1)18
I'EDER,4.L$POR'rER,
vol. 45. DIEGO
·lJ'ARMERS' LOAN
& TRUST Co.
'11.
SAN
ST.
CAR
Co.
(Oircuit Oourt,S.D.Oal1jornia. March 23, 1891.) L ltAILltOAD MORTGAGE-FORECLOSURE-brTERVENOR'S EXCEPTIONS TO MASTER'S POBT.
RIl-
In proceedings to foreclose a mortgage on the property of· a street railroad, where the bill contains no averment as to the pledging of the bonds, nor as to who were tbe holders of them, but only alleges that enough of them were outstanding' to comply with the provisions of· the as to foreclosure, an intervening petitioner cannot be expected to know these circumstances in advance of the evidence, and the fact that his petition of intervention makes no allegations as to the invalidity of the pledging of the bonds will not preclude him thereby from excepting to the master's report sustaining the validity of such a pledge. S. SAME-UNAUTHORIZED PLEDGE OF BmlDs. It appeared upon foreclosure proceedings that the bonds of a street-car company, issued pursuant to a vote of the stockholders, "for the purpose of extending- and constructing" the road, purchasing rolling stock and equipments, and paying "for labor done and to be done in the construction" and operation of the road, were never sold to procure funds for these purposes, but that after ineffectual attempts to sell them they were pledg-ed by the. president and vice-president of the mortgagor to secure antecedent indebtedness of the company, Which to a large extent was due to other companies, of which also they were officers and directors. Hela, that the pledge was without authority, and in fraud of the rights of the stockholders. .
In Equity. Bill for foreclosure. Turner, McClure &- Rolston and Myr{ck &- Deering, for complainant. ·BruniJon, Wilson &- Lamme, for defendant. F. W. Burnett, for intervenor Baine!;!. N. H. Conklin, for intervenor First Nat. Bank of San Diego. E. W. Hendrick, for intervenors Gautner et al. O. A. Trippet, for intervenor Fox. Noah Hodge, for intervenors Howard et ale CoUier &- Watson, for intervenor Bidwell. 4. Haines, forintervenor J. G. Capron. Ross, J. This is a suit in equity, brought by the Farmers' Loan & Trust Company, a corporation organized and existing under the laws of the state of New York, as trllstee, against the San Diego Street-Car Company,.B street railroad corporation, organized and existing under the laws of the state of California, to foreclosure a mortgage executed by the defendant company on aU of its property and franchises of every kind and description, to secure the payment of 250 of its bonds of $1,000 each, payable to the complainant as trustee or bearer. The bill containing allegations making such action proper, a receiver was duly appointed by the court at the commencement of the suit to take possession of the property involved in it, which has since been and now is in his possession. To the bill the defendant interposed no defense, but numerous parties, s()meunsecured creditors, and some claiming to be the bonds thus secured, with leave of the court, intervened in the case. A reference was subsequently made to the master to take the evidence in respect to the claims of the respective parties, and
FARMERS' LOA:N' & TRUST
00.
fl. SAN
DIEGO ST. CAR CO.
519
to report his findings of fact in the premises, with the names of the holders of the bonds and the respective amounts thereof, together with the character and amount of all claims made against the defendant company. Upon the coming in of the master's .report, exceptions were filedbyseveral of the intervenors, all of which were withdrawn at or before the time of the argumerit on the exceptions. except as to the amount proper to be allowed the attorney of the intervenor Capron, and except as to the exceptions filed by the intervenor Baines. Baines was found by the master to be a general unsecured creditor of the defendant company to the amount of $32,987.81, besides interest, for which he had obtained judgment. That indebtedness was due, as the evidence shows, for work done by the assignor of Baines on the extension of the defendant company'srailroad between February and July, 1888. The master also found, among other things, that the bonds and mortgage were executed by the defendant company onthe 2d day of April, 1888, to the complainant as trustee; that none of the bonds were ever sold, but that they are all held by various named parties as collateral security for pre-existing iridebtedness of the defendant company; and not otherwise; that 10 of said bonds are so held by the First National Bank of San Diego as trustee,lI8 by George Sturges, 2 by T. Case, 1 by the San Diego & Coronado Ferry Company, 2 by the San Diego & Coronado Transfer Company, 103 by the Coronado Beach Company, 14 by Spreckles Bros. Commercial Company, and 2 by John G. Capron. The master further found that the giving of the bonds as such collateral security "was in each case the direct means of securing to the defendant company, the San Diego Street-Car Company, an extension of time in the payment of pre-existing indebtedness of said San Diego Street-Car Company:" The allegations of the bill in respect to the insolvency of the,defendant company at the time of the commencement of the suit not only stands confessed by it, but the master finds .thl!-t the property covered by the mortgage constitutes very inadequate security for the indebtedness secured. by it. The exceptions filed by the intervenor Baines are, in effect, that the m.aster erred in finding that any of the ,bonds are held by the parties named, or any.of them, .as collateral security for debts of the defendant company, and in finding, ineflect, that the parties named as the holders thereof are entitled to any priority over this intervenorill the distribution of the assets of the corporation; that the evidence shOws that none of the. bonds were ever issued or pledged, or ever became outstanding oblig/!.tions of the defendant corporation; and that the this inr.espeet to the,124 bonds held by T. Case, ,the San. Diego· & Coronado. Ferry Compatiy, the San Diego & COrl:mado Transfer Company, The Coronado Beach CompanY,SprecklesBros.'Commerical Company, and John G.Capron. . . '.. . A, preliminal:Y objection is made to the right of the intervenor Baines to be heard in,support ."of ',the exceptions ,filed. by him, first,uvori the ar!" insufficient in form, Il,nd, nex,t, becaruse ground that the the petition in intervention of the intervenor Baines contains no allegations in respect to theJnvalidity of the pledging of the bonds. It is a
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-520
REPORTER,
vol. 45.
sufficient answer to the latter objection to say that the bill contains no averment in regard to the pledging of the bonds, nor as to who were the owners or holders of them. The bill alleges the outstanding of more than the number of bonds necessary to bring the case within that provision of the mortgage authorizing the complainant, as trustee, to commence suit to foreclosure the J].lortgage, upon request in writing made by the owners and holders of 124 of them, and in default of payment of interest thereon for a certain time; but it neither alleges the exact number of bonds issued and outstanding, nor the holders or owners of any of them. All of this was left to be ascertained by proof before the master under the order of reference. To hold that the petition in intervention should contain allegations respecting a matter about which the intervenor could know nothing in advance of the making of proof would be altogether unreasonable. As a general creditor, the intervenor Baines has an equitable lien upon the property of the defendant company, and therefore the right to contest the question of priority of other asserted liens. Richardson's Ex'rs v. Green, 133 U. S. 30, 10 Sup. Ct. Rep. 280; Daniel, Ch. Pro (5th Amer. Ed.) pp. 1173, 1312. The exceptions, I think, are sufficient in form to entitle the intervenor to be heard. In respect to the merits, the case shows that on the 7th of February, 1888, the following resolution was unanimously adopted by the stockholders of the defendant corpor!lotion present at the meeting, and representing more than two·thirds of the capital stock of the company: "Whereas, it is necessary, for the purpose of extending and constructing the street railroad of this company in the city and county of San Diego beyond where it is now constructed, and for .the purpose of providing means for furnishing the necessary rolling stock and equipments therefor, and to pay for labor done and to be done in the constrllction, maintenance, and operation of the said road, that the company shall incur a bunded indebtedness, and issue and sell its bonds in the sum of $250,000, to be secured by first mortgage on all of the property and franchises of said company of every kind and description: therefore, be it resolved, for the purposes above set forth, that the board of directors pf this company be, and they are hereby, authorized and directed to cause to be prepared and issued the corporate bonds of this oompany, bearing interest at the rate of six per cent. per annum, payable semi-annually, not to exceed in number 250, for thti sum of $1,000 each, having twenty years to run.; time, terms, and manner of iSlluing, disposing of, ·and method of redemption left to the dIscretion of said board of directors· .And that said board of directors shall causeto be prepared and properly executed, for the purpose of fully securing tbe payment of said bonds, principal and interest, according to their tenor. a first mortgage on all the property and franchises of said company of every kind and description." Pursuant to this resolution of the stockholders, the board of directors of the defendant corporation, "at a meeting held March 6, 1888, unan-
imously adopted the following resolutions: "Resolved, first, that the president of this company be, and he is hereby, directed to cause to be prepared, and to be duly executed under theC1orporate'seal of this company, attested by the signatures of himself and the secretary of this company. two hundred and fifty bonds of this company. Each of said bonds shall be for the principal sum of one thousand dollars, numbered from one to two hundred and fifty, boti:l inclusive,the ago
FARMERS' LOAN &: TRUST CO. t1. SAN DIEGO ST. CAR CO.
521
gregate amount of all of said bonds being two hundred and fifty thousand dollars. They shall be dated as of April 2, 1888, and be payable, as to principal, twenty years after date. They shall bear interest at the rate of six per centum per annum, payable semi-annually on the second days of October and April each year, coupons for which interest shall be annexed. They shall be made payable at the office of the Farmers' Loan and Trust Company, in the city of New York, in the state of New York. "Resolved, second, that for the purpose of securing to the bolders of all of said bonds the payment of both principal and interest, without any priority or preference, the president of this company is authorized and directed to be caused to be prepared, and to be executed under the corporate seal of the company, and duly acknowledged. a mortgage to the Farmers' Loan and Trust Company of the city of New York. as trustee for the holders of said bonds, upon all the property and franchises of the company now owned, or that may be hereafter acquired by it, for the uses and purposes of its railway. Said mortgage shall contain a provision that if any default be made in the payment of any interest, and sllch default shall continue for sixty days, t,hen the sum secured by said bonds shall, at the option of the holders of such bonds, expressed as hereinafter in a manner to be indicated in said mortgage, become due and presently payable, and shall also contain all sllch provisions as are usually contained in a railway trust mortgage, and as to the president of the company may seem expedient." Accordingly, the bonds, with the usual coupous attached, were prepared, and, together with the mortgage, were executed by the defendant corporation to the complainant as trustee, each of the bonds having indorsed upon it a certificate to be executed by the trustee in this form: "The Farmers' Loan and Trust Company of New York, trustee, hereby certifies that this bond is one of a series amounting in the aggregate to two hundred and fifty, as mentioned in the within-described mortgage. I' At the time of the execution of the bonds and mortgage H. L. Storey was president of the defendant corporation, E. S. Babcock was its vicepresident, and they, together with O. S. Hubbell, Milton Santee, and a Mr. Thomas, constituted its board of directors. The defendant corporation was at this time largely indebted, and among its creditors was the First National Bank of San Diego, a banking corporation, whose board· of directors was composed in part of E. S. Babcock and H. L. Storey, and the Coronado Beach Company, also 8 corporation, and of which Babcock was president and Storey vice-president. The debt from the defendant company to the First National Bank was then $40,000, and that to the Coronado Beach Company was large, but concerning the exact amount of which there was then some controversy. Storey, as presidentof the defendant com pany, had entered into negotiations with a Mr. Claypool of Indianapolis for the sale of the bonds on commission, and when they were executed they were sent east to be sold, but, owing to some defect of form, they were returned for correction. In May, 1888, Storey went to New York, where Babcock then was. What took place between them there, and what occurred subsequently in California in re. spect to the disposition of the bonds, is stated by Babcock, whose testimony is more favorable to the holders of the bonds than that of any other witness, substantially as follows: On Storey's arrival in New York in May he told Babcock that the First National Bank of San Diego t
5.22
·
,' f ,
, FEDERAL
voL.4,5·
to which,' as 'has b0ensaid, the' defendnntcompany was indebted in the: SUln' of '$40,000, must have' themorley."Storey and Babcock ofNe'''!!ork,' which agreed .the $40,000 wttll 'whIch to pay the to loan the defendant National Bank OrSl;lU Diego 'upon its note"pr,ovided the note be indorsed by Thomas, Hubbell, Storey,and,Babcock, all of whom were' at the time directors of the defendant carporation. The note was acCordingly executed. When it was indorsed by Babcock, the latter said to Storey that he did not like to personally indorse the to which Storey replied that he would note,'of the ,see tijat Babcock should have the, bonds to protect him and the other arpount d,ne from the defendindorsera, and also for ant cOI)lpany to the Coronad,oBeach Oompany, then su pposedto be about $75,000.· Storey then returned to Chlifornia, and the bonds were sent '0'0 Wtbe. Farmers' Loan'&'T1'ustOoJIlpany for certification. They were upon a from Storey, delivered by the to Babcock.':['4e latter, pursuant to an understanding witn Storey to that effect, made. persistellt, efforts in variQuscities in the east to sell the bonds, but without success, and' in July, 1888, returned to by pressSan Diego, to filld thQ ciefendantcomvany ingciemands for money due, among othl;lrs, one for $30,000, then held by the First National of San ,As collateral security for this lat.ter claim, Babcock,at storey's suggestion, gave the bank 45 of the bonds. .Act Storey'nequest, Babco*,also gave fClUr of the bonds to the ,St. Louis Car Compauy a13security a, debt that company by the 'defendant corporation. The balance of the, bonds he then took to San Francil;lco, with Sto):'ey!s and deposited them with J. D., Spreckles & Bros. as for a debtor about $70,000, then due them frolU; t4e Coronado Beach: the time telling, Spreckles & company. That Bros. that the bonds h8;d been pledged to the waa the lat,ter part of July or the first .of August, 1888. On Babcock's retij,J.'n to San Piego he [oulld thats9me Chicago creditors of the Coro.nado Beacq.Company .had, become so pressing for their money that it was a,rr,anged between him and Storey Storey's sOQ east with some of str,ee....car bonds, Npledgeas that indebtedness; an,d in :pqrsuance of that requested J. D.Sprecklel;lq.; ·:ifOs.:'19 depo13it 59,9£ the ,bonds he had, left with them with the Bank orOaU,fQJ,nia in Sl1n to the credit of the First National Bank .pi $llon.;Diego,and ll.uanged with latter to turn some of the ,b.onds PaId byit.to young Storey, to be taken to Chicago for the purpose ,seems to have been carried out, ex& Bros., instead of depositing the 59 bonds with the ,credit First National"Bank of San Diego, tbe.IP to ,latter, institution, direct. Babcock ,also got S qf :thebonds ,lleldby them to'W, J. c,qllawmJ "secllrity; for a.debt,of $,30,OQO :due, him by the Coronado Beach turned .over 14 of the bonds to Company, and he .&Bros.OOII).l}lercjal ,as security for a
FARMERS'LOA.N
&;
TRUS'rCo;'V.SAN
ST. CAR CO.
$8;000, due thatcompantbythe CoronadoBeach of the bond'S by yoling' Storey to Chicago were t,urned over 'by him as security to of the Beach company there, and the balance of the bonds taken by him (the exact number of which does not appear) he sent to the Central Trust Company of New York, for account of the Coronado Beach Company. The bonds so placed in Chicago were subsequently returned to the Beach company. Babcock further testified that some time in the summer or fall of 1888 the $40,000 note of the street-car company given the Chemical Nation.a1 Bank of New York became due, and that at the request of at least three ofihe directors of the defendant company he wrote to that bank, asking an extension of time within which to pay the money, and offering to give as security therefor street-car bonds at 80 cents on the dollar, which proposition was accepted,and the $40,000 note oCthe defendant company, with the personal indorsements, was taken up by the execution of a. new note of the defendant company, to secure which 60 street-car bonds were deposited by Babcock with the First National Bank of San Diego, as trustee. When. the second note so given the Chemical National Bank became due, it was again renewed, but on that occasion that bank required that the note of the defendant company.be guarantied by the First National Bank of San Diego,and, as security against sueh guaranty, the latter bank continued to hold, but for itself, the 60 bonds it had theretofore held as trustee for the Chemical Bank. These various dispositions of the bonds of the defendant company were made by Babcock, who was evidently exerting himself to tide over the crisis then existing in the affairs of both the defendant company and the Coronado Beach Company, without any authority of the board of directors of the defendant company. Babcock, however, testified that all of the direct-, ors of the latter company knew about the disposition that had 1;Ieen and was being made of the bonds; that it was a matter of geperal conversation among theJ;Il when they met on the street; that Storey, the president, had actual notice of all the transactions at the time of their occurrence, and consented to them; that while Thomas and Hubbell, two of the directors, may not have known of each of the transactions. at the time of their occurrence, they' knew of the deposit· of the bonds with Spreckles & Bros., and that it was at their request that he (Babcock) got Spreckles & Bros. to deposit the 59 bonds with the First National Bank of San Diego, of which bank Hubbell and Thomas were also directors. ' There were still other dispositions subsequently made of some of the bonds, to be stated. None of them,' however, were ever· sold, not one Of them was ever in the possession of the defendant company after they were senito the complainant for eertification.Butcertain resolutions in respect to them were pas.sed by the board of directors of the defendant corporation, subsequent <tathe dispositions already detailed, whiehwillnow be 'set out. At a meeting of the' directors on the 2d of October, at which Bahcock, Storey, Hubbell. and Santee. were present, and from which E. H. Storey, the other dirictor, at that time was absent, the follo'wing ,resolution was· unanimously adopted:
)'JmERAL REPORTER,
"Be it resolved by the board of directors that the president of the company be, and is hereby, authorized to use the bonds of this company, at not less thim 661 per cent. of their face value, as collateral security in procuring at least four months' extention of time for the payment of any obligations of the company outstanding. " On the 21st of November, 1888, the board of directors unanimously adopted the following resolution offered by Babcock: "Resolved by the board of directors of the San Diego Street-Car Company that the president and secretary be, and they are hereby, authorized to make a, loan of any sum up to $250,000 from any person or persons, corporation or corporations, of or through whom the same may be negotiated, at nine per cent. intel'est per annum, payable one year after date, with the privilege of renewal for one year, and with the fU,rther privilege of repaying said loan at any time, on the payment of one per cent. per month interest for even months from date of loan until paid. And for that purpose the said officers are hereby fully authorized and empowered to pledge as security for such loan all or any part of the bonds of this company heretofore issued and secured by mortgage to the Farmers' Loan and Trust Company of New York, as trustee. And the lIaid officers are hereby authoriZed and empowered to give such party or making such loan an option for the purchase of such bonds, at the SlIm of ninety cents on the dollar, which option shall be and remain irrevocable until the repayment of any loan so made... On the next day, to-wit, November 22, 1888, at a special meeting of the board of directors, it was unanimously resolved"That the president of this compatlybe, and hereby is, authorized to give Carter Tebbis, of San 8uthorityto negotiate a loan of $150,000 on the company's $250,000 of first mortgage bonds, at nine per cent. interest per annum, for one year, with privilege of another year at same rate; said authority to stand good up to and including December 2, 1888. And when loan is made, a commission of two and one-half' per cent. be paid said Tebbis, said commission'to be deducted from said loan; this company to hava the privilege of anticipating the note by paying one per cent. per month for even months fol' time money is used." As has been already said, in effect, at the time of the passage of these three resolutions, not one of the bonds in question was in the possession of the defendant company, but all of them were then held by third parclaimed to hold them as collateral security for various debts. ties, Babcock, however, testified that when the resolutions of November 21st 22d were passed it was understood among the holders of the bonds that, if the proposed loan could be effected or the bonds sold, the hold. ers of them would surrender them, and share pro rata in the proceeds. But no loan was effected, no sale made, and nothing was done under the of November 21 and 22, 1888. On the 28th of January, 1889, at a meeting of the directors of the company, at which three of them were present, and from which two were absent, the following reso· lution offered by Babcock was adopted: "Resolved, that the president of this company be, and is hereby, authorized and directed to use the bonds of this company as collater$! security tl) any cfeditors wherein his jodgment it is wise and expedient 80 to do, subject to the ratification of the board of directors." Respecting this resolution, Babcock testified:
FARMERS' LOAN & TRUST 00. 'D. SAN DIEGO ST. CAR 00.
525
"I think that resolution was passed more to put on record the contemplated action of giving bonds to different creditors in town, principally feed, who were threatening attachments on the railroad. And I said to Mr. Santee, [the then president of the defendant company,] when he approached me on the sUbject: 'Certainly, we would give any amount of bonds it was necessary to quiet those people from attaching the road on their claims.", And Santee, being asked: "Did you, as president of the company, since the date of that resolution, use any of the bonds of the street-car company as collateral security under that resolution?" answered: "I have not had any of the bonds in my possession since I was elected president. The bonds were all out at the time." On the same day the last resolution of the board of directors was passed, to-wit, January 28,1889, the annual meeting of the stockholders of the defendant company was held, at which 2,072i shares of the 2,500 shares into which the capital stock of the company was divided were represented, and at which 427 i shares were not represented, the following resolution offered by Babcock Wal;! unanimously adopted: . "Resolved, by the stockholders of the San Diego Street-Car Company, that all the acta of the board of directors and officers of this company done during the past year be, and in all things are hereby, confirmed, J.:atified, and approved." The only stockholder present and voting for this resolution besides the directors of the company, was O. I. Tyler, holding 5 shares. The others voting for· it were Babcock, holding for himself 972 shares, and as proxy forJ. Collett, 170 shares; Storey, 420i shares; Santee, 250 shares; Hubbell, 250 shares; and Cook, 5 shares. All of these were not only directors of the defendant company, but Babcock, Storey, Santee, and Hubbell, representing almost the entire number of shares that were voted for the resolution of ratification, were also interested in and directors of the corporations that claimed to hold as collateral security the great bulk, and almost the entire number, of the bonds in question. In addition to the disposition of the bonds already mentioned, Babcock turned over to the San Diego & Coronado Transfer Company two of the bonds, and to the San Diego & Coronado Ferry Company one of them, as collateral security for indebtedness due to them, respectively, from the Coronado Beach Company; and to T. Case, he turned over two, to John G. Capron, two, and to the First National Bank of San Diego, as trustee for the San Diego Lumber Company, the Russ Lumber & Mill Company! the West Coast Lumber Company, and Hunsaker, Britt & Lamme, ten of the bonds as ()ollateral security for indebtedness due those parties from the defendant ()orporation. The only creditor of the defendant company to whom bonds in a greater or less amount were not distributed seems to have been Graham, whose claim is represented by the intervenor Baines, and which claim is the claim of all others against the defendant corporation that comes most directly-if it is not the onl,y one that does comewithin the purview of the resolution authorizing the issuance of the bonds in ,question, and. under which they were in faot executed; for it was to pay the cost of the extension of the defendant company's railroad i
526
, DD$lUL REPORTll11h
that ,the bonds were authorized and directed to be issued sold. To the' bonds so, issued to be wholly diverted from the purpose whIch they 'were' executed, and, to the entire exclusion oia demand for suoh work, to be apjH:opriated p\!yment, not only of pre-existing indebtedness ofthe defendant cpmpany, ,but also the in4ebtedness of one of its creditors, is surely contrary to the first principles of equity. Since the 'defendant corporation is insolvent, 'arid the mortgage givei1 to secure the payment of the, bonds covers its entire property, to sustain the pretensions of the h()lders of the bonds is to exclude entirely' from payment the claim for doing, in part, the very work to pay fotw,hich the bonds were authorized alid directed to be issued and sold. This, llS has been said, is manifelitl.r irie'quitahle. It is further urged 'that none 'of the bonds are, or ever became, valid outstanding obligatiorts of the defendant company. The case shows that not one of them :was ever sold. Since they Were first delivered to Babcock in New York, not one of them ha:sever been in the possession of the derendant corporation. It is not pretended that the 'delivery to him as collateral security was in any ,way authorized by the board of directors of the defendant company, or that any of the individual directors,exce1'>t St(}reyanu Babcock, ,at the tilne knew of the agreement between them by which all of the bonds are claimed to have been pledged to the latter for himself and others. Yet these bonds. iflegally iss:ued, were secured by a mortgage upon /ill of the property and franchises of the defendantcorporationofevery kiud Rnd description, and, contrary to the purpose expressly deqlared in the resolution authorizing the issuance of the:bonds and the giving of the mortgllge to secure their payment, were pledged by these two ita president and the othE'r its,vicepresident-to secure inpartari indebtedness in which they were largely illterested, fludat.a too, when the defendant corporation was largely indepted to third "parties. Neither the president nor any other officer of acorporati,oll'organized uJ,lder, the laws of California: has the power thus ,to mortgage or dispose of property of the corporation. Itis"am{)llg other things,pravided by the statute nuder which the defendant company was.orgqniied that ','the corporate powers, business, !:lod property of all formed Ullder this title must be exeroised, oouductf;ld, and controUed'!'by a board '.If directors, (sectioll 305, Civil C<>de Cal. i) and 308 of the Same Code, among other things. declsion oLA' mnjorityof the directors forming such board, is valid ,aSllcorporate act." And of its prothe board Is: requiredtokeeparecord which ah8,ll be "open to tpe inspection of any director, member, stockholder j ,()I'creditor of the cQlporfltion·." Section 377 , ld. " ': ' 'liln Ga8hwiler v,. WiUi8,'33 Cill. 16"the, t;rllstee$, oLacorporation, act.. fp&Ilpt ,as !l b:ut$s indivIduals.Ul1dertook to dispose by deed of the (}prporate to do 80 by t.he stockhold:ers at fl.. btll the court held that spch cpnveyan(lC co:uld, OIlly bil'Ve beeull,1J'thoriz¢d by tbe, board, of directors as,sl1<lh;$aying: {{TheCQrpofation could (luly act":""'"'
FARMERS' LOAN &: TRUST CO. ".
sAlt
DIEGO ST.,CAR
co.
1527
codldonly'spellk-through the medium prescribed by la.w, and that is its board of directors;" See, W80, Alta Silver Min.a>;v;Alta Placer Min.' Co., 78 Cal. 632, 21 Pac. Rep. 373j Graveav. Minillg'{)()., 8lCw. 303, 22 Pac.. ·Rep. ' .;'i. It is contended that if. the pledging of, the: bonds: in question was not originally valid, it was made so by the resolution adopted at the stockholders'meeting of January 28,1889, by which all of the ,acts of the board of directors and officers of the defendant company during the year then last past was confirmed, ratified;i and approved. If the pledging of the bonds in question admitted of ratification, Ido not'ihink. in view of the evidence in the case. that the general imd sweeping resolution rat' ifying "all of the iacts 'ofthe officers"'constituted a valid ratification 'of the acts in question. I think the record fails to show' knowledge of facts that is requisite to the validity of such ratification. Besides,in every case, the appIlcation of that doctrine largely depends upon thecir'" c)lmstances of the ca.se. In speaking of the applicati'On of the doctrines' of ratification a.ndestoppel, it is said in ali Private COrpota-c tions; (section' 631a:) of these doctrln,es depends, in each case;oIlon all the peculliir circumstances. Tile equity of the case"must bedeterm'ined; It is neceBsary to cons'ider t.he charactl!rof the act with which it is sOught'to charge tM corporation, the importance of. the act, and the degree of publicity which was to it.. ' good faith.oJ' bad faith pt theparties,.and tbeif business are important considerations." i .
Here, as has been seen, the only stockholder present,and voting for the resolution of ratification, besides the directors'of the company, was Tyler, holding 5 shares ofa. toml number of 2,500 shares. All of the others for it were Dot only' ratify in general terms tbeit:own'acts,not in any way: named, but acts' which, if ratified, must resultto their own individual interest, and tothij prejudioe ofsome of theirceBtwis que trustent;, UD'dersuoh circumstances the case is ootone for the application 0[' the doctrine of ratificatioIi, 'e-.ren if it that the acts in question admitted of ratification. ' Aside from the want of legal power already referred to. a court of equity will not permit the directors of a corporation, who. are not only trustees for the stockholders of the corporation, but for its creditors as well, to thus dispose of the corporate property to themselves, or for their individual benefit. However in fact intended, equity treats such transfer as fraudulent, because it operates as a fraud upon the cestuis que trustent. Koehler v. Black River, etc., Co., 2 Black, 715. See, also, upon the genera] subject, Richardson's Ex,'rv. Green, 133 U:S. 30, 10 Sup. Ct. Rep. 280. In California, it is provided by statute that" neither a trustee, nor any of his agents, may take part in any transaction concerning tbe trust in which he, or anyone for whom he acts as agent, has an interest, present or contingent. adverse to that of his beneficiaryj" with certain enumerated exceptions not applicable to the present case. Civil Code, § 2230. And section 2234 of the same Code declares that every violation of the provisions, among others, of section 2230, "is a fraud against the
528
FEDERAL REPORTER,
beneficiary of the trust." These Code provisions have been. held applito the directors of corporations in their trust relations by the supreIAecourt of the state. Graves v. Mining Co. supra. . But apart from and beyond the foregoing considerations, the constitu,,: tion of California in terms declares that "no corporation shall issue stock or bonds except for money paid, labor done, or property actually received. * * *"Section 11, art. 12. A similar provision is embodied in the statutes of the state. Civil Code, § 359. This constituti<mal and statutory inhibition ispIain, and has but one meaning,-the money paid, labor done, or property actually received must be paid, performed, or received, as the case may be, on account of the issuance of the bonds; and any bonds issued oontrary tothis provision are ofcourse illegally issued. The provision does not mean, and .cannot be held to mean, that such bonds may be issued as collateral security for any sort of pre-existing indebtedness. Now none of the bonds in question are, or ever were, issued or held for money paio, labor performed, or property actuallY'received on aceountof their issuance. On the contrary, all of them were delivered and are held as collateral security in part for preexisting indebtedness of the defendant corporation, and, in large part, for ..prerexisting indebtedn.ess; not of the defendant corporation, but of one of its creditors. As has already been said, not one of the bonds was ever sold I and not one of the holders of them paid a dollar on account of their delivery. In no ju'st or legal sense, I think, can· any of them be regarded as an innocent purchaser for value. The bonds were distributed and redistributed, not only without authority of the board of directors of the defendant.corporation, but in utter disregard of the constitutional and statutory· provisions upon the subject, and contrary to the very purpose declared in the resolution authorizing their issue. My conclusipn is that the exceptions of the intervenor Baines should be, and therefore are, sustained; and as, in my judgment, none of the bonds in question ever were legally issued, or ever became valid outstanding obligations of the defendant corporation, it results that the bill was not well filed.
HAYES t1. H'INTIRE.
629
HAYES
et ale v.
McINTIRE
et ale
(O£rcuf.t Oourt; W. D. Missouri, Bt. Joseph DWl.Bion. April, 18M.) ADVlIIRSE POSSESSION-LEGAL TITLE IN TRUSTEE-RUNNING OF STATUTE.
Where the husband, to give his wife the legal title to land, conveys to his son, who at the same time conveys to the wife, the son will be deemed to have the legal title, with power to sue, long enough to start the running of the statute of limitatioDs in favor of one who has been knowingly allowed, since before the date of the deeds, to take and keep possession, and make valuable improvements, under the belief that he had a perfect title.
.
In Equity. George W. McOro/ry, for complainants. John S. Crosby, for defenda,nts. BREWER, Justice. This case stands on demurrer to the bill. The facts as alleged are these: In August, 1869, Samuel S. Hayes and Lizzie J. Hayes were husband and wife, and he the owner in fee-simple of the real estate sued for. For a good and valuable consideration he then deeded the land to her·. Afterwards, and on the 31st day of July, 1877, for the purpose of perfecting the legal title in her, and for no other purpose, he quitclaimed to Harold V. Hayes, his son, and he at the same time quitclaimed to Lizzie J. Hayes, his mother. In 1875 certain parties forged a deed from Samuel S. Hayes and wife to Charles a.Mclntire, one of the defendants, and he afterwards conveyed a part of the land to his co-defendant. No participation in the forgery or fraud is charged upon defendants. At the time of the receipt of this forged deed defendants entered into possession, and they have since made valuable improvements on the property. An action at law could not be maintained by reason of the statute of limitations, defendants' adverse possession having continued more than 10 years. To escape the effect of this statutory bar to a legal action, complainants bring this suit in equity. In addition to the facts above stated, it appears that on August 7, 1877, Mrs. Hayes died, leaving surviving her husbaud and these complainants, her children and only heirs; that her husband died on the 28th day of Jannary, 1880. These, I believe, are all the 1acts bearing upon the question. Conceding, as I said, that the defendants have a perfect defense to an action at law for the recovery of possession, complainants insist that the deed from Mr. Hayes to his wife in 1869, though void at law, yet, having been for a good and valuable consideration, was valid in equity, and therefore the equitable title vested in Mrs. Hayes; that complainants inherit that equitable title; that, by reason of the life-estate which vested in Mr. Hayes upon the death of his wife, they could not maintain any action until his death in 1880, and hence their right of action to recover the equitable title which they had from their motheris not barred until 10 years from that date; that if, by the needs of 1877 from father to son and from son to mother, the legal title also passed to her, there would be no merger, because it was not for her v.45F.no.8-34