Case ID: va_59/html/0831-01.html
Source: Caselaw Access Project
Author: {"author": "JOYNES, J.,", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

*Stevens & al. v. Davison.
    June Term, 1868,
    Richmond.
    [98 Am. Dec. 692.]
    1. Railroad Corporations — Authority of Directors to> Lease Road. — The board of directors of a railroad company have no authority, without the sanction of a lawful meeting of the stockholders, to make a lease for years ol the road and property of the company, with authority to the lessees to operate the road and to charge for carrying upon it.
    2. Same — Same-Case at Bar. — A by-law of the stockholders provides that no contract shall be made by the directors involving the franchise of the road, except the same be approved by a general meeting representing a majority of the stock, after being recommended by a majority of the stockholders. Though a lease made by the directors does not involve the essential franchise of the company to be a corporation, yet if it authorizes the lessees to take toll upon the road, it involves a franchise within the meaning of the by-law, and is null and void.
    3. Same -Alteration of By=Laws by Directors — Case at Bar. — Though a by-1 aw of a company authorizes the directors to alter or amend the by-laws, the directors have no authority under said by-law or otherwise to disregard or alter another by-law, which wasinlended to impose a limitation on their powers.
    4. Same — Appointment of Receiver. — Though a court of chancery will be reluctant to appoint a receiver to take charge of and manage a railroad, it is competent to do so when su ch a course is indispensable to secure the rights of the legitimate stockholders, and to prevent a failure of justice.
    5. Same — Same.—Though the conrt should properly, under the circumstances, appoint a receiver to take charge of and manage the road, it may not he proper to enjoin the directors of the company from doing any act as such.
    *In February, 18S4, the General Assembly of Virginia passed an act to incorporate the Alexandria and Washington Railroad Company, with authority to construct a railroad from Alexandria to the city of Washington, with a capital of three hundred thousand dollars, subject to all the provisions of the Code of Virginia applicable thereto. And it was provided in this act, that the said company should not permit the said road to pass into the exclusive possession' of any corporation without the limits of the Commonwealth of Virginia.
    In February, 1856, the General Assembly passed another act authorizing the Alexandria and Washington Railroad Company, for the purpose of completing their road, to sell their bonds, with coupons attached, to the amount of one hundred thousand dollars, at a rate of interest not exceeding seven per centum per annum, to be paid semi-annually. In pursuance of this act, the said railroad company sold $30,000 of their bonds, and to secure the same, executed a deed by which they conveyed to Walter Lennox, of the city of Washington, all the property and franchises of the company, in trust to be sold for the payment of the said bonds upon the failure of the company to pay the interest or the principal for six months after it fell due. This deed, however, recognized the existence of another deed, which had been executed in April, 18SS, to secure the payment of the principal and interest of sixty thousand dollars of the bonds of the company, guarantied by the city of Washington.
    In February, 1862, the County Court of Alexandria, in pursuance of a provision in the deed to Lennox, on the motion of Joseph Davison, the attorney in fact of the holders of all the bonds in said deed of trust mentioned, reciting that.Lennox was incapacitated for executing the trust, appointed Joseph B. Stuart, of Washington city, trustee in the place of said Lennox. And there having *been a failure by the company to pay the interest upon the bonds, at the request of Davison, the attorney in fact of the holders of the bonds, Stuart, in April, 1862, made a sale of all the property and franchises of the company, when Alexander Hay and Joseph Thornton became the purchasers at the price of $12,500.
    A few days after the sale another company was formed under the original charter, with a capital of $300,000, which was after-wards increased to $500,000; and in the name of the Alexandria, Washington and Georgetown Railroad Company. The bylaws adopted by this new company provide that it shall be managed by a board of five directors, to be annually elected from among the stockholders; and to hold their offices until their successors are elected; and that the board of directors shall elect from among their number a president, secretary and treasurer, no two of which offices shall be filled by the same person. The sixth by-law provides, “that the president shall make all contracts of purchase or sale, by and with the advice of the directors, or a majority of the same; but no contract shall be made involving the franchise of said road, except the same be approved by a general meeting representing a majority of the stock, after being recommended by a majority of the stockholders.” The eighteenth by-law provides, that these bylaws and regulations may be altered or amended by an affirmative vote at any regular meeting of directors, and the approval of the board at the next regular meeting.
    From the time of the organization of the new company Joseph B. Stewart was a stockholder, director, and the secretary of the company. It does not appear when Leonard Huyck became a stockholder of the company, but some time previous to May 5th, 1866, he was a director and the treasurer of the company; and he and Stuart had issued stock of the corn-pany, in excess of the amount of *the capital, to the extent of seven thousand three hundred and eightj’-four shares. Of this over-issue of stock there were eight hundred and seven shares standing in the name of O. A. Stevens, who was the recording secretary of the company. He says in his answer in this case, that the certificates were filled up in his name in his absence, by Huyck, or under his direction, without the knowledge of himself, and that on the same day, in said office, as soon as he returned, and before the certificates were taken from the office, the same were endorsed by him, under the direction and instruction of Huyck, who thereupon took the same into his possession; and that he, Stevens, received no benefit from the same of any kind.
    On the 5th of May, 1866, there was the annual meeting of the directors of the company. This was the day for the annual meeting of the stockholders; but the directors, whose duty it was, had failed to call the meeting. At the meeting of the directors, there were present R. W. Latham, President; F. P. Stanton, Leonard Huyck, and Joseph B. Stuart. The President stated to the meeting, that after mature deliberation, he was confident it would be to the best interests of the company to lease the road for ten years to Oscar A. Stevens and W. Jackson Phelps, one the superintendent, and the other the general manager of the company; and that after a consultation with a majority of the stockholders, representing nearly the whole of the capital stock of the company, he had concluded to lay before the board of directors a lease prepared for that purpose. This lease was approved and ratified by the directors, and the President was directed to execute it;' which was done on the same day.
    Bjr this lease the said company, by its directors, leased to Oscar A. Stevens and W. Jackson Phelps the road of the said company, and all its property and rights of every kind, both real and personal, except as thereinafter ^excepted, for the term of ten years, commencing on the Sth day of May, 1866, and ending on the Sth day of May, 1876, upon considerations set out at length therein. These considerations were: 1st. That the lessees should pay the interest on the bonded debt of the company, that debt being $300,000, and the annual interest thereon being $21,000, payable semi-annually. 2d. That they should pay further, $7,500 annually, which was to be invested as a sinking fund, to be applied to the payment of said bonded debt. 3d. That they should pay to the company fifty per cent, of the earnings or gross receipts, payable annually at the end of each year, after deducting therefrom the two sums before mentioned. 4th. That they might make all necessary repairs and improvements, for the better practical working operations of said railroad or its branches, either by the use or the sale, with the consent of the directors, of any of the property leased. And they were to keep the road and its branches and all the property leased in good repair. Sth. That they were to furnish and pay for all future rolling stock which they might' require in working the road, after the company had paid for and completed the contract for that theretofore purchased and contracted for with Messrs. Grice & Cong, of Philadelphia, which was to be paid for by the company, ■and to belong to the lessees for the purposes of the lease. 6th. They were to keep good, competent men in the management and working of the road; and they were to pay all damages arising from accidents by and through the negligence of their employees, and save the company harmless in this respect. 7th. They were to build certain depots in the manner directed by the company, the cost of which was to be charged to the company, to be deducted from the per centum to be paid by the lessees. 8th. They were to pay all Government, State or city taxes of a general nature, required to be paid by the company. 9th. *They were to observe and fulfill the contracts theretofore made by the company with the Adams Express Company, and with the Alexandria and Fredericksburg, and the Richmond, Fredericksburg and Potomac railroad companies, the company reserving the right to modify these contracts according to the true intent and spirit of the same. And whatever was received under the contract with the Adams Express Company, was to be charged against the company and deducted from the annual per centum to be paid by the lessees, up to $7,000 per year during the lease, which was to be paid by the express company to the lessees. All over this sum to be treated as earnings of the road and disposed of as such.
    The company was to construct the extension of their road from the intersection of Maryland avenue and Sixth street across the canal, or if constructed by the lessees, it was to be deducted from the annual per centum payable to the company. And all improvements of a permanent character, which might be deemed necessary, and become the permanent property of the company, constructed by the lessees, were to be charged to the company ; but after being constructed, they were to be kept in repair by the lessees; but the lessees were not bound to expend in improvements in any year more than the per centum payable to the company. And the company was to pay for all rights of way which might be deemed necessarv for the better practicable working of the road. And the company reserved the right to sell and dispose of any real estate that might not be necessary to the working operations of the road. And any additional real estate which might be necessary was to be purchased and paid for by the company. And the company was to take from the lessees, at valuation, all rolling stock and other materials and fixtures acquired by them for the road during the term of its lease, at its termination; and to pay the instalment *of interest which would fall due on the first of June, 1866. And if the lessees failed to pay the interest on the bonded debt for thirty days after it was due, or the $7,500 for thirty days after the first of June of each year, commencing with June, 1867, or should fail for sixty days after the first of June of each year of the lease, to pay the per centum agreed to be paid after deducting such portion as was properly chargeable to the company, then the lease to be void.
    At the meeting of the directors of the company before mentioned, F. P. Stanton resigned his office of director, the resignation to take effect on the adjournment of the meeting; and the lease aforesaid having been executed and delivered during a recess of the meeting, after this was done, at the afternoon session, Stevens was appointed a director in his place.-
    The company not being able to comply with its contract with Grice & Eong, Steven & Phelps were authorized to carry it out on their own account; and having agreed with Grice & Eong upon the terms for the purchase of the rolling stock and motive power, they transferred this contract to Adams Express Company, who advanced the money to pay for it, and it was to be held by the lessees as the property of the Adams Express Company, for which they were to pay a rent to Adams Express Company.
    In November, 1866, Joseph Davison, one' of the stockholders in said railroad company, after notice to the parties, filed in open court, on behalf of himself and such other stockholders as would join him, his original and amended bill, against Stevens and Phelps, the railroad company, and the directors of the company, in which he charged that the lease made by the directors to Stevens and Phelps was null and -void, and should be set aside on various grounus. 1st. That the 1 directors had no author.ity, *under the charter and laws óf the, land, to make the lease. 2d. That they were forbidden by the sixth by-law of the company to make such a lease. 3d. That the directors and lessees were both acting in a fiduciary character to the company when it was made; and that, under all the circumstances, it was invalid and should be set aside; and that at a full meeting of the stockholders of the company held in October, the said lease was repudiated and -annulled by a unanimous vote. The prayer of the bill was for an injunction, for the appointment of a receiver, that the lease might be annulled, for an account, and for general-relief.
    The parties answered at great length, contesting all the grounds stated in- the bill for avoiding the lease. The cause being heard upon the bill, the answers and exhibits filed by both parties, the court being of opinion that the lease was made illegally and improperly, and without lawful authority, and that the same should be declared void and be annulled upon a final hearing of the cause, awarded an injunction against Stevens and Phelps, restraining- them from the further working of the road by virtue of the said lease; and the directors were enjoined and restrained from acting as officers and directors of the company. And a receiver was appointed to take possession of and-control and operate the road, under certain directions stated in the decree.
    Prom this decree Stevens and Phelps obtained an appeal to .the District Court of Appeals at Fredericksburg, where it was affirmed; and they then obtained an appeal to this court.
    Daniel and G. W. Brent, for the appellants.
    R. G. Brent and Magruder, for the ap-pellee.
   JOYNES, J.,

delivered the decree of the court:

*The court, without deciding whether or not it would have been competent to the stockholders of the Washington, Alexandria and Georgetown Railroad Company to make such a lease of their railroad as that in the proceedings mentioned, which is a question that does not arise in this cause, is of opinion that it was not competent for the board of directors of the said company, without the sanction of a lawful meeting of the stockholders, to make the lease in the proceedings mentioned: 1. Because a board of directors of a railroad company have no authority to make such a lease under the powers vested in such a board by law; and 2. Because the said lease was in contravention of the sixth article of the by-laws of said company, which provides, that no contract shall be made “involving the franchise of said road, except the same be approved by a general meeting representing .a majority of the stock, after being recommended by a majority of the stockholders;” the court being of opinion that, while the said lease does not involve the essential franchise of the said company to be a corporation, it does involve the franchise to take tolls upon the road of said company, which comes within the meaning of “the franchise of said road,” as expressed in the said by-law. And the court is further of opinion, that although, by the eighteenth article of the by-laws of said company, authority is given to the board of directors to alter or amend any of the said by-laws, the said board had no-authority, under the said by-law or otherwise, to disregard or to alter the said provision of the sixth by-law, which was intended to,impose, a limitation upon the powers of the board of directors.

The court is further of opinion, that the said lease, having been made by the board of directors, two ■ of whom had been concerned in the fraudulent issue of a very large amount of spurious stock, greatly exceeding in amount the lawful stock of the company, having been made on the *very day on which the regular term of office of said directors was to-expire, -and on which the annual meeting of the stockholders of said company should regularly have been held, and when the said board of directors had failed to issue the call which it was their duty to issue for the said meeting; being made to two-persons in the employment of said company, one of whom had been an agent, to some extent, in the issue of a large amount of such spurious stock, and securing to the said lessors a clear profit, except the amount payable for taxes, to the extent of one-half of the gross earnings of said company during the term of the said lease, besides the sum of seven thousand dollars per annum, to be paid by the Adams Express Company under a previous contract with the said railroad company; and charging all the debts and expenses of the said company, except the taxes upon the shares of the gross earnings reserved to the said company, the same must be regarded as a fraud upon the rights of the stockholders; and that this conclusion is not repelled by the statement that the said lease was made after consultation with a majority of the stockholders, and with their approval, because: 1. It does not appear whether the stockholders thus consulted were the holders of genuine stock or of spurious stock; and 2. The approval of stockholders thus informally obtained could have no legal force .or effect. The court is, therefore, of opinion, that the said lease is null and void, and should be so declared upon the final hearing of this cause.

The court is further of opinion, that while, for the reasons assigned in the case of Gardiner v. The London, Chatham and Dover Railway Company, 2 Law Reports (Chancery Appeals) 201, a court of chancery will be reluctant to appoint a receiver to take charge of and manage a railroad, it is competent to do so where ' such a course is indispensable to secure the rights of the legitimate stockholders, *añd to prevent a failure of justice. And the court is of opinion, that under the circumstances of this case, it was proper for the court to appoint a receiver to take charge of and manage the said railroad until it can be ascertained, by a proper en-quiry, to be made in this cause, who are the legitimate stockholders of said company, to whom the custody and management of said railroad should be committed. And the court is of opinion, that it is not made to appear that the Circuit Court erred in not appointing the lessees as the receivers to manage the said railroad during the pendency of this cause.

But the court is of opinion, that it was not proper to enjoin Robert W. Batham, Joseph B. Stuart, Samuel M. Shoemaker, Oscar A. Stevens and J. Deane Smith from acting as directors and officers of said railroad company, or doing any act as such; such an order not being necessary to accomplish the object of the principal, order.

The court is, therefore, of opinion, that the said order of the Circuit Court be amended by striking therefrom the order of injunction last mentioned, and that the said order as amended be affirmed; and that the appellants pay to the appellees their costs, &c.

Decree amended and affirmed.