Rothchild v. Memphis & C. R.

WANTY, District Judge, after making the foregoing statement of the case, delivered the opinion of the court. The proofs in this case fail to show any actual fraud on the part of the Southern Railway Company before or at the sale, or any actual control by it of the Memphis & Charleston Railroad. The road was in the hands of receivers appointed by the court from July 14, 1892, until the sale was made on the 26th of February, 1898. The defendant Southern Railway Company was not organized until 1894, and there is nothing in the proofs from which any manipulation of the affairs of the Memphis & Charleston Railroad by the Southern Railway Company since its organization, or by its stockholders before its organization, can be inferred. The relief, in the absence of this proof, must be founded on the allegations in the bill “that the relations of said Southern Railway Company and of your orator and the other stockholders of said Memphis & Charleston Railroad Company at the time when said sale took place (the said Memphis & Charleston Railroad Company having abdicated its functions of controlling said property, and it and its board of directors being entirely under the control of the Southern Railway Company) were the same as those of tenants in common, and the said Southern Railway Company could not acquire any right, title, or interest in the said property, except for the equal and common benefit of itself and the other stockholders of said Memphis & Charleston Railroad Company; and that the Southern Railway Company, a foreign corporation, did not have the right in law to become the purchaser of the Memphis & Charleston Railroad Company’s property.” 1. Stockholders are not tenants in common of the property of the corporation, and a stockholder, as such, even though he owns a majority of the stock, does not occupy a trust relation toward the other stockholders, and he may deal with them or with the corporation in good faith. In order to establish a trust relation, the ma [480] jority stockholder must actually control the affairs of the company for his own benefit and to the prejudice of the minority stockholders. If he is not in control of the property, and does not mismanage it to the prejudice of the minority stockholders, he may purchase, if there is no actual fraud, the property of the corporation at a judicial sale for his own benefit, and he is not accountable to any other stockholder for the property so purchased. In Mickles v. Bank, 11 Paige, 127, 128, 42 Am. Dec. 103, Chancellor Walworth uses this language, which seems apt when applied to the facts here, and has long been indorsed by courts and text writers: “The principal object of the bill appears to he to set aside the sales of the property of the corporation upon the ground that the sales were invalid. In this the complainant must necessarily fail upon the allegations of the bill, even if the corporation is made a party; for the sales were valid, and gave a good title to the purchaser. And one stockholder of a corporation has a perfect right to become a purchaser, for his own benefit, at a sheriff’s sale of the corporate property upon an execution against the corporation; nor Is he accountable to any other stockholder for such property if there is no fraud in the sale, even where the property is bought in by him much below its value. The remedy of the other stockholders is to attend the sale upon the executions, and bid up the property to its cash value, and thus prevent the same from being sacrificed. The stockholders of a corporation are neither tenants in common of the corporate property nor copartners, either before or after the dissolution of the corporation.” There is nothing in the proof in this case from which it can be found that the Southern Railway Company ever operated or controlled the property of the Memphis & Charleston Railroad Company, so that no mismanagement of its corporate affairs- for the purpose of obtaining advantage at the expense of the minority stockholders can be attributed to it. The sale of the property was not brought about through its manipulation, and it is not shown that the property did not bring a fair price. If the minority stockholders desired to become purchasers, they could have devised a plan of reorganization, and bid in the property if it did not bring what they thought was its full value at the sale. Oil Co. v. Marbury, 91 U. S. 587, 23 L. Ed. 328. This the complainant did not do, but waited until after the sale had been, made and confirmed, and the purchaser had been in possession of and operating the property from February 26, 1898, until August 7, 1899, when he filed this bill, the allegations of which would, if action had been promptly taken, have brought the defendant Southern Railway Company within the principles laid down in the cases holding the majority stockholder a trustee in the purchase of the corporate property for the benefit of all of the stockholders of the corporation. But the proofs lack the essential elements of control and mismanagement, without which the relief could not be given, even if the bill had-been seasonably filed. The allegations of control, mismanagement, and fraud are emphasized throughout the bill of complaint, but seem to be wholly lacking in the proof, the complainant apparently relying on the position that, when it is shown that a person holding a majority of the stock of a corporation purchases all of its property, there is a presumption of fraud which makes him a trustee for all of the stockholders, and proof of fraud becomes unnecessary. No case in the large number cited by counsel for the complainant justifies this posi [481] tion. In each one there had been actual fraud in the control and mismanagement of the property for the purpose of bringing about its acquisition by the majority stockholder. It is true that every transaction of a majority stockholder with the corporation will be viewed by the courts with jealousy, and set aside on slight grounds; but it is not void, and, if the relations of the majority stockholder are fair and open, there is no rule which forbids his dealing with the corporation, and no presumption that such dealing is fraudulent. The actual control of the property, which is the basis in all of the cases of the trust relation, not existing, and the sale not having been brought about by the fraudulent action of the defendant, it did not, by its purchase, become a trustee for the complainant and other stockholders of the Memphis & Charleston Railroad Company. Oil Co. v. Marbury, 91 U. S. 587, 23 L. Ed. 328; McKittrick v. Railroad Co., 152 U. S. 473, 14 Sup. Ct. 661, 38 L. Ed. 518; Rogers v. Railway Co., 33 C. C. A. 517, 91 Fed. 313; Gillett v. Bowen (C. C.) 23 Fed. 625; Lucas v. Friant, 111 Mich. 426, 69 N. W. 735; Bank v. Walker, 66 N. Y. 424; Spurlock v. Railway Co., 90 Mo. 200, 2 S. W. 219; Price v. Holcomb, 89 Iowa, 123, 56 N. W. 407; Thomp. Corp. §§ 1071, 1076, 1079; Cook, Corp. §§ 6, 653. There is nothing in the case of Farmers’ Loan & Trust Co. v. New York & N. R. Co., 150 N. Y. 410, 44 N. E. 1043, 34 L. R. A. 76, 55 Am. St. Rep. 689, which is relied upon by this complainant, at variance with these views. In that case the New York Central & Hudson River Railroad Company purchased a majority of the stock and bonds of the New York & Northern Railway Company, and while its officers were in control of the New York & Northern Railway Company they declined to accept traffic from other roads that would have produced a fund with which to pay the interest on the bonds; the income of the road which should have been employed to pay the interest was diverted to other and improper purposes, which action occasioned the inability of the company to meet its obligations, the default in which resulted in the foreclosure suit. After making an elaborate review of the authorities, Judge Martin, for the court, states the rule as follows: “Tlie principle of those authorities renders it quite obvious that, a corporation purchasing a majority of the stock of another competing one cannot obtain control of its affairs, divert the income of its business, refuse business which would enable the defaulting company to pay its interest, and then institute an action in equity to enforce its obligations, for the avowed purpose of obtaining entire control of its property to the injury of the minority stockholders.” The elements of control and mismanagement there existed, and were the basis upon which the judgment rested, and will be found in the cases reviewed by Judge Martin, and in the cases-urged by counsel for complainant here. Their absence in this case is fatal to the appellant’s contention. 2. The minority stockholders, as the proof shows, with the full knowledge of all of the proceedings culminating in the sale, made no objection, but permitted the property to be sold to the Southern Railway Company for a large sum, and that company to expend a [482] large amount of money in its improvement, without making any effort to impeach the sale until the filing of this bill. There is no excuse given for this delay, and the complainant would have thereby lost any right to the relief sought, if he ever had any. Oil Co. v. Marbury, 91 U. S. 591, 592, 23 L. Ed. 328; Simmons v. Railroad Co., 159 U. S. 278, 16 Sup. Ct. 1, 40 L. Ed. 150; Miles v. Vivian, 25 C. C. A. 208, 79 Fed. 848-853; Harwood v. Railroad Co., 17 Wall. 81, 21 L. Ed. 558. In the case of Oil Co. v. Marbury, above cited, Justice Miller says: “The doctrine is well settled that the option to avoid such a sale must be exercised within a reasonable time. This has never been held to be any determined number of days or years as applied to every case, like the statute of limitations; but must be decided in each case upon all the elements of it which affect that question.” 3. The Southern Railway Company has filed its charter in the state of Tennessee, as provided by the laws of that state, and is thereby authorized to make the purchase of another railroad sold under judicial proceedings, as provided by its statutes. Acts Tenn. 1881, c. 9, § 2; Rogers v. Railway Co., 33 C. C. A. 517, 91 Fed. 299. The transaction has been executed, and the title has passed, and the state would be the proper party to now question the transaction, if it were illegal. In Rogers v. Railway Co., 33 C. C. A. 534, 91 Fed. 316, 317, this court, speaking through Judge Lurton, says: “We do not think that this complainant, in his character as a stockholder of the Nashville, Chattanooga & St. Louis Railway Company, is in a position to make this question. The railroads in question were sold at a judicial sale. The purchaser at that sale has conveyed them by deed to the Louisville & Nashville Railroad Company. The transaction is an executed one, and the title has actually vested in the purchaser. * * * If the contract was in fieri, it might be open to a stockholder of the Louisville & Nashville Railroad Company as such, and upon a bill properly framed to restrain his company’s officers from completing such an illegal transaction. But that is not this case. This is an executed transaction. The title has vested. It may be a defeasible title, but it has passed out of Phillips by his deed, and is vested in his conveyee. Until the state shall institute proceedings for the forfeiture of the charter, or fcr the purpose of defeating the title, it is a sound legal title, and will support this lease, unless it be subject to other objections.” ^ The decree dismissing the bill was correct, and it is affirmed.