Court Opinion

ID: 5205389
Source: CourtListenerOpinion
Date Created: 2022-01-06 16:00:48.768016+00
Date Added: 2024-06-11T08:27:16.478849
License: Public Domain

Ingraham, J. (dissenting):
The plain tiff as a stockholder of the defendant, the Hew York, Westchester and Boston Railway Company seeks to have the board of estimate and apportionment of the city of Hew York enjoined from granting an application made by the defendant the Hew York and Portchester Railroad Company for a change of the routes of that company, so far as the substituted routes-are.-the saíne or substantially the same as the routes covered by the franchise granted to the Hew York, Westchester and Boston Railway Company; the defendant the Hew York and Portchester Railroad Company enjoined from continuing an application for a change of routes,-and the defendant the Hew York, Westchester and Boston Railway Company enjoined' ■ from entering into a proposed contract with the Hew York and Portchester Railroad Company,' or ■ any other company, wherein and whereby the assent, of the said Westchester .Company to the said change of routes shall be' given, or wherein .and whereby said Westchester Company shall assign and convey its right, title and interest, or any part thereof, in and to a certain contract mádé with one Charles H. ’Smith, or shall assign or convey any of its property Or real estate, or right of way ih or along said second substituted route to the defendant the Hew York and Portchester Railroad Company; and for such other and further" relief as may be-just and equitable.
The complaint alleges that the defendant the Westchester Com*347pany is a corporation organized under the General Railroad Law for the purpose of building and operating a railroad from a point at or near Port Morris, on the Harlem river, borough of the Bronx, city of Hew York, to the village of Portchester, Westchester county, and certain branch lines; that the defendant the Portchester Company is a domestic corporation organized under the General Railroad Law for the purpose of building and operating a railroad from a point at or near the Harlem river to the village of Portchester, with certain branch lines, the main line of which is parallel with that of the Westchester Company, that the Millbrook Company is a domestic corporation organized for the purpose of acquiring and owning the stock and bonds of the Westchester Company and the Portchester Company, and now owns all of the stock of the Portchester Company and a majority of the stock of the Westchester Company; that the defendant the Westchester Company was granted a franchise by ordinance of the board of aldermen of the city of Hew York, approved by the mayor on August 2, 1904, to construct and operate a four-track railroad over so much of its route as lies within the city of Hew York, upon and across certain named avenues and highways, which franchise was accepted by the Westchester Company and it has complied with the terms and conditions of the said ordinance ; that the capital stock of the said Westchester Company is $20,000,000, and it was authorized to issue $20,000,000- in bonds secured by a mortgage upon its franchise and property; that thereafter it entered.into a contract with one Charles H. Smith, dated April 25, 1904, whereby Smith agreed to construct and equip that part of the railroad company’s line-located between One Hundred and Seventy-seventh street in the city of Hew York and the village of Portchester and acquire all.rights of way, rolling stock and other appliances and property necessary for the complete equipment and operation of the said road in consideration of its bonds, secured by a mortgage to the amount of $15,000,000 and $19,000,000 par value of its capital stock; that Smith assigned such contract to the City and County Contract Company, a corporation organized for the purpose of building and equipping said road, and by an agreement between Dick and Robinson and the City and County Contract Company a syndicate was organized for the purchase of $15,000,000 par value bonds, and *348$4,500,000 par value of said stock for the purpose of providing necessary funds to enable the City and County Contract Company to complete its contract and construct the said road ; that under said contract it was provided that for each subscription of $900 the subscriber was entitled to receive a first mortgage bond of the par value of $1,000, and $300 par value of stock of the Westchester Company, that this syndicate agreement expired on the 12th of May, 1907 ; that by an agreement in writing, dated the 8th of December, 1904, the stockholders of the Westchester Company assigned and trans- ' f erred to certain trustees all their stock in the Westchester Company, to be held by the trustees until the expiration of one year aftor the completion of the road of the Westchester Company, the said trust not to continue after the 15th of July, 1909, with authority to said trustees to vote on all of said stock so transferred to them at any and all meetings of the stockholders of the Westchester Company and at all elections of directors during said time ; that on the termination of the said trust, the voting trustees should assign and transfer to-the holders of trust voting certificates, issued on deposit of said stock, the amount of stock to which each holder thereof was entitled; that in the month of October, 1906, the City and County Contract Company was indebted to two certain trust companies in the sum of $300,000 ; that on the 26th day of October, 1906, the City and County Contract Company entered into a written agreement Whereby the presidents of these trust companies agreed to supply the place of all underwriters of said syndicate agreement not satisfactory to the syndicate managers with good and satisfactory underwriters, so that the said subscriptions should aggregate the total amount of $15,000,000 "at par, to the end that funds would be provided for building the road of the Westchester Company; that thereby Perry and Thorne, the'presidents of these two trust companies, purchased from the stockholders of the City and County Contract Company the stock of the City and County Contract Company, and the City and County Contract Company transferred and assigned to Perry and Thorne all their - right, title.- and interest in and to the stock of the Westchester Company then owned by the City and County Contract Company of the par value of $10,325,000 ; and thereby Perry and Thorne subscribed to the syndicate agreement to the amount of $9,158,700 and obligated themselves to pay *349that amount according to the terms of said syndicate agreement for the account of the City "and County Contract Company to be used for the construction of the said road of the Westchester Company; that thereby Perry and Thorne became the owners of a majority of the stock of the Westchester Company and thus became the owners of a controlling interest in the stock of the Portchester and Westchester companies;,that the defendants Perry and Thorne had not paid the amounts due either on their own subscription to the underwriting agreement, or the amount due on the subscriptions assigned to them or any part thereof; that in'the month of November, 1906, the defendants Perry and Thorne organized the defendant Mill-brook Company for the purpose of taking over the stock and securities of the Westchester Company, the Portchester Company and the City and County Contract 'Company; that the defendants Perry and Thorne, after they acquired control of these various corporations, caused the City and County Contract Company to stop all work on the construction of the road of the Westchester Company, and no construction work on said road has since been done ; that on the 4th of April, 1907, the Portchester Company made application to the board of estimate and apportionment of the city of New York for the right to change the line of parts of its proposed railway in the borough of the Bronx, city of New York, and that this change of route in some respects is identical with the route of line for which a franchise was granted by the board of aldermen of the city of New York to the Westchester Company, and that should the board of estimate and apportionment grant the application of the Portchester Company, the result will be that the city will have granted two franchises for railroads of similar construction upon the same route, and that said application was pending before the board of estimate and apportionment, action thereon having been adjourned to June 21, 1907; that the Portchester and Westchester companies were about to enter into a contract in which it would be agreed that the Portchester Company will build its railroad on so much of the route as is common to both companies, and that both companies will have equal rights to operate trains over such lines upon a schedule to be mutually agreed upon by them, and in which the Westchester Company assigned to the Portchester Company all its right, title and interest in and to the construction contract between it and Charles H. Smith, *350and thereafter assigned to the City ánd County Contract Company for the construction of that portion of- the main line of its railroad between One Hundred and Seventy-seventh street and the Portchester terminus; that the Westchester Company also assigns and transfers to the Portchester Company all the construction work, rails, tools, engines, bridges, tunnels and other property now owned by the Westchester Company, or to which it may hereafter become entitled under and by virtue of the said agreeznent with the said Smith, in and along that portion of its line from the southeasterly corner of Bronx Park to the northern boundary line of the city of HeW York; that it is not the purpose or intention of the defendants Perry and Thorne, who'own or control all or substantially all of the stock of the Millbrook Company, to build or cause to be built both the Westchester Company’s road and the Portchester Coznpany’s road, but it- is their purpose and intention to construct the road of' the Portchester Company only; that the execution of the said proposed contract has never been authorized by a vote of a majority ¿f the stockholders of the Westchester Company, and if it had been authorized or assented to by a majority of the said stockholders, said authorization and consent was obtained by reason of the control exercised by said Perry and Thorne over the voting trustees of ■ the Westchester Company; that the length of the'Westchester O'oznpany’s main line in process of construction between One Hundred and Seventy-seventh street and the northern boundary of the. city is approxiznately 23,000 feet, and is entirely over private right of way, except at street, crossings; that about 13,000 feet has.been completed, and the Westchester Company has expended thereon, exclusive of amounts expended for right of way, upwards of $1,077,000, and expended upwards of $700,000 in the purchase of right of way between said points; that the franchise granted to the Westchester Company is necessarily exclusive; that the defendants Perry and Thorne are in full and complete control .of the' defendant Westchester Company and of the majority of its board of directors; and that • the action was commenced and prosecuted by the plaintiff on his own behalf and for the benefit of all the other stockholders of the Westchester Company siznilarly situated.
There are two railroad corporations who claim to have franchises to build railroads through the same territory in the ■ city of Hew *351York. The validity of the franchise of one of the said corporations, the Westchester Company, was questioned.
It does not appear that the franchise of the Portchester Company is open to question. The persons who were the beneficial owners of a large majority of the stock of the Westchester Company had acquired the stock of the Portchester Company, • and it was then proposed to substantially unite the two companies so that there should be but one line of "railroad constructed within the city of Yew York, which could be used by both companies, and to accomplish that result an application was made to the board of estimate and apportionment to change the route of the Portchester Company so that it would substantially coincide with the route of the Westchester Company, and a contract was to be entered into between the two companies and the work completed in accordance therewith. A minority stockholder, claiming that this arrangement will in some way injure the Westchester railway and his rights as a stockholder brings this action to enjoin the carrying out of this plan.
The learned judge at Special Term granted this injunction upon the ground that the delay in the action by the board of estimate and apportionment can hardly, if at all, harm the defendants, but should the board grant the application and the proposed contract be executed, irreparable loss would follow to the plaintiff, even should he succeed at the trial, and, therefore, ¿n injunction was granted which restrains the board of estimate and apportionment from granting an application to change the route of the Portchester Company upon an application commenced by a stockholder of the Westchester Company. I do not think that the power of the board of estimate and apportionment to grant the application of the Portchester Company can be questioned. That the grant of any railroad company franchise may affect a road with which it would compete is in the absence of an exclusive grant a legal objection to the granting of a franchise to a competing road, and I know of no authority in the Supreme Court to restrain the Portchester Railroad Company from obtaining by a change of its route a line of railway which will compete with the Westchester Company, or the board of estimate and apportionment from granting it.
By the ordinance of the city of Yew York the Westchester *352Oompany acquired no exclusive right tó the route granted, for in the ordinance granting the privilege to construct this road it was provided by section 4 that “ the grant .til: this' privilege"shall’ not affect in any way the right of the. City of New York to grant a similar -privilege upon the same or other terms' and conditions to any other person or corporation.” The Portchester Company, therefore, had a right tó apply: for. a change of routes, and the board. of estimate and apportionment had power to entertain that- application,, and there was nothing to justify the. court in enjoining the Portchester Company from, applying for the change . of routes or the board of estimate and apportionment from granting such application. The injunction granted, however, further enjoins the defendant, the Westchester Company -and Perry and Thorne from consenting or permitting or ' agreeing in any way to consent or permit Or to effect or to attempt to effect either directly or indi-’rectly the change of route hereinabove mentioned and forbidden, or any part thereof, or to assign, convey or give or to agree in any manner to assign, convey or give, .directly or indirectly, unto the said New York and Portchester Rttilroad Company, the use of or right - to use the -said route of the New York, Westchester and Boston Railway Company, or any part thereof, or any of the property, real or personal, contracts or choses in action, of the said New York, Westchester and Boston Railway Company.. "
The action was' brought by a minority stockholder of- the Westchester Company to control the actions of the majority in relation to a contract which the corporation was by law authorized to make. The Westchester Company in the construction'of its road had been met with an objection to -its franchise to .construct - the road. It is not necessary or proper that. we should, attempt lipón tiffs-, application to determine whether that, objection was or was not well taken ; but it is perfectly apparent from the papers that the objection was á serious one, and might result in-a determination which would- imperil the franchise of the Westcheiter Company and subject it to the loss of a. large portion of the. money that had been expended in the construction of the road.
There was the franchise of the Portchester Railroad, Company in existence, as to which no substantial■ objoption had been made, and those, interested in-the Westchester Company acquired the capital *353stock of the corporation owning that franchise. It was then proposed that the two companies should make a contract by which .the Portchester Railroad Company should construct an important sec7 tion of the road upon the route covered by the franchise of the Westchester Company under an arrangement by which both companies should use the road thus constructed. , The total amount that had been expended by the Westchester Company in the construction of the road, including the purchase of the right of way, was approximately $1,700,000, while it would cost upwards of $5,000,000 to compílete the construction and equipment of the railroad upon that portion of the route that is affected by this controversy. The apparent result would be that the Westchester Company would acquire the right to use a completed railroad which 'would cost in the neighborhood of $7,000,000 at an expenditure of about $1,700,000, and would also avoid the obligation of having to defend its franchise, and be'relieved from the risk of having such franchise destroyed. Certainly, under such circumstances, the execution of such a contract is not a breach of trust or such assertion of power by the majority stockholders of a corporation as justifies a court of equity in granting a temporary injunctionpfrom proceeding with the execution of the contract. It is only to a very limited extent, if at all, that the majority of the stockholders of a corporation can be said to be the trustees for the minority stockholders. While the piower of a court of equity to restrain the majority stockholders of a corporation at the suit of a minority from doing an act which would in effect destroy the corporation, or prevent it from carrying out the objects for which it was incorporated, or from misappropriating or wasting its assets or propierty, is well settled, the general power of a court to grant such relief is based upion some illegal or unauthorized act of the majority which 'tends to destroy or injure the corporation. The court should not interpose in a disponte between the majority and minority stockholders in relation to control and management ■ of the corporate affairs and substitute its judgment as to the proper management and control of the corporation for that of the majority stockholders. It seems to me that in such a case, to justify the interposition of a court of equity, there must appear to be some " *354illegal or unauthorized action of the majority which would directly tend to injure the corporation or destroy its franchise, or waste and misapply its property. We must hear in mind that it is not the right, of the corporation to question the acts of its directors that is involved, but the right of a minority stockholder as against the majority of the stockholders. It is quite unnecessary upon this' application to determine just what situation would justify the interference by the court at the request of a minority stockholder, but it is evident that the rule which is applied between principal and agent or trustee and cestui que trust is not at all applicable. In Gamble v. Queens County Water Co. (123 N. Y. 91) the question is quite fully discussed, and Judge Beckham in delivering the opinion of the court says: “ A shareholder has a legal right, at a meeting of the shareholders, to vote upon a measure, even though he has a personal interest therein separate from other shareholders. In such a meeting each shareholder represents himself and' his own interests solely,.and he in no sense acts as a trustee or representative of others. The law of self interest has at such time very great and proper sway. * * * Their action resulting from such votes must not be so detrimental to the interests of the corporation itself as to lead to the necessary inference that the interests of the major-, ity of the shareholders lie wholly outside of and in opposition to the interests of the corporation and of the minority of the shareholders, and that their action is a .wanton or fraudulent destruction of the rights of such minority.” The court then cited with approval the case of North West Transp. Co. v. Beatty (L. R. 12. App. Cas. 589) in which case it was said that a resolution of a majority of the shareholders upon any question with which the. company was competent to deal was valid and binding upon the minority. A voidable contract, it- was also said, might be. ratified or affirmed by a majority of shareholders at a proper meeting, provided that such ratification was not brought about by improper means, and the contract itself was not fraudulent or oppressive towards the minority. And also cited Baggallay, L. J., who said that great confusion would be introduced into the affairs of joint stock companies if the circumstances of shareholders acting in that character in general meeting were to be "examined and their votes practically nullified if they also stood in some fiduciary rela-' *355tion to the company. The ground upon which the court will interfere upon application of a minority stockholder is then stated as follows: “ I think that where the action of the majority is plainly a fraud upon, or, in other words, is really oppressive to- the minority shareholders, and the directors or trustees have acted with and formed part of the majority, an action may be sustained by one of the minority shareholders suing in his own behalf and in that of all others coming in, etc., to enjoin the action contemplated, and in which action the corporation should be made a party defendant. It is not, however, every question of mere administration or of policy in which there is a difference of opinion among the shareholders that enables the minority to claim that the action of the majority is oppressive, and which justifies the minority in coming to a court of equity to obtain relief. Generally, the rule must be that in such cases the will of the majority shall govern. The court would not be justified in interfering even in doubtful cases, where the action of the majority might be susceptible of different constructions. To warrant the interposition of the court in favor of the minority shareholders in a corporation or joint stock association, as against the contemplated action of the majority, where such action is within the corporate powers, a case must be made out which plainly shows that such action is so far opposed to the true interests of the corporation itself as to lead to the clear inference that no one thus acting could have been influenced by any honest desire.to secure such interests, but that he must have acted with an intent to subserve some outside purpose, regardless of the consequences to the company, and in a manner inconsistent with its interests. Otherwise the court might be called -upon to balance probabilities of profitable results to arise from the carrying out of the one or the other of different plans proposed by or on behalf of different shareholders in a corporation, and to decree the adoption of that line of policy which seemed to it to promise the best results, or at least to enjoin the carrying out of the opposite policy. This is no business for any court to follow.” And in Farmers' L. & T. Co. v. N. Y. & N. R. Co. (150 N. Y. 410) this case is cited and the principle there established was not questioned. The judgment in that case, which was an action to foreclose a mortgage, was reversed because the court had refused to find material facts upon the ground that they were immaterial, and facts which were mate*356rial and established by uncontradicted evidence, and in rejecting as immaterial evidence offered b/ the defendants.
There can be no. question, I think, but that by section 15 of the Railroad Law (Laws of 1890, chap. 565) the corporation was,authorized to make the proposed contract and the two companies, there.fore, had a right to make such a contract. In the making of such a contract as in the performance of the other business df the corporation, except' as otherwise. expressly prescribed by law,, the directors elected by a majority of' the stockholders are authorized to act for the corporation. In Beveridge v. N. Y. Elevated R. R. Co. (112 N. Y. 1) it was expressly held that power to make ' such a contract'“ is to be exercised as any other power of a corporation is, where the mode of exercise is not prescribed by the charter or general laws applicable thereto. All powers directly conferred by statute, or impliedly granted*, of necessity, must be exercised by the directors who are constituted by the law as the agency for the doing of corporate acts. * * * Within the chartered authority they have the fullest power to regulate the concerns of a corporation according to their best judgment, and contracts, which the corporation could legitimately make, come within the scope of the ordinary powers of corporate management. * * * The question of the exercise, of such a power of management, must, be, left to the honest and fair business discretion of the board of directors, and the only inquiry, by the stockholders could be as to whether there was any fraud by which assets were wrongfully diverted.”
Coming down then to the real question presented, which is, did it appear that the proposed action “ is so far- opposed to the true interests of the corporation itself as to lead to the clear inference that no One thus acting could have been influenced by any hones^ desire to secure such interests, but that he must, have acted with an intent to subserve some outside purpose, regardless of the consequences to the company, and in a manner inconsistent with, its interests” (Gamble v. Queens County Water Co., supra), it seems to me that the facts established entirely fail to prove such a situation, and that the court at .Special Term was not, therefore, justified in granting this temporary injunction.
There is nothing, in the record before us to. justify the conclusion that the majority stockholders of the Westchester Company are act*357ing in bad faith or with intent to despoil the minority stockholders, unless indeed fraud is always, instead of never, to be presumed. The situation was marked and serious. The apprehended invalidity of the Westchester Company franchise and the consequent inability of that company to proceed with the project of building a road was not an imaginary situation furnishing a pretext for the action contemplated by the majority stockholders. It was a real and grave situation. The proposed contract, if the charter of the Westchester Company is valid, is one which seemingly in all the circumstances disclosed in the record would appear to be beneficial to the Westchester Company. Confined as it is to a short section of a common route, the Westchester Company would receive, by contributing property costing $1,700,000, aright to the joint use of a portion of a line requiring an expenditure by the Portehester Company of about $5,000,000. The contract, if the Westchester Company franchise is valid, does not prevent the building of other parts of the Westchester road not embraced within it, nor is the Westchester Company deprived of what it now relies upon as the means with which to build remaining portions of its road. The obligation of Perry and Thorne to the extent of $9,000,000 subscriptions to stock of the Westchester Company still remains, and there is nothing which would indicate that they could in any way be released from, performance of that obligation, and the contract for building the road is only assigned to the Portehester Company in so far as that contract relates to that'portion of the road which it is contemplated should be jointly operated by both companies. If the charter of the Westchester Company is invalid and there remains only a dé facto corporation possessed of property, then it would appear, as the case is now presented, that the Weschester Company would have $1,500,000 in Westchester county not affected by the contract, and. a one-half interest in the equity of a railroad costing $6,800,000 subject to the existing mortgage made by the Westchester Company. In either situation, therefore, we cannot assume that the proposed contract should at this stage of the proceedings be deemed to be so unfair and destructive of the interests of the minority stockholders of the Westchester Company as to authorize the issuance of an injunction to restrain the board of estimate and apportionment from acting upon the application *358of the Portchester Company, or to prevent the formal execution of the contract between the Westchester and the Portchester companies. '
I only desire to add that I do not wish to determine what, if any, relief the plaintiff may be entitled to upon the trial of the action. The court will then have before it all the parties to this contract and the holders of the majority stock of the two corporations that are interested. It can fully protect the plaintiff or the Westchester Company if it should appear that any attempt has been made, or is to be made, to sacrifice the interests of that company or of its stockholders. The effect of permitting the contract to be formally executed will be to allow the Portchester Company to expend its money in the construction of the road upon the route claimed by the Westchester Company, and the court can say at the trial whether or not the contract, as formally entered into, fully protects the Westchester Company and assured to it the substantial rights to which' it is entitled.
We think, therefore, that the order appealed from should be reversed, with ten dollars costs and disbursements, and the motion for an injunction denied, with ten dollars costs.
Patterson, P. J., concurred.
Order affirmed, with ten dollars costs and disbursements.