Haynes v. Kenosha Electric Railway Co.

119 N.W. 568, 139 Wis. 227, 1909 Wisc. LEXIS 115

• Court: Wisconsin Supreme Court
• Decided: May 11, 1909
• Status: Published

Opinions

The following opinion was filed January 26, 1909:

Barnes, J.

In view of the conclusion reached in this

case it is unnecessary to decide whether ordinance No. 240, passed by the common council of the city of Kenosha, was. re-enacted or validated by the amendment of October 19, 1901, granting certain rights and privileges to the Kenosha Street Railway Company and approving of the assignment to said railway company of the franchises and rights granted plaintiffs -by said ordinance. We will assume, without deciding, that the bonds issued to B. J. Arnold on March 25r 1902, were void within the meaning of sec. 1753, Stats.. (1898), for want of sufficient consideration to support them. The validity of $29,000 of the $30,000 in bonds so-issued is involved in this suit.

The evidence in the case is undisputed that Mr. Arnold owned practically all of the stock of the Kenosha Street Railway Company (hereinafter called “railway company”), organized August 10, 1900, and that he absolutely dominated and controlled the affairs of such corporation. It is also undisputed that he held at least a majority of the stock in the Arnold Electric Power Station Company (hereinafter called the “construction company”) and that he dominated and controlled the affairs of that company. It is likewise conclusively established that he owned practically all of the stock in the Kenosha Electric Railway Company, which was organized shortly after May 5, 1902, and that he also dominated and controlled the affairs of.that company until he disposed of his stock therein during tbe year 1906.

Prior to May 5, 1902, the construction company had performed construction work, and delivered construction material in the streets, to the value of $47,513.83, under its agreement with the railway company. On April 22, 1902, this court decided the case of Allen v. Clausen, 114 Wis. 244, 90 N. W. 181, in which it was held that the original franchise granted the plaintiffs was void because the grantees named therein were individuals, while sec. 1862, Stats. (1898), authorized the granting of such a franchise to a corporation only. No part of the above sum had then been paid the construction company. ,, , .

On May 5, 1902, the directors of the railway company met and adopted two resolutions. Mr. Arnold was present, hut voted on neither. The first recited that, ordinance No. 240 having been declared void by the supreme court, it was expedient that the proposition of B. J. Arnold for the issue ■of stock to him on account of the transfer of said ordinance, and the company’s acceptance of such proposition, should be abrogated, the consideration therefor having wholly failed. Mr. Arnold testified on the trial that the sole consideration for the $30,000 in bonds issued and delivered to him was the •assignment of said ordinance No. 240 by him to the railway ■company. It does not appear just what the agreement between the parties was in reference to the amount of stock he was to receive in addition to the bonds. Such stock was evidently intended to represent his profit on the purchase of the franchise from the plaintiffs, they having received the entire $30,000 in bonds in consideration of their assigning the fran■chise, according to Mr. Arnold’s testimony. The second resolution recited the adverse decision of this court rendering the ■franchise void and that the company was unahle to sell its bonds or provide money to make payments under the construction contract, so that it was necessary, in order to prevent greater loss,' to procure the cancellation of such contract. The resolution then recited:

“Whereas, Mr. B. J. Arnold has this day offered to save this company harmless from said construction and equipment ■contract, and from all loss, costs, damages and payments ■thereunder and growing out thereof, provided and on condition that he be paid and allowed for so doing the sum of $46,000, payable $16,000 in cash and the balance of $30,000 in and by the delivery to him of thirty of the bonds of this ■company for one thousand dollars each, with all their coupons, matured and unmatured, attached: . . . Therefore be it and it is hereby resolved, that said proposition of said B. J. Arnold be and the same is hereby accepted and the officers of tin's company are directed to take all steps and perform all .acts necessary to carry out said proposition and its acceptance.” ,

The resolution further recited that “the thirty bonds to be .allowed to said B. J. Arnold shall be bonds numbered 121 to .150, both inclusive.” The company further assigned to Mr. Arnold its rights in the sum of $5,000 on deposit with the-city of Kenosha “on account of ordinance No. 240,” and “$5,000 in the hands of Z. Gr. Simmons to indemnify him as-bondsman.” The $16,000 in cash referred to in the resolution was paid Mr. Arnold. The bonds to be turned over to-him were the identical bonds delivered to him on March 25th and the consideration for which it was supposed had failed by reason of the franchise for which they were given having been declared void. As already stated, these bonds had passed out of Mr. Arnold’s possession, and it is apparent that it was his intention, when the transaction of May 5th occurred, to take the necessary steps to supply the want of consideration for their issue and thus validate them.

The decision of the trial court was based on two grounds r (1) The street railwáy company received nothing of value on May 5th that would furnish a sufficient consideration for the bond issue at that time; and (2) the bonds in suit were issued prior to May 5th for an insufficient consideration and were therefore void, and could not be validated by the transaction of May'5th. In support of the first ground it is said that the work done and material furnished by the construction company, a substantial portion of which had been worked into the street railway line, never was the property of the railway company and never became such, and that therefore on May 5th, when the issue of bonds was voted, the company received no consideration and had no property or thing of value whatever. The following authorities are relied on to sustain such contention: 30 Am. & Eng. Ency. of Law (2d ed.) 1217; Haney v. Schooner Rosabelle, 20 Wis. 247; Galloway v. Week, 54 Wis. 604, 12 N. W. 10; Andrews v. Durant, 11 N. Y. 35; Gregory v. Stryker, 2 Denio, 628; West Jersey R. Co. v. Trenton C. W. Co. 32 N. J. Law, 517; Elliott v. Edwards, 35 N. J. Law, 265; Clarkson v. Stevens, 106 U. S. 505, 1 Sup. Ct. 200. If the position taken is sound, it disposes of the case for all practical purposes. While the agreement on Arnold’s part to indemnify the railway company against being called npon to pay the money due “the construction company might furnish a sufficient consideration to support the validity of the bonds, yet, if there is no property on which the trust deed given to secure such bonds could operate, there is no security whatever for the payment of the bonds.

The authorities cited by the respondent do not seem to reach the situation here presented. Prior to the decision of this court in Allen v. Clausen, 114 Wis. 244, 90 N. W. 181, the railway company and the construction company evidently acted upon the assumption that the franchise granted by ordinance No. 240 was valid. It was the only authority which gave any color of right to tear up the streets and place tracks and erect poles therein, and it would appear from the ■evidence in the case that about one third of the construction work had been performed when the ordinance was declared invalid.

The construction contract is peculiar in its terms. It is silent as to title or ownership of the road as constructed or as to the ownership of the construction material as delivered on the ground. It made no provision for acceptance of the work •on completion. Under its terms the street railway company was obligated to pay the actual cost of completing the line, plus fifteen per cent, to cover the work of engineering and supervision by the construction company. Settlement was required to be made on the “5th of each month for all material delivered and labor performed and other expense incurred . . . during the previous month in cash or other payment satisfactory to the said Arnold Company.” If this •contract had been carried out according to its terms, the construction company would be obliged to advance very little money of its own to carry on the work. The fact that the same person controlled both corporations rendered the acceptance of the work a merely formal matter. Eor the same reason, perhaps, the advances to carry on the work were all made hy the construction company, although it appeared that the railway company had over $19,000 in its treasury on May 5, 1902. The nature of the contract was such that it would seem that the construction company was employed by the railway company as its agent and employee to construct the line, receiving, as compensation for its services for engineering and supervision, fifteen per cent, of what the road ■otherwise cost.

The authorities are generally to the effect that, as to materials that are affixed to and made a part of a railroad which is- subject to a mortgage, both present and future property will be subject to the lien of such mortgage in favor of bona fide mortgage bondholders, in superiority to any contract between the vendor of the property and the railroad company. Galveston, H. & H. R. Co. v. Cowdrey, 11 Wall. 459; Porter v. Pittsburg B. S. Co. 122 U. S. 267, 7 Sup. Ct. 1206; Thompson v. W. W. V. R. Co. 132 U. S. 68, 10 Sup. Ct. 29; Coe v. McBrown, 22 Ind. 252. The trust deed that is being foreclosed in this suit, in express terms covered after-acquired property.

Aside from the foregoing considerations, and regardless of where the title to the improvements made and the materials furnished vested prior to May 5, 1902, we think the transaction at that time was amply sufficient to vest the title to the property in question in the street railway company, if it were otherwise vested before.

Without any intent to use the appellation in an invidious ■sense, Mr. Arnold was a veritable Pooh Bah as far as the three corporations here involved were concerned. When he “met” with himself, they met if he so willed. His unhampered authority to dictate was questioned by no one. He was •simply dealing with his own property through a corporate agency as absolutely as he might deal with it as an individual. We’ must look to his intent, to some extent, to determine just which corporate entity owned the property we are dealing-with. When he made a proposition to the railway company to save it harmless from the construction contract and also-from all “loss, costs, damages and payments thereunder or growing out thereof” in consideration of $16,000 in cash and $30,000 in bonds, the construction company was in fact making the offer. He was, to all intents and purposes, the-construction company. The amount to be paid was substantially the amount due the construction company. There is-no proof that he was called upon to pay any “loss, costs, or damages” arising out of the contract, except as he might have-paid the construction company what was due it. The resolution shows that he was empowered to collect $10,000, which had been deposited by the railway company for two different purposes, in addition to receiving the $46,000 in bonds and money. It does not appear how much was realized on such-claims. No claim was made upon the railway company after May 5th for the amount then due on the construction contract, presumably because Mr. Arnold had settled with the construction company, as the arrangement entered into contemplated he should. It never thereafter asserted that the construction contract was not by mutual arrangement canceled and terminated as it was agreed it should be.

It makes very little difference whether this contract was entire or separable. If entire, the parties had a right to agree upon the amount due thereon and on the damages the contractor should be entitled to receive for surrendering his contract, if any; and on payment of such amount there was-no obstacle whatever in the way of terminating such agreement. We know of no rule of law that would, in the absence of express agreement, permit a contractor to receive pay for what was due him on his contract and for damages he might be entitled to for cancellation thereof, and at the same time permit him to retain the property thus paid for. If the construction company here could receive $46,000 in payment for all sums due upon the contract and could voluntarily agree to a termination of such contract, and in addition thereto could keep the property represented by the payment, we would have an apt illustration of how it is possible to eat cake and keep it at the same time. We think no such intention should be inferred from the acts of the parties, and certainly no such intent is.expressed.

The obvious reply to this reasoning is that the arrangement was made between the railway company and Arnold as an individual, and that the agreement should not be treated as though made with the construction company. Neither the street railway company nor the construction company is here repudiating Arnold’s authority to- act for the construction company; nor are they combating the proposition that he did so act. This is a proceeding in a court of equity, that looks ' to substance rather than to form. Mr. Arnold testified, and his testimony is undisputed, that the construction company was an Illinois corporation “owned and controlled” by him. In view of this fact, which is a verity in the case, the rational conclusion to draw is that the arrangement of May 5th was, in legal effect, made between the two corporations. As to the effect of permitting Arnold to deal with these corporations in the manner in which he did, the following cases support the view that his acts were binding upon the corporation he assumed to act for: St. Clair v. Rutledge, 115 Wis. 583, 92 N. W. 234; Northwestern F. Co. v. Lee, 102 Wis. 426, 78 N. W. 584; First Nat. Bank v. G. V. B. Min. Co. 89 Fed. 439; Quee D. Co. v. Plant, 55 App. Div. 87, 67 N. Y. Supp. 10; Fitzgerald & M. C. Co. v. Fitzgerald, 137 U. S. 98, 109, 11 Sup. Ct. 36; Chambers v. Lancaster, 160 N. Y. 342, 54 N. E. 707; Nat. State Bank v. Sanford T. & T. Co. 157 Ind. 10, 60 N. E. 699; McComb v. Barcelona A. Asso. 134 N. Y. 598, 608, 31 N. E. 613; Preston Nat. Bank v. G. T. Smith M. P. Co. 84 Mich. 364, 47 N. W. 502; Sherman. Center T. Co. v. Morris, 43 Kan. 282, 23 Pac. 569.

Erom what has been said it is apparent that there was an ample consideration to support an issue of bonds to the amount of $30,000, aside from the consideration that would follow because of the payment of the debt, unless the lack of a franchise rendered the property worthless. We do not think the lack of a franchise deprived the construction work of value, and it certainly did not destroy the value of material placed upon the ground and not' actually wrought into the construction. The city of Eenosha was evidently desirous that a street railway system should be installed. It granted the original franchise over the mayor’s veto. It afterwards granted additions to the franchise and ratified the assignment thereof to the street railway company. The Kenosha Electric Railway Company was organized in May, 1902, and almost immediately secured a franchise not materially different from that originally granted. This corporation was dominated and controlled by Mr. Arnold to the same extent that the former company had been, and no doubt the new franchise would have been granted to the former company if the proper request had been made upon the city council.

It is argued, however, that if it be assumed that the railway company might have legally issued bonds to the amount of $30,000 it did not do so; that in effect it attempted to validate bonds to that amount which were already issued and delivered to Mr. Arnold; that such bonds were void for want of consideration, and, having passed out of Arnold’s control, they were void for all purposes and could not be made valid obligations by supplying a new and sufficient consideration. To state the proposition in another way, it amounts to saying that, though the holders of the bonds might have surrendered them and taken other valid bonds in the same amount in their stead, yet the failure so to do has left them with worthless paper in their hands. Here again the question of substance rather than of form is involved. If the law pronounces the bonds void, however, it is just as much the duty of a court of equity to obey its mandate as it would be the duty of a court of law to do so.

Sec. 1753, Stats. (1898), provides that:

“No corporation shall issue any stock or certificate of stock except in consideration of money or labor or property, estimated at its true money value, actually received by it, equal to the par value thereof, nor any bonds or other evidence of indebtedness except-for money, labor or property estimated at its true money value actually received by it, equal to seventy-five per cent, of the par value thereof, and all stocks and bonds issued contrary to the provisions of this section and all fictitious increase of the capital stock of any corporation shall be void.”

It will be observed that this section treats of corporate bonds and stocks.- In the case of stock it is void unless issued in consideration of money or its equivalent to the amount of the par value of the stock. In the case of a bond it is void unless issued in consideration of money or its equivalent to the extent of seventy-five per cent, of its par value. It is very obvious that the lawmaking power did not use the word “void” in this statute, as applied to stock, in the sense that stock once issued in violation of its provisions could not be validated by paying a full consideration therefor. Secs. 1751, 1754, 1756, Stats. (1898), wherein provision is made for collecting the difference between the amount paid and the face value of stock issued, negative any such construction.

It is difficult to imagine any greater infirmity in the stock of a corporation than would result from overissue. Such stock is wholly void. But it seems that overissued or spurious stock may be legalized by a subsequent legal increase of the capital stock of the corporation. In re New Zealand B. Corp. L. R. 3 Ch. App. 131; 1 Cook, Corp. § 292. And it is held that where spurious stock is issued, if there is an after surrender of an equal amount of valid shares, made for the purpose of validating the spurious shares, they thereby become valid. Per in v. C., N. O. & T. P. R. Co. 18 Weekly Law Bul. 382; Cincinnati, N. O. & T. P. R. Co. v. Citizens’ Nat. Bank, 24 Weekly Law Bul. 198. Judge Tart participated in the first of these decisions and wrote the second. See further collation of cases under sec. 766, 3 Cook, Corp. (5th ed.) 2016 et seq.

It is difficult to see why the word “void” in sec. 1753 means one thing when applied to stock and something different when applied to bonds. And if stock, void because the statutory requirement as to consideration has not been complied with, can thereafter be validated without surrender and without reissue, by supplying such consideration, no good reason is apparent why the same rule should not apply in the case of bonds.

The New York statute inhibits the issue of bonds “for less than the fair market value thereof.” Where bonds te the amount of $10,500 were pledged to secure an indebtedness of $6,415 and in contemplation of further loans being made, with an agreement that the pledgor might sell the bonds at face and pay the loan with the proceeds, and loans were thereafter made to the face value of the bonds, it was held by the United States circuit court of appeals that the bonds were lawfully issued within the meaning of the statute. In re Waterloo O. Co. 134 Fed. 345. The validity of the bonds was not sustained on the ground that the $6,415 represented their “fair market value,” but because the bank actually advanced money thereon to the amount of their face value.

Sec. 1753 does not in terms provide that the payment of the consideration must be contemporaneous with the issue of the bonds. In this case, in the first instance, a supposedly valid consideration was given by the party to whom the bonds were issued. lie transferred them to third parties. Six weeks later, when it transpired that the consideration had failed, or the parties so supposed, he substituted other and sufficient consideration therefor. We conclude that the issue of the bonds was validated by the payment of such consideration. Having reached such conclusion, it is unnecessary to consider the application of sec. 1753, Stats. (1898), to bona fide holders of bonds received in due course of business, or whether the plaintiffs are holders in due course, and neither is it necessary to discuss numerous other questions argued by .appellants.

Our conclusions are: (1) That the construction work ■done and the material furnished and delivered under the construction contract became and.were the property of the Eenosha Street Railway Company from and after May 5, 1902; (2) that the lien of the trust deed sought to be foreclosed in this action attached to such property and is now a valid, outstanding, and subsisting lien against the same; (3) that such lien, as to such portions of said railroad as had been wholly or partially constructed prior to May 5, 1902, is prior and paramount to any right, claim, or interest of the Kenosha Electric Railway Company in or to such portions ■of said railroad; (4) that the plaintiffs are entitled to the usual judgment of foreclosure and sale in this action.

By the Court. — The judgment of the circuit court is reversed, and the cause is remanded for further proceedings .according to law.

Upon a motion for a rehearing there was a brief by Wegner, Blaichley & Gilbertson, attorneys, and F. M. Lowes and Spencer Ward, of counsel, for the appellants, and a brief hy Quarles, Spence & Quarles, of counsel for the respondent.

The following opinion was filed May 11, 1909: