Johnson v. United Rys.

The record in this case is exceedingly voluminous. It is made up, in large part, of the records in eleven other cases, which are thrown together in the abstract with little regard to system or relevancy. The index is a frank failure. After much labor, it is hoped that a fairly succinct statement of such facts as are essential to an understanding and a decision of this case has been obtained. It has not been thought necessary to deal with masses of figures, nor to do more than state the effect of documentary evidence, since all of those matters are very fully set out in the very exhaustive opinion of the learned Special Judge who writes the principal opinion.

On March 10, 1898, the Central Traction Company of St. Louis was duly incorporated, with a paid-up capital of one hundred thousand dollars. On July 10, 1899, by proper proceedings, its name was changed to United Railways Company of St. Louis. Thus one of the parties to this record was born. Upon changing its name, it increased its capital to forty-five million dollars — twenty-five million common stock and twenty millions preferred. Then it bought all but one of the street railways of St. Louis and was established in business.

On March 2, 1899, the St. Louis Transit Company was duly incorporated — capital three thousands dollars — and so a second party to this record was born. Shortly thereafter this capital stock was also increased, and then stood at twenty million dollars. By September 13, 1899, the United Railways Company apparently desired to quit active business, and so it "leased" everything it had — including its bank account — to the Transit Company, which then apparently desired to get into active business. This lease was to run for forty years. When all formalities were over, the Transit Company owned a clear working majority of all the voting stock of the United Railways Company, and the United Railways Company owned a clear working majority of all the voting stock of the Transit Company. Thus each company had absolute control of the other, but neither had control of itself — paradoxical, but true.

The Transit Company ran the street railways of St. Louis and the United Railways Company marked time until September 27, 1904, at which time the "Tripartite Agreement" was made. "Syndicate" was the third party to this agreement, United Railways and Transit Company being the other two. (If Syndicate's genesis is a matter of interest, it may be found in the principal opinion, and in other opinions herein cited.) By this agreement Syndicate acquired all of Transit Company's holdings of United Railways' voting stock, and numerous other things, and Transit Company agreed, among other things, that it would, on demand, at any time, surrender its lease to United Railways, and deliver, also to United Railways, all property of every kind and character received by Transit Company under the lease, and, in addition, "all cash, bills receivable or other credits then owned or held by it." Thus Syndicate owned a clear working majority of all of United Railways' voting stock, and therefore had control of United Railways, and United Railways owned, as has been said, a clear working majority of all of Transit Company's voting stock and therefore had control of Transit Company, and, in addition, was armed with the specific power to strip Transit Company at any time, on demand, of its lease and all property received under the lease, and in addition all cash and credits then belonging to Transit Company, regardless of the amount of cash and credits, and regardless also of whether there had been a breach of the terms of the lease or not. This power United Railways was bound by contract to exercise whenever Syndicate called upon it to do so.

In the meantime, Transit Company had become liable to answer in damages to divers and sundry, and specifically to Murphy and Madigan and Schmitt, and numerous others, for personal injuries, in large sums. These claims already were in the form of judgments, or ultimately assumed that form. The situation was charged with evil omen, for Transit Company and for its creditors. The president of United Railways was also president of Transit Company, the secretary of United Railways was also secretary of Transit Company, and the auditor of the United Railways was also auditor of Transit Company. In addition, the eleven directors of United Railways were (with a single exception) also directors, and all of the directors (with a single exception) of Transit Company, counsel for United Railways was counsel for Transit Company, the stockholders of both companies were, in the main, identical — and United Railways was controlled by Syndicate. Less than thirty days after the execution of the "Tripartite Agreement," on October 26, 1904, to be exact, United Railways demanded that Transit Company should instantly surrender up its lease and all assets received under the lease, and all cash, bills receivable and other credits as provided in the "Tripartite Agreement," and on October 29, 1904, thirty-two days after the execution of the "Tripartite Agreement," Transit Company complied, in minutest detail, with that demand. It not only complied with the terms of the Tripartite Agreement, and of the demand made under it, but it went much farther. It voluntarily delivered to United Railways all other property which it had accumulated during the five years it had been operating the railway system, and of these accumulations there seems to have been a huge volume. A detailed statement of this sum and its items is found in Barrie v. United Railways Co., 138 Mo. App. 557, and need not be repeated here. This surplus was delivered, gratuitously, when no obligation, contractual or otherwise, existed requiring its delivery, and when its delivery had not even been demanded. Section Fourteen of the lease did indeed call for the forfeiture of all this surplus in the event of a breach by Transit Company of the terms of the lease, but there was no pretense, even, that any breach had occurred. There was no provision, even in the Tripartite Agreement, calling for this sacrifice.

Murphy, Madigan, Schmitt, et al. had not been paid, however, and the "Tripartite Agreement" carried no guarantee that they ever should be paid. Thereupon, Murphy, Madigan, Schmitt et al. assigned their judgments to respondent Johnson, who brought this suit. Johnson claims that United Railways took back from Transit Company some millions more than it "leased" to that now financial derelict, and that a court of equity should compel United Railways to pay the judgments of Murphy, Madigan, Schmitt et al. United Railways denies this claim, and asserts that neither at law nor in equity is it bound to pay any of those judgments, and in its briefs filed herein, (though not in its pleadings) it intimates that Johnson has no standing in a court of equity, his hands being lacking in that degree of cleanliness which entitles him to be heard, for the purchased the judgments in question at too low a price, to-wit, at about one third of their face value, but inasmuch as even that sum was exactly that much more than United Railways would pay, or than Transit Company could pay, after Syndicate and United Railways had taken possession of all of its assets, that suggestion cannot be taken seriously. Respondent has a justiciable claim and as between the parties to this action that fact suffices.

What is the salient question in this case? It is stated negatively by the eminent counsel for appellant in point three in his brief in this case, as follows: "Plaintiff is not entitled to recover because he has neither shown that appellant Railways Company agreed to assume the liabilities of the Transit Company, or that it took the assets of Transit Company without any or adequate consideration." It is conceded that United Railways did not expressly agree to assume the liabilities of Transit Company which are here in suit. All that then remains to be answered is, did United Railways take the assets of Transit Company without any or adequate consideration? This is the crux of the whole controversy.

This is a question of fact. But if authority be sought for any questions of law hereinafter touched upon, it may be found in abundance in Barrie v. United Railways Co., 138 Mo. App. 557; Johnson v. United Railways Co., 247 Mo. 326, and the cases hereinafter cited. The opinion in the Barrie case, supra, was in express terms adopted and approved in the Johnson case just cited.

It may be noted, in passing, that the parties to the Tripartite Agreement view the claims of Murphy, Madigan, Schmitt, et al., with large indifference. Mr. Murray Carleton, president of the United Railways and president also at the same time of Transit Company, testified as follows:

"Q. You had no concern about people who had claims against the Transit Company, as to whether they were paid or not paid? A. None whatever.

"Q. And you didn't care anything about it? A. Not a particle."

Mr. Carleton by virtue of his office as president of Transit Company (it then being insolvent) was, in a sense, a trustee of an express trust for the benefit of "people who had claims against Transit Company." "To the extent to which the assets of a corporation may be regarded as a trust fund for its creditors, the directors are undoubtedly the trustees of those assets for the creditors of the corporation." [10, Cyc. 788; Fogg v. Blair,139 U.S. 118, l.c. 126; Sawyer v. Hoag, 17 Wall. 610; Upton v. Tribilcock, 91 U.S. 45; Upton v. Tribilcock, 91 U.S. 56; Hatch v. Dana, 101 U.S. 205; County v. Allen, 103 U.S. 498.] There is no question but United Railways knew of the claims against Transit Company. Having the same executive officers, the same claim department, the same counsel, and with a single exception of one member of each board, the same individuals upon the board of directors of each, notice to one company was necessarily notice to the other. It is also beyond dispute that United Railways Company took over every vestige of the assets of Transit Company. In the terse language of Mr. Carleton, Transit Company simply "moved out," and United Railways "moved in." The consideration for this transfer it appears also by the testimony of Mr. Carleton, president of both companies and presumably in position to know, was the release by United Railways of the obligations imposed upon Transit Company by the lease, and some "circumstances." Witness the following:

"Q. Now, Mr. Carleton, isn't it true that the only consideration that the Transit Company ever received in this agreement, as far as you understood, was a mere discharge of liability under the terms of its leasehold? A. No, sir.

"Q. Well, what else did the Transit Company get? . . . A. Well, by consideration I suppose you mean that there was some substantial consideration. I will state that there were circumstances.

"Q. There were circumstances? A. Yes, sir.

"Q. But no actual consideration? A. No, no consideration but circumstances."

However, it may be assumed, and the record, indeed, seems to show, that the "circumstances" referred to were the assumption by the United Railways Company of certain large obligations of Transit Company, already, for the most part, liens upon the property, but not including the claims here in question.

The question then arises whether or not the discharge of Transit Company from the obligation of its lease, together with the assumption of certain obligations of Transit Company by United Railways, constituted a fair consideration for this transfer. On this point there is a sharp conflict in the evidence. The value of the lease thus surrendered by Transit Company is estimated by some witnesses at sums varying from three millions to thirty-two millions of dollars, and other witnesses with equal confidence testify that it was a liability and not an asset. Inasmuch as this lease still had about thirty-five years to run, and covered one of the large street railway systems of the country, it seems improbable that it was valueless, and much more likely that its value was great.

The questions involved in this case are not new in a court of equity. Practically the identical facts here involved and all matters of law growing out of them, have been adjudicated in various trial courts, in the St. Louis Court of Appeals, and in this court in other cases and are now presented anew in this case. In Johnson v. United Railways Co., 247 Mo. 326, this court, referring to the question of the adequacy of the consideration paid by United Railways, said, in substance, that United Railways "was benefited in vast amounts by relief from its bond guaranties, from the release of its lease, thereby taking over the leasehold estate enormously bettered and swollen by the outlays of Transit Company and of great value; it got over $600,000 in cash from the Transit Company, a great amount of other assets in supplies, and at the end came out the owner of a great block of stock once the property of Transit Company. So, it stepped into a business . . . that netted over a million dollars the last year it ran (a phenomenal year, it is true) and took over a plant of which its president boasted it was equipped so well it needed no extra expense for betterments for a considerable time." [Johnson v. United Railways, supra, l.c. 363.] Later in the same opinion, l.c. 366, reference is made to the "disproportionate gains accruing from the transaction as compared to what was paid out."

The same matters were in issue in the the Barrie case, supra, and in that case the St. Louis Court of Appeals concluded "that the liabilities claimed to have been assumed as a consideration by the United Railways for taking over the assets of the Transit Company did not equal, by a large sum, the assets turned over." [Barrie v. United Railways, supra, l.c. 667.]

Both in the Johnson case and the Barrie case, the findings of the trial courts were evidently in harmony with the conclusion of the Courts of Appeals and of this court upon this question. In this state of affairs, it is not only proper to give some weight to the findings of the trial court, but it is entirely proper, also, to give strongly persuasive effect to the fact that the appellate court in each instance agreed with the chancellor below upon the question of fact. That question has already been decided adversely to appellant five times; once by the trial court and once by the St. Louis Court of Appeals in the Barrie case, supra; once by the trial court and once by this court in the Johnson case, supra, and again by the trial court in this case. There is nothing in the voluminous and jumbled record before us in this case to justify a different holding now. It is reasonable to conclude that United Railways did not pay a fair consideration for the property it took over from Transit Company, and that the difference between the amount actually paid and the value of the assets actually received was largely in excess of respondent's claims. This difference, whether it arose from the value of the unexpired term of the lease or from any other source, was the property of Transit Company, and was a trust fund for the payment of its debts. Why, then did Transit Company deliver this surplus to United Railways, when its delivery had not even been demanded? There is and there can be but one explanation for this extraordinary action. Transit Company was, at that time, a mere name, "a shadow cast by turning" — and a devious turning at that. It was "such stuff as dreams are made of," devoid of any will or power of its own, and incapable of contracting to the detriment of its creditors. Much is said in the briefs on the question of whether the course of conduct between these two companies which resulted in the delivery of all of the assets of the one to the other was a sale, an entry under the terms of the so-called lease, a voluntary surrender by Transit Company, or what not. The question does not seem to be of more than academic interest, so far as this case is concerned. By whatever name it may be called — and, indeed, it might well be described as "a deed without a name" — it was utterly void as to creditors, and no time need be consumed in naming it.

"Corporations, insolvent or financially embarrassed, often find it necessary to scale their debts and readjust stock issues with an agreement to conduct the same business with the same property under a reorganization. This may be done in pursuance of a private contract between bondholders and stockholders. And though the corporate property is thereby transferred to a new company, having the same shareholders, the transaction would be binding between the parties. But, of course, such a transfer by stockholders from themselves to themselves cannot defeat the claim of a non-assenting creditor. As against him the sale is void in equity, regardless of the motive with which it was made. For if such contract reorganization was consummated in good faith and in ignorance of the existence of the creditor, yet when he appeared and established his debt the subordinate interest of the old stockholders would still be subject to his claim in the hands of the reorganized company. Cf. San Francisco N.P.R.R. v. Bee,48 Cal. 398; Grenell v. Detroit Gas. Co., 112 Mich. 70." [Northern Pacific Ry. Co. v. Boyd, 228 U.S. l.c. 502.]

In the Boyd case, the property which was held to be subject to his claim had been sold under order of court and had again been sold by the purchaser at that sale, yet the second vendee was nevertheless held liable. There is nothing new in the case at bar, except, perhaps, some minor details in the method. The general scheme and plan does not differ in principle from similar transactions called in question and held void in hundreds of cases. Neither is there any doubt or novelty about the equitable principle upon which such transactions are and should be held void.

"It is a well-settled principle of equity jurisprudence that a party holding a fiduciary relation to trust property cannot, either directly or indirectly, become the purchaser of such property, or transfer it to his own use or for his benefit; and if he does, the sale or transfer is voidable, and will be set aside at the mere pleasure of the beneficiaries, although such fiduciary may have paid a full price and gained no advantage. [Newcomb v. Brooks, 16 W. Va. 32, 59, and cases cited.] In Reilly v. Oglebay, 25 W. Va. 36, 43, this court, following Newcomb v. Brooks, supra, says: `This rule is not confined to trustees and fiduciaries in the technical sense of those terms, but it extends to every person coming within the reason of the rule. In embraces trustees, guardians, executors, administrators, agents, cashiers of banks, factors, auctioneers, sheriffs, commissioners in bankruptcy, and their solicitors, assignees of bankrupts, attorneys at law, directors of corporations, and parties bearing many other relations to each other which may not be classified.' Newcomb v. Brooks, 16 W. Va. 63; Abbott v. American Co., 33 Barb. 578." [Sweeney v. Sugar Co., 30 W. Va. 443, l.c. 450.]

If further authority is desired, it may be found in any rudimentary work on equity jurisprudence, and practical application of the doctrine, fully supporting the conclusions herein announced, may be found in the following cases: Grenell v. Detroit Gas Co., 112 Mich. 70; Fort Payne Bank v. Sanitarium,103 Ala. 358; Missouri Lead Co. v. Reinhard, 114 Mo. 218; Bertholdt v. Holladay-Klotz Co., 91 Mo. App. 233; Montgomery Web Co. v. Dienelt, 133 Pa. 585; Singer v. Hutchinson, 183 Ill. 606; Barksdale v. Finney, 14 Gratt, 338; Chicago Ry. Co. v. Ashling,160 Ill. 373; Camden Interstate Ry. Co. v. Lee, 84 S.W. 332.

After all, when stripped to its essential elements (and an effort has been made in this opinion so to strip this case), the question to be decided is a very simple one. Appellant wrongfully appropriated property to which respondent was entitled to look for the payment of his claims. This cannot be done. The hand of a court of equity is not stayed by metaphysical distinctions nor by specious reasoning as to questions of separate corporate indentity, nor are the issues clouded by the ceremonial of separate, though in individual composition practically identical, boards of directors, nor technically existent, but in fact wholly imaginary, powers of corporations, bound together as these two corporations are shown to have been, to contract freely together and thereby to bind the rights of third parties. Equity looks to substance rather than to form, and will not sanction an unconscionable result merely because it may have been brought about by means which simulate legality. "The property was a trust fund charged primarily with the payment of corporate liabilities. Any device, whether by private contract or judicial sale under consent decree, whereby stockholders were preferred before the creditor, was invalid" [Northern Pacific Ry. v. Boyd, 228 U.S. l.c. 504.] The sum of the whole matter is that when the minutes all were written and the contracts all were drawn, when the stocks and bonds had all been shuffled and shifted and results were all disclosed, it was found that Syndicate had reaped a profit of a quarter of a million dollars; United Railways had gathered profits estimated by some witnesses in indefinite millions and described in opinions of this court, and of the St. Louis Court of Appeals, as "large sums" and "disproportionate gains;" Transit Company had been stripped to its naked hide; and Murphy, Madigan, Schmitt, et al. had been left unpaid and confronted by another law suit.

What is there in all this legal labyrinth to bar the course or stay the hand of justice? There is nothing. "Justice moves with a leaden heel, but strikes with an iron hand." And so, with little effort, the hand of justice cleaves its way through all entanglements to seize upon the vital fact — five times heretofore found to be a fact — that United Railways took more than it paid for. It must answer for it. Thus shall vindication come to the rights of Murphy, Madigan, Schmitt et al., the humble victims of Transit Company's negligence and of United Railways Company's greed.

The judgment of the trial court should be affirmed.

Walker, C.J., and Williams, J., concur.