Case Name: Taylor v. The Philadelphia & Reading Railroad Co. and others; McCalmont v. The Philadelphia & Reading Railroad Co. and others
Court: United States Circuit Court for the Eastern District of Pennsylvania
Jurisdiction: United States
Decision Date: 1881-04-21
Citations: 7 F. 386
Docket Number: 
Parties: Taylor v. The Philadelphia & Reading Railroad Co. and others. McCalmont v. The Philadelphia & Reading Railroad Co. and others.
Judges: 
Reporter: Federal Reporter
Volume: 7
Pages: 386–399

Head Matter:
Taylor v. The Philadelphia & Reading Railroad Co. and others. McCalmont v. The Philadelphia & Reading Railroad Co. and others.
(Circuit Court, E. D. Pennsylvania.
April 21, 1881.)
1. Corporation—Railroad—Ultra Vires—Power to Borrow Money —Issue of Irredeemable Bonds—Obligations Entitling Holder to Share only in Profits.
Under an authority to borrow money a railroad company lias no right to raise monéy by the issue of .irredeemable bonds entitling the holder merely to a share of the earnings after the payment of a certain dividend to the stockholders.
2. Same—Mortgage to Secure Perpetual Bonds.
Nor has it the right to issue interest-bearing bonds, secured by mortgage, if a portion of such bonds are perpetual.
3. Same.
A railroad company, after insolvency and appointment of receivers, adopted a plan by which, in order to pay the floating debt, income bonds were to be issued and sold entitling the holder to a certain dividend and share in the profits after payment of a dividend to stockholders ; and, in order to retire and pay the mortgage debts of the company, bonds secured by a new mortgage for the whole amount of such debts were to be executed, some of which were to be payable in 50 years, and the others to be perpetual. Held, that in the absence of express legislative authority the issue of such obligations was beyond the power of the company, and would be restrained by injunction at the suit of stockholders.
This was a hearing upon two motions,—one for a preliminary injunction on a bill hied by stockholders of a railroad to restrain the company, which was then in the hands of receivers, from issuing certain “deferred bonds” and from executing a certain mortgage upon its road; and the other for the rescission of an order made in the suit in which the receivers had been appointed, and authorizing the issue of the said “deferred bonds.” The facts appearing by the bill, petition, and affidavits were as follows :
The Philadelphia & Reading Railroad Company is a corporation chartered by the legislature of Pennsylvania. Its charter gave it a general power to mortgage its property, and a supplement thereto provided as follows:
“ That 1he president and manager’s of the Philadelphia & Reading Railroad Company may * # * secure such issues of bonds as they may deem advisable to make, bearing such rate of interest, with or without provision for the payment of taxes on the said bonds, and payable at such times as the president and managers may provide, either in United States money or sterling, by mortgaging, from time to time, the whole or any part of its railroads,' real aiid personal estate, and corporate rights and franchises, acquired or to bo acquired, and may dispose of the said bonds at such price and in such manner as 1hev may determine: and any such mortgage may, at the option of the said president and directors, be made to secure bonds to bo subsequently issued, as well as those issued prior to or contemporaneously with the dale of the said instrument.”
Prom time to time after its organization the company negotiated loans of money, to secure which it executed successive mortgages upon its road. It also acoiunulalod a, large floating debt. In 1880 it became unable to meet its obligations, and on May 2d, 1880, npon the suit of mortga ge creditors, receivers of tlio corporation and of all its property, privileges, franchises, and powers, wore appointed by the United Btatos circuit court for the eastern district of Pennsylvania. At the same time the court appointed two special masters in the cause. On ^November 16, 1880, the railroad company and its receivers joined in a petition to the court, setting forth that the following proposition had been made by responsible parties for securing a contribution equal to §13 for each share of stock for the purpose of paying off the floating debt, viz.:
“Tlie company is to issue 686,000 obligations of a par or nominal value of §3U, to be known as deferred income bonds, on which interest, only is to b<¡ payable, and that out of the annual surplus profits of the company remaining after the payment of a 6 per cent, dividend on tlio common stock. These remaining surplus profits are to be first applied to the payment of a yearly interest, not exceeding 6 per cent, on the deferred income bonds, and after each class has had 6 per. cent., the deferred income bonds are to rank for further dividends pari pansu with the common stock. The right of the latter to this participation in the surplus profits of the company is to take effect as of December 1, 1880.
“The deferred income bonds are to he issued at 30 per cent, of their par value, or §15 per bond, payable in instalments, as follows: Three dollars on subscription, four dollars one month thereafter, four dollars three months thereafter, and four dollars five months thereafter, with the right to pay up in full at any time under 6 per cent, per annum discount. Scrip transferable to bearer will be issued if desired on the payment of the first instalment. Each stockholder is to have an option of taking a pro rata share of these obligations, and all not thus taken are to be awarded to an association or syndicate of the promoters of the plan, by whom its success is to be guarantied by the deposit of the sum of $2,058,-000. * * * * The company ‘is to pay the guarantors a commission of 5 per cent, on the proceeds of the issue of deferred income bonds, and the net proceeds of the issue are to be applied to the payment of the floating debt.”
The petition prayed that the court would approve of the issue of deferred income bonds of the character above stated, and that the money realized therefrom should be paid to the receivers and applied to the payment of the floating debt. This petition was accompanied by the report of one of the special masters, acting alone, in the necessary absence of the other, and approving the proposed scheme. On November 18, 18S0, the court entered a decree granting the prayer of the petition, and authorizing and empowering the railroad company to issue the said bonds.
■ On December 7, 1880, the board of managers of the railroad company authorized the president to issue the said deferred income bonds. At the same time they approved and adopted a plan laid before them by the president to issue, in addition to the income bonds, a new consolidated 5 per cent, funding mortgage, to secure bonds to the amount of $150,000,000, which were to be used for retiring all the outstanding obligations of the company. These bonds were to be divided into two classes—A and B. Class A were to be either perpetual or 50-year obligations, with provision for renewal at the end of 50 years. They were to have priority over class B, and were to be used in retiring the earlier obligations of the company. The interest on them was to be cumulative, and subject to be collected by legal proceedings upon any default. Class B were to be perpetual obligations, and were to be used in retiring the later obligations of the company. The interest on them was to be cumulative, but no suit could be brought to recover such interest until three years after default. On the same day the receivers of the company approved this plan, and authorized the president of the company to carry it into effect. In pursuance of this authority, subscriptions were invited- for the deferred income bonds, and were received from various parties. In the prospectus inviting these subscriptions it was stated that the plan was simply a method of obtaining a voluntary contribution from the shareholders, by offering them a reversionary interest in the earnings, and that the bonds would be irredeemable. Subsequently certain mortgage bondholders of the company, who were also stockholders, filed a petition for the revocation of the order of November 18, 1880, and also, as stockholders, filed a bill in equity, and moved for an injunction restraining the issue of the income bonds and the execution of the $150,000,000 mortgage. At a preliminary hearing, on February 14, 1881, upon these motions, the court modified the order of November 18, 1880, so that it should read as follows:
“And now, February, 14,1881. this motion having been fully argued by. counsel and duly considered by the court, it is now ordered that such part of the said order of November 18,1880, as purports to confer authority by this court upon the Philadelphia & Reading Railroad to adopt and carry into elfect the deferred-bond plan, which is generally described in said order, be and the same is hereby revoked, and that the said order shall be construed and taken only as relieving said company from the effect of the injunction ordered by this court when receivers of the property of the said company were appointed, by permitting it to exercise, upon its own responsibility and according to its own legal discretion, such powers as its chart er conferred upon it in providing means for the payment of its debts in the mode proposed.”
The court then continued the hearing until March 25, 1881, and in the meanwhile restrained the respondents from doing any act by which the railroad company might be definitely bound with respect to the deferred-bond plan or the $150,000,000 mortgage loan. On March 25th a final hearing was had upon the two motions.
Richard G. Dale, Ashbel Green, and John C. Bullitt, for complainants.
John G. Johnson and James E. Gowen, for respondents.
Richard G. McMurbrie, for a subscriber to the deferred bonds.
Reported by Frank P. Prichard, Esq., of the Philadelphia bar.

Opinion:
McKennan, C. J.
The present proceeding is two-fold: First, to obtain a rescission of an order made November 18, 1880, by one of the judges of this court at chambers, touching the issue by the Philadelphia & Heading Hailroad Company of $34,000,000 of "deferred bonds;" and, second, to enjoin the issue of such bonds.
Whatever may be the literal import of the order of November 18, 1880, only the significance and effect of an order by consent can be given to it. The petition for it was referred to one of the masters in the cause. ITis report was favorable. All classes of interest supposed to be affected by it were apparently represented and concurring, and it was, therefore, made without argument and as of course. When it was afterwards challenged by tho complainants hero, the circumstances under which it was made were fully explained, and its phraseology was so changed as to exclude any inference of authoritative sanction of the plan referred to. The petition for the revocation of the order must then stand upon the same footing as to merit with the motion for the injunction.
The deferred-bond plan is challenged for the vital reason that the corporation is legally incompetent to institute it. It is notably peculiar in its features. It is a proposition by the corporation that the stock and bondholders shall subscribe and pay ratably over #10,000,000, to be used in extinguishing the floating debt of the corporation; that to each subscriber shall be issued a writing, the form of which is yet undetermined, entitling him to receive 6 per cent, on the sum of $50 for each $15 paid by him out of the net earnings of the corporation, after paying all fixed charges and a dividend of 6 per cent, upon the common shares, and that for further interest these subscriptions will -rank pari passu with the common shares. Is this proposition, then, authorized by the charter of the corporation ?
The principle by which we must be guided in answering this question has been so often the subject of judicial recognition that it has grown into an axiom of construction. It is this: That the exercise of powers which are not conferred upon a corporation by express concession or clear implication must be taken as denied to it. It is thus comprehensively stated by Mr. Justice Miller, in Thomas v. The West Jersey R. Co. 101 U. S. 82:
" We take the general doctrine to be in tills country, though there may be exceptional cases and some authorities to the contrary, that the powers of corporations organized under legislative statutes are such, and such only, as those statutes confer. Conceding the rule applicable to all statutes, that what is fairly implied is as much granted as what is expressed, it remains that the charter of a corporation is the measure of its powers, and that the enumeration of these powers implies the exclusion of all others." •
Whatever power the defendant has in the premises can •only be found in its general authority to borrow money. Neither in the charter of the defendant, nor in the special act which authorizes it to sell bonds, which it may issue below, par, is anything contained to legalize the contested proposition, unless it can be put on the footing of a loan. Has it then this character ? I think plainly not. It does not propose to create the relation of debtor and creditor between . the defendant and the subscribers. The money obtained by the defendant could not be regarded as borrowed, because that implies -re-imbursement, and it is not demandable by the subscribers or payable by the defendant. It has not the essential and distinguishing qualities of a loan. It contem plates a stipulation that the subscribers, in consideration of the sums paid-—not lent—by them, shall be entitled to receive, in a remote and uncertain contingency, a portion of the defendant's earnings, to be measured by a certain rate per cent, upon three times the sums paid by them, and after that shall participate with the common shareholders in the division of the residuary earnings. By what allowable doonition of a loan or borrowing such a transaction can be embraced I am at a loss to conceive. Nor will the fact that it is to be evidenced by the sealed writing of the defendant change its inherent character and bring .it within the range of a power to which it is not otherwise referable.
In one respect, and in one only, does the plan proposed resemble a loan, and that is In the result to be attained. They are both expedients for raising money, hut the method of accomplishing this result is of the essence of the power of the corporation. If its employment has not explicit legal sanction it cannot he made available. If the defendant were offered a rental for its property amply sufficient to relieve it from the burden of embarassment with which it is now struggling, unless it could show that Its legislative creator had endowed it with a right to make a lease, it could not accept such relief. Thomas v. West Jersey R. Co., ante. And, although it has power to acquire real estate for all necessary corporate purposes, no one would maintain that it could lawfully eider into a contract for the purchase of real estate merely to resell and thereby realize large gains. Authority to raise money by borrowing does not imply the use of another and different method of raising it, however well adapted to the end it may be. Even in the prospectus issued by the president of the defendant (Exhibit 1) the proposed issue of "deferred bonds" is not in any aspect treated as a loan, and the system is correctly stated to be new in the United States, and to have been frequently adopted in Great Britain with great benefit to the companies and to subscribers. But we know that in Great Britain this "system" is expressly authorized by statute, and hence it may be assumed that such legislation was deemed necessary to legalize a resort to it. Is not this suggestive of the inference that, although it has been proved to be of great benefit in Great Britain, it is "new" in this country, because it has been regarded as without necessary legislative authorization ?
I am, therefore, of opinion that the issue of "deferred bonds, " as proposed, is without warrant of law, and that the order of November 18, 1880, ought to be revoked and a preliminary injunction granted, and it is so ordered.