St. Paul & Chicago Railway Co. v. McDonald

25 N.W. 453, 34 Minn. 195, 1885 Minn. LEXIS 189

• Court: Supreme Court of Minnesota
• Decided: October 15, 1885
• Status: Published

Opinion

Mitchell, J.

Incorporated by Laws Ex. Sess. 1857, c. 1, under the name of “The Minnesota & Pacific Railroad Company,” revived by Sp. Laws 1862, c. 20, under the name of “The St. Paul & Pacific Railroad Company,” which was changed to the present name pursuant to Sp. Laws 1867, c. 1, the plaintiff was organized to build a railroad from St. Paul to Winona. The lands, the taxability of which is the issue in the present ease, are a part of a grant of swamp land made to this company by the state by'Sp. Laws 1863, c. 4, to aid in the construction of this road. This grant amounted to 462,000 acres, being seven sections to the mile, although it appears that the railway company claimed it to be double that amount, or fourteen sections to the mile. According to plaintiff’s own testimony, it is not worth to exceed |1.25 per acre, or $577,500.

By the charter of this company a commuted system of taxation was stipulated for, by which, in consideration of the payment of a percentage of the gross earnings of the road to the state, the lands and other property of the company were to be forever exempt from taxation. Laws 1857, Ex. Sess. c. 1, § 18; Sp. Laws 1865, c. 6. By the original grant the lands in question were not to be subject to taxation until sold and conveyed by the company. Sp. Laws 1863, c. 4. This was subsequently modified so that whenever any of these lands should be contracted to be sold, conveyed, or leased by the company, the same should be placed upon the tax-list for taxation as other real estate, for the year succeeding that in which such contract for a sale, conveyance, or lease thereof should have been made; but in enforcing the collection of the taxes the title or interest of the company, or any trustee or mortgagee thereof, should in nowise be impaired or affected thereby. Sp. Laws 1865, c. 9.

In June, 1869, the railroad company entered into a contract (which is fully set forth in the record) with “The Minnesota Railway Construction Company” for the construction and equipment of its line of road from St. Paul to Winona, by the terms of which the latter agreed to obtain the necessary right of way, and build and equip the line complete, and, in consideration of such agreement, the railway company sold, transferred, and assigned to the construction company —First, $3,000,000 first mortgage land-grant bonds of the railroad company; second, $3,000,000 (the whole issue to be limited to that amount) of special preferred capital stock of the railroad company, issued pursuant to Sp. Laws 1864, c. 3, which should give the holders a preference from said railway company of 10 per cent, per annum from the net earnings of the road, and absolute separate ownership of all the lands which had been or which should be thereafter granted to or acquired by the railway company in aid of the construction of the road; third, all their right, title, and interest in and to all of the $6,000,000 capital stock of the railway company; fourth, all gifts, donations, bounties, or aids in any form or shape which had been or might thereafter be made or given by any person, corporation, municipality, or state, to aid in the construction of such railway; fifth, the railway company also agreed to make and deliver to the construction company any and all other documents and instruments in writing which the construction company should require or be advised by counsel as necessary or important to them to more effectually carry out the true intent and meaning of the agreement.

This rather remarkable contract, by which the railroad company completely sold itself out to pay for the construction of its road, was fully executed on its part. Although, perhaps, not very important, it is claimed that the $3,000,000 special preferred capital stock, which was to give its holders absolute separate ownership of the lands, was never issued. But the fact that it was actually issued is virtually admitted in tbe complaint, and conclusively proved by tbe evidence.

Under this contract the construction company proceeded to build tbe road. In February, 1871, after the greater part of the road was constructed, but before it was completed, tbe construction company applied to the railway company, asking for a modification of tbe contract so as to allow it to return the $3,000,000 special preferred stock to be cancelled, and that in lieu thereof the railway company execute to it a mortgage upon all the lands (the 462,000 acres) donated to aid in the construction of tbe road, for $3,000,000, with interest at 10 per cent. This modification was assented to and executed by tbe return and cancellation of the special preferred stock, and tbe execution of a mortgage on the lands for $3,000,000, presentlydue. Only one bond or certificate of indebtedness was issued to represent tbe entire amount.

As this modification was made before tbe railway company had acquired title to or fully earned these lands, we shall not consider the effect of the issue of this special preferred stock further than as it may serve to characterize what followed. In the communication to the railway company the reason assigned by the construction company for requesting this change of the contract was inability to raise money on the special stock with which to complete the road. But there is very little in the surrounding circumstances to indicate that this was the real, or at least the important and controlling, reason for requesting the change; for it nowhere appears that the construction company ever attempted to raise money on tbe stock, or ever raised, or attempted to raise, money on the mortgage after the change was effected. The mortgage was certainly not put in the usual form of railway mortgages or trust deeds, when the bonds are intended to be placed on tbe market. But however that may be, it pretty conclusively appears that the important consideration for making the change was the fact that while the lands were represented by this stock, they might be liable for the debts of the railway company. Two facts are, in our opinion, very evident: First, that by the original contract, whatever misapprehension might have existed as to its legal effect, the intention was that the issue of the special preferred stock should give the construction company the absolute and separate ownership of the lands; and, second, that the object of the modification of the contract was, not that the construction company should take a less interest in the lands, but that it might hold more securely the beneficial interest in them which it was intended by the original contract that it should have. The mortgage was not an ordinary railway mortgage, and could never, under the circumstances, have been intended or expected to perform the ordinary offices of a mortgage. In view of facts hereafter referred to, it could never have been intended or expected that the railway company would ever pay the mortgage or redeem the lands. The necessary effect and manifest purpose of it was to accomplish, in another form, what was designed to be done by the original contract, viz., to turn over to the construction company the entire beneficial interest in the lands, but in a way that would secure them against possible claims of creditors of the railway company. Another result of this change was, in effect, to separate the land grant from the other property of the railway company. Whether this was desired in anticipation of a sale of the road, which was actually made in the following January, it would perhaps be improper here to speculate.

After this modification the construction company proceeded and completed the building of the road. In January, 1872, the entire road was sold and transferred to the Milwaukee & St. Paul Railway Company, leaving the St. Paul & Chicago Railway Company “a mere legal shadow,” which neither owned nor operated a mile of road, and possessed no property, present nor prospective, unless it was the right of redemption in these lands, already incumbered for several times their value. The stock of the company represented nothing of any intrinsic value. It is as Mr. Chamberlain himself expresses it, “a mere myth,” of no value, and held “merely to keep up the organization.” The construction company, which owns it, (they have undisputed title to $4,000,000 of it, and claim to own the other $2,000,-000,) use it solely for the purpose of keeping in name and form the organization of the St. Paul & Chicago Railway Company, — and this is confessedly kept up for the sole purpose of holding the nominal legal title of these lands. When asked the question, Mr. Chamberlain admits that be knows of no other purpose, and that if there was one he thinks he would know it.

Under the form and name of. this “legal shadow,” the construction company control the lands. Although the mortgage has been overdue for over 15 years, and nothing paid on it except the proceeds of some 80,000 or 85,000 acres of the land sold to third parties, and the security confessedly not worth a fifth of the debt, and the railway company possessed of nothing out of which the deficiency can be made, yet the construction company has taken no steps to foreclose or perfect title. The lands are managed by an agent, nominally of the railway company, but really of the construction company, who remits the proceeds of sales to the trustee named in the mortgage for the benefit of the construction company. The ownership of the lands is entirely divorced from that of the road. The St. Paul & Chicago Eailway Company, existing only in name, has no valuable or beneficial interest in either. The entire beneficial interest in the lands is, to all intents and purposes, in the construction company.

After thus stating the facts as we understand them, very little remains by way of argument. The legal principles involved are few and simple. The exemption from taxation stipulated for in this charter is a privilege or immunity for the benefit of the railway company, and not inhering in the property, or passing to an assignee or grantee of the lands, severed from the enterprise in aid of which the grant was made. Equity will never suffer the mere appearance or external form to conceal the real nature and purpose of a transaction. The question is not what are the words or terms of a contract on its face, but what is its real character? It would be useless as well as disingenuous for a court to profess to be so blinded by the mere external form as to be unable to perceive the real facts underneath, which would be perfectly apparent to any business layman of ordinary intelligence.

Now, in the present case, when we strip off the external dress in which this transaction has been clothed, and look at the substance of the matter, the following facts are, in our judgment, transparently manifest, viz.: That the construction compañy has acquired these lands in payment for building plaintiff’s road, and holds the entire-beneficial interest in them as fully, to' all intents and purposes, as if conveyed by deed absolute in form; that if the exemption from taxation is to continue, it will be for the exclusive benefit of the construction company; that no part of the commutation tax now paid by the Chicago, Milwaukee & St. Paul Railway Company out of the earnings of the road is paid in lieu of taxes on these lands; that the mere form of an organization of the St. Paul & Chicago Railway Company is kept up by the construction company for the sole purpose of holding the nominal fee of these lands. And for this there can be but one object, viz., to continue this exemption for the exclusive benefit of the construction company. The organization of the railway company, which is not in the exercise of a single franchise for which it was created, and which has no beneficial interest in the lands, is kept up in form by the construction company (by virtue of this valueless stock) for the sole purpose of holding a nominal equity of redemption, so that the real owner of the lands may hold under the guise of mere mortgagee, and thus evade taxation.

This is the necessary effect of this scheme, and it can be the only possible object in keeping it on foot. If the railway company had, in payment for building its road, sold, or contracted to sell, this land grant in a block by conveyance absolute in form, it would require no argument to show that these lands are taxable. In substance and effect, we think, the same thing has been done. In short, the evidence compels us to the conclusion that this transaction, although in form a mortgage, is in substance a conveyance, and was intended to operate as such. The state should and must, in letter and spirit, religiously keep its contract obligations; but the law will not tolerate the use of mere forms to evade its spirit. To continue the exemption of these lands from taxation would be a fraud upon the state, and contrary to the meaning and spirit of the statute. Our conclusion, therefore, is that the findings of fact and conclusions of law of the learned trial court are not justified by the evidence.

The order denying a hew trial is reversed, and a new trial ordered.