146
.FEDlJJR4.L ltEPORTER,
vo1.4.4:.
views expressed by Judge sw,te court. For two reasons the suit is not removable, under the act of 1888: First. The Farmers' Loan & Trust Company, which ,seeks the removal, occupies the attitude of an intervening plaintiff. It' is the actor, the complaining as to the cause of action wbichIt seeks to enforce, and cannot be held to be within the meaning of the act a defendant who alone, is aGcorded the right to remove by the terms of the law. Second. If, in h:gal contemplation, tile trust company could be construed, or held, to be,a defenda.nt, it would still be precluded frorn removing the cause, on the ground that there is not in the suit a controversy wholly between citizens of different states, which could be fully determined as between them'. ,To ,the full and final determination of the -controversy ,Johnson and Hansen and the intervenor, the Farmers' 1.0&0 & Trust Company I Ithe,StmAntonio & Pass Railway Comp.anyis not only a proper hut:.anecessaryparty., Tbedebts claimed the railway company 'hy;both, Johnson and Hansllnand the trust company, 'are the principal ,to the existthing,a.nd; the Hens out. ence of the dates, and establish the valhlityof tbEi liens, the debtor's presence before the court is indispensable. But when thedebtQr makes its appearance, as the railway company herein did, upon the original institl1tion:of the suit against {t""we havedirecUy" presented a ·contro.'\ter&Y.notwhoUY hetweep,citi1:ens.-of dtfferentstates"which could he fully determined.. as betweentbeI:(:\'. Upon the hypothesis tha.t the trust company,oouldbeconsid-ered, as 'a defEmdant, the controversy·jaone. between .a. citi!'en of' Rsplaintiff,and llo citi2;en ()fTexas Rl'l,4 'a citizen ,of NewYQrk j as defendantliJihenoe it follows that the $uit is not removable updel't;hethil'd clauS6 ofsection 2 of the statute invokedbltheinter_veningtrust
MAXEY, J., (orally.) I concur fully in the PARDEE in ordering theaallse. to be remanded
'I'
,
WOOD
etal· .'U.CORRyWATER-WO'RKS Co. et aI.
(Cirouit Court, W\D. Pennsylvania. NOvember 24, 1890.) CORPORA.TI0NB-IBBUE OJ!' BONDB-VA.LIDITy-EBTOPPEL.
The Corry 'Water-"WorkB:Company, a corporationo:ttbe state of Pennsylvania, in accordance with a contra¢t>' for the of its works, and with the consent of all its stockholders, expressed by vote at II. meeting called only for the purpose of incroasingits stock, issned to the contractors whobuHt tlle works, in settlement, its; boll-ds. payable $lOQ;QOO,secured by a trust mortgage, and also $l2Q,QOO of stock. The contractors sold the bonds before maturity, in the open market, for a large'urice, thepurohaser having no knowledge of anything affecting their validity. Upon default in payment of interest, the mortgage trustee, under a ppwer conferred by the.mortgage, was pro«;leeding to sell the mortgaged property, when the plaiiltiffs, who had acquired Bome of the stock so issued to the a enjoin the sale upon the that the debt wall not autborlZedoya previous meeting and consent of the Iltock1:).olders, as prescribed by sectiOn 7 artA6, of ttie constitution of PennBylvania,. 'allli the law of thestata; that, in v1 olation of the law; the amount of bonds 'e:JQEleded; !JI\e·ll.alf.of th:e capital stock paid in ;lI.ndthat by the issue to the contractors there was a fictitious increase of indebtednes& wild stock, in violation Of said 'provisiOn. 1,,'J
-V. CORRY WATER-WORKS. CO.
Heta {t) THat 8S all tbe stockholders of the water-works' coml'6ny When assembled, voted 1D of the issue of the bonds, the corporation nor the.plaintiffshad auy-standing to complain-of a want of compliance with the directions of the Gonstitution and statute, as to Previous notice to and the consent of the stockholders at a meeting called for the purpose. (2) That the corporation having received .and enjoyed the fruits of its mortgage bonds, it was not competent for it; or the plaintiffs, to assail their validity in the hands of a bonn fide purchaser for value, on the ground that the issue was in excess of one-half the capital stock paid in. (3) That as the proofs show that the actual expenditure by the contractors was greatly in jjxcess of the whole issue of bonds, there is really no ground for the assertion tbat the indebtedness socreated was fictitious; an.d if the construction contract, as a whole, offended against the constitutional and statutory provisions bere invoked, the corrective power resides in the commonwealth, which alone can now complain of the completed transaction. (4) That the bill of complaint should be dismissed.
In Equity. Samuel1Jickson and R. 0. Dale, for complainants. George Shims, Jr., aod John8 Mc,Olea-ve, for detimdant Farmers' Loan &: Trust Company. ACHESON; J. On the 29th day of March, 1886, the firm of Samuel R. Bullock & Co. and the Corry Water-Works Company, a corporation of -the state of Pennsylvania, entered into a contract whereby the former agreed to construct for the latter water-works in the city of Corry, Erie county, Pa., according to certain plans and specifications, and to pay all the expenses, legal fees, and salaries, which might be needed to maintain and operate the works fora period of six months after completion; and to pay the first s.ix-months interest,-viz. 33,OOO,-on the hereinafter mentioned mortgage bonds of the water company; and, in consideration thereof, the water-works company agreed to issue and deliver to said Bullock & Co. 3100,000 in bonds, and $125,000 in the full paid-upnon-assessable stock of the water-works company. Bullock & Co. proceeded to construct the water-works, and fulfilled their part of the contract, and the water-works company issued and delivered to them the bonds and stock, as agreed on. The bonds bear date April 1, 1886 t are each of the denomination of $1,<)00, and are payable to Samuel R. Bullock & Co., or bearer, on the 1st day of April, 1916, with interest coupomumnexed payable to bearer, semi-annually, and the bOlids are secured by a mortgage, or dlO1ed of trust, of even date covering all the property, real and personal, rights, privileges, and franchises of the water-works company, executed and delivered by said company to the Farmers'Loan & Trust Company, (<lefendnnt in this flu-it,) a corporation of the state of New YBrk, as trustee. The last-named company accepted the trust, and; the mortgage, or trust-deed, was duly recorded in the county of Erie, Pa., on April 13, In the month of October, 1886, the National Water-Works Investment Company, a corporation of the state of New York, purchased from Samuel R. Bullock & Co. all of said bonds, together with $50,000 oHheir8aid stock, for the cash price of$90,OOO;.which sUm was paid to Bullock ,& ,Co. by_said investment company upon the delivery Qf the bonds, bonds are' still owned by that:company.. The'water-works eompanymade default in ment oBhe interest on said bonds, due ApriL 1,1889,. and thereupon,.
148
FEDERAL REPORTER,
vol. 44.
and in accordance with the terms of the mortgage, or trust-deed; the National Water-Works Investment CompanJ", the holder of the whole issue of said bonds, elected, as it had the right to do, to declare the principal of the bonds to be due and payable; and, after such election, the default still continuing, the Farmers' Loan & Trust Company, the trustee, upon the written request of the holder of the bonds, took possession of the property embraced in the mortgage, or trust-deed, for the purposes therein declared; and, in further execution of the power thereby conferred, advertised, at public sale, and was about to proceed so to sell the mortgaged property and the rights and franchises of the water-works company, when the bill in this case was filed by the plaintiffs, R. D. Wood & Co., stockholders of the Corry Water-Works Company. The main purpose of the bill is to enjoin the exercise by the Farmers' LoMn & Trust Company of the power of sale given by the said trust mortgage, on the ground that the same is an invalid instrument! and no estate or rightful authority upon the trustee. In support of this proposition, three reasons were assigned and' urged by the plaintiffs' counsel at the final hearing, namely: "First. Because the issue of bonds which it attempts to semITe was an increase of the corporate indebtedness without the consent of the: perSOns holding the larger amount in value of the .stock obtained at a meeting to ,be held after sixty days notIce. Second. the arpount of mortg,age bonds issued exceeqed one-half of the capital stock .paid in, the evidence in, the showing, substantially, that nothing was ever paid in on account of. the capital stock. l'hird·. Because it appears from the evidence that, bythe attempted issue of stock and bonds to Bullock' & Co., under the construction contract,: there was a fictitious increase of stock and indebtedness, Which, by the terllls of the constitution, are vj)id." The plaintiffs rely upon the provisions of the corporation laws of the commonwealth of Pennsylvania, which limit the right of suCl{a ration to issue bonds secured by a mortgage to an amount not exceeding one-half the capital stock paid in, and require the previous consent of the stockholders at a meeting called for the purpose, and iiponsection 7 art. 16, of the constitution of the state, which provides: . "No corporation shall issue stocks or bonds except for money, labor done, or money or property actually received; and all fictitious increase of stock or indebtednc-ss shall be void. The stock and indebtedness of corporations shall , not be increased, except inpuJ'suance of general law, nor without the consent vf the persons holding tbe larger amount in value or the stock a meeting to be held after sixty days' notice gi ven in pursuancj3 of law.:' , Before approaching the consideration of the legal questions involved, oertain matters of fact must be stated. It appears that the meeting ot the stockholders of the water-works company, at which the issue of the mortgage bonds was authorized, was not called for that purpose, but to vote \lpOn the proposition to increase the capital stock from $20,000 to $200,000. It is, however, shown that all the stockholders of the com" pany except one,-viz., CharlesS. Wallace,-were present meet-; ing, and voted in favor of the issue of the bonds and the execution of the mortgage, or trust-aeed, to secure them; and it is furthersati'sfaotorily
WOOD 'V. CORRY WATER-WORKS CO.
149
established that Wallace was only the nominal owner of the stock standing in his name, and that the real owner thereof was Ellis Morrison, who was present at the meeting and voted in favor of the issue of the mortgage bonds. Furthermore, the trust-mortgage on its face bears this recital: "And whereas, this form of mortgage, or trust-deed, was, at It meeting of the stockholders of the water company, held on the 29th day of March, A. D., 1886, duly approved and ratified, and the proper officers directed to execute the same in the name of the water company." The bill alleges that the cost of the construction of the said waterworks was only about $60,000, but the proofs do 110t sustain this gation. On the contrary, Samuel R. Bullock testifies that the entire cost, including the expenses the contractors assumed for the first six, months after completion,etc., "was in the neighborhood of $121,000,". and I do not See why this estimate should not be accepted as substantially Gorrect. The plaintiffis claim to be- the owners of 1,420 shares of the stock of the Corry Water-Works Company. The whole of this stock, however, came from Samuel R. Bullock & Co. originally. and was· part of the stock that firm received from the water-works company, . under their Gonstruction contract. The plaintiff"s title to 920 shares of this stock is under an assignment from said firm, dated Noveinber 10, 1888, and they have possession of the stock certificate for. these 920 shares. But, in fact, that certificate had been surrendered to the com- . pany for cancellation, and other certificates had been issued for at least part of thisstock , and how much stock, if any, the plaintiffs are entitled to on this certificate is not shown. The plaintiffs' title to the other 500 shares of stock is good. They acquired those shares in February, 1889, from the National Water-Works Investment Company, at a valuation of one dollar per share, the transaction being this: The plaintiffs were creditors of SamuelR. BUllock & Co., and held, as collateral securities for their claims, stocks in various water-works companies; and the investment company was also the holder of such stocks which had been acquired from said firm. Upon the failure of that firm, with a view to a severance of their interests, mutual stock transfers were made between the plaintiffs and the investment company, and the plaintiffs thus acquired said 500 shares of the Corry Wat.er-Works Company's stock at the valuation mentioned. Upon the undisputed facts, it is very difficult to see the standing the plaintiff!) have in a court of equity, in virtue of any rights of their own, to assail the transaction between the Corry Water-Works Companyano Samuel R. Bullock & Co., of which they complain. Dimpfel v. Railroad Co., 110 U. S. ,209, 3 Sup. Ct. Rep. 573; Appeal of Columbia Nat. Bank, 16 Wkly. Notes Cas. 357; Graham v. RailToad Co., 102· U. S. 148; Monroe v. Smith, 79 Pa. St. 459. They were not shareholders of the corporation at the time of thetransaction, and werenotinjured by what took place. The contract had been exeC\lted long before the plaintiffs acquired their shares of stock, and they .took them with full knowledge that the bonds and mortgage
150
FEDERAL
REPORTER, vol.
of theoOrporation were outstanding and unpaid. Moreover, tIle very stock they, now hold we.spart of the issue to Samuel R. Bullock & Co., under the construction contract wbich they now impugn. But in this contro'versy the plainti:lfs may be considered as representing the corporation itself, and clothed with its rights. It is then open to the corporation to defend against the bonds and mortgage, or trust-deed, or to question their validity? At the outset of the discussion, it is to be botlle in mind that the bonds arenegotiable instruments, and were purchased before maturity in the open market, for a large price, by the National Investment Company, withou t notice of anything afl'ectingtheir validity. Furthermore, this is not a case of a total want of power 'in the corporation to act. Undoubtedly, the Corry WaterWorks Company had the right to create an indebtedness for the purpose ofcoristi'ticting its works, and to issue therefor bonds secured by a mortgage, ortrust-deed; and the utmost that can be said in impeachment of . its action is that, in the exercise ofthe power, it did not conform to the requirements Rnd limitations which the law imposed upon the company.But, in Oil (Jreekj.etc;, R. Co. v. Pennsylvania Tramp. Co., 83 Pa. St.160, it,was distinctly ruled by the supreme court of Pennsylvania thatwhere a'corporation has entered into a contract which has been fully exeCuted, by the 'other party, and nothing remains to be done but for it to paythe consideration money, it will'not be allowed to !let up that the contrachi¥asultravire3. And in Wright v. Pipe Line 00., 101Pa. St. 204, it was helditDat:where a cOl'poration,although prohibited by its charter, contracte(i'forthe purchase of stock in another corporation, and thE' contract waliexecuted by the delivery 'of the stock, in an action on a promfor the price of the stock, in the hands of a holder for' value',itcouldnbt defend on the ground that the contract was beyond its corporate' Turning now to the;,s,peoific objections urged against the validity of the bonds and trust mortgage, we find that in the case of the Appeal of Colnrrtbia :Nat. Bank, 'supra, in which an issue of cor}Jorate stock was involvedtthe supreme court of Pennsylvania held that the only object of the: prescl'ibednaticeof a pro}Josed increase of stock was to give information to the shareholders, aodH they had such knowledge from any source it was Elnotigh. Now,every shareholder of the Curry WaterWorks Company was present when the issue of the bonds and trust mortgage was determined 'on, and all voted in favor of that measure. Again,' in Hardwrn"e Co. v.iPhalen, 128 Pa. St. 110, 18 At!. Rep. 428, where,toQswejacia8 ori camortga!!:eof a corporation, the receiver onhe' corporation made defEmse that the debt was not authorized by Q previous meeting nndconsent,of stockhcllders, as directed by section 7, art. 16 of the constitution ,and the act ofApril 18, 1874, the defense was overruled, that \then a corporation has received the benefit of money borrowed on' its'IDortgage, and the stockholders knew of it, and made no objection within.a;reasollabletime to the lack of authority in the, corporate officerS the loan,neither the corpora.tion, its' stocllj101dersinor it&creditors:eall set up such want ofauthotity in a suit on ,
HARTFORD FIRE ,IN(O.,CO. P.
MERCANTILE CO.
151
the mortgage, nor can the receiver oBhe company do so for them.' In Reed's Appeal, 122 Pa. St. 565, 16 AU. Rep. 100, it was declared by court that a contractor.who had k;nowledge that under atiust mortgage of 8 corporation the issue of bonds was in excess of the cllpital stock paid in, and who was a participant in the fraud of such issue, could' not attack the validity of the mortgage as in violation of the statute. No more, in my judgmeilt,is' it competent for the corporation itself, which has received and enjoys the fruits of its mortgage bonds, toassail their vaJidity in' the hands of a bona fide purchaser for value, on such gr9und. We have already seen that the consideration which passed from Sam" uel R. Bullock & ,Co. to the Corry Water-Works Company wR$'largely in excess of the whole issue;ofmortgage bonds, and this, too, 'without taking into consideration a contractor's profit. Therefore, there is really no ground for the assertion that the indebtedness so created fictitious; and,certainly, under the facts of this case, neither the corporationnoT its ,stockholders ':uan be heard so to allegj'l to of the innocent 'bondholder. " If the construction contract,8s a: whole; offended against the constitutional and stlitutory prOVisions here 'invoked, the corrective 1I0WfT the, complain: of transactioq, Appeal of Colu,mbia .B.ank, ThIs' prinCIple, which fndeed is decisive of the entire case,wa.s recognizedaaso:l.l:lld, aU9 w8f:1.enforce,din Bank v'. Matthe:ws ,' ,98'.U. S. 621, where a sought to e'njoin a sale or'the mortgaged premiE\esun<iera pqwer, the lDortgage; 'Qp'the groundtha.t it ,was taken in yi9lation of;the whel'c.Q; fore,ign ,corpo.ra.tion,. 1,1.'. qOl)veyance iq,dl:fe9lviothe lflws o(th,e state in. Which .theJand was.sitqateQ..,Jt; . held., that the ,corporatiQrl took granto:r and4i!l' subf:1equent. grantee, and that it waslortbe lIJOI:l.13 to question the; validity of. the<ieed:ofcoDveyan.cetQ thecorpQfflt!Qll, Let a decree drawp disIllissipg the ,bill ofG9mplll,il:l.t, ..
was'
mortgagor
IIARTFolm .FIRE
Izqs. Co. et al.
'V. 130NNER MEROAN'.l'Jl,Jl:.Co.
(Oircuit court, D. 1. ARBITRATION AND A WAR])-Jl[IsCONDUCT oFARBlTRATOItB.
6,1890.)
An award mad6byan arbitJ:ator, or an umpire oatween two arbitrators, as to the amount of loss upon a stock of by fire, without any eXlI,IJ1inationof the goods themselves, bu.t merely frol;n bills, invoice books,and iiivelirories,is in,valid. ' . . .. . " . ., .. . " .' . .. '...
2.QSAJ4E.·
S ..'tton,regulaws ttie:<iondn:etotnrbitl'ators, .Bud..provides·fOr.vlRl41;ing the for
An award made by an not upon his own judgIllent or by r,aso!1 of any heluia,made, but solely atthe'directwu of 0lle,ot the-'parties, . is Ulvalld. " , . ,.'" .:;" . ,'" ,1', .. 'e;tbitraby