Court Opinion

ID: 5207328
Source: CourtListenerOpinion
Date Created: 2022-01-06 16:05:05.949105+00
Date Added: 2024-06-11T08:27:18.904924
License: Public Domain

Scott, J. (dissenting):
The transaction by which the St. Louis and San Francisco Railroad Company (called for brevity the Frisco company) acquired the stock and consequent control of the Chicago and Eastern Illinois Railroad Company (called for _ brevity the Chicago company) was one between the Frisco company and the stockholders of the Chicago company as individuals. It was a contract of purchase by which the actual and beneficial title to the stock passed to the Frisco company. Since, however, the purchase price was not to be paid until 1942 and certain sums in lieu-of dividends on the stock were to be paid meanwhile, it was necessary.that security should be afforded to the vendors of the stock for the fulfillment of its obligations by the vendee, the Frisco company. The contract of purchase being in the form of what is called a stock trust certificate issued to the owners of the stock of the Chicago company in exchange for the stock sold by them is incorporated into the trust agreement between the Frisco company and the Colonial Trust Company, it being recited that “ This stock trust certificate is issued under a trust agreement, dated October 1, 1902, between the Railroad Company (meaning the Frisco Company) and the Colonial Trust Company, trustee, to which this stock trust certificate is subject and to which reference is made for its contents, for the nature and extent of the security, for the righto of holders of stock trust certificates and for the terms and conditions on which the stock trust certificates may be issued and are secured.” Thus the trust agreement between the Frisco company and the Colonial Trust Company is read into and becomes a part of the contract between the Frisco company and the individuals from whom it purchased shares of stock of the Chicago company. A reference to that trust agreement discloses the nature and extent of the ownership by the trust company of the Chicago company’s stock. The trust agreement recites that the railroad company (meaning the Frisco company), had determined to secure said stock trust certificates by the deposit and pledge with the Colonial Trust Company, the trustee, of all of the stock of the Chicago company which it, the Frisco company, might acquire. It is further recited that in order to secure its obligations and agreements to and with the holders of the stock trust certificates (the vendors of the stock of the Chicago *887company), the Frisco company had and did assign, transfer, pledge and set over unto the trustee (the Colonial Trust Company), its successors in the trust, and its or their assigns, all of the shares of stock of the Chicago company which the Frisco company may have acquired or may acquire, “ in trust, nevertheless, for the common and equal use, benefit and security of all and singular, the person or persons, firm or firms, bodies politic or corporate who shall from time to time be holders of the stock trust certificates.” The relations to each other of the former stockholders of the Chicago company, and the Frisco company and the Colonial Trust Company are thus made exceedingly plain. The stockholders of the Chicago company had sold absolutely their stock to the Frisco company, receiving in return therefor stock trust certificates issued by the Frisco company ; the Frisco company having become the owner of the stock of the Chicago company had deposited that stock with the Colonial Trust Company as a pledge and security for the performance of the undertakings and agreements under which the stock had been purchased; the Colonial Trust Company held the "stock of the Chicago company merely as trustee under the trust agreement, and while it held the legal title to the stock, as trustee, it had no beneficial interest therein or title thereto, and no right or authority to deal with the stock or to exercise any of the. rights of ownership therein, except as it was especially authorized to do by the trust agreement. In short the Frisco company had purchased the stock of the Chicago company, and had mortgaged the stock as security for its fulfillment of the contract of purchase, making that mortgage effectual by a deposit of the stock with the trust company, retaining in itself the beneficial ownership of the stock, but vesting the naked legal title in the trust company as trustee. That the Frisco company retained the beneficial title to and interest in the stock is illustrated by the clauses known as sections 2 and 3 of article 5 of the trust agreement. By section 1 of article 5 it is provided that the trustee shall cause to be transferred into its own name, or into the name or names of its nominee or nominees, all shares of the common stock deposited with it under the trust agreement. Obviously it was necessary that this should be done in order to make the pledge effectual, and to put the trustee in a position to act, if necessary, for the protection of the trust certificate *888holders. But hy section 2 it is provided that unless one or more of the events specified in section 2 of article 6 of the trust agreement, and therein denominated the “ events of default,” shall happen and be continuing, the trustee shall not collect or be entitled to collect, except upon the request of the Frisco company, any of the dividends from time to time declared in respect of the stock of the Chicago company held by the trustee under the trust agreement, and the trustee shall at once pay over any dividends collected to the Frisco company. By section 3 the Frisco company is expressly given the right, not being in default under the stock trust certificates or under the trust agreement, to vote upon all shares of the stock of the Chicago company at any time held by the trustee, for the election of directors, or for any of the other purposes for which stockholders may vote, except for purposes contrary to the covenants and guaranties on the part of the Frisco company set forth in article 7 of the trust agreement, and the trustee is required,' on demand of -the Frisco pompany, to execute and deliver to the Frisco company, or its nominees, suitable powers of attorney to vote on such shares. Thus the Frisco company has reserved to itself, until default, the sole beneficial use of and interest in the pledged stock, to wit, the receipt of the dividends and the power of voting thereon. The “ events of default ” referred to in the preceding section are enumerated in section 2 of article 6 of the trust agreement, and consist of failure to pay the principal or any dividend due on the stock trust certificates; the appointment of a'permanent receiver of the Chicago company; failure to |pay the principal or interest upon any mortgage of the Chicago company; failure to pay rent upon any line of railway leased to the Chicago company, or default in the payment, observance or performance of any other of the covenants, conditions or agreements on the part of the Frisco company in the stock trust certificates, or in the trust agreement, if such default shall have continued for six months after notice thereof shall have been given by the trustee to the president of the Frisco company. It is only if and when some one or'more of the foregoing events' of default shall happen, and during the continuance of such default, that the trustee may vote upon the shares of stock held by it, or may refuse its proxy so to vote to the Frisco company. Until such default the trust company was to remain a purely passive trustee, and could neither itself *889vote upon the stock held by it in pledge, nor refuse to execute and deliver to the Frisco company a proxy to enable that company to vote thereon. Up to the time that the Frisco company, by virtue of its beneficial interest in the stock of the Chicago company, voted to enter into the traffic agreement which is the subject of controversy in this action, no event of default had occurred, and consequently the trust company had acquired neither the right nor duty to itself to vote upon the stock or to refuse its proxy to the Frisco company. No default had as yet been made in any of the payments specified in the enumeration of “ events of default,” and, assuming that the execution of the traffic agreement was a violation of the trust agreement, it was one of those defaults which conferred upon the trust company no right to vote or to withhold its proxy until the default had continued for six months. Even if it be assumed, which I by no means concede, that the trustee had any power or authority as holder of the legal title of the stock of the Chicago company to assent to a modification or violation of the trust agreement, such assent cannot lie presumed from the fact that it gave its proxy to the Frisco company to vote upon the proposition to execute a traffic agreement when it was obliged by the very terms upon which it held the stock to give such a proxy upon demand. But it seems to me that it was quite beyond the power of the trust company, either by its own vote, if it ever acquired the right to vote, or by executing a proxy to the Frisco company to vote upon the pledged stock, to validly consent to the imposition upon the property and franchises of the Chicago company, represented by the pledged stock, of obligations which the Frisco company as pledgors had covenanted should not be imposed. The trust agreement, which specified, defined and limited the power and duties of the trust company as trustee was not only an agreement between the Fi’isco company and the trust company, the signatories to it, but by the very terms of the stock trust certificates had been read into and made a part of the contract between the Frisco company and the individuals holding the stock trust certificates. Nowhere in the trust agreement is there to be found any authority given to the trust company, either expressly or by implication, to participate in or to consent to a violation of these restrictive covenants which were designed and intended to preserve the security *890given to the holders of the stock trust certificates. The trust company was made depository and trustee of the stock in order to preserve the security to the holders of the stock trust certificates and not to destroy or lessen it, and was powerless to consent to any departure from or violation of the trust agreement in which it had no beneficial interest. Article 7 of the trust agreement contains covenants specifying with great particularity the things which the Frisco company will and will not do in the management of the Chicago company. Under these covenants the Frisco company, as owner and pledgor of the stock, agrees that it will not suffer or permit the issue of stock, bonds or certificates of indebtedness or the proceeds thereof, except for certain specified purposes, all of which have for their object the improvement and preservation of the property of the Chicago company, that property which lies back of and is represented by the pledged stock, and it is obvious that a wasting of the property and assets of the company would be tantamount to a wasting of the stock representing that property and which constitutes the sole security of the holders of the stock trust certificates. The so-called traffic agreement certainly involves, potentially at least, the pledging of the assets and credit of the Chicago company for the benefit of the Frisco company, and the St. Louis and Southeastern company, and for a purpose not contemplated by the trust agreement. The restrictive (7th) article of the trust agreement specifies what the Frisco company will not sanction or permit until all of the stock trust certificates shall be paid. This article forbids the issue or use of any stocks or bonds or certificates of indebtedness of the Chicago company or the proceeds thereof, or any use of its property or assets, or the proceeds thereof except for certain specified purposes, all of which are such as will be beneficial to or in the interest of the Chicago company, and thus by fair inference and intendment the use of the credit or assets of the Chicago company for the benefit of any other corporation is expressly forbidden. The court below has found, and the evidence amply sustains the finding, that the traffic agreement, which is the subject of attack in this action, was not made in good faith for the benefit of the Chicago company, but for the benefit of the Frisco company and of the Southeastern company which it controlled and owned.. The evidence to support this conclusion is furnished by *891the defendants’ own officers. The Southeastern road was burdened by mortgages, the interest of which it was not as yet able to earn. As to a portion of this debt the Frisco company was directly liable as guarantor for the payment of the interest, and as to the remainder it was virtually bound to provide for the payment of the interest, because of its ownership of the stock of the road. This burden became onerous, and various successive plans were devised for refunding the indebtedness. One after another these plans failed, either because it was found to be impossible to float the securities proposed to be issued, or because the holders of the outstanding Southeastern bonds refused to accept the securities proposed to be given them in exchange for their securities. Finally it was proposed that the new securities to be issued should be guaranteed in some way by the Chicago company. A frank and outspoken guaranty was of course impossible under the terms of the trust agreement, and thereupon the plan of a traffic agreement was devised under which while the Chicago company would not in terms guarantee the new bonds, it would guarantee to the Southeastern road a certain and sufficient income to meet its interest and obligations upon the new issue of bonds. That this was the purpose of the traffic agreement appears clearly upon its face. It recites the intention of the Southeastern company to refund its outstanding first mortgage bonds by the issue of $16,000,000 five-year four and one-half per cent gold bonds bearing an interest obligation of $720,000 per annum. It further recites that the entire capital stock of the Southeastern road (owned by the Frisco company) is deposited with a trust company to secure notes of the Frisco company, aggregating approximately $3,700,000, which has been advanced by the Frisco company and expended in the construction of the railroad lines of the Southeastern company, and that the Frisco company proposed to return these notes and issue new gold notes for $5,000,000, the annual interest charge on which would amount to $250,000. Thus the annual interest upon the proposed new issues would amount to $970,000. The Chicago company and the Frisco .company “collectively” agreed to interchange with the Southeastern company an amount of traffic which would aggregate to the Southeastern company a semi-annual net revenue of $485,000 “ over and above all expenses of maintenance, operation, repairs and *892renewals of and taxes on the railroad property of the Southeastern company,” and the Southeastern company in turn undertook that this net. revenue of $970,000 per annum should be applied to the payment of the interest upon the proposed issue of gold notes of the Southeastern company and to the payment of $250,000 per annum as dividends upon the stock of that company owned by the Frisco company, and pledged for its proposed issue of new notes. The net result of this agreement was that the Chicago company became obligated to issue to the Southeastern company a net annual income equivalent to the interest upon the new bonds to be issued by that company and the new notes to be issued by the Frisco company. It is true that this was proposed to be done by the interchange of traffic, but if it should prove to be impossible thus to provide it, the Chicago company would undoubtedly be liable as for damages for so much of the net income as it could not provide by interchange of traffic. It is true also that the Frisco company was also bound, but its failure to furnish income would not relieve the Chicago company from its obligations. I have no doubt.that the Frisco company, being the owner of all three companies, could arrange an interchange of traffic between them as it pleased, and, if it saw fit, could agree with itself to make such an interchange in the future. So long as it observed its contract obligations with the stock certificate holders of the Chicago road, they could not complain, and if the traffic agreement was so limited as to the time of its duration that it would terminate, as to any obligation imposed upon the Chicago company, if and when the Frisco company defaulted in its obligations to the stock certificate holders, I should find it free from legal objection. Its vice consists in the fact that it is not so limited. By its terms it is to continue until the 1st day of June, 1909, “ and thereafter so long as any of said five year four and one-lialf per cent gold bonds or of said two and one-half year five per cent gold notes shall remain outstanding and unpaid.” This is wholly indefinite, for while by the terms of the agreement the' bonds and notes may not be formally extended, there is nothing to prevent the indefinite postponement of their actual payment with the acquiescence of their holders. The effect of the agreement, therefore, is to impose upon the Chicago company an obligation to insure to the Southeastern company a net *893annual income of $970,000 with which to pay the interest on its bonds and a dividend upon its stock, and this obligation may extend beyond the time when, under the trust agreement, the stock certificate •holders will become entitled to resume the ownership of the stock of the Chicago company. The effect of this would be to return them the ownership of the Chicago company burdened with an onerous obligation imposed for a purpose foreign to the interests of the company. Against this contingency they are entitled to be protected by a court of equity. It is not, in my opinion, a sufficient answer to say that the holders of the stock trust certificates are only potentially injured, that the contingency upon which the traffic agreement will become oppressive may never occur, and that it will be time enough then to attack its validity.
The trust certificates are property, and can be bought and sold. The existence of such a cloud upon the security upon which their value depends must affect that value in the hands of their holders, and the question whether that cloud indicates a real menace should not be left to future determination. As has. been said, if the agreement were limited to the time during which the Frisco company continues to own all the stock of the Chicago company its validity ■might be affirmed, but it is not so limited, and we have no power to so limit it. To do so would be to make a new contract for the parties, and one which they would not have made, because it would not have answered the required purpose. The traffic agreement must stand or fall as it is, and as it is I cannot resist the conclusion that it is invalid and contrary to the terms of the trust agreement. I am, therefore, in favor of an affirmance of the judgment, with costs.
Judgment reversed and complaint dismissed, with costs.