Chicago Railway Equipment Co. v. National Hollow Brake Beam Co.

Mb. Presiding Justice Smith

delivered the opinion of the court.

This record presents the question whether, under the facts, the National Hollow Brake Beam Company ought to be allowed to treat the note of the El Nayal M. & M. Co. for $4,000, the Hammond Manufacturing Company draft for $5,000, the certificate of the Deceiver of the Monterey & Mexican Gulf Bailroad for $4,500 as not received in part payment of the rent due December 31, 1898, and the Atkins & Milligan notes for $20,000 as not received in part payment of the $106,287.90 which was to be returned to the Brake Beam Company in 1897, and to declare forfeitures of its lease to appellant on the ground that the rents reserved have not been paid.

There is no material controversy between the parties as to the facts and conditions existing prior to the rent reduction agreement in 1898. Nor is there any controversy as to the relations of Leigh and Laughlin to the Brake Beam Company subsequent to that agreement, or as to their relations to each other until June, 1900. Laughlin and Leigh owned substantially all the stock of the Beam Company, except 1,325 shares owned by Mr. Kern, and were the executive and finance committee of the Beam Company, and directed its affairs and business.

The master found, and we think correctly, that after the rent reduction agreement was made the Equipment Company paid and adjusted all its obligations under the lease up to and including the year 1896, and in doing so had paid upwards of $810,000; and that at the time of the filing of the bill in this case its assets were upwards of $1,600,000 in value; that on March 16, 1898, Laughlin submitted a formal proposition to the Equipment Company regarding the reduction of its rent from $65,000 to $5,000 per annum, in which it was recited that the $106,287.90 balance had been returned by the Equipment Company to the Beam Company; that after January 1, 1899, the Equipment Company promptly paid the sum of $5,000 per annum to the Beam Company as it fell due; that a certain note for $4,000 of the El Nayal Milling & Mining Company had appeared in the transactions of the Beam Company prior to the turning over of the note of the El Nayal M. & M. Company in controversy here. This note was for moneys advanced to the El Nayal Company on account of Leigh, Laughlin and Burkhardt, and was divided up between them subsequently, Laughlin and Leigh giving their notes for $1,000 and $2,000 respectively, and Burkhardt his note for' $1,000. The latter note is paid, but the Beam Company still holds Laughlin’s and Leigh’s notes.

The evidence shows that Laughlin and Leigh were interested in the Noonday Mining Company operating in Oregon. This company obtained certain machinery from the Hammond Manufacturing Company which was installed and operated in the Oregon mine. The Hammond Manufacturing Company item here involved represented a loan by Leigh to that company of $5,000. Laughlin refused to become a party with Leigh in making the loan, but at Leigh’s request prepared the papers therefor which consisted of a draft drawn by the Hammond Company upon Leigh accompanied by a note signed by the Hammond Company and F. B. Hammond, payable to Leigh, certain securities being pledged as collateral to the note by a collateral agreement.

It appears from the evidence that notes representing large sums of money borrowed from the Equipment Company, made by Laughlin and Leigh, were received by the Brake Beam Company as cash, through Laughlin and Leigh, constituting the executive and finance committee of the Beam Company; that Laughlin and Leigh for the Beam Company loaned its moneys on paper purporting to be the receiver’s certificates of the Monterey & Mexican Gulf Railroad Company to the amount of $20,000, which certificates were other than the $4,500 certificate here in question.

Edward B. Leigh testified that in ttje latter part of December, 1898, he mentioned to Laughlin the three items here in controversy and his (Laughlin’s) note for $7,500 as being held by the Equipment Company, and that Laughlin said to him: “Turn them over to the National Hollow Brake Beam Company; that is where they belong * * * as a part payment of the rent.” This testimony is denied by Laughlin.

From the journal of the Beam Company under date of December 31, 1898, it appears that the Equipment Company is credited with $21,000 for the following notes received from it: El Nayal M. & M. Co., $4,000; Hammond Mfg. Co., $5,000; Monterey & Mex. G. R. R., $4,500, and H. D. Laughlin, $7,500. This credit is posted in the ledger of the Beam Company to the credit of the Equipment Company. The entries are made in the handwriting of Leigh. When Leigh made these entries he put the notes and certificate in a separate envelope and placed the envelope with the Brake Beam Company papers.

It clearly appears from the evidence, we think, and the master finds, that the Brake Beam Company was used by Leigh and Laughlin to carry their personal matters when it suited their convenience.

It is perhaps worth noting at this point that Laughlin testified that Robertson represented to Leigh and himself that he was authorized by the Federal Court of Mexico at Monterey to borrow for the Monterey & Mexican Gulf Railroad Co., for which he claimed to be the receiver; that he also said to them that if they would consent to make the loans he would buy brake beams of the National Hollow Brake Beam Company for some freight cars he was having built; and that Leigh and Laughlin agreed to loan on these certificates (four other certificates, not the one in question), if they had the certificate of the court that they were authorized. And Laughlin went to Monterey to look into the matter of these certificates and approved of these loans.

Laughlin and Leigh had many and quite large transactions in which they were interested, and in some of these their interests were joint. Leigh, by mutual consent and long practice, kept the books of account and the papers and documents pertaining to these interests, and their relations were of such character that Leigh had the custody of many of Laugh 1 in’s private papers and securities.

In and through the rent re-adjustment Laughlin had acquired substantially all the capital stock of the Beam Company except Leigh’s stock and Kern’s 1,325 shares. On February 8,1900, Laughlin received a statement of account from Leigh dated February 1, 1900, purporting to state the account between them for the preceding ten years. In the account was a statement of the assets of the Brake Beam Company showing the following, among other items, as accounts not good or not available: Monterey & Mexican Gr., $25,158.48; El Nayal M. & M. Co., $4,000; Hammond Mfg. Co., $7,353.81.

By a letter dated October 4, 1900, Leigh explained to Laughlin the El Nayal M. & M. Co. note, saying this amount was advanced for the enterprise, and that Laughlin had agreed to share it with* Leigh by absorbing it in the Beam Company.

On Hovember 7, 1900, an auditing committee of the Beam Company was appointed and later reported that it found among the assets of the company" the El Hayal, Hammond and Montere}T items here in' question. The same items appear in the trial balance of the Brake Beam Company dated December 31, 1898, and also in the trial balance of January 18, 1899. The same items appear in the trial balance of the company dated Eebruary 1,1900, and in the trial balance of October 1, 1900.

A copy of the auditing committee’s report above referred to was received and spread at large on the records of the proceeding of the board of directors of the Beam Company in 1900 and a copy of it was furnished to Laughlin.

In the trial balances above referred to there also appeared among the assets of the Beam Company the Atkins and Milligan notes here in question. V

There is evidence tending to show, and the master finds, that the fund of $106,287.90, which was recommended to be returned to the Brake Beam Company in January, 1897, was left with the Equipment Company, on the responsibility of Laughlin and Leigh, who were the managing officers and the executive and finance committee of the Brake Beam Company until the latter part of the year 1897. The report of J. L. Calhoun, treasurer of the Brake Beam Company, dated January 19, 1898, shows that this item had been received by the Beam Company at that time. That Laughlin knew that the items in controversy had been turned over to the Brake Beam Company not later than March, 1900, appears from his letter to Leigh asking for the date of the El Hayal note, and when the Brake Beam Company acquired it, and stating that he was sufficiently familiar with the other items to enable him to figure intelligently.

From this evidence and other evidence in the record of perhaps equal or greater importance which we have not taken time to refer to, we are convinced that Laughlin and the other stockholders of the Brake Beam Company knew of the turning over to the Beam .Company of the securities in controversy here, and that Laughlin, at least, assented thereto. Laughlin and Leigh were the finance committee and had authority to act for the Beam Company, sufficient at least to bind the company of which they were the principal owners, by accepting the securities in payment of rent. At the meeting of stockholders in January, 1898, the treasurer reported the payment of the $106,287.90 to the stockholders, and this report was approved by a formal vote. This payment either in form or substance was not questioned until December, 1901, a period of three years after the transaction. It was then questioned, apparently, not for the purpose of bringing a suit for the rent alleged to be due against a large and prosperous corporation possessing assets of over $1,000,000, but for the purpose of making it the basis of a forfeiture of the lease. We are justified by the evidence in believing that the transfer of these securities would never have been questioned but for the bitter quarrel and disagreement that afterward arose between Leigh and Laughlin, for both of them had been using the Beam Company for their individual purposes without any warrant or authority in law and in a manner which would have afforded abundant basis for legal complaint against them on the part pf other stockholders, if there were any, who had not consented to such use. Brown v. DeYoung, 167 Ill. 549.

Upon the facts shown by the record a court of equity will not allow the Brake Beam Company after three years of acquiescence in a payment of rent accepted by its stockholders and officers, to repudiate their action and declare a forfeiture of the lease. In equity the stockholders are in substance the corporation, and what will estop the stockholders will estop the corporation. If the stockholders have no standing in equity for relief sought or rights claimed for their benefit they cannot obtain such relief or maintain such rights through or in the name of the corporation. In other words, equity looks to the substance and not the form; it looks behind the corporation to the shareholders who are the owners and beneficiaries and ascertains whether these ultimate beneficiaries have any standing to demand a legal right insisted upon. Thomp. Corp. Vol. 4, p. 4479; 1 Morawetz Priv. Corp. 1; Swift v. Smith, 65 Md. 428; Home Fire Ins. Co. v. Barber (Neb.), 60 L. R. A. 927.

But it is to be remembered that Laughlin had discretionary authority of the broadest latitude in the conduct and management of the business and affairs of the Beam Companjr after the rent reduction agreement with him had been made. This was embodied in his proposition to the company which was accepted by it. Laughlin’s acquiescence in the payment of rent by delivery of the securities in question here for so long a time with full knowledge, as we think, of such transfer must be regarded in determining the issues in this case, as the act of the corporation itself. So that without appealing to the equitable principles above mentioned, and quite apart from considerations based thereon, it would be inequitable and unjust to permit a forfeiture of the lease upon the grounds stated in the notices and relied upon by appellees. After carrying through the rent reduction agreement upon the basis of the partial payment of the $106,287.90 by the turning over of the Atkins & Milligan and Burgess notes and the payments of large sums of money and the issuing of the bonds by appellant called for by that agreement, appellant is entitled to insist that the Brake Beam Company is bound by the rent settlement, and that it cannot now say that the payment is invalid.

The evidence in the record proves the averments of the bill. Appellant is entitled to the relief prayed. The decree is reversed, and a decree granting an injunction will be entered here.

Reversed and decree here.