Court Opinion

ID: 5456261
Source: CourtListenerOpinion
Date Created: 2022-01-09 19:20:10.130016+00
Date Added: 2024-06-11T08:32:40.220572
License: Public Domain

James, J.
This action is brought by the holders of preferred stock of the Erie Railway to restrain said company from issuing, &o., bonds secured by a mortgage made by itself to the Loan and Trust Company, in trust for that purpose, to have said mortgage removed of record and cancelled, and to restrain Loan and Trust Company from aiding in negotiating, &c., any of such bonds.
The first question arising is the power of the Erie Railway Company to do the acts complained of.
The statutes give every railroad corporation the power to borrow money for*fcompleting, furnishing and operating its road, to issue bonds for any amount so borrowed and to mortgage its corporate property and franchise to secure such bonds, or any debt contracted for the purpose aforementioned (Laws of 1850, ch. 140, subd. 10, § 28 ; 1 Rev. Stat., 599, part 1, ch. 18, title 3, § 1).
*201There was no proof in this case of the purpose for which the bonds secured by this new mortgage were to be issued, further than appeared on the face of said mortgage, viz : “to consolidate its funded debt, obtain the money and material necessary for perfecting its line of railway, enlarging its capacities and extending the facilities thereof.” Such purpose is within the scope of the powers given every railroad corporation to create a debt and secure the payment thereof.
For aught that appears in the case, the funded debt and other debts may have been incurred in constructing and operating the road of said corporation, and the excess of money sought to be obtained by said bonds may be necessary further to complete and operate the same. In fact, there was no proof before the court whereby it could say that the contemplated bonds and the mortgages affected the interests or rights of the preferred stock, or that it was an act not within the authority and power of such corporation.
If the power to make such mortgage, and issue bonds thereon, existed in the corporation, no suit to restrain such action would lie by a common stockholder.
This was substantially conceded on the argument; and plaintiffs, as holders of certain shares of the ‘£ preferred stock,” stand in no better condition.
Holders of “ preferred stock” have no special control over the corporation or its management.
Stockholders are the constituent elements of a corporation, and in this case there is no other difference between the two classes than this ; one is to be paid interest out of a certain fund, if raised, to the exclusion of the other, if such fund is inadequate to pay both.
The corporation is in no sense the trustee for the holders of preferred stock. Its duty is to each alike according to the conditions attached to the stock of each.
The grounds on which the plaintiffs place their case *202are not established. It is insisted, that consolidating the prior mortgage and subsequent indebtedness into one large debt, would be detrimental, that the prior .mortgages becoming due at separate intervals, and not all at once, was an advantage, that the interest clause in the new mortgage was dangerous and detrimental.
It may be that the directors of this corporation would be personally liable to those affected, should they divert or allow to be' diverted, the net earnings first applicable to the preferred stock, before the interest on such stock was paid. But it is not necessary to decide that question.
What mortgage interest may be paid by the company, before payment of interest on its preferred stock,. must depend on the construction to be given the conditions attached to such stock. Whatever rights attached to the preferred stock when issued, adhere to' it still. If at the time of issue, only interest on then existing mortgages was to be paid before interest on preferred stock, subsequent mortgage indebtedness will not affect that stock, nor the legal rights of its holders to payment of interest before payment of interest on mortgages given for such subsequent indebtedness ; otherwise, however, if it should be held that interest on all mortgages of said corporation, whether for indebtedness prior or subsequent to the issue of said preferred stock, was first to be paid from its earnings.
It can therefore make no difference to the plaintiffs’ rights whether the new mortgage consolidates the funded debts, or confuses or mixes prior with subsequent indebtedness.
Under one condition it would do no harm, under the other their rights would remain, and it behooves the managers of the corporation to see that those rights are not so confused as to be lost sight of.
The interest clause in the new mortgage, whereby, in case of default in the payment of interest, the whole *203principal of the bonds issued may become due in six months, is similar in substance to a clause contained in the previous mortgages, and hence the new mortgage effects no change in the rights of the holders of preferred stock.
My conclusions, therefore, are:
1. That the railroad corporation had power to issue its bonds for the purposes expressed in the mortgage, and to mortgage its property and franchises, in trust, to secure such bonds.
2. That such an action as the present could not be maintained by the holders of the common stock of said corporation, and the facts do not place the plaintiffs, as holders of “preferred stock,” in any better condition.
3. That there is no evidence in the case showing that plaintiffs would sustain injury by the acts sought to be restrained.
The complaint should be dismissed, with costs to the defendant the Erie Railway Company, and without costs to the other defendant, the Farmers’ Loan and Trust Company.