Court Opinion

ID: 8810049
Source: CourtListenerOpinion
Date Created: 2022-11-26 15:00:07.551319+00
Date Added: 2024-06-11T17:04:15.170188
License: Public Domain

HOOK, Circuit Judge
(dissenting in part). I concur in the award to plaintiffs of what is called the surplus earnings of the terminal company, not only for the particular reason given, but also for a broader one, arising from the other branch of the case.
I am unable to agree to the foregoing opinion upon the main controversy, and will state my reasons in a general way. The railroad, companies organized the terminal company, and invested it with the legal title to their property, including integral parts of railroad lines and appurtenant franchises, solely for the more convenient and better performance of their public duties. It is open to question whether the most important of the conveyances could lawfully have been made, except for that specific purpose. That purpose was fundamental, not temporary or casual, and it determined the character of the terminal organization. The terminal company was not incorporated by individuals as an independent enterprise for personal profit, and its stock was not put upon the market as that of a financial venture. The contract of 1882 between the railroad companies foreshadowed the terminal company in express words, and when that company was chartered it took the place of the individual trustee provided for by the contract. That fact is too plain for discussion. The change to a cor*953porate trustee was solely for reasons of convenience. It was one of method or form, but not of underlying, essential substance.
As regards the legal title to the property, the terminal company became the trustee of the railroad companies that organized it and of such others as might thereafter be admitted to joint beneficial ownership. The beneficiaries, present and future, were what are commonly called proprietary or constituent companies. Each of them owed a duty to the others that it would not at any time so deal for itself or with its own proprietary interest as to impair or destroy the joint relation among them or the character of their common organization. Not only did the terminal company hold the legal title as trustee, but in the operation and maintenance of the property it-was an agency of the proprietary companies for the performance of their railroad functions. This was accurately expressed in a sworn declaration by one of the individual defendants in 1892 when president of the terminal company. He averred that it was “simply a representative company, acting as an agency at Des Moines for the Wabash Railroad Company and the Des Moines, Northern & Western Railway Company, performing all necessary work for them, and charging each, at actual cost, its due proportion for the expense thereby incurred.” The Des Moines, Northern & Western was the successor of two of the original proprietary companies.
In both aspects of its position towards the proprietary companies the terminal company was in a high sense their trustee, and according to salutary principles it was bound to maintain the integrity of that relation. Being itself a corporation, its fiduciary obligations and disabilities rested equally upon its officers, through whom alone it could act. The limitations upon the right of a person in such a capacity to act for his personal benefit with respect to the subject of the trust are familiar. Never are they less than that the dealing must be open, avowedly at arm’s length, and without connivance or concealment. The individual defendants, one or the other, or both, were, at all the times material in this case, officers and directors of the terminal company. The conclusion of my Brothers, briefly stated, is that by a series of transactions occurring in a long course of years the original character of the terminal company was gradually changed into that of an independent corporation, and that the control of it was lost by the railroad companies and was acquired by the individual defendants, who were its officers. But they say:
“There is nowhere any indication that the railways intended any such result, and yet such, in our judgment, is the result. This unexpected outcome was the product of several circumstances.”
In other words, the proprietary companies were not cognizant of the trend of the circumstances, and the result held to follow, though unexpected, and not intended by them, is enforced, because of a legal presumption of intention of natural consequences of acts, regardless of intention in fact. The circumstances relied on do not appear to me to have the significance attributed to them; but, were it otherwise, the presumption should not be so broadly applied to the case of a trust, the destruction of which is claimed by those subject to the disabilities *954of trustees dealing for themselves. The excerpt quoted above touches the quick of this controversy. In my opinion the various transactions thought to produce a-result so unexpected and unforeseen should be severally examined in the light of the surroundings at the time they occurred. If in one aspect they were then consistent, or not apparently inconsistent, with the frequent and studied declarations of the object of the .terminal organization, and that view was then reasonably entertained by the railroad companies, that view should prevail in a court of equity, rather than a shrewder one tending to a conclusion in favor of participants who were bound in good conscience to the con- • trary.
An argument is made upon the issue by the terminal company of bonds on the property and the necessity that it should have had the title to enable it to make the mortgage. Of course it had to have title as complete as the giving of the mortgage required, but there is nothing in that inconsistent in any degree with the existence of a trust relation between it and the proprietary companies. The mortgage is still afoot, and in this case no rights are asserted under it. Its effect upon the question before us is not different from that of a joint mortgage by the proprietary companies upon properties severally owned by them, but committed to a common use, or that of an authorized mortgage by an individual trustee named under the contract of 1882. The proprietary companies were fully justified in believing that the changes and amendments in the charter, etc., of the terminal company, now relied on as making for its complete independence, were for the sole purpose of giving it the conventional dress of a corporation that has put forth an issue of bonds. That was why suggestions originating within the terminal company were so readily agreed to by them, and that is why the result so contrary to their vital interests, now held to follow, was unforeseen.
I question whether property and rights of great value are lost in that way, except in circumstances concededly not present here. The very suggestion that a great railroad system, like the Wabash, for example, had unintentionally and unexpectedly lost its proprietary interest and right to use extensive terminals in a large city, to the establishment and upbuilding of which it was a party, and to which it had contributed property acquired for railroad purposes by eminent domain and public grant, is so unusual as to impose upon those who make it a heavy burden of law and fact. Questions like these naturally suggest themselves: Who got the property of the railroad company, and deprived it of its right of entrance into the city? How did they do it? What were their relations to the railroad company ? Who represented the railroad company in such an important matter, and what authority did they have?
After the conclusion is reached that the terminal company had by gradual action thrown off its trust character and had become independent, attention is directed to the transactions in its stock. The power asserted by the individual .defendants to control the terminal company and thereby to exclude the plaintiffs from the use of the terminals rests upon their possession of five-eighths of the issued capital stock. *955There is, however, abundant proof that the stock of that company was intended only to represent the interests of railroad companies actually using the terminal facilities and as a method of apportionment among them. The stock was not intended as a source of personal or individual profit apart from railroad use. Stock ownership and terminal use were inseparable. I know of no public policy or rule of law against such a status of corporate stock or its enforcement as between the parties who established it. If it were formally expressed in the corporate charter, the world would have to take notice. But as between the parties themselves, those participating and having actual knowledge, infernal evidence may disclose it It should always be in mind that in this case there are no innocent purchasers relying upon public records. The contract of 1882 specified the proportional interests of the three original railroad companies, and foreshadowed the organization of the terminal company to take the place of an individual trustee. In 1884 the terminal company was organized for the expressed purpose of carrying out the contract. My Brothers see in the articles of incorporation some evidence of a departure from the trust and the beneficial relations, but it seems to me that the intention to maintain them was asserted and reasserted as definitely and positively as words would permit.
While, as customary, the charter made provision for a capital stock, the connection between the distribution and future ownership of such thereof as might be issued and the railroad use of the property was manifested, not only in that instrument, hut afterwards in many ways by both the railroad companies and the terminal company. The limitations of an opinion will not admit of a recital oí this evidence in detail. It is in the record, and there is much of it. In 1887, three years after the terminal company was incorporated, when the parties began to convey to it the legal title, the directors of the predecessor of the Wabash Company adopted a resolution directing its president and secretary to execute a deed conveying “all its real estate, rights of way, franchise, roadbed, and other property of said company lying and being in the city of Des Moines, east of Rarnham street, whether the same was acquired by grant from the city of Des Moines, or by purchase or condemnation,” and, it was added, “this resolution being offered for the purpose of carrying out the contract oí date January 2,, 1882,” etc. One of the individual defendants, as secretary of the directors’ meeting, recorded the adoption of the resolution. The Wabash Company was then the real party in interest. The conveyance executed by the officers so authorized, the individual defendant being-one of them, was in form a warranty deed, but certainly the resolution of authority fixed the effect of the conveyance for the parties and those who afterwards dealt, with knowledge of the facts. Mere executive officials of a railroad company cannot, upon their own initiative, convey away parts of its road and franchises. And, were it necessary to be determined here, it would be an interesting question how far its representatives in a terminal company, organized and holding title like the one here, could do so by consenting to a vital change of its character, or even by a disposal of its stockt without express au*956thority of their principal manifested in the usual corporate way. The 30-year contract of May 10, 1889, between the terminal company and the proprietary companies, was authorized as supplemental to the contract of 1882, and in a preamble it was recited that in pursuance of its charter it acquired and owned a railway. The charter was that of 1884 into which the contract of 1882 was written.
One other matter bearing on this phase of the case may be mentioned. The effort to purchase stock began in 1888. The property of the Wabash Company, including a half interest in the terminal stock not yet issued, was then in a transitional state in a foreclosure proceeding, being held by a purchasing committee. One of the defendants wrote Mr. Ashley, the president of the Wabash Company, and also- a member and the secretary of the purchasing committee, saying he had been asked whether half of that stock interest, one-fourth of the whole, could be bought. M'r. Ashley replied favorably, adding:
“But I have always supposed that it would be necessary to confine the sale to such railway companies as would be interested in the station.”
Also:
“Was there not an understanding or agreement as to -the sale of the stock When the terminal company was formed, and .would it not be prejudicial to the interest of the whole to part with the stock to outsiders?”
The defendant replied, agreeing with him and mentioning some railroads in whose interest inquiries had been made. The purchase was made in 1890. It was in 1892 that the other individual defendant made the sworn- statement that the terminal company was “simply a representative company, acting as an agency” for the railroad com- • panies. About two months after the first sale, the purchasing committee sold an additional eighth of the stock to the defendant. In a letter during the negotiations Mr. Ashley wrote him:
“It must be understood, of course, that a one-eighth interest in the capital stock shall be sufficient to represent a proprietorship in the company according to the understanding we had when you were here.”
The phrase “proprietorship in the company” is not commonly used to describe the stock of an ordinary corporation. Moreover, the defendants, being substantially interested in the proprietary companies, other than the Wabash, had been endeavoring to induce other railroads to come into the terminal company. They were, one or both,, also officers of the terminal company. It would naturally be assumed that in dealing with them they were acting in the railroad and terminal interest, as distinguished from that in which they now assert control. The record shows that it was common practice in correspondence to address them personally on subjects of corporate concern. In fact, the three-eighths of the stock bought from the Wabash purchasing committee was transferred to and became the property of the Des Moines Northern & Western Railway Company, into which the two other companies were merged. That was in 1892. The Des Moines Northern & Western then owned seven-eighths of the terminal stock and the Wabash one-eighth. As has already been observed, the terminal company was declared in that year to have been simply a rep*957resentative agency. Early in 1893 a similar declaration was made on behalf of that company. The Des Moines Northern & Western was financially dominated and officially controlled by the individual defendants. In the fall of 1893 their company pledged five-eighths of the terminal stock to them as collateral to some indebtedness. In January, 1894, the pledged stock was by agreement applied as part payment to a. small amount, and they have since held it.
The next annual sworn statement on behalf of the terminal company to the Executive Council of the state of Iowa illustrates the transforming effect upon the character of the corporation which a mere transfer of its stock is supposed to have. In February, 1894, it was declared that the terminal company was the owner of the property ; that it leased it to the railroad companies, performed services for them, and collected a rental. My Brothers, adopting that theory, say that the ultimate result was the entire emancipation of the terminal company from “outside government.” According to the decision, the proprietary companies became outsiders, without right, after the expiration of the operating contract of 1889, to use the terminals, contrary to the will of the holders of five-eighths of the stock, except upon the order of some public administrative board in Iowa, if there be one with jurisdiction. I do not think the stock in the hands of the defendants should be destroyed, or its true value in the scheme or plan of the terminal organization impaired, but that it should be actively operative and profitable only when transferred to and held by railroad companies which use the terminals and contribute in that way to the object of their creation. There are four or five other important railroad systems entering Des Moines, besides those of the plaintiffs.
There is little conflict in the evidence. The difference between my Brothers and myself is not so much about the facts as their significance. They put emphasis upon the corporate cover of the terminal company and perceive a drift to complete self-sufficiency and inde-pendency from the very moment of incorporation. But the doctrine of a corporate entity separate and apart from the persons composing the corporation is after all a mere legal fiction, established for convenience and to serve the ends of justice. It does not go beyond that. In equity the shell artificially assumed is not impermeable. The court will look through it and regard the kernel, and whenever justice requires will hold the stockholders as the corporation. That is being constantly done in equity in determining public rights as affected by the corporate association of particular individuals and the rights of the individuals among themselves and with respect to their organization.
But, however the above may be, it seems to me that the less measure of relief granted by the trial court cannot be denied the plaintiffs. It is that they were entitled to a continued use of the terminal properties and that the court would determine the terms and conditions if the parties were unable to agree. That is the matter of defendants’ appeal. Whenever a definite right claimed by a railroad cómpany to use specific property of another is of contractual origin, as where it *958is a condition of the franchise of the owner or is founded upon conventional agreement, the question of the existente, of the right and its extent and limitations is a justiciable one, and the claimant may invoke the aid of a court of equity for its establishment and enforcement. Similarly, when the right is upon reasonable terms and conditions, the court may determine them if the parties do not agree. Both phases of this subject have been so decided in the cases, familiar in this circuit, of the-Union Pacific Bridge, at Omaha, and the Wabash right of way and tracks, at St. Louis. If the right of use exists, reasonable terms and conditions are implied, in the absence of recital or stipulation about them. In view of the admitted history of the terminal company, the plaintiffs, merely as minority stockholders, have a right to the use of the terminals and upon reasonable terms. Thé right is not of that general nature which requires an appeal to some administrative board for the enforcement of the public policy of the state applicable to all railroad companies, but is essentially contractual. It could not reasonably be said that, had the contract of 1889 not been made, two of the original companies holding a majority of the stock might have excluded the third from the use of the terminals and defeated its appeal to the courts. The individual defendants have no greater right or power.