing the holders with the right to vote “in the election of directors of said comipany,” one vote for each $100 of bonds. This unusual power given to a 'bondholder, altering the voting power of the stockholder, and impairing his control over his own enterprise, must be interpreted to mean no more than it says, for this power is not confined to the bonds issued in exchange for ■preferred stock, and might be considered, within State v. Greer, 78 Mo. 188, as subject to attack by any nonconsenting stockholder as unconstitutional. Clearly, none of the rights of stockholders were intended to be disturbed, except the right to vote for directors. Such rights as stockholders possessed respecting mortgages, loans, consolidations, etc., were left unimpaired by this law, and whatever was done under it must have been understood by the parties as subject to strict construction; the bondholders taking, and the bondholders losing, as little as strict construction permits. Under this law, bonds were issued of two classes, both secured by one mortgage upon all the property and franchises of the company, aggregating in all the full amount of $4,500,000. The first class was called “first consolidated mortgage bonds,” aggregating $3,500,000. The second class was called “income mortgage bonds,” aggregating $1,000,000. The interest upon the first class was payable periodically and absolutely. The interest on the second class, or income bonds, was payable yearly out of the net earnings of that period, if sufficient, and, if there were no net earnings during the year, then no interest was payable; “and the board of directors of said company shall determine the amount of snch net earnings in each of such periods.” The principal of all the bonds was to be paid in forty years. The mortgage given with these bonds and for their security by the Ogdensburgh & Lake Champlain Railroad Company is given, “subject, however, to the right of the party of the first part, [said company,] its successors or assigns, to retain the free and uncontrolled use, enjoyment, possession, and management of the premises, rights, and property hereby granted,” so long as the principal and interest •of the bonds of the first class, and the principal of the bonds of the second class, are paid according to their terms; no reference being made in the mortgage to the interest of the second-class bonds. The plaintiffs are owners of a portion of the second class, or income bonds, and are entitled to vote for directors of said company,—one vote for each $100 of said bonds. The income bond and mortgage provided for by the law referred to. and held iby plaintiffs, constitute the contract between plaintiffs and the Ogdensburgh & Lake Champlain Railroad Company, which plaintiffs allege is about to be violated to their irreparable injury by a vote of the stockholders, in ratification of an agreement of consolidation, entered into by and between the directors of the Ogdensburgh & Lake Champlain Railroad Company and the Central Vermont Railroad Company, which two companies now own a continuous or connected line of laiiroad; and plaintiffs base their claim upon two grounds: (1) The projected consolidation, if consummated, will destroy their right to vote for directors in the Ogdensburgh & Lake Champlain Railroad Company by working a practical dissolution of that corporation; (2) that consolidation will so mix and intermingle the properties and earnings of the two roads that it will be impossible to determine the net earnings which the bonds have a right to claim for interest. Each of these two things, plaintiffs claim, the defendant has contracted shall not be done.
    Without doubt the consolidation act,. which was passed in 1869, and was in force when the law authorizing these bonds was enacted, and when these bonds were issued, does contemplate that the directors of the old consolidating companies shall, in the event of consolidation, be shorn of most of their functions; that the corporate body shall be reduced to a skeleton without rags, and with very limited powers; but it does not contemplate its complete dissolution. It expressly says that the old corporation shall continue in existence to preserve the rights of all creditors, and the limit of such existence can be measured by the duration of creditors’ rights. It is not quite plain, under this provision, how there can be valid objection to the annual election of directors for these old corporations, so long, at least, as there are in existence stockholders or bondholders capable of voting. I see none, and, until the law points out a different method of exhibiting a tangible existence, the life of a corporate body, I think, must be shown in, and its functions, whatever they may be, must be discharged by, a board of trustees or directors. Justice Gray, speaking of this consolidation act in Polhemus v. Railroad Co., 123 N. Y. 511, 26 N. E. Rep. 31, says: “The true theory of this act is that each consolidating company survives in the consolidated company, and that it represents each company in its claims and its obligations.” This is theoretically true, since the new company springs from the old. But this theory is not inconsistent with the existence, as the statute provides, of the old corporations distinct from the new, and with sufficient vitality to discharge in the ordinary way, through directors, the duties imposed by the law. If the idea was contemplated and expressed in the bonds and mortgage, as plaintiffs now claim, that for 40 years the directors of the Ogdensburgh & Lake Champlain Railroad Company should exercise undiminished functions,—that for this full term there should be no consolidation of interests with any other company, as the law at the time permitted,—then the same idea must be expressed in the law of 1880 authorizing the issue of the bonds, for it is only by virtue of the provisions of that law that bondholders have the right to vote for directors. They are not given the right to vote on the question of consolidation. The law then conferred upon the stockholders not bondholders the right to vote upon any agreement entered into by the directors. Can it be reasonably urged that the giving to a bondholder owning a $100 bond the right to vote for directors shows a manifest intention in the law to place it within the power of that bondholder to prevent consolidation for 40 years because, in case of consolidation, the directors he may vote for thereafter will have diminished functions? The law does not so declare; and, if such power were conferred with the right to vote for directors, it must be implied. The implied rights which the bondholders take under this law, for the reasons before given, must be those only which necessarily go with the language used, interpreted in utmost strictness. And I see no reason heré to conclude that the right to vote for directors meant anything more than to vote for such directors, with such powers as might be needed by the corporate body in its then, or in any changed, condition. There is no intention manifest in the law to deprive the stockholders of any rights which any existing law conferred upon them exclusively, even though the exercise of such rights should operate, directly or indirectly, to diminish the value of the bondholders’ right to vote; nor can it be reasonably claimed that the contract expressed by the bond and the accompanying mortgage contemplated or expressed upon tills head more than the law itself. In case, then, the threatened consolidation is effected, the bondholders will possess still the right to vote for directors, as now, during all the time that they are bondholders. The directors will possess the powers, and be burdened with duties, as expressed in the consolidation act, and one of these duties will be that declared in the bond, relating to the ascertainment of net earnings applicable to interest upon the income bonds.
    If there had been any intention in the law, or in the contract evidenced by the bond and mortgage, to curtail the rights of stockholders touclúng a step, so important, and possibly vital, to their interests, as consolidation with connecting roads making a continuous line, I think that intention would have been clearly expressed. It might be urged that by the same contract the corporation promised not to propose another mortgage upon their property and franchises, and the stockholders were not permitted to authorize a mortgage, since the mortgage might be foreclosed, the property and franchises sold, and the corporation dissolved, and in this method the plaintiffs might be deprived of their right to vote for directors. Indeed, no indebtedness could be created by the company without risk that such debt might ripen into a judgment, and result in a judicial sale and dissolution of the corporate body; and still I think no one will contend that these rights were by implication taken from the directors or the stockholders by this law or this contract. All contracts are supposed to be made in view of the existing law, and must be interpreted to have been so made. The statutory conditions must be deemed to have permeated the agreement, and to have constituted elements in the obligation. The contracting parties here knew of the provisions of the consolidation act. They knew of the diminished powers of directors in case of consolidation. They knew that no consolidation could be effected unless the board of directors first entered into an agreement to consolidate. They knew their powers, through these bonds, over the election of directors, and may have, wisely or unwisely, concluded that no consolidation could be had except the bondholders were friendly to it; or they may have concluded that no consolidation would be ever considered except for the purpose of increasing the earnings, and so benefiting bondholders. So, also, they knew that only through this same board of directors created by their votes- if their votes were so potent as to be of any value whatever—could any new mortgage or debt be created, and the existence of the corporation be imperiled, or any leases be made, and they were content to exact nothing in express terms of the nature now contended for. Referring to the right of the company under this contract to lease a road, and pledge its earnings in payment in fact for its construction, the court of appeals, in Day (these plaintiffs) v. Railroad Co., 107 N. Y. 146, 13 N. E. Rep. 765, uses this pertinent language: “It is the contention of counsel * * * that the power to change the condition of the road * * * is limited and restrained by these provisions. It does not seem probable that such was the intention of the parties. * * * Uniformity is not bargained for nor promised. If that were intended, it is difficult to see why the bond and mortgage did not provide that the operations of the company during forty years of credit should be confined to the running of its road between the then termini. * * * Nor do I think the construction contended for is warranted by the words actually used, and that, acceding to that construction, the court below has inserted by implication that which the parties have not expressed.” And it was there held, in effect, That the company was in no manner restrained by this contract in doing what, In the judgment of the directors, was for the best ultimate interest of the road, even if the thing done resulted in the absorption of the entire earnings, and left nothing tó apply as interest on income bonds. While this may have little direct bearing upon the Question of diminishing the power of plaintiffs’ vote, it does not bear upon the construction to be placed upon the contract respecting implied limitations therein upon pre-existing powers of directors and stockholders. If, upon reading the terms of plaintiffs’ bond and mortgage, the court of appeals says, in substance: “These parties, when this contract was entered into, knew that, by the law of 1869 then in existence, this corporation might lawfully agree with any other corporation for the use of its road; and, if it had been intended to deprive this corporation of that power, it should have been so plainly declared. The court below has erroneously inserted by implication that which the parties have not expressed, even though it is conceded that the exercise of this power will deprive plaintiffs of all interest on their bonds,”—why must not we also say: ‘‘These parties, when this contract was entered into, knew, by the terms of the consolidation act then in existence, that this corporation might lawfully unite with a connecting road, making a continuous line, and, if it had been intended to deprive this corporation of that right, it should have been so plainly declared. This deprivation of so valuable a right cannot be implied, even though it is conceded that its exercise will diminish the power of the directors, for whom plaintiffs have a right to vote.” Considering, as the parties must, what the demands of 40 years might be in the great progress of railroad enterprises, the changes which might be forced by conpetition and strife for business; considering, as said by Judge Huger in Woodruff v. Railway Co., 93 N. Y. 615, that “the public policy of this state, as manifested by numerous acts of the legislature, has always been, not only to afford the fullest scope for the consolidation of noncompeting railroads and railroad corporations, but also for the transfer of the use of such roads and their functions by one corporation to another;” and considering the grave consequences to this corporation which might result in being deprived of the privilege of uniting with any other road,—is it likely that the parties intended to give each holder of a $100 bond the power to prevent such a union when the interests of all concerned demanded it? I think not. The implication, it seems to me, points to just the reverse.
    The impossibility of ascertainment of the “net earnings” applicable to interest on the income bonds, which plaintiffs claim will be the result of consolidation, and which constitutes the second ground of plaintiffs’ objection, calls for Ihe examination of the proposed agreement. The agreement of consolidation contemplates no change of stockholders; a union of corporate interests; a union of two roads, forming a continuous line of railway, under a single management. Neither the law nor the agreement suggests relief, directly or indirectly, from any existing liability or obligation. On the contrary, by language unmistakable, the law and the agreement each fasten upon the new management every obligation, liability, and duty which either of the consolidating companies has created or consented to by contract, express or implied. The obvious purpose of union is the obtaining of increased “net earnings.” Stockholders have interest in nothing else. Only out of the net earnings can dividends be made. No question is made of good faith of directors in making the agreement, or of stockholders in their threatened ratification of it. The income bondholders are also interested in “net earnings,” and, if the amount can be increased, certainly no harm can result to them from that. The only question is, can it be ascertained, if the two roads are run under one management, what proportion of net earnings properly belong to each? Will it be possible, under any plan or by any method which the new board of directors can devise, to determine the “net earnings” properly attributable to the Ogd'ensburgh & Lake Champlain road and its properties? If so, then there is nothing for plaintiffs to fear, for this is just what, by the agreement, the new company undertakes to do. It is a matter of common knowledge that the earnings of a railroad company are mainly derived from freight and passenger traffic, which neither begins nor ends with that particular road. Bach road is but a link in a long chain, and, though the entire line is made up of separate roads under separate corporate management, the earnings of each must, for the most part, be ascertained by arbitration or agreement with all roads in the line. Consolidation can have no efffect to confuse the data by which the amount of such earnings are determined; neither can it confuse the accurate data always accessible respecting local traffic, (passenger or freight,) over which each company has exclusive control. What, then, will necessarily prevent the ascertainment of the earnings of the separate properties? The new company possesses the same data and means of determining, which were possessed by the two old. The business being operated by one corporate body instead of two does not explain how confusion can.be necessary. So far as the commingling of assets goes, it should be borne in mind that plaintiffs have no interest in such assets, only in their earnings, and that the proposed union of assets is upon a fixed basis which the agreement of consolidation determines. The union is upon a basis of valuation of the properties of tire two consolidated companies, and has relation to earning capacity. It is presumed to be a fair valuation. No question is raised as to this. This is yet to pass the examination of the stockholders of the Ogdensburgh & Lake Champlain Railroad Company, and it may be presumed that their personal interest will be sufficient to insure a fair ratio of valuation for the properties of this company. If the basis of union or ratio of valuation fixed by the agreement is right, then a division of earnings of the new company between the two old companies on that basis, or in that ratio, must bo right, and no one interested in the earnings of the Ogdensburgh & Lake Champlain Railroad Company can be injured. I see no practical difficulty in reaching a just and accurate division of earnings; nor do I see how the plaintiffs can be injured in any respect as to their interests in such earnings.
    The learned counsel for plaintiffs, in support of this ground of contention, cites Maine Cent. R. Co. v. Maine, 96 U. S. 499, but the case is hardly authority for so much as is claimed here. It was there a question whether the parties in interest, as against the state, had not voluntarily abandoned a contract right to a certain mode of taxation by taking on the new form of consolidation with five separate companies. That act made it impossible for the officers stipulated for in the law conferring this right to make an annual report to the legislature, which was to be the basis of taxation; and the court held that The state could not be compelled to accept a substituted service, and uses this language: “The new company was subject to no such duty of keeping an account of expenditures and receipts of the original lines. Its directors were not called upon to make any report as to the income pf such lines, nor was its treasurer required to make any annual exhibit of the net profits derived from them.” This would have been sufficient to support the decision. The court, however, does use this further expression: “The assets of all the companies were intermingled, and continuous trains were run over the whole length of the several roads. It would have been impossible to show what would have been the profits of each road without the consolidation. Only an approximation of them would have been attainable, and that would have been based upon estimates more or less speculative in their character.” It is quite possible that the facts of that case and those roads may have been peculiar. It is not obvious how such conclusions could be reached in the case of the proposed agreement of consolidation now being considered. It is true, the assets of the two old companies will be intermingled, but in the union each old company, through allotment of stock in the new company, will be accurately apportioned its proper fraction of the unit. It is also true that “continuous trains” may run over the whole length of the two roads, but if that has not' been the practice in the past, and necessarily the practice, then from common knowledge we must say that these two roads must-be an exception to the universal practice in railroading, where the two roads make a continuous line. As to the conclusions drawn by the court in that case from those two facts, if such conclusions are predicated on those facts alone, there must have been, it seems to me, something exceptionally confusing in the agreement of consolidation, or in the operation under it, which does not appear in the agreement we are considering. The state, in the case cited, did not seek to restrain the union of the several roads. It had granted certain immunities to two of them, and fixed the conditions upon which these immunities might be retained. The two companies voluntarily placed themselves in a position where it became impossible to perform the conditions in the manner by the law prescribed. No officers were in existence, or could be brought into existence, whose duty it was, under the law, to make the required report; and the court held that the state could not, without the passage of a new law, accept the report of a substitute,—a stranger,—upon whom no duty to report rested. I think the plaintiffs, for the reasons stated, are not entitled to this restraining order, and direct that it be vacated, with costs.
    
      Argued before MAYHAM, P. J., and PUTNAM and HEBBICK, JJ.
    Louis Hasbrouck, (Daniel Magone and John C. Keeler, of counsel,) for appellants.
    Theodore H. Swift, (William Caleb Loring and Charles 0. Tappan, of counsel,) for respondents.
   MAYHAM, P. J.

Appeal from an order made at special term, vacating and setting aside an injunction order granted by a judge of this court, restraining the defendant corporations from consolidating under the laws of New York. The defendant the Ogdensburgh & Lake Champlain Bailroad Company is a corporation incorporated under the laws of New York, owning and operating a railroad, with a capital stock of over $3,000,000. The defendant the Central Vermont Bailroad Company is a corporation organized under the laws of the state of Vermont, owning and operating a railroad in the state of Vermont, with a capital of $1,000,000. The railroads of these respective corporations connect with each other at the state lines, and together form a continuous line of railroad into both states. In 1880 the defendant the Ogdensburgh & Lake Champlain Bailroad Company issued its income bonds to the amount of $1,000,000. These bonds, by their terms, bore annual interest at the rate of 6 per cent., payable semiannually, provided that the net earnings of the railroad and other property of the company, after satisfying the expenses of operating and maintaining the same, and the interest on all liens, charges, incumbrances, and other indebtednesses, with all taxes and assessments and floating indebtedness on the property of, or owned by, said company, “shall, respectively, suffice to pay such rate of interest on all of this issue of bonds outstanding at the time any installment of interest shall fall due, or such interest, less than six per cent, per annum, as such net earnings shall be sufficient to pay upon such bonds, each being entitled to the ratable share thereof on presentment and surrender of the coupon representing the same, and that the board of directors of such railroad company shall determine the amount of such net earnings.” These bonds also provided that, on the registration of the bonds by the holder 30 days previous to an election of directors, such holder “may have one vote for each $100 of such bonds held by him for directors of said company.” The plaintiffs are holders, each in his own right, of some of these income bonds, and as such owners and holders are entitled to such privileges and immunities as are provided in such bonds to the holders thereof. The Ogdensburgh & Lake Champlain Company now propose to consolidate their railroad company with the Central Vermont Bailroad Company under the provisions of the statute which authorizes railroad companies, upon conditions therein provided, and preliminary to such consolidation entered into an. agreement for consolidation with the directors of the Central Vermont Bailroad Company. By the terms of this agreement of consolidation the capital of the new and consolidated company is $1,-307,700, and the capital stock of each of the old companies is made convertible into the stock of the new company; ten shares of the stock of the Ogdensburgh & Lake'. Champlain stock for one of the consolidated company, and that of the Central Vermont Company into such consolidated company stock share for share. The agreement provides for the naming of the directors of the new company, and their election annually thereafter. The contract also provides for holding a meeting of the stockholders of each of the old companies and the submission to them" of the question of such proposed consolidation. The contract also provides for the vesting in the new corporation of all the property and effects of each of the old " corporations, but expressly provides that “the rights of all creditors of liens upon the property of either of said corporations, parties to this agreement and act, shall be preserved and unimpaired; and the respective corporations shall be deemed to continue in existence to preserve the same; and all debts and liabilities incurred by either of said corporations shall thenceforth attach to such new corporation, and be enforced against it and its property to the same extent as if incurred or contracted by it.”

It is insisted on the part of the plaintiffs and appellants that this proposed consolidation, if carried into effect, would essentially impair the obligations of the contract between them and the Ogdensburgh & Lake Champlain Eailroad Company—First, by depriving them, as bondholders, of the right to vote for those persons whose judgment as to the application of earnings is practically decisive of their rights to interest; second, by depriving them of directors who would have any motive to promote the interests of the plaintiffs, and who, from their position, would be familiar with the facts, and in whose selection they, as bondholders, have a right to participate; thirdly, that the net earnings of the property of. the company belong to the bondholders, and that by the article of consolidation no provision is made for keeping separate accounts, and no accounting is provided for for the same; fourthly, that the bondholders are deprived of their share in the extension of the business of the company. If it be true that, for any other objections suggested by the plaintiffs, the law authorizing the consolidation of these companies impairs the obligation of the contract between the Ogdensburgh & Lake Champlain Eailroad Company and these bondholders, then the contention of the plaintiffs that the law is unconstitutional must prevail. But there is no express provision in chapter 73 of the Laws of 1880, under which these bonds were issued, nor in the condition of the bonds themselves, against consolidation of the company with any other railroad company under the provisions of chapter .917 of the Laws of 1869 and the amendments of the same, and, as has I think been clearly shown in the very able and exhaustive opinion of the special term, these bonds must be deemed to have been issued and taken by the plaintiffs subject to the contingency which might occur,—of a consolidation. If, therefore, the right to consolidate existed at the time of the issuance and negotiation of these income bonds, the purchaser must be deemed to have taken them subject to that right, which vested in the company by the act of 1869, and which, like Aaron’s rod, swallows up all the objections of the appellants, and against which they cannot now be heard to contend. I think, therefore, that the order should be affirmed on the opinion of the special term, with costs and printing disbursements.

PUTNAM, J., concurs. HERRICK, J., dissenting.  