Court Opinion

ID: 8516076
Source: CourtListenerOpinion
Date Created: 2022-11-23 08:51:03.702234+00
Date Added: 2024-06-11T16:51:17.736431
License: Public Domain

OPINION.
Sayler, J.:
The plaintiff, Evan J. Henry, who sues in his own behalf and in behalf of all other stockholders of the Cincinnati & Muskingum Valley Ry. Co. who may see fit to join in the prosecution of this action and contribute to the expense thereof, brings the action against the Pittsburgh, Cincinnati, Chicago & St. Louis Railway Company and the Cincinnati & Muskingum Valley Railway Co. (and hereinafter for convenience called the Muskingum Valley Co.), setting up that he is and has been since 1870 the owner of 550 shares of the stock of the Muskingum Valley Co.; that the P. C. C. & St. L. Ry. Co. is the successor, by consolidation, of the Pittsburgh, Cincinnati & St. Louis Railway Company, with its line of roa'd extending through Dresden Junction, etc., and the Chicago, St. Louis & Pittsburgh R. R. Co., with its line of road, etc.; that the Muskingum Valley Co. was the owner of the line of railroad from Dresden Junction to Morrow, and averring that the Pennsylvania Railroad Co. held control of the Pittsburgh, Cincinnati & St. Louis Railroad Co. (and hereinaftei for *140convenience called the Pan Handle Co.), and of the Muskingum Valley Co., through the majority of the stock of said companies owned or controlled by it; setting up the bonds issued by the Muskingum Valley Co., secured by mortgage on the line of road of said company; the payment of the coupons on said mortgage to and including those maturing on January 1, 1887; the maturity of the coupons maturing since the 1st of January, 1887, which remain unpaid; the lease executed by the Muskingum Valley Co. to the Pan Handle Co., and the possession taken by and the occupation of the lessee of the said road under said lease; and the advancement by the lessee under the provisions of the lease of the money to pay the coupons on said bonds to July, 1885; with a statement as to the Jeans suit in Jefferson county, and the subsequent transactions of the lessor and lessee with reference to the road and lease, claiming that the suit was not brought in good faith, that the defense made was a sham, and that by the dismissal of the Jeans suit the lease was left in full force and effect, and further claiming that the act of the directors of the Muskingum Valley Co., of December 80, 1885, was in the interest and at the instigation of the Pennsylvania Co. and of the lessee, and not in the interest of the lessor, and that the same was a pretended surrender of the railroad; that the raliroad continued thereafter to be operated by the officers and agents appointed by the lessee and in the interest of the lessee. That on March 22, 1892, Moran Brothers, stockholders of the Muskingum Valley Co., acting for the plaintiff as ivell as in their own interest, made a demand upon said company at the annual meeting of the stockholders to take action to enforce the said lease and to compel the payment of the sums agreed to be advanced, and to that end prepared and submitted resolutions providing for such action, which were referred by the stockholders to the board of directors, but the board of directors refused to take action. That on January 4, 1898, the plaintiff, by Moran Bros., having further made demand upon the directors of said Muskingum Valley Co., that they should at once cause the Pan Handle Co. to be repossessed of the railway of the said Muskingum Valley Railway Co. under the terms of said lease, the said directors by resolution refused to take any such action, and refused to take any steps to enforce said lease.
Wherefore the plaintiff says it is impossible to procure said Muskingum Valley Co. to take any action towards the enforcement of said lease, inasmuch as the said Compaq is controlled by and acts under the direction of said Pennsylvania Co. and the said Pan Handle Co., which companies are controlled by the Pennsylvania Railroad Co.
Wherefore the plaintiff prays “that the validity, obligation and binding force 'of the said lease as against the said Pittsburgh, Cincinnati, Chicago & St. Louis Ry. Co., may be established by the judgment of this court; that the said company may be repossessed of the said demised premises, and compelled, during the residue of the term of said lease, to maintain and operate the demised premises at its own proper cost, expense and risk, and so to save the Muskingum Valley Co. and its stockholders harmless therefrom; that judgment may be rendered against the said Pittsburgh, Cincinnati, Chicago & St. Louis Ry. Co. for the amount of the said coupons so in default and the interest thereon, and the interest on the said coupons which have been paid at dates later than the dates of maturity, and that said sums of money may be collected and distributed by the judgment of this court among the proper parties, holders of said bonds and coupons, who may appear to be entitled thereto by proof taken before a commissioner appointed by this court or otherwise, as to this court may seem best, and that the said last named company may be compelled hereafter to advance to the Muskingum Valley Company from time' *141to time, as the same may mature, all moneys necessary for the payment of said coupons as they mature until the maturity of the principal sum due and secured upon said mortgage aforesaid, and that, in all things, the said Pittsburgh, Cincinnati, Chicago & St. Louis Railway Company may resume and be compelled to continue performance of the obligations .and agreements of said lease until the end of said demise, and for such other and further relief as in equity and good conscience this plaintiff may, upon final hearing of this cause, prove to be entitled to.”
Charles Moran, Daniel Comyer Moran and’Amelia D. Moran, partners under the firm name of Moran Bros., file an answer and cross petition, setting up that they are shareholders of the Muskingum Valley Co. since 1370, as individuals and trustees, to the number of 28,250 shares; they admit the averments of the petition, and ask that they may be taken to have been made by them as fully and completely as if they were recited and fully set out in their answer and cross petition, and they join in the prayer of the petition.
The Pittsburgh, Cincinnati, Chicago & St. Louis Ry. Co. files an answer, putting in issue the allegations of the petition, and setting up defenses to the action of the plaintiff.
The Muskingum Valley Co. files an answer, adopting the allegations, etc., of the answer of the Pittsburgh, Cincinnati, Chicago & St. Louis Rail-waxy Company.
It would seem that by reason of the demand made on the Muskingum Valley Co. to take action to enfocre the lease and to compel the payment of the sums agreed in said lease to be advanced, and the refusal of said company to comply with the demand of the plaintiff, with whom Charles Moran et al. join in a cross-petition, may maintain this action in behalf of himself and his co-stockholders, for the purpose of asserting the rights of the corporation. 18 Howard, 331; 18 Wallace, 626.
Provided the action “be a bona fide one, faithfully, truthfully, sincerely directed to the benefit and interest of those shareholders whom the plaintiff claims a right to [represent. ’ ’ Forest v. Ry. Co., 4 De. Gex. F. & J. 126, 130.
In that case the court found that the plaintiff was a shareholder in a rival company, and brought the suit by direction of that company, who indemnified him against costs; that he was a puppet of that company, and therefore could not maintain the action.
And to the same effect are the cases in 54 Penn. St. 402; 1 Hemming .& Miller, 489; 8 Law. Rep. Eq. Cases, 301.
It appears that the plaintiff is a bondholder, and that if this suit is successful, interest will be paid on his bonds. This interest in the matter certainly does not show mala fides on his part in bringing the suit under the rule laid down in Forest v. Ry. Co. supra.
If it be true that the lease is still in "force as claimed by the plaintiff, the rights of the company with reference to the lease are involved, and the company, refusing to take steps to protect them, the plaintiff may maintain the action; but only to enforce the corporate right, not the individual rights of the plaintiff. 1 Morawetz on Corporations, 2 Ed. sec. 271.
The company certainly has a great interest in the action; its continued existence would seem to depend on the result. Yet it is contended by the defendant that the stockholders have no interest in the matter; that the action can in no way benefit them. I cannot appreciate this argument. The stockholder has an interest in the continued existence of the company and in the payment of its debts. It is true he is not liable on the bonds or for the coupons, but by the payment of the coupons, the property of the company is relieved from the debt and becomes more valuable to the corporation, consequently to the shareholder.
*142I think the evidence shows a combination of the Pan Handle Co. and Muskingum-Valley Co. through the Pennsylvania Railorad Co. to cancel the lease, which presents a case of equitable jurisdiction for specific performance of the obligations of the lease. (Penn. Co. v. St. L. A. & T. H. R. R. Co., 118 U. S. 290.)
It is claimed by the defendants that the decree of the Circuit Court of the United States in the action brought by Charles Moran to foreclose the mortgage is, as to all questions, litigated and decided in said cause, binding and conclusive on the Muskingum Valley Co. and all of its stockholders.
The bill in the United States Circuit Court was filed by Charles Moran, as surviving trustee under the mortgage executed by the Muskingum Valley Co. and in his own behalf and that of the holders of bonds of the Muskingum Valley Co. secured by said mortgage for the purpose of foreclosing said mortgage, and claiming said lease to be in full force and covered by said mortgage under said lease to the payment of the bonds secured by said mortgage.
This action is brought by Evan J. Henry, an owner of capital stock of the Muskingum Valley Co., in his own behalf, and also in behalf of another stockholders of the company who may see fit to join in the prosecution of said action and contribute to the expense thereof, for the purpose of enforcing the rights of the company under the lease — the company itself refusing to act — and Moran Brothers, as stockholders of said company, by a cross-petition, join in the relief prayed for.
The plaintiff cites Bigelow on Estoppel (4 Ed. 128, 5 Ed. 130), which lays down the rule that:
“Judgments, as a general rule, conclude the parties only in the character in which they sue or are sued,” etc.
This is quoted and affirmed in 99 Ind. 496. Also in 102 Ind. 27. In 58 N. Y. 463, it is laid down that:
“A judgment against a paitv sued as an individual is not an estoppel in a subsquent action in which he sues or is sued, in a representative capacity. ’ ’
'And in 45 Cal. 444, the court say:
“In order to determine if the former judgment can be availed of as a bar in a subsequent suit, we must inquire whether the former litigation was between the same parties in the same right or capacity litigating in the subsequent suit, ’ ’ etc.
In the Moran case the issue was as to the right of the mortgagee to subject the rights of the Muskingum Valley Co. in the lease to the payment of the bonds. The court hold against such right. While the Muskingum Valley Co., lessor, and the Pan Handle Co., lessee, were both parties defendant, I do not see qn what principle they could have had a hearing as to their respective rights under the lease so as to bring the case within 109 U. S. 163, or how the rights of the Muskingum Valley Co. in the lease could be adjudicated so as to bring the case within 22 Ohio St. 191.
I do not think, therefore, that the rights of the MuskingumValley Co. sought to be enforced in^this proceeding, areres ad judicata under the decree in the Moran case.
The defendants claim that the agreement of the lease was in its terms and operation greatly inequitable, unreasonable, hard and oppressive on said Pan Handle Co., and — claiming that the road and property had been surrendered to the lessor and that the lease had been terminated by the act of the parties — that the re-establishment of the lease and the enforcement of its provisions against the P. C. C. & S. L. Ry. Co. would be *143grossly inequitable, unreasonable, hard and oppressive on said company, and without any equivalent consideration, past, present or prospective.
I think equity will grant specific relief under a contract, when it is apparent, from a view of all the circumstances of the particular case, that it will subserve the ends of justice; but that it will withhold such relief when it appears that, from circumstances connected with its inception, the enforcement of the contract would be unreasonably harsh and oppressive, or when it appears that the contract was fair and just when made, but from subsequent events its enforcement would be unreasonably harsh and oppressive; and without any corresponding advantage to the party seeking performance. Trustees of Columbia College v. Thacker, 87 N. Y. 311, 317; Amermanv. Dean, 132 N. Y. 359; Willard v. Taylor, 8 Wall. 557, 566; P. C. R. R. Co. v. C. J. R. R. 13 Ohio St. 544, 556. Also to the same effect: 36 Iowa, 253; 36 Ohio St. 24; 43 Ohio St. 178, 183; 1 C. C. R. 275; 3 Pomeroy Eq. Opinion, sec. 1405.
Were' there circumstances connected with the execution of the contract of lease which would render the enforcement of its covenants against the lessee unreasonably harsh and oppressive?
On the reorganization of the Muskingum Valley Co., in 1870, a large majority, but less than two-thirds, of its capital stock, was distributed to the Pennsylvania Railroad Company and to the Pan Handle Company, and said stock was transferred to the Pennsylvania Company in 1872, and has been held by it since that time.
During this time, and until 1890, the Pennsylvania Railroad Company and Ihe Pennslyvania Company held over two-thirds of the capital stock of the Pan Handle Company, and the Pennsylvania Railroad Company owned and held the entire stock excepting a small amount outstanding for the purpose of qualifying directors of the Pennsylvania Company.
This ownership of stock in the Pennsylvania Railroad Company gave that company the entire control of the Pan Handle Co., and the control of the Muskingum Valley Co., in all matters save where the concurrence of two-thirds of all the stock was required.
Of the seven directors of the Muskingum Valley Co. in’ 1872 and 1878, three were also directors of the Pan Handle Co.; Mr. Jewett, the president of the Muskingum Valley Co., was the general counsel of the Pan Handle Co. and a director and general counsel of the Pennsylvania Co.; Mr. Scott, one of the directors of the Muskingum Valley Co., was the president of the Pan Handle Co., and, as stated in the argument, of the Pennsylvania Ry. Co.
The history of the transaction, as shown in the letters and in the action taken by the directors and stockholders of the lessor and lessee, shows a determination on the part of the lessee, represented by Mr. Scott, to obtain a lease upon the Muskingum Valley Road. Mr. Scott was able, through the Pennsylvania R. R. Co., to control the directors of the two companies, and to control the vote of two-thirds of all the stock of the Pan Handle Co., but could control the vote of only a majority of ihe stockholders of the Muskingum Valley Co.
Moran Bros, could control the vote of one-third of the stockholders of the Muskingum Valley Co., and it was therefore within their power to defeat any action of that company which required the approval of a two-thirds vote of the stockholders.
From the time a lease was submitted to Mr. Moran, representing the minority stockholders, in May, 1872, to the time of the meeting of the stockholders of the Muskingum Valley Co., on January 9, 1873, there was a continual pressure on the part of Mr. Scott to have the lease executed, and a continual resistance on the part,.of Mr. Moran to its execution upon *144the ground that the terms of the proposed lease did not protect the minority stockholders and the bondholders of the Muskingum Valley Co.
During this time the rights of all the parties were fully discussed and fully understood. The various drafts of the leases were drawn on behalf of the lessee by the officers of the lessee; the lease which was finally executed was drawn by Mr. Jewett, president of the lessor, but also the general counsel of the lessee.
Mr. Jewett, as president of the Muskingum Valley Co., certainly had full information of the condition-of the road, of its earning capacity, of its prospective value as a feeder for the proposed lessee, and it may be assumed that he, as general counsel for the proposed lessee, advised Mr. Scott fully. Mr. Scott, as director for the Muskingum Valley Co., should have had, and in all probability did have, all such information independent o£ the advice of Mr. Jewett.
In the negotiations it was apparent that Mr. Jewett, as president of the Muskingum Valley Co., and Mr. Scott, as president of the Pan Handle Co., were acting in unison, and for the same purpose. They evidently thought a lease was for the benefit of both companies; that thereby the Pan Handle would get the advantage to be derived from the operation of the Muskingum Valley Road in connection with its road, that the business of the Muskingum Valley Road could be operated at a less expense proportionately, and that its business would be developed to the advantage of the stockholders of that company. They could control the necessary two-thirds vote of the Pan Handle stockholders, but they could only control a majority of the stockholders of the Muskingum Valley Co. Consequently, negotiations with Mr. Moran, who controlled one-third of the stock of the Muskingum Valley Co., became necessary, and for the purpose of obtaining the consent of Mr. Moran concessions were made after due deliberation and with full knowledge of the circumstances. It would not seem that Mr. Scott or Mr. Jewett, representing the owners of the roads, would have made these concessions had they not known that they were proper to be made.
It is claimed that they wei’e acting under the prevailing power of and in the interest of the Pennsylvania Railroad Co., the owner of a large majority of the stock of the Pan Handle Co. So long as the Pennsylvania R. R. Co. controlled by the election of directors and by the vote of its stock in the two companies, in a legal manner, and without fraud, and so long as the officers so elected by it acted without fraud, it seems to me their acts would be legal.
It was understood by all parties that it was in the power of the Pan Handle Co. to so operate the leased road in connection with its road as to increase or diminish its earnings as it would see fit. This is repeated by Mr. Moran in his letters.
The road and property was placed in the hands of the Pan Handle Co., in confidence that it would be operated in such manner as to make the arrangement a success.
Mr. Moran, in his letter of January 6, 1878, to Mr. Scott, says:
“I have thus given up nearly every stipulation for the protection of the minority interests of the shareholders of the C. & M. V. Ry. C., placing my interest entirely in your hands, and must look to you and your company to so arrange the affairs of the road as not to make me regret the confidence I have placed in you. ”
Have subsequent events transpired which would render the enforcement of the lease a hardship or an injustice to the lessee?
It is clear from the evidensce that in the operation of the road under the lease from 1879 to 1885, the lessee expended large sums of money in excess *145of the amounts received from the road, and that, m the operation of the road from 1886 to and during the year 1894, large amounts were also expended in excess of the amounts received, and that additions and improvements became and were necessary during said time.
If we should consider simply the amount of earnings received from the road, and the amounts expended in its operation during these years, the contract of lease would certainly appear to be a hard one.
But it seems to me, under the authorities, the subsequent events, which would relieve the lessee from the covenants of the lease, must be such as could not have been reasonably foreseen.
The court, in B. E. & C. R. R. Co. v. N. Y. L. E. & W. R. R. Co. (128 N. Y. 316), say on page 330:
“A contingency has happened in the case not within the contemplation of either of the parties to the contract, to-wit: The continuous failure of the plaintiff company to earn money enough to pay all of its operating expenses, etc * * tinder these circumstances no specific performance will be decreed. ’ ’
In that case the company was chartered in 1881; the contract was made in 1888; in 1882 the road had earned more than enough to pay operating expenses and interest and a dividend to its stockholders. The operation of the road was left in the hands of the company owning it. It would seem, under these circumstances, that the parties might reasonably anticipate success in the future operation of the road, and that failure would be a disappointment. The court say:
“It never could have been contemplated that Abe company would permanent!}' cease to earn enough even to pay operating expenses, and it cannot be supposed that it was ever in the thoughts of the two officers of either of the two companies that the time would speedily come when such a continegncy would arise and seemingly become fixed a financial condition.” Ib. 828.
In the case at bar, however, the original company was organized in 1851; in 1857 the mortgage securing the bonds was foreclosed for defarilt in payment of interest; a new company was organized, and in 1869 its mortgage, securing the bonds, was foreclosed for default, in payment of interest.
Thus, in a history of nearly twenty years, the owners of the road had not been able to make sufficient out of its operation to pay the expenses of operation and interest.
On the reorganization by the present company in 1870 the road was extended to Dresden Junction, thereby probably increasing its earning capacity; but its bonded debt was also increased.
In the year ending March, 1872, it was operated at a profit over and above all expenses and interest on its bonded indebtedness, and representations were made during the year 1871 and 1872, by the officers of the company, that the road was earning sufficient to pay its expenses and the interest; but for the next fiscal year ending in March, 1873, it was again operated at a loss.
So that during all but one yaer, out of some twenty two years, prior to the execution of the lease, the road had been operated at a loss.
The repairs, additions and improvements which were necessary on the road for .its successful operation at the time it passed into the hands of the lessee, are strong evidence that the companies owning it prior to that time had not been earning sufficient money out of the road to put it in good condition, or keep it in good condition.
Could the lessee, with full knowledge of these facts, reasonably'anticipate that the road, depending upon its own resources, would be able to *146earn in the future more than it had in the past, or was earning during the year in which the lease was executed?
The fact that, subsequent to the execution of the lease, competing roads were built, would hardly relieve the lessee in this matter, as it Avould hardly count on having no competition during the term of the lease.
It is evident that Mr. Moran, representing the minority stockholders, did not anticipate that the road would earn sufficient to pay the interest. It was for this reason, as shown by his letters, that he fought so long, and finally with success, for a covenant in the lease providing that the lessee should advance money to pa the interest on the oonds in case of a deficiency. It was his opinion that the earnings of the road would depend entirely upon the operation of the same by the lessee in diverting traffic to or from the same; that if the lessee would permit traffic to go over the leased road from its road, which he urged would be the most economical way of doing the business, the operation of the leased road would be made profitable; and that in the absence of such manner of operating the road the results would be doubtful.
Mr. Scott was more hopeful. Thinking, and urging on Mr. Moran in his letter of November 19, 1872, that by putting on additional equipment and by developing its coal trade with Cincinnati and Cleveland through additional connections, the road could be developed without calling upon the stockholders as ultimately to make it a valuable property.
But Mr. Moran was apparently not satisfied, and still insisted upon the covenant, that the lessee would advance the money to pay the interest, the sums so advanced to be repaid only out of the future earnings. The reluctance on the part of Mr. Scott with which such covenant was incorporated in the lease would indicate that Mr. Scott had very little faith in the future prospects of the road, so far as its earning capacity was concerned. In fact, in that letter he wrote that they might find themselves in a very embarrassed condition by issuing additional bonds unless the stockholders would take them.
It is claimed that the lessee could derive no profit from the lease or the earnings of said railroad in any event, as the entire net earnings were to be turned over to the lessor company.
Mr. Scott, in his letter of November 19, 1872, in discussing the question of the lease, says that his company, the Pan Handle, is “willing to work the line and give the stockholders all the net results.”
This purpose of the Pan Handle Company is carried out in the lease. It was, therefore, contemplated during the time the negotiations for the lease were going on, and at the time the lease was executed, that the Pan Handle Co. should derive no profits from the earnings of the road in any event.
But it does not appear that the lessee would derive no profit from the lease.
Considering all the circumstances in the case, it seems to me the purpose of Mr. Scott in obtaining a lease on the road for the term of ninety-nine years — and in order to obtain which he was willing to make the concession required by Mr. Moran — was that the road would thereby become a permanent feeder for the Pan Handle lines; that thereby the Pan Handle lines would get the advantage which might accrue to them by operating the road in connection with them during the term of the lease.
This seems to be the only reasonable solution of the acts of the parties.
It is claimed under Gear on Landlord & Tenant, sec. 11; Fry on Specific Performance, sec. 982; 1 Young & Collier, 841; 8 Vesey, 92; 8 Hill Ch. 140, that the agreement will not be specifically enforced because the lessor is insolvent. But the lessor was insolvent, as set up in the answers, *147and, as I think, to the knowledge of all parties, when the lease was executed. Its insolvency is not a subsequent event. The contract ivas made by an insolvent corporation.
The money to be advanced to pay interest was to be paid out"of the subsequent earnings of the road, and not otherwise. Therefore, as the lessee could have no claim over against the lessor for the same, it is immaterial whether the lessor ivas solvent or insolvent. In that respect this case is distinguished from 128 N. Y. 816, supra., in which the court found there was no obligation on the part of the company receiving the money to repay the same.
The judge of the United States court, on practically the same testimony that has been submitted to me, has held that “that court would not compel the lessee to specifically perform the provisions of said lease or enforce the lessee’s covenant to make advances beyond the net earnings of the demised road sufficient to pay the interest on the lessor’s bonds and leave it to look alone to the future earnings of an insolvent road for its reimbursements, because the enforcement of that agreement would be grossly inadequate, unreasonable, hard, oppressive on the lessee, and without any equivalent consideration, past, present or prospective, etc.”
I can only say that, under the authorities, and in view of all the circumstances of the case, I can not agree ivith the learned judge of the circuit court in his view of the harshness of the contract.
That the enforcement of the contract would be a benefit to the lessor is manifest. It would pay its debt and would protect its property from being sold under the threatened decree of foreclosure.
It is claimed on behalf of the defendant that the condition of the lease that the lessee will advance the needful means to pay coupons at maturity in the event the net earnings of the leased road are not sufficient to protect the interest on the first mortgage bonds as it matures, was an agreement to lend the money to the lessor in expectation of being repaid, and that, as the lessor is insolvent, and as repayment will not be made, a court of equity will not enforce the agreement; and counsel cite the Eldred and Cuba R. R. Co. v. The New York, Lake Erie & Western Ry. Co., 123 N. Y. 316, in support of the proposition.
The Eldred Road, connecting with the Erie Road, had been constructed by parties in interest with the Erie Company with a view of contributing business to the Erie Company, and the Eldred Company needing assistance form the Erie Company, agreed with that company: First, To deliver all freight and passengers to that company for transportation that it could control or influence, and to use its influence to promote the interests of that company; and, Second, For the purpose of protection of the Erie Company in rendering assistance to the Eldred Company under the contract, the Eldred Company would cause to be deposited with the Erie Company a majority of the capital stock of the Eldred Company, upon which, as long as the management of the Eldred Company shall be satisfactory to it, the Erie Company would give the right to vote to such representative of the Eldred Company as shall be designated by it.
The Erie Company agreed: First, To use its influence to promote the interests of the Eldred Company; and, Second, “That upon condition that the corporate control of the Eldred Company shall become and remain vested in the Erie Company, as above provided, the Erie Company will make good any deficiencies in the net earnings of the Eldred Company, to meet the interest upon its present bonded indebtedness from time to time as the same becomes due and payable, and for any and all advances so made by it, with interest thereon, as well as for any and all advances made to said Eldred Company by the Erie Company for other *148'purposes, with interest thereon, the Erie Company shall have, and is hereby granted, a first lien upon the railroad franchises and property of the Eldred Company next after its bonded indebtedness aforesaid, and a first charge upon its surplus earnings next after the payment of the accruing interest upon its said bonded indebtedness.”
The Eldred Company duly performed the agreement on its part, and, there being a deficiency in the net earnings to meet the interest on its bonded indebtedness, and the Erie Company failing to make the same good, the Eldred Company brought an action for an account and asked for judgment for the amount that should appear to be due on the account. A decree in favor of the plaintiff was entered in the court below, which was “substantially a decree for the specific performance of a simple contract to advance money to the plaintiff company. ’ ’
The Court of Appeals say, p. 825: ‘ ‘ Generally speaking, equity does not decree a specific performance of such a contract. This case is sought to be distinguished form this general rule by the fact that the defendant, under this contract, while bound to make the advances, even if there were an entire failure of net earnings, had no right under it to claim repayment of such advances until net earnings should be made, and that the repayment must proceed from such fund. It is urged that this is one of. the chances taken by the defendant when it agreed to make such advances, and that the consideration for such agreement to advance and to rely for repayment upon the future existence of a fund arising from the earnings was to be sought in the other part of the agreement by which the defendant was to reap the advantage of the so-called traffic arrangement between the two companies. ’ ’
But the court say, p. 887: “The whole substance of the agreement, so far as the advances are concerned, is that an obligation is assumed by the defendant to advance money enough to make up any deficiency in the net earnings to pay the interest on the bonded indebtedness of the plaintiff company, and that company was placed thereby under an equal obligation to repay to the defendant the amount of such advances upon demand, or, in other words, immediately. Such an obligation is not the subject of a decree for a specific performance in equity. If there be any remedy at all, that remedy is at law, by a recovery of damages. ’ ’
. And the court holds that in an action at law there must be proof of damages, and says:
And it is equally plain that it must be a rare case indeed where it can be said that a person has sustained any damages by the refusal of another to advance money which he has agreed to advance, where the person to whom it .is to be advanced is bj^ the agreement under a valid obligation to pay it back immediately. ” It is therefore clear that the reason of the court in holding in this part of its decision against the claim of the plaintiff, was because, under the agreement, there was an obligation on the plaintiff to repay such advances as should be made by the defendant; that the provision for a lien on the franchises and property of the company and a charge on the earnings were in the nature of securities for the obligation of repayment.
The first drafts of a lease submitted by Mr. Scott to Mr. Messier contained no provision relating to the repayment of the coupons by the lessee. To this objection was made. He wanted a guaranty on the part of the lessee to pay the interest.
After much negotiation another draft of a lease was submitted, with a stipulation that in the event the net earnings of the leased line were not sufficient to protect the interest on the mortgage bonds as it matures, the lessee “shall advance the needful means to pay the coupons at maturity, *149charging any such advance over the net. earnings, in open account, to be returned out of subsequent earnings.”
But this was still not satisfactory. Fears were had and expressed that there could be a recourse on the lessor for the money advanced. The fears were quieted by the assurances of Mr. Scott, but Churchill and Fillmore were not satisfied, and so wrote Moran, and as a result Moran wrote his letter of January 6, 1873, with a postscript to the effect that the lease should express, in clear language, that the Pan Handle Co. should look only to the future earnings of the leased road for reimbursement of any advances, and as a result of these further negotiations, at the meeting of the stockholders of the Muskingum Valley Co., on January 9, 1873, the words, “and not otherwise,” were added to the stipulation in the lease as to the reimbursement of money advanced.
It seems to me clear, from the history of this stipulation in the lease, that the intention of the parties was that the lessee should have no recourse on the lessor company for advances made. The lessee should look only to the subsequent, earnings of the road, and the lessor company was not placed under an obligation to repay to the lessee company the amount of any such advances. The consideration for such agreement to advance and rely on the subsequent earnings of the leased road for repayment, is to be sought in the other part of the agreement, by which the lessee was to reap the advantage growing out of the control of the leased road.
It would seem, therefore, that the contract in this ease for the advancement of money <o meet the interest on the mortgage bonds of the lessor company is distinguished from the contract in the 128 N Y. case in the point on which the decision of that court, in this part of its decision turned.
The defendants further claim, “that in said alleged agreement, of lease it was expressly provided that said Muskingum Valley Co. should, at its own expense, perfect and completely finish its said railroad, and should also, at its own expense, make and finish such additions and improvements thereto as said Pan Handle Co. should determine to be necessary from time to time for the prompt and economical movement of the traffic on and over said road; that said Muskingum Valley Co. was unable and wholly failed to perform said covenant on its part to be performed, and by reason thereof said Pan Handle Co., in order to operate said road with safety, was compelled to and did expend for said purpose up to December 31, 1884, the large sum of $140,000.00 and over, and that said Muskingum Valley Co. has not refunded said sum, or any part thereof, and has not been and never will be able to do so. ”
The lease provides, ‘ ‘ that certain work yet to be done and required to perfect and completely finish the said road hereby demised, as well as such additions and improvements thereto as the parties of the second part shall determine to be necessary from time to time for the prompt and economical movement of the traffic on and over said road, shall be done by and at the expense of the said first party. ”
It is claimed by the plaintiff that the money to pay for the additions and improvements was to come from the gross receipts and be paid as an addition to operating expenses; that this provision is in form and fact a provision to an agreement for the appropriation of the earnings of the property, and in legal effect is a stipulation and nothing more, that there should be added to the operating expenses before the ascertainment of the net earnings or “surplus” the amount of these betterments to be settled between the parties as best they might; then to pay the surplus, if any should thereafter remain to the treasurer. If, however, the provision is to be treated as a covenant, it is an independent covenant, and the con*150sideration is the promise, not its performance. It is claimed by the defendants that, while this stipulation is included in the part of the lease providing for the disbursement of the earnings, it is not a part of the same; that it is a specific stipulation under which an obligation rests on the Muskingum Valley Co. to make the additions and improvements or to repay the expense of the same; that the agreements of the lessee under the lease are dependent upon the performance by the lessor of its stipulation to make the additions and improvements; that the covenants are dependent, or at least mutual. But whether the covenants are dependent or independent is immaterial, as a court of equity will not grant specific performance if it would bp inequitable or unconscionable, and that the stipulation in regard to the additions and improvements was an important one. It was a large part of the consideration for the agreement on the part of the Pan Handle Co. to maintain and operate the railway and to collect and apply its income; a failure to make the betterments would essentially interfere with the beneficial enjoyment of the premises leased.
The defendant, by its answer, avers that the “Muskingum Valley Co. operated the railroad and property up to May 1, 1878, and its earnings were insufficient by a very large amount to pay the interest which matured on its said bonds, and said company was insolvent throughout the years 1872 and 1873, and up to and through the year 1885, ” etc. It seems to me that the evidence in the case fully establishes this averment* While it appears that in 1872 the road was run at a net profit, yet it appears that for the year ending March 31, 1873, it did not produce a sufficient amount of earnings to pay the interest on its bonds. While ,a balance may be figured out from the reports to have been in the hands of the company in April, 1872, yet it appears all through the case that the company was not then and never had been in a condition financially to pay the interest on its bonds and to maintain its road in a manner necessary for the prompt and economical movement of the traffic.
It is claimed by the defendant “that not long after the lease was made the Valley Company became wholly insolvent, and has ever since remained so. When the improvements and additions were made by the Pan Handle Co., the Valley Co. had ho means, and was insolvent.” But it seems to me, under the answer of the defendant and under the evidence in the case, the Muskingum Valley Co. was insolvent at the time the lease was executed, and has been insolvent long prior thereto.
At the time of the execution of the lease all the- property of the Muskingum Valley Co. went into the possession of the lessee. That no property was left in the hands of the lessor is apparent from the provisions in the lease, that the lessee should advance not to exceed $2,000.00 a year to defray the expenses of maintaining the corporate organization of the company if the net earnings of the road under the lease should not be sufficient.
The lessor had nothing out of which to pay the expenses for additions and improvements except the net earnings which it might receive under the lease.
These are the circumstances under which this agreement as to additions and improvements was made, and it must be construed with reference to them. It was clearly not contemplated that the lessor should pay such expenses on demand, as by the act of the lessee in taking possession of the property, the lessor was deprived of its capacity to earn money, and it was only in the event that the lessee should operate the road in such a manner as to produce a surplus of earnings that the lessor would have anything with which to pay.
It could hardly have been contemplated that the payment should be a condition precedent to the continuation of the lease, as, if it were, then *151the contract of the lease, which was for ninety-nine years, had, to the knowledge of the parties, that within it which destroyed it almost at its inception.
It is contended, however, that if the Muskingum Valley Co. had no other recourses, the parties may have expected that in case of necessity therefor the stockholders or the bondholders would contribute funds to enable it to make such additions and improvements.
I do not think the circumstances, as shown by the evidence, indicate any intention on the part of the stockholders or of the bondholders to make any further advances. They were willing to issue more bonds .providing Mr. Scott thought the earnings would be sufficient to pay the interest; but he was fearful, and the bonds were not issued.
It is true the constitutional liability of the stockholders for the payment of debts existed, but there is.nothing to indicate that the parties contemplated payment of this debt by the enforcement of this liability.
In the letter of June 7, 1872, Mr. Moran objects to this provision, and asks out of what the expense shall be paid, if they exceed the surplus earnings; and in the letter of October 18, 1872, he suggests that the provision be made to read that no expenditures for such work shall ever be made in excess of the surplus earnings after payment of interest, etc.
An interview was had between Mr. Moran and Mr. Scott, at which many things seemed to have been agreed upon, and on another draft of the lease being subsequently submitted to Mr. Moran, containing the same stipulation, Mr. Moran, in his letter of December 12, 1872, makes no objection to the provision further than to suggest that it be changed so as to provide that the work be done by the lessor in place of the lessee. That Mr. Moran was at this time not unmindful of claims accumulating against the lessor which the lessor might be called upon to pay, is shown by his remonstrance in this letter against any claim accumulating for money advanced to pay interest. Had -he not then understood that the expense of the additions and improvements should be paid only out of the earnings, he certainly would then have protested.
In the postscript to the letter of January 1, 1873, Mr. Moran says the lease should express in clear language that the lessee should not have power to sell the road through any advances made for construction account. In his letter of January 6, 1873, to Mr. Scott, Mr. Moran, being satisfied that the road could not be sold to pay for money advanced for interest, makes no objection to the provision as to money advanced for additions and improvements.
In the letter written to Mr. Churchill, on December 29, 1872, Mr. Moran says that Mr. Jewett and Mr. Scott call his attention to the fact that increased earnings require additional side tracks, equipment, etc., and that the lessee cannot be expected to incur them if they are to be at his sole risk, so long as the earnings are inadequate to defray them. While the letter of Mr. Jewett to Mr. Moran, of December 25, 1872, is not very clear, yet it would seem to indicate that Mr. Jewett contemplated that the expense of the additions and improvements was to be paid out of the earnings.
The Pan Handle Co. entered into the contract of the lease with the Muskingum Valley Co. knowing that it was insolvent. Under the lease the Pan Handle Co. took possession of all the property to be operated by it and to pay the surplus over to the Muskingum Valley Co. The Pan Handle Co. knew that the Muskingum Valley Co. had no means with which to make the additions and improvements or with which to pay for the same save as there might be a surplus of earnings produced by its *152operation of the road". Therefore the Pan Handle Go. could not have anticipated that the Muskingum Valley Co. would either make the additions and improvements, or would pay for them, save as it could do so out of surplus earnings, and the lease must have been executed with the understanding on the part of the Pan Handle Co., as well as on the part of Mr. Moran, that the additions and improvements were to be made by it and paid for out of the earnings of the road. And as the Muskingum Valley Co. had nothing with which to pay except the surplus earnings, settlement as between the lessor and lessee should be made out of them. The Pan Handle Co. made the additions and the improvements, and at no time made demand on the Muskingum Valley Co. for payment.
This is the contract the Pan Handle Co. made with full knowledge of all the. circumstances. It did or should have, anticipated all the results. I do not think the failure on the part of the Muskingum Valley Co. to make payment, or the failure of the Pan Handle Co. to produce a surplus out of which payment could be made, are subesquent events which would fender the enforcement of the contract unreasonably harsh or oppressive.
Tiedeman on Real Property (2 Ed.) sec. 194, lays down the proposition: “Nor is the lessor’s performance of his covenant to repair a condition precedent to the tenant’s liability on his covenant for rent.”
This is supported by the case of Newman v. French, 45 Hun 65, and under this authority it would appear that the covenants are independent.
The defendants claim that the net earnings of the Muskingum Valley Co. in the operation of its road up to Maj^ 1, 1872, were insufficient by a large amount to pay the interest on its bonds; that said company was insolvent in 1872 and 1878, and up to and through 1875; that in 1872 and 1878 the Pan Handle Co. was doing a prosperous business and had, after paying all operating expenses, a large surplus of net yearly earnings; that prior to 1873 the bonds of the Muskingum Valley Co. were of little value because of the insolvency of the company and its inability to pay interest; that the negotiations for the lease were entered into in 1872, and it was not then contemplated that the Pan Handle Co. should advance any means to pay interest on the bonds of the Muskingum Valley Co.; that through the years 1872 and 1878 the president of said Muskingum Valley Co. was a director and general counsel of the Pan'Handle Co., and also general counsel of the Pennsylvania Co.; that the Pennsylvania Railroad Co. and the Pennsylvania Co., who owned alarge'majority of the stock of both said Pan Handle Co. and the Muskingum Valley Co., had, as owners of $752,000.00 of the bonds of the Muskingum Valley Co., large pecuniary interests directly adverse to the interest of the minority stockholders of the Pan Handle Co., and by means of their control of the latter company caused said alleged agreement of lease to be executed by its officers; that the provisions of said lease were directly adverse and greatly prejudicial to the interest of the minority stockholders of the Pan Handle Co., and were in law a fraud upon their rights and void.
It is clear that the Pennsylvania Railroad Co. and the Pennsylvania Co., through its ownership of a majority of the stock of the Pan Handle Co., controlled in the election of directors of said company, and the evidence shows that at the meetings of the stockholders of the Pan Handle Co. at which the subject of the lease was under consideration, said com, panics voted their stock in favor of the lease. It is also clear that the Pennsylvania Co., through its ownership of a majority of the stock of the Muskingum Valley Co., controlled in the election of directors of that company, and the evidence shows that, at the meeting of the stockholders of that company, the Pennsylvania Co. voted its stock in favor of the lease.
I take it to be the law that the stockholders of a corporation, so long *153as they act within the law and in good faith, may vote their stock for such persons as directors and for such measures as to them may seem best; and that, in doing so, they are not bound to observe the wishes or interests of other stockholders. (L. R., 9 Eq. 354.)
The fact that the Pennsylvania Railroad Co. owned the majority of the stock of the Pennsylvania Co., and that these two companies owned the majority of the stock of the Pan Handle Co. and of the Muskingum Valley Co., would not preclude them from voting their stock; but it must appear that they acted in good faith towards the minority stockholders. (Cook on Stock and Stockholders, 8 Ed., sec.662.) It certainly appears that the Pan Handle Co. and the Pennsylvania Railroad Co. and the Pennsylvania Co. acted in unison to effect the lease; but such action was the result of the control of the Pennsylvania Railroad Co. over the other companies by the ownership of stock. But the mere fact that it owned the majority of stock does not raise a legal inference of undue influence. (120 U. S, 670.)
The Pan Handle Co. acted in the matter by its directors duly elected by the stockholders, and their action was approved by the vote of 135,800 shares for, to 1275 shares against the lease, at the meeting of December 80, 1872; and by the vote of 185,841 shares for, and none against the lease, at the meeting of March 18, 1878 — the total stock of the company being 168,671 shares. The large majority by which the lease was ratified by the Pan Handle Co. shows that the stockholders of that company were practically unanimous in ratifying the lease as being for the best interests of the company. (54 N. Y. Sup. Ct. 179.)
The Pennsylvania Railroad Co. held a majority of the bonds of the Muskingum Valley Co., which were bearing 7 per cent, interest. It was clearly to its advantage to have the interest paid; but at the same time the Pennsylvania Railroad Co. held over two-thirds of the stock of the Pan Handle Co., and payment of the interest by the Pan Handle Co. was to the detriment of the Pennsylvania Railroad Co. I think a mathematical calculation shows that its loss on its stock by the payment of interest was greater than its gain by receiving interest on its bonds. The loss to the minority stockholders by the payment of interest was greater in proportion than the loss of the Pennsylvania Railroad Co., as it was not off-set by the receipt of money as interest. While the interests of the majority stockholders and of the minority stockholders were different in degree, yet they were not antagonistic. The payment of interest on the bonds was detrimental to both.
Under these circumstances, could it be said to be a fraud on the part of the Pennsylvania Railroad Co. to vote for the lease?
If there was fraud on the part of the majority to the prejudice of the minority stockholders, he may have his remedy. “A court of equity will intervene and protect the minority upon an application by the latter. ” (Cook on Stock and Stockholders, 3 Ed., sec. 662; L. R., 9 Éq. 35.) Provided they are nob barred by laches. Peabody et al. v. Flint et al., 88 Mass. 52, 57.) But I cannot appreciate upon what principle the Pan Handle Co. can, in this case, set up that by a vote of the majority of its stockholders it entered into an agreement to the prejudice of the minority stockholders, and asked to be relieved from the covenants of its agreement, otherwise valid. If we can recognize in this case the majority stockholders and the minority stockholders, then we must recognize that it is the same majority stockholders who caused the execution of the lease, who are today claiming that by doing so they perpetrated a fraud upon the minority stockholders, and that by reason of having perpetrated such fraud they should be relieved of their agreement. Even if the lessee corporation *154could be heard to set up the right of its minority stockholders, I think that under the circumstances of the case it would be barred by laches. (145 U. S. 408.)
The minority stockholder is not here complaining. He brought his suit in Jefferson county, setting up all matters now set up by the company, but he dismissed his case and went out fo court.
Three of the directors of the Muskingum Valley Co. were also directors of the Pan Handle Co. But it would seem that in the action of directors the court will not interfere. on the ground that a minority of the board of directors of one company were also directors of the other company. between which two companies a transaction is had (84 Ohio St. 450) unless they are guilty of fraud or a breach of trust. (87 Ohio St. 556.)
The record shows no fraud on the part of the directors of the Pan Handle Co. or Muskingum Valley Co.
It is further claimed upon the part of the defendants that the alleged agreement of lease was not legally executed on the part of the Pan Handle Co., in that it was not ratified by the vote of the stockholders of said company at a meeting legally called for said purposes.
It apears, too, that at the meeting of the directors of the Pan Handle Co., held on March 17, 1873, a resolution was passed that the lease as modified be submitted to the stockholders of said company at their annual meeting, to be held on March 18, 1873; that at the annual meeting of the stockholders of said company, held at said time, the said lease was approved, ratified, etc.
It is provided by the act passed March 19, 1869, (66 Ohio L. 82), in force at the time of the execution of the lease, that:
1 ‘ Any railroad company organized in pursuance of law, either within this or any other state, may lease or purchase any part or all of any rail,road, the whole or a part of which is in this state, and constructed, owned or leased by any other company, if said company’s lines of said road are continuous or connected at a point either within or without this state, upon such terms and conditions as may be agreed on between said companies respectively;” provided that no such lease shall be “perfected until a meeting of the stockholders of said company of this state, party to such agreement, whereby a railroad in this state may be * * * leased * * * shall have been called by the directors thereof at such time and place and in such manner as they shall designate, and the -holders of at least two-thirds of the stock of such company represented at such meeting in person or by proxy and voting thereat, shall have assented thereto;” etc.
It would seem that the provisions of the statutes were complied with on the part of the Pan Handle Co., unless it be that the matter of the lease was submitted to the stockholders at the next annual meeting, in place of being submitted to them at “ a meeting of the stockholders of said company, * * * called by the directors thereof at such time and place and in such manner as they shall designate.”
It will be noticed that the statute makes no provision for notice of such meeting being given for any length of time. While the directors did not call a meeting, they ordered that the matter be submitted to the stockholders at a meeting, the time and place of which was fixed and known by all the stockholders.
Of the 168,671 shares of the capital stock of said company, 185,841 shares were voted, all for said lease, at the meeting of March 18, 1878. No protest was entered, and no objection was made by any stockholder. Under the resolution passed at this meeting, the lease was executed, the lessee went into possession, remaining in possession and complying with fl t he terms of t he lease until 1885, when Samuel Jeans brought his suit *155in Jefferson county, based upon bis protest against said lease, entered at the meeting of the stockholders of the company held December 30, 1872, and dismised the same in 1892.
Even if the point were well taken, it seems to me it is too late now for the Pan Handle Co. to raise it. (88 Mass. 57.)
And it is further contended that the power given by the legislature to one railroad company to lease the road of another company does not include the power of the lessor to make any guaranty of the obligations of the other, that such guaranty is entirely foreign to the provisions of such a lease as the legislature contemplated should be made, and that such guaranty is not obligatory on the lessor; that there is no sufficient consideration for such guaranty.
But as the legislature has given the right to a railroad company to lease the road of another, it certainly, by implication, gave the right to stipulate for the payment of a rental. In this case no specific rental is contracted for, the lessee does not guarantee the payment of the interest, but it stipulates that it will advance the needful means to pay the coupons at maturity, to be refunded out of the subsequent earnings. If by its operation of the road earnings were produced, to that extent the amounts so advanced would 'be returned; if no earnings were produced, a return would not be made. The contingency of earnings was one of the chances taken by the lessor. The amount stipulated to be paid was seven per cent, on the bonds which had been issued for the purpose of building the road— the cost of the road — with a chance of a return of the same or a portion of the same. This would not be an excessive rental.
But further, the payment of the interest on the bonds was a condition precedent to the continuation of the lease, as all the parties well knew; if the interest ivas not paid, the mortgage would be foreclosed. Surely the lessee could contract to do that which would make the lease possible.
The defendant sets up the proceedings in the suit brought by Samuel Jeans et al., in Jefferson county; that on or about January 1, 1886, the Pan Handle Co. turned over and surrendered all of said railroad and property of said Muskingum Valley Co. to the latter company; that the said Muskingum Valley Co. accepted such surrender and - resumed the control and possession of said railroad and property; that since said time the companies have regarded and treated said alleged lease as -surrendered and terminated, and said Muskingum Valley Co. had possession and control of said road and property, and operated the same ever since.
And the defendant sets up the proceedings of the directors and stockholders of the respective companies at the meeting of the directors of the Muskingum Valley Co., held January 4, 1893; at the annual meeting of the stockholders of the Muskingum Valley Co., held March 28, 1893; at a meeting of the directors of the P. C. C. & St. L. Ry. Co., held on January 5, 1893; 'at the annual meeting of the stockholders of the P. C. C. & St. L. Ry. Co., held on April 11, 1893, and claims that the said lease was can-celled and terminated, and the railroad and property were surrendered by the lessee to the lessor and accepted by the lessor.
It appears from the evidence that the action of the Pan Handle Co. in turning the property over to the officers of the Muskingum Valley Co. on or about January 1, 1886, was taken after the appeal form the decree in the Jeans case was perfected, and I suppose it could therefore hardly be claimed that the act of the company was taken under said decree. (Henry v. Jeans, 48 Ohio St. 443, 458.)
But it seems to me clear that by the dismissal of the Jeans case all proceedings in that case drop out of consideration in determining the *156rights of the parties. The question remains whether, by the acts of the parties, the lease was cancelled and terminated.
On April 15, 1878, and after the execution of the lease, an act was passed (70 Ohio L. 129) amending the act of March 19, 1869, supra. This act provides that no such lease shall be “perfected until a meeting of the stockholders of each of said companies shall have been called for that purpose by the directors thereof on thirty days’notice to each stockholder, at such time and place and in such manner as is provided for the annual meetings of said companies, and the holders of at least two-thirds of the stock of each company, in person or by proxy, shall have at such meeting assented thereto, ” etc.
Judge Jackson held in the Moran case, that “the lessor and lessee could themselves have vacated and terminated said lease by mutual agreement at any time. ’ ’
Judge Van Brunt held, in 11 Daly, 373, 377, that under chap. 218 of the Laws of 1839 (N. Y.) given below, the directors, with the assent of the stockholders, could modify the lease; and the Court of Appeals of New York, in the Beveridge case, 112 N. Y. 1, held, under the same act, that the directors could modify the lease.
It seems to me, therefore, that powers to cancel the lease existed in the corporation. The difficult proposition to determine, however, is, m what mode may the lease be cancelled?
It is claimed on the part of the defendant that while the power of one corporation to lease the road of another corporation is not one of the ordinary owers of the corporation, and does not exist except as given by special enactment, yet that a lease, having been executed by two corporations under such special enactment, the power to cancel the same is one of the ordinary powers of the corporation, and may therefore be exercised by the directors. The proposition is that the primary and main design of authorizing the formation of a railroad company is to construct, maintain and operate a railroad (sec. 3270 Rev. Stat.), not to construct roads to lease to other companies, or to lease roads from other companies to be operated. A railroad company cannot, therefore, lease its road, unless expressly authorized to do so by the legislature; but when the power to lease is granted, such power, being a “corporate power,” is to be exercised bj^ the directors under sec. 3248, Rev. Stat. If, however, the assent of the stockholders is required by the statutory provisions, a lease made by the directors does not become operative until such assent is given. And it is urged that the reason of the rule that a corporation may not lease its road without legislative authority, is that the franchise is granted to the company to be exercised for the public good, the due performance of its franchises being the consideration of the public grant. And that any contract undertaken without consent of the state to relieve such company of the burden imposed by the charter, is a violation of the contract with the state, and is void as against public policy, citing 101 U. S 71; that the power to make a lease, therefore, does not exist unless expressly conferred, because it is a departure from the objects intended to be accomplished by the grant of the franchises; but the vacation and termination of a lease simply restores the parties to their original legal and actual state established by the charter No new powers are thereby created The power to vacate and terminate a lease is therefore one of the “corporate powers” which under sec. 8248 must be exercised by the directors.
I think it is well settled by 101 U. S. 71 118 U. S. 290; lb. 630. 145 U. S. 393, that unless specially authorized by its charter or aided by some other legislative action, a railroad company cannot, by lease or other contract, turn over to another company for a long period of time, its road and *157all its appurtenances, the use of its franchises, and the exercise of its powers. Such contract is not among the ordinary powers of a railroad company, and is not to be inferred from the usual grant of powers in a railorad charter.
The reason of this proposition seems to be not only as stated by the defendant, but also as stated in 11 Peters, 421, “Public grants are to be construed strictly. ’ ’
But it seems to me to follow from this proposition that the power to cancel a lease can not exist in a corporation until the power to execute a lease is given to it. It can not be an ordinary, corporate power conferred by the charter. The corporation can not have power to loosen that which it has no power to bind.
While it is held that in grants by the public nothing passes by implication (11 Peters, 421, 546), yet the rule applicable to all statutes, “that what is fairly implied isas much granted as what is expressed, ” applies to statutes granting powers to corporations (101 U. S. 82), and it seems to me that the power to cancel may be fairly implied from the power to execute.
By the statute, no provision being made with reference to the mode in which a lease executed under it may be cancelled, it would seem the intention of the legislature was to allow its mode of cancellation to be governed by the general rule established by the law with respect to the cancellation of contracts generally.
The rule of law is laid down in Broome’s Legal Maxims, p. 877: “Nothing is so consonant to natural equity as that every contract should be dissolved by the same means which rendered it binding. ” * * * “An obligation is not made void but by a release; for “naturale est quidlibet dissolvi eo modo quo ligatur. ’ ’ A record by a record, a deed by a deed, and a parol promise or agreement is dissolved by parol, and an act of parliament by an act of parliament. This reason and this rule of law are always of force in the common law. ” lb.
If, therefore, the agreement to lease is not perfected until ratified by the stockholders under the statute, an agreement to cancel the lease would not be prefected until ratified by the stockholders under the statute.
It would seem this rule of law is applicable, not only because it is a rule of law, but because its application is necessary to carry out the intention of the legislature in making provision for the execution of a lease.
The lease of a road necessarily affects the interests of the stockholders of the lessor and lessee companies.
Judge Gholson says, in 1 Disney, 92: “The legislature has, in some cases, in respect to some matters, authorized action on the part of stockholders, and directed their assent to be obtained. Such provisions will be found in the general railroad law, and they are on points vitally affecting the interests of the stockholders. ’ ’
It was clearly the intention of the legislature that the interests of the stockholders should be protected, not only through their directors,' but also by the power given them to ratify or reject a proposed lease; the act of April 15, 1873, even providing that any stockholder who shall refuse to assent to the proposed lease, shall be entitled to receive from the lessee the average market value of his stock.
It certainly could not be rightfully claimed under these statutes that after the lease had been executed containing the provision for the advancement of money to pay interest on the bonds, which was inserted at the instance of Mr. Moran and for the purpose of getting the stockholders represented by him to consent to the lease, that the directors of the companies could modify the contract by a rescission of the stipulation. The *158purpose of the law could not be evaded in this manner,. If this be true then could the lease be modified as to its term by the directors? Could they change the term from ninety-nine years to, say, ten or fifteen years, without the consent of the stockholders? The stockholders represented by Moran consented to the lease for a term of ninety-nine years, and with a stipulation contained in it as to the advancement of money for the payment of interest during the term of lease, or so long as the bonds are outstanding, not for a term of ten or fifteen years, and not that the money should be advanced for ten or fifteen years; I do not see upon what principle the rights of the stockholders of the lessee company in the leased porperty, or the rights of the stockholders of the lessor company-in the stipulations of the lease, can be modified in any particular or can be can-celled, without their assent. The cancellation of the lease is in effect its modification by changing its term form ninety-nine years to a shorter term.
“If the board of directors could not make a new lease upon definite terms and conditions, then clearly they could not radically modify the old lease. If they could not make a new lease directly, then they could not in effect make a new lease by striking out of the old lease substantial covenants upon the part of the lessee and inserting others. What would be unlawful if done directly, cannot be legal because done indirectly.”
Judge Van Brunt, in Metropolitan R. R. Co. v. Manhattan Elevated R. R. Co., 11 Daly, 373, 471.
This decision was followed in Harkness v. Manhattan Ry. Co., 54 N. Y. S. C. 174, 179. The Court of Appeals, in Beveredge v. N. Y. E. Co., infra., holds that the directors may modify a lease because they may make the lease. This does not controvert the above proposition of Judge Van Brunt.
It seems to me to necessarily follow that by the execution of the lease under the terms of the statute, an estate vested in the lessee which cannot be divested either by modification of cancellation, without the consent of its stockholders, under the terms of the. statute, and which can not be reinvested in the lessor without the like consent of its stockholders.
The defendant cites Beveredge v. N. Y. E. R. R. Co., 112 N. Y. 1, in support of the claim that the agreement may be modified without the concurrence of stockholders. In that case the court held that under the act of the legislature of 1829 (Chap. 218, Laws of 1839), a lease by one railroad corporation to another of its road and franchises may be made by the board of directors of the lessor,and the concurrence of the stockholders is not essenital to its validity; and the court held further that the concurrence of stockholders was not essential to the validity of a subsequent agreement reducing the rent.
Chapter 218 of the Laws of 1839 of N. Y. is as follows: “It shall be lawful hereafter for any railroad corporation to contract with any other railroad corporation for the use of their respective roads, and thereafter to use the same in such manner as may be prescribed in such contract. But nothing in this act contairted shall authorize the road of any railroad .corporation to be used by any other railroad corporation in a manner inconsistent with the provisions of the charter of the corporation whose railroad is to be used under such contract.”
The court, in the Beveredge case, in discussing the question of the necessity of the authorization of stockholders to give validity to the lease, say, on page 22, 23: “If such a contract or a lease by a railroad corporation to another of its railway, was not within the powers expressly conferred by General Laws, by which, or by the charter, the corporate powers 'are measured, it would be ultra vires and could not be made at all. But *159as the act of 1889 authorizes the making of such contract, and the law does not regulate the manner of making it, or impose restrictions with respect to it, I think it must logically follow .that the power to make it is, like all other general powers of management, lodged in the directors.”
In this case the court was construing a statute which gave to the directors the power to execute a lease, and held that they could modify the lease. This is clearly the law, under the rule of law laid down in Broom, supra. But I do not think the case is applicable under the provisions of the law of our state further than it exemplifies the rule laid down in Broom.
The defendant also cites 15 Ohio St. 828; 34 Ohio St. 450; 87 Ohio St. 556; 7 Fed. Rep. 798; 1 Disney, 92, to the effect that after the election of the directors of a corporation all the business of the corporation is to be transacted by them or under their authority. But this power of the directors is, by all these cases, made subject to any restrictions which may be placed, by special enactment, on the same. The power to cancel a lease was not a power given by the charter, but grew out of the statute conferring power on the corporation to execute a lease. Its exercise by the directors should therefore be subject to such restrictions as will carry out the object of the legislature. At the meeting of the stockholders of the Muskingum Valley Co. of March 28, 189, a majority, but less than two-thirds of the holders of stock of the company represented at the meeting and voting, assented to the action of the directors in declaring the lease cancelled. Consequently less than two-thirds of the holders of stock of the cempany assented to such action. Therefore, whether we consider the act of March 19, 1869, or the act of Aptril 15, 187, a requisite number of stockholders did not assent to the cancellation of the lease.
If it be true that a cancellation of a lease requires the assent of the stockholders under the statute, then any action taken by the lessee and the lessor companies through their directors, without such assent, would be of no moment. The act of the Pan Handle Co., on January 1, 1886, in turning the road and property over to the officers of the Muskingum Valley Co., and the possession taken by the same by said officers, would not affect the rights and obligations of the parties under the lease. The title of the road and property under the lease would remain in the Pan Handle Co., and the rights of the Muskingum Valley Co. under the lease would remain unaffected. The action of the stockholders of the Muskingum Valley Co., at the meeting of March 2, 1886, March 22, 1887, and March 27, 1888, in approving the reports of the directors is of no avail, as it does not appear by wliat vote the reports were approved.
The claim made by the defendant under Pomeroy’s Eq. Juris., sec. 1407; 15 Mich. 381; 46 N. H. 464; 130 111. 44 118 Pa. St. 610, that the Muskingum Valley Co. has not complied with the terms of the contract on its part to be performed, and can not comply with them, and t]jat therefore it has no standing in equity, can not be sustained, if I am right in my construction of the terms of the lease.
Under the lease it placed the road and all of its property in the possession of the lessee, and complied -with all the terms of the lease on its part to be performed. The road and property remained in possession of the lessee without any question for twelve years, when the lessee, of its own motion, attempted to divest itself of the same. The attempt on the part of the officers of the Muskingum Valley Co. to resume possession of the road and property in 1886 was without any authority whatever on the part of the company, and the attempt of the company in 1898 to cancel the lease was without authority of law, and the act of the officers in 1886 and the attempted action of the company in 1893 were clearly at the in*160stance of the Pan Handle Co., and procured by its power over the Muskingum Valley Co. through the Pennsylvania R. R. Co.
The plaintiff prays that the validity, obligation and binding force of the said lease, as against the P. C. C. & St. L. Ry. Co. may be established by the court.
I think this part of the prayer should be granted.
The plaintiff further prays that said company may be repossessed of the said, demised premises and compelled during tire residue of the said term of lease to maintain and operate the demised premises at its own proper cost, expense and risk, and so as to save the Muskingum Valley Co. and its stockholders harmless therefrom.
Under 18 Ohio St .544, the court will decree the specific performance of a contract to operate a railroad only “in a case where the demand for the exercise of such a power was stringent, ’ ’ etc.
If the validity of the lease is established, and the obligations of its covenants are maintained as enforceable against the lessee or its successor, it seems to me that, so long as the road is operated in the manner called for by the lease, it is immaterial to the plaintiff whether it is operated in the name of the lessee or in the name of its successor, or in the name of some other company.
Further, the reasons given by Judge Gholson on p. 555, 557 of 13 Ohio St., for refusing to decree the specific performance of a contract to operate a railroad, would appear to apply to the case at bar, and they are so cogent that the court would not seem to be justified in granting this part of the prayer of the petition.
The plaintiff further prays for a júdgment against the P. C. C. & St. L. Ry. Co. for the amount of the coupons in default, with interest, to be collected and distributed among the holders of the bonds and coupons. I think this part of the prayer should be granted.
The plaintiff further prays a judgment for the interest from date of maturity to date of payment on coupons maturing on and after July 1, 1885, and which were paid after respective dates of maturity.
It seems to me that the holders of the coupons in accepting payment of the same after maturity and in surrendering the coupons without any stipulation as to interest indicated their intention to accept the face of the claim in full settlement, and the court should not interfere. Therefore this part of the prayer should not be granted.
The plaintiff further prays that the P. C. C. & St. L. Ry. Co. may be compelled hereafter to advance to the Muskingum Valley Co. from time to time as the same may mature, all moneys necessary for the payment of said coupons. I think the rights of the Muskingum Valley Co. in this matter should be enforced through supplemental pleadings.
A judgment may therefore be taken finding that the attempted surrender of the road and property was without authority of law, and decreeing that the same be sot aside and held for naught. And finding that the parties, in attempting to cancel the lease, had failed to comply with the law, and decreeing that the lease is, and at all time has been, a valid and subsisting lease, as against'the Pittsburgh, Cincinnati & St. Louis Railway Company and its successor, The Pittsburgh, Cincinnati, Chicago & St. Louis Railroad Company, and adjudging that the Pittsburgh, Cincinnati, Chicago & St. Louis Railway Company pay the amount of the coupons which matured prior to the filing of the petition herein, and are in default, with interest, to the proper parties, holders of said bonds and coupons, who may appear to be entitled thereto, by proof to be taken before a commissioner, to be appointed by this court; with leave to the plaintiff, by supplemental petition to set up claims on subsequently maturing coupons.
George Hoadly, and Harmon, Colston, Goldsmith & Hoadly, counsel for plaintiff.
Ramsey, Maxwell & Ramsey, and Harrison,’ Olds and Henderson, contra.
July 20, 1895.