Peabody v. Interborough Rapid Transit Co.

212 A.D. 502, 209 N.Y.S. 380, 1925 N.Y. App. Div. LEXIS 9493

• Court: Appellate Division of the Supreme Court of the State of New York
• Decided: April 3, 1925
• Status: Published

Opinions

Clarke, P. J.:

This motion was presented solely upon the pleadings. The notice of motion asked: First, for judgment for the plaintiff on the pleadings for the amount sued for thereon, together with any other relief plaintiff may be entitled to; second, that in the event the court does not grant judgment for the full amount, that the court determine what issues shall be tried in the action as affecting the parties thereto; third, that the plaintiff have such other and further relief as he may be entitled to.

The plaintiff is a stockholder of the Manhattan Railway Company. The amended complaint alleges that the Interborough Rapid Transit Company and the Manhattan Railway Company, on the 1st of January, 1903, entered into a lease whereby the Manhattan Company leased to the Interborough all its railroads, together with all its franchises, rights, etc., for a term of 999 years from the date of the organization of the Manhattan Company, and that as part of the consideration for said lease the Interborough executed and delivered to all the owners of record of the capital stock of the Manhattan Company guaranties in writing upon the certificates of stock, duly signed by the treasurer in the manner and form following:

“ Dividends amounting to six per cent per annum and an additional amount, if earned, not exceeding one per cent per annum, until January 1st, 1906, and after that date, dividends amounting to seven (7) per cent per annum, upon the par value of the outstanding capital stock of the Manhattan Railway Company are guaranteed, and will be paid by the undersigned, in accordance with the terms and provisions of a certain indenture made between the Manhattan Railway Company and the undersigned, dated the 1st day of January, 1903.

[signed] INTERBOROUGH RAPID TRANSIT COMPANY,

“ By-' Treasurer

That said guaranties were executed pursuant to the terms and provisions of article 6 "of said lease, the material portions of which are as follows:

“ * * * the Lessee hereby covenants and agrees to pay to the Lessor and hereby guarantees to each owner of record of shares of capital stock of the Lessor, dividends, as rent, as hereinafter provided, for the term of two years and nine months from the 31st day of March, 1903. The Lessor hereby covenants and agrees that prior to the date of payment of each of the instalments of rent provided for in this article, it will declare a dividend equal to such instalment, payable upon the date of payment -of such instalment, and after or simultaneously with such declaration of dividend, will close its transfer books of stock for a reasonable time prior to such date of payment, and that such dividend shall be payable to the owner of record of its stock, who shall be such, on the date of closing of its transfer books aforesaid. The said dividend rentals payable to all such owners of record for each of the first two years and the remaining nine months comprised in said two years and nine months shall be an amount equal in the aggregate to the net earnings of the Lessor for each of said three periods respectively, but shall not exceed seven per centum (7%) per annum upon the outstanding capital stock of the Lessor; and shall be not less than six per centum (6%) per annum upon such stock. * * *. No reduction of the guaranteed annual dividend rental or in the term of years of this lease shall be made without the unanimous consent of the shareholders of record of the Lessor. * * *. From and after the expiration of said two years and nine months, and from January 1st, 1906, the Lessee hereby covenants and agrees to pay to the Lessor, and guarantees to each owner of record of the shares of capital stock of the Lessor as rent, an annual dividend of seven per centum (7%) on his holding of the capital stock of the Lessor.

“ The Lessee hereby covenants and agrees, that it will each and every year during the term hereby granted, beginning with the first day of April, 1903, pay to the Lessor as rent for the demised property, and hereby guarantees to the respective owners of record of the shares of the Lessor, the said annual dividends free of all charges, in quarter-yearly payments on the first days of January, April, July and October in each year, which after January 1st, 1906, shall be equal quarterly payments; the first of such payments to be made on the first day of July, 1903; and the Lessee will from time to time execute in proper form a guarantee to the above effect printed or engraved upon the certificates of stock of the Lessor; and as such stock certificates are surrendered for cancellation and issuance of new certificates in place thereof, will from time to time, upon request of the holder renew such guarantee upon all such new certificates. * * ' *

“ Payments of dividends as above provided by the Lessee to the stockholders of the Lessor shall constitue payment of rent, in compliance with the foregoing covenants to pay the same to the lessor.”

That on the 1st day of April, 1903, the defendant took possession of the railroads and other property of the said Manhattan Railway Company granted by said lease and commenced the operation of the railroads belonging to said company and ever since said date has continued and is now in possession of and operating the same, and that said lease is still in full force and effect and has not been canceled or terminated.

The complaint further alleges that prior to the 1st day of January, 1922, the plaintiff induced by the aforesaid guaranty, duly became the owner of 1,100 shares of the capital stock of said Manhattan Railway Company, as to 700 of which shares he became the owner of record on or before the 1st day of January, 1922, and as to the remaining 400 shares he became the owner of record on or about the 4th day of April, 1922; and ever' since said respective dates plaintiff has been and still is the owner of record of said shares; that the defendant, at the time plaintiff became the owner of record of said shares, made, executed and delivered to the plaintiff a guaranty in the form and manner heretofore set forth, wherein and whereby defendant guaranteed to the plaintiff that said Manhattan Railway Company would distribute to the plaintiff dividends amounting to seven per cent per annum upon the par value of his said shares of stock in said Manhattan Railway Company, in equal quarter-yearly installments upon the first days of January, April, July and October in each and every year; that no dividends were declared or paid by said Manhattan Railway Company on January 1, April 1, July 1 and October 1, 1922, or January 1, 1923, although due demand upon said company for said dividends had been made, and that said company has neglected and refused to pay the same, of all of which the defendant has had due notice; that due demand was made of the defendant that it perform its said contract of guaranty and pay to plaintiff the amount of said dividends unpaid as aforesaid, but defendant has failed and refused so to do; that all dividend payments due prior to the date of the first default aforesaid were paid by the defendant directly to the respective owners of record of stock of the Manhattan Railway Company, payments being made upon the first days of January, April, July and October in each year during such period.

The complaint then prays for judgment in the amount of said unpaid dividends, with interest from the respective due dates.

The learned court at Special Term held that the complaint stated facts sufficient to constitute a cause of action. A similar complaint was sustained in Bowers v. Interborough Rapid Transit Co. (121 Misc. 250; affd., 208 App. Div. 768).

The court in Peabody v. Interborough Rapid Transit Co. (121 Misc. 647), referred to in the order granted in the case at bar, said: “ There is no dispute between the parties as to the making of the lease, the execution of the defendant’s promise indorsed upon the certificates of stock of the Manhattan Company and the non-payment of the seven per cent dividends. The defendant’s denials are concededly not intended to raise an issue as to these facts but are intended to controvert the assertion of the ultimate facts alleged in the complaint: (1) That the promise of the defendant constitutes a ‘ guaranty ’; (2) that the promise of the defendant was executed and delivered to the stockholders of the Manhattan Railway Company; (3) that the lease of the property of the Manhattan Railway Company is still in full force and effect. Briefly stated the defendant’s contentions are: (1) That its promise was made to the Manhattan Railway Company and only that company can enforce it in the courts; (2) that the promise indorsed on the certificate is dependent upon the continued existence of the promise contained in the lease for the payment of rental thereunder, and (3) that this promise has been modified by mutual agreement of the lessor and the defendant.”

The court held, and properly so, that the contention that defendant’s promise indorsed upon the certificate is not a promise to the individual stockholders upon which they as individuals may bring suit, has been overruled in Bowers v. Interborough Rapid Transit Co. (supra).

The court held, however, that the answer alleged a modification of the lease by the parties thereto.

The “ Nineteenth ” paragraph of the answer alleges:

“ Nineteenth: On information and belief that pursuant to due authorization the defendant and the said Manhattan Railway Company duly executed the said Plan of Readjustment and Agreement embodied in the said definitive agreement upon November 28th, 1922, and the said lease dated January 1, 1903, from the said Manhattan Railway Company to the defendant Interborough Rapid Transit Company, modified as aforesaid and all the provisions thereof including the guaranty to the holders of the capital stock of the said Manhattan Railway Company of the payment by the defendant of dividends as rental at the rate of -7% per annum thereupon ceased and determined in every respect inconsistent with or superseded by the terms and conditions of said Plan of Readjustment and Agreement, modified as aforesaid and said Memorandum of Definitive Provisions which and all the provisions thereof including those governing payment of rental dividends to the holders of stock of the said Manhattan Railway Company became thereupon effective and fully binding upon the defendant and upon the said Manhattan Railway Company and the stockholders thereof.”

That allegation presented a question of fact, and, therefore, an issue which could not be disposed of in favor of the plaintiff upon this motion for judgment upon the pleadings. It is of course true that the parties to an agreement may, by mutual consent, modify it or abrogate it.

There was argued at the same time as the case at bar Nina H. Peabody v. Interborough Rapid Transit Co. (124 Misc. 801) upon a similar cause of action. In that case, however, two separate motions were made under section 476 of the Civil Practice Act and rule 113 of the Rules of Civil Practice. Voluminous affidavits and exhibits were presented, and the learned court held: “ It seems to me as clear as noonday that the lease between the two railroad companies not only was n ,ver modified or amended so as to be binding upon all stockholders of the Manhattan Company, but there never was any intention so to modify or amend it. There is in the lease not alone the clause guaranteeing-the payment of dividends of seven per cent by the defendant, but the further provision is also there that ' no reduction of the guaranteed annual dividend rental or in the term of years of this lease shall be made without the unanimous consent of the stockholders of record of the lessor,’ the Manhattan Company. It is obvious to me that the two corporations recognized the validity of the latter provision in all that was done to bring about an agreement of the Manhattan shareholders to accept less than the guaranteed dividend. Holders of over ninety per cent of the stock did so agree, but it is unquestionable from the language contained in the * Plan and Agreement,’ wherein the purposes of those stockholders were reduced to printed form, that no one intended or expected non-assenting shareholders, of whom the plaintiff was one, to be in anywise bound by the arrangement, or that the lease itself should be modified or changed as to them. * * *. Having obtained the consents of the shareholders of more than nine-tenths of the stock of the Manhattan Company and other concessions immaterial here, the promoters of the project decided to put the scheme into operation with full knowledge that the rights of those shareholders who did not join in it would remain untouched and unprejudiced by the ‘ Plan and Agreement.’ * * *. So far as the non-assenting shareholders are concerned the original lease is still in full force and effect in respect of the payment in full of the guaranteed dividends.” ¡ j

The orders granting the motions for judgment in that case are to be affirmed by an order of this court to be handed down herewith. (See 213 App. Div. 857.) It may be pointed out that the Railroad Law (§ 148) permitting the leasing of railroads provides that “ such contract may provide for the exchange or guaranty of the stock and bonds of either of such corporations by the other.” The guaranty so authorized, when executed by the'company and indorsed upon its stock, constitutes a contract with the owner of the stock. Upon its faith and credit the stock is sold. In the case at bar it appears that $60,000,000 of stock so guaranteed was issued. In this great commercial city no court should venture to declare such a guaranty worthless unless absolutely compelled to do so. The validity of contracts together with the enforcement of the obligation of such contracts is the comer stone of the business world, the distinguishing mark of modern civilization, protected by the Constitution itself. (See U. S. Const, art. 1, § 10, subd. 1; Id. 14th Amendt. § 1; State Const, art. 1, § 6.)

As this motion, however, was made solely on the pleadings, we may not in the decision of this case apply the knowledge of the facts obtained from the record of the Peabody case, argued at the same time. But as section 476 of the Civil Practice Act provides that “ a judgment may be rendered by the court as to a part of a cause of action and the action proceed as to the remaining issues, as justice may require,” and as such relief is prayed for in the motion for judgment, the order appealed- from should be modified by providing that the issue raised by the allegation of the answer in the 19th clause thereof alone be tried, and as so modified affirmed.

Merrell, Finch and Martin, JJ., concur; Burr, J., dissents and votes for affirmance without modification.