was not finally struck off on the single bid, thesepro....te bidders have no claim, either in law. or equity. Furthermore, it may well be doubted whether there was any memorandum in respect to their bids, sufficient to sustain them under the statute of frauds. Eppich v. Clifford, 6 Colo. 493; Grafton v. Oummings.99 U. S. 100. As no cause of action appears in respect to this claim of title it is unnecessary to any time upon the exceptions to the answer thereto. The order. therefore, will be that the plea be sustained, and the exceptions to the answer overruled. '
GIBSON t7. RICHMOND & V.&.
Co.
(Q(rc'Uit Oourt, 8. D. New York. February .23, 1889.) RAn-ROAD C<mPANIES-BoNDS AND ¥ORTGAGES-RIGHTSOF MORTGAGEES.
The state of North Carolina. under act Jan. 27, 1849, tbe N;' C. R. Co., subscribed for $3,000,000 of' its $4,000,000 authorized capital stock; with the right to vote thereon. and to appoint eight of the twelve directdra.: The state created a statutory mortgage upon its stock to secure constr,uction', bonds issued by it. and subsequently created a second mortgage on its stock to secui'e an issue of bonds. Thereafter, and while the road was paying 6 per' cent. per annum on its capital stock, defendant. with notice of the rights of: the second bondholders. took a lease of the road ata rental cient only to pay the interest on the first mortgage bonds. The chartEir ail" thorized the N. C. R. Co. to lease its property and franchises, and it w,asnot claimed that the lease was improvident, or in any respect invalid. The plainant, a second mortgage bondholder, filed a bill against the defendant" the lessee, to compel it to account for the excess of earnin'gs above the amount of interest on the first mortgage bonds, upon the theory that by the' hypothecation of its shares to the second mortgage bondholder:s the state. fm·' pliedly agreed to become a trustee for them, and exercise its control as a nia-' jority stockholder in the N. C. R. Co., so as to preserve the earnings for the' benefit of their bonds, thus making the earnings a trust fund which COmplain·' ant could follow into the hands of the defendant. the defendant beiJ;l'g a r,,·, cipient with notice. The defendant demurred to the bill. Held, (1) that in the absence of ,any averment of fraud in the making of the lease the com· plainant could not maintain the, action. (2) That the state was no mOre a. trustee than anv other majority shareholder of a corporation who mortgages, his stock, and was under no dutyto the mortgagee except to conduct itself' honestly in exerting its power of control for the interests of the mortgagees' and the. other creditors and of the corporation. '
"
In Equity.
Edward L. Andrews, for complainant. George Hoadley, for defendant.
On demurrer to 'bill.
;:
WALLACE,J. The 1J0mplainant is the owner of certain bonas1'or: 81,000 each of the state of North Carolina, created pursuant to an act of' the legislature'Qf the state, and containing a certificate executed· by; the authorized officers of the state, which recites that "ten shares of the stock in the North Carolina Railroad Company, originally subscribedfol"by the state, are hereby mortgaged as collateral security for. the' of
744·
FEDERAL REPORTER,· vol.
37·
this bond. » . The defendant is a lessee of the property of the North Carolina·Railroad Company ·for a term of years. The complainant has filed this bill for himself, and in behalf of other holders of the bonds, to compel the defendant to account for the earnings of the leased railway property in excess of the rent reserved in the le&se. The defendant has demurred to the bill. Succinctly stated, the averments of the bill are that the North Carolina Railroad Company was incorporated by an act of the legislature of the state of North Carolina, passed January 27, 1849; that the act provided that the state should subscribe for $3,000,000 of the $4,000,000 authorized capital stock of the company; should be entitled to appoint eight of the twelve directors of the company, and should be entitled to vote by an official proxy upon its capital stock at all stockholders' meetings; that the state took the stock, arid has always exercised its rights to appoint directors and vote; that the state created a statutory mortgage upon the shares of the stock, to secure certain construction bonds issued by it; that subsequently it'created a second statutory mortgage upon its shares of stock, to secure an issue 0f bonds, of which the bonds in suit lj,re a part, and issued $2,500,000 of such bonds, and sold them to the public; and that thereafter, September 21, 1871, and while the railway company was earning and paying 6 per cent. per annum upon its capital stock, and while the state was in default in paying the interest on the second mortgage bonds, the defendant, with full knowledge of the rights of the second mortgage bondholders, took a lease of the railway at a rental merely sufficient to pay the interest on the first mortgage bonds, and has since been in possession of the property, and in receipt of earnings therefrom largely in excess of the rental. The acts of the legislature incorporating the railway company, and authorizing the creation of the construction bonds by the state and the first mortgage upon the shares to secure their payment, are not fully set out in the bill; but, as these are laws of which the courts must take judicial notice, the bill is to be read in connection with their provisions. By the act incorporating the railway company and directing the state to take shares therein, power was granted to the corporation to lease its property and franchises. Such effect was giveil to section 19 of the act by the decision in State v. Railroad Co., 72 N. C. 634, where the lease in question to the present defendant was adjudged to be within the authority of the corporation. The acts creating the statutory mortgages give effect to the lien of the bondholders, at law and in equity, without registry or proof of notice. The bill does not aver that the lease made to the defendant was improvident, or in any respect invalid or vicious. The averment that at the time the lease was made the railway was earning 6 per cent. upon its capital, and the rent reserved was only equivalent to the interest on the first mortgage bonds of the state, may be intended to suggest that the property was leased for an inadequate rental; but as the amount of the first mortgage bonds is not mentioned, and as their amount may have been for as much or for more than the amount of the capital stock, this averment does not even insinuatetbat the lease was improvident. The bill does not seek to have thQ
GIBSON ,. RICHMOND & D. R. CO.
745
lease declared invalid or vacated for any reason. Neither the railway company nor the state is made a party defendant. The theory of the bill seems to be, and the case for the complainant has been argued upon that theory, that the state of North Carolina was invested, by the legislation under which it became a stockholder of the railway company; with complete control of the afJilirs of the company; that by the hypothecation of its shares to the second mortgage bondholders it impliedly agreed to become a trustee for them, charged with the duty of exercising its power of control so as to preserve the earnings of the railway, and them to the payment of the bonds; that consequently the earnings were a trust fund for the bondholders; thnt by permitting the lease by the railway eompany to the defendant the state consented to a diversion of the trust fund; and that, as the defendant is the recipient of a trust fund, with notice of the rights of the cestuis que trustent, it must account for such of the fund which has come to its hands as is not applicable to the payment of interest to the first mortgage bondholders. The proposition that the swte assumed fiduciaryobligations towards the second mortgage bondholders which do not ordinarilyexist between mortgagor and mortgagee, and which gave the bondh"lders the right to insist that the railway company should be managed in their interest as a trust property, has been ingeniously presented, but does not seem to have any real substance. The case is not distinguish. able, in its legal aspects, from one where an individual, a majority stock,,: holder of the stock of a corporation, has hypothecated his shares by chattel mortgage to a creditor as security for a loan. In such a case it maybe assumed that both parties to the transaction understand at the time that the value of the security is to depend upon the financial prosperity of the corporation, and measurably upon the honesty and efficiency of the corporate management; but no promise or duty can reasonably be implied from that understanding that the shareholder who has mortgaged his shares is to use his power of control in the corporate affairs exclusively in the interest of the mortgagee, or is not to consent to or promote any scheme or undertaking in the conduct of its business which is within -the scope of its legitimate functions, and which he may believe to be expedient and proper. Certainly no promise or duty can be implied from such an understanding, which would be inconsistent with his obligations to the other shareholders, or his good faith towards the creditors of the corporation. So long as he conducts himself towards the mortgagee honestly in exerting his power of control, he violates no duty, and. the latter has no ground of complaint. When, in consequence of a default in payment, pursuant to the terms of the hypothecation, the title to the shares become absolute, he is in a position to substitute himself in the place of the mortgagor, and participate in the control of the corporation, according to the forms and subject to the conditions of the organic law. If, instead of doing this, he nevertheless allows the mortgagor to do so, he ought not to complain, and cannot be heard to challenge any transactions with third persons by the corporation which are effected in the mean time in good faith, and are within the corporate
FE;DERA{.REPORTEB, '-" :. ' , - . ' . ' ".
vol. "
87.
,.;
I ,,Applying thesefan;liliar:rulesof law to caae, the secassert. with ref!,son that the state has onn mortgage bondholders :violated.aQY fiduciary duty towards them, tpe corporation itself in any way a party to the subversion of their rights, unless they prepared to show-JVh,at is not alleged bill-that the lease Wall or ultra vires. All persons dealing with a corporation take notice of the provisions of its organic law. In the present .case the second mortgage bondholders were bound to kn<>w when they took their security that the railway company. wasauthotized to lease its ,property.and .franchises, and should have expected that circumstances might arise under which the interests of the corporation, its stockholderI', its,creditors, would be promoted by doing so. They were also pound. t,:> ta,Jte n9tice of the prior'rights of the first mortgage bondholders, origi,natingin :the statutory mortgage created by the acts of the legisla. @d.to anticipate that the interests ,of these bondholders, to whose the shares of stock their own. lien was subordipate, might reto lease its property. The second mortgage bondtp.erefore ,took their se<?urities with the knowledge that circum;might which it, would be not only the right, but the Auty,;pftlle a.s amaj9rity stockholder in the railway corporation :t;pWll,ft;la: the ptllel; stockholders and the first mortgage bondholders to Certainly)t cannot be maintained second mortgage was such as to the sharecompany; other than the state, an4 the prior mort:gagees 9Up;0: shares, from deriving the benefit of any legItimate mode of to t.he corporation which might be.ex·,ped;i.ent., , ;, . '.' , y So far as from the bill, the lease in question was a reasonable ,Anq iWgitimltwarrangeJ:Ilent, and has been acquiesged in since 1871 by J . an.d those whom he represents. It is fair to assume NqrthCarolinaRailroadCompany and, the state both regarded jt"lj.l3p'Qpa1:>,1y: 9fferinga better income th l1n could be derived from the of the railway, and. as an arrangement which · :promote .the of shareholders and bondholders. Very qlEllirly second mortgage bondholders cannot maintain a snit In equity · to:clul,rge defend!tnt with the earnings derived under the lease, when that the lease is void Or voidable, as between the par,.they, do tg. ,rhe lease is either a valid contract between the North Oa1'Othe defendant, or it is an invalid one. .If the,complainant cannot assail it, and the defendant is entitled to , sf,alld'JupQntlle of the contrapt,. and derive whatever profit it may he;fl.ble to from operating the road after paying the rent. It cannot be M Petween theparties t,dt and invalid a13 to the complainant, unmortgagj:l bondholders have righ,ts or equities superior to ..H,\ey woqld have if, when the bonds we1'6not paid, they had dethe shares of stock hypothecated to them as col· It may be that they. arenot)n !L position to intervene ,dtfflil\i,s.. pf the North Carolina Railroact;Company, andqannot, . J
through their influence at corpbrate 6rother""ise:' cause' such' proceedings to be taken bytlietiorporation as i:t ought to take'ifthe lease were a fraud upon the stockholders whom it represented as trustee in; entering into the contract. But although the complainantniay oce-upy· a better position as to matters,of procedure and remedy than he would if he were a stockholder, this circumstance cannot prejudice the right of the defendant to insist that the contract cannot be set aside, in whole or in' part, unless it is invalid as between the North Carolina Railroad Conlpany' as a trustee for its stockholders and itself. The complainant's cause of action is founded on the rights to which he has succeeded as a mortgagee of the shares of stock, and his position is not assisted, nor is that:of the defendant prejudiced, by his neglect to substitute himself asa stock·' holder in place of a mortga.gee of the stock. Fol' these reasons,'and without discussing the other questions which are presented by the demurrer, the demurrer is sustained.
UNlTED STATES 'U. AMERICAN WATER·WORKS
CO.
:
(
"",
OQ'I1'1't, D. Nebra8ka. March 1,1889.) WATER COMPANIEs-TARII,l'F OF. CHARGES-CONSTRUCTION.
The Omaha water,works ordin,ance provides that the company shall furnIsh' water to citizensrel>iding along the line Cif its mains at certain rates; and' gives a. taritr for dwelling-houses according to the number of rooms auet other buildings of different kinds. Rents for other purposes are fixed by, meter-rates.'lowering inversely to the amount of water taken. Held. that the' company has the right t,o trea.t each building separately; and the United' States,. as owner of the Fort Omaha reservation,-a tract of ,mullY:8cr,fjs, OD! which are dwellings for officers: hospitals, warehouses, and not e-ntitled to be supplied as a single consumer. ' : .',:'., '. : · ,I,
.,
,
.In Equity.
Injunction. George E. Pritchett, for the United States. J. lrI. Woolworth, John L. Webster, and Lake &- Hamilton, for respondentJ,
BREWER, J. This is a bill brought by the United States to enjoin the d'e:" fendant from taking up its or shutting offthe supply of Wlitet' heretoforefumished by it to Fort Olllaha; The facts are these: . ernment, complainant herein, owns a reservation of many aoresknoWn fis! "Fort Omaha," upon which are situaten a number of buildings,'atnong for officers, hospitals, warehouses, 'anU· 'barracks: them for at least a regiment of troops. In 1870, the state Nebraska ceded jurisdiction over this tract of land to the general government: At that time it was a. mile or two distant from the limits of the city ofOnii!ha. The defendant is a corporation having authority byordinances'ah'cli tracts'to lay down, its in the streetsoHhe'city ofOrtJaha:,' and obliged to: supply its citizens and inhabitants with wal:fet anee with the provisions of the ordinances.Some·yt!l1rs sinoo"tbEPg0Voi.i
of