Huson v. Portland Southeastern Railway

Appellants contend in substance:

(1) That plaintiff's complaint does not state a cause of suit, and the evidence does not prove a cause of suit. (2) That Lynott at no time promised to give Huson or Munly an interest in the project. (3) That such alleged parol promises are within the statute of frauds. (4) That the court had no power or jurisdiction to decree that a stockholders' meeting of the Railway Company be held. (5) That the court had no power under the law and the evidence, to decree that the written contract which Lynott gave to Denny, was an absolute conveyance to Denny of a one thirty-second interest in the project.

It should be stated at the outset that the answers of the cross-appellants asking for affirmative relief are in the nature of complaints. The matters alleged herein and the relief sought are only such as a court of equity can take cognizance. It is apparent from the replevin action that was commenced for possession of a few maps, etc., that an action at law would not provide adequate remedy. The interests of the parties in the "project" as it is called and in the certificates of stock in the Portland and Southeastern Railway Company issued to represent the same, which are in dispute, and the settlement of the compensation and interests of the Myler Construction Company under its contracts and the preservation of the right of all parties concerned, are such that a court of equity only has authority to settle and determine. There was no demurrer filed to the complaint. Where a court of law and a court of equity have concurrent jurisdiction, if the plaintiff resorts to equity, the objection that he has an adequate remedy at law is waived by answering over to the merits:Maxwell v. Frazier, 52 Or. 183 (96 Pac. 548, 18 L.R.A. (N.S.) 102);McDowell v. Carothers, 75 Or. 126 (146 Pac. 800). It would require a multitude of law actions to settle the various disputes between the parties.

It is proper for several defendants to crossplead with each other and relief may be obtained by one defendant against another:Hough v. Porter, 51 Or. 318, 375, 376 (95 Pac. 732, 98 Pac. 1083, 102 Pac. 728); Knighton v. Chamberlin, 84 Or. 153, 159 (164 Pac. 703); Pomeroy's Code Remedies (3 ed.), § 808.

The case was tried in the Circuit Court upon the issues arising upon the allegations in the complaint and the cross-pleadings of the several defendants, and not upon the theory that it was a suit to enforce specific performance of an oral contract relating to land. The plaintiff did not sue on behalf of the Portland and Southeastern Railway Company. The Railway Company was made a party defendant because it brought a replevin action against the Myler Construction Company, which injuriously affected the interests of all the associates in the enterprise. It was necessary to bring in all the associates in the undertaking as new parties to the litigation in order to avoid a multiplicity of suits: Alderman v. Tillamook Co., 50 Or. 48 (91 Pac. 298). The issues in this suit, in the main, are between the projectors in the railway enterprise concerning their respective interests in the project. The railroad undertaking or project, up to the time of the incorporation of the Railway Company, was in the nature of a joint adventure. It appears to be settled by the weight of authority that an enterprise in the nature of a copartnership which has for its purpose the purchase, improvement and sale of real estate for the profit arising therefrom, to be divided among the joint adventurers, as among partners, and which does not undertake to operate upon the ownership and title to the realty, is not within the operation of the statute of frauds:Knott v. Knott, 6 Or. 142; Flower v. Barnekoff, 20 Or. 132 (25 Pac. 370, 11 L.R.A. 149); Maguire v. Kiesel, 86 Conn. 453 (85 Atl. 689, 691; 23 Cyc. 454; Smith v. Imhoff, 89 Wash. 418 (154 Pac. 793); King v. Barnes, 109 N. Y. 267 (16 N. E. 332);Chester v. Dickerson, 54 N. Y. 1 (13 Am. Dec. 550); Bates v.Babcock, 95 Cal. 479 (30 Pac. 605, 29 Am. St. Rep. 133, 16 L.R.A. 745); Eaton v. Graham, 104 Ill. App. 296.

The matters involved in this suit are those over which a court of equity has complete jurisdiction. The defendant Lynott cannot, after the contracts in dispute have been executed and the benefits thereof realized, be heard to say that the contracts are void under the statutes of frauds: Coward v. Clanton, 79 Cal. 23 (21 Pac. 539).

The statute of frauds should not be made an instrument of fraud:McDaniels v. Harrington, 80 Or. 628, 632 (157 Pac. 1068);Cooper v. Thomason, 30 Or. 161, 175 (45 Pac. 295).

It was understood and agreed by the parties that Lynott should subscribe for 10,000 shares of the capital stock to represent the different interests in the project owned by the several promoters, most of which were held in the name of E. P. McMahon as trustee for the promoters. In payment for the shares. of stock all of the assets and property belonging to the railway project including the water-power project, which were estimated by H. S. Huson, chief engineer for the project, in writing, to be of the reasonable value of $1,000,000 "for railroad purposes," were to be turned over to the Railway Company. Based upon the statement of Huson, Lynott stated to the directors of the company at a meeting held May 27th, that such assets and property were of the reasonable value of $1,000,000 for the purposes of the company, and it was agreed that the same be turned over to the Railway Company in payment for the 10,000 shares of the capital stock of the company, fully paid up and nonassessable, which he had theretofore subscribed for. The directors by resolution duly accepted the proposal and property, and directed that the company issue to Lynott the 10,000 shares fully paid up when he should turn over and convey to the company the foregoing property.

Up to this time the business of the railway enterprise had been transacted by Lynott during the first stages and afterwards by him and the other promoters. At this juncture the corporation commenced to transact its business as such organization.

It was agreed that 10,000 shares of the capital stock of the par value of $1,000,000 subscribed for by Lynott, should be distributed among the respective parties in proportion to their interests theretofore held in the project. For example, Barron, who owned an undivided one-eighth interest in the project under the arrangement, was entitled to one eighth of the stock subscribed, which was one half of the whole amount of capital stock, making Barron's portion 1,250 shares.

We now have for consideration the transaction between the Railway Company and the Myler Construction Company. Soon after the organization of the Railway Company, and on June 26, 1919, three contracts were regularly entered into between the Portland and Southeastern Railway Company and the Myler Construction Company for the purpose of carrying out the project for a line of railway from Mount Angel, Marion County, Oregon, to Bend, Crook County, Oregon. The purport of these contracts is set forth in the statement above.

By reference to the first, or survey contract, which was carefully prepared and duly executed, the Myler Construction Company as payment for making the thirty miles of survey and the maps, profiles, etc., in connection therewith was to receive "one-eighth interest in such railway project as a whole." This oneeighth interest is further described thus: "To be represented by one eighth of the entire capital stock of the corporation, to wit, twenty-five hundred (2500) shares of the par value of one hundred ($100.00) dollars each, fully paid up and nonassessable." It is clear from this contract that under such provision the Myler Construction Company upon completion and certification of the work which was accomplished was entitled to 2,500 shares "fully paid up and nonassessable" of the Railway Company. While it was provided that these 2,500 shares should in the first instance be taken from the 10,000 shares subscribed for by Lynott, it was plainly provided in the pooling agreement (paragraph five) that, "whenever any of said stock is withdrawn, and turned over, and reissued, to said Myler Construction Company, that he, the said M. Lynott, upon the written request of a majority of said trustees, shall subscribe for an additional and equivalent amount of stock of the Railway Company, and shall forthwith transfer or cause the same to be transferred and reissued, to said trustees so that there shall always be the same amount of stock in this pool, and so that the total stock held under this pooling agreement shall remain intact and never be diminished during the life of the same, it being the intention and purpose to reimburse the undersigned shareholders for all the stock surrendered to Myler Construction Company under the terms of this pooling arrangement."

Reference to these contracts shows the amount of capital stock to be distributed to the parties interested, other than the Myler Construction Company, and makes it clear that this stock of the Myler Construction Company was finally in effect to be taken from the second half of the capital stock of the Railway Company.

The Myler Construction Company, after the completion of the survey and the failure of the promoters to obtain the assistance of Mr. Ryan, to finance the railway system on October 16, 1919, notified the Railway Company and now claims "that this stock, which has been placed in escrow to be delivered to it upon the completion of the surveys, has in fact never been paid up, either in whole or in part, and that at this time the Board of Directors of the Railway Company are contemplating the acceptance of a transfer of certain property, which is for the most part worthless and absolutely of no value, in payment of this stock."

The Construction Company claims that Lynott misrepresented the value of the property turned over to the Railway Company in payment for the 10,000 shares of stock. At the stockholders' meeting held May 27, 1919, a resolution was adopted authorizing the payment by Lynott of his subscription for 10,000 shares of stock by his conveying to the corporation the property required for the project. Doubtless a speculative value was placed thereon and the figures are large. At this meeting of the stockholders Lynott, Huson, Watson and Spencer were present. They were confronted with a problem of completing the organization of the corporation. Spencer was then attorney for the corporation, and informed them that one half of the stock would have to be subscribed for then, and that it would be legal for the Railway Company to accept this property in payment for Lynott's subscription. Huson testified that "for railroad purposes" this property in his opinion was reasonably worth $1,000,000. All of the waterpower interests which he had acquired were also to be transferred to the Railway Company as part payment for the subscription.

A careful reading of the voluminous testimony and record in the case convinces us that the proof shows that the findings of the trial court that plaintiff Huson and defendant Munly were each entitled to a one-eighth interest in the project, and one eighth of the 10,000 shares of capital stock subscribed for by Lynott, are right and equitable. To state the matter briefly, Mr. Lynott was a railroad contractor and entered upon the project of promoting a railroad first from Salem to Stayton. He afterwards interested plaintiff Huson who, as conceded by all, is an expert railroad engineer, to act as chief engineer of the project and agreed to give him a one-eighth interest therein. Huson performed the services and in addition thereto was instrumental in connecting up with the railroad scheme, the Marion Lake waterpower project. The water-power proposition greatly enhanced the whole project. While the option on the water-power project was at first held in Huson's name, and afterwards the filing for the same with the state engineer was in Huson's name, it is conceded by him that it was all for the benefit of the project.

The testimony indicates that it was Judge Munly's idea of changing the proposed line of the railroad so as to begin near Mount Angel and run to Stayton and thus connect with Portland by means of other lines instead of beginning at Salem. It appears that he was instrumental in interesting J. T. Barron in the enterprise. Barron contributed large sums of money to further the project. Munly also contributed $1,080 to further the scheme.

It is claimed by Lynott and his associates that Huson and Munly are estopped from claiming an eighth interest, for the reason that the "bill of sale" executed by E. P. McMahon as trustee and the pooling agreement did not specify such interests. Huson objected to the bill of sale for that reason. That document recites:

"Whereas it was understood that the said M. Lynott, upon the receipt of said million dollars worth of stock, so subscribed for, as aforesaid, should divide the same up between the parties herein in proportion to their holdings, as hereinabove set out, subject to any existing contracts and agreements."

The object of the bill of sale as the writing shows was to provide a means of perfecting the organization of the railway corporation. The quoted portion indicates that the division of the shares of stock should be "subject to any existing contracts and agreement." The pooling agreement mentioned "the undersigned shareholders of the Railway Company" without specifying the number of shares of stock held by each. It was not signed by Denny or Munly. These memorandums answer the purposes for which they were intended, but do not estop Huson, Munly or Denny from asserting their rights to their respective interests.

While Lynott was the main promoter, and practically the sole promoter at the inception of the project, in equity, he did not own the surveys, profiles, etc., which were produced by the services and money of Munly and Huson. The water-power project is held in the name of Huson as much as the railroad project was formerly in Lynott's name. Lynott through McMahon, trustee, could assign his interest in the concern, but not the interest of the others without their consent. The shares of stock were subscribed for by Lynott to be held in trust for all of the interested parties, and the part paid for by the interests, services or money of Munly and Huson belongs in equity to them. Otherwise the project would be disintegrated.

"Where property is purchased as a joint venture, it is not material in whose name the title is taken, as any one holding the title will be regarded as trustee for his associates; and properly paid for out of the receipts of the joint adventure becomes the joint property of all the parties." 23 Cyc. 455.

We think the testimony shows that Lynott's contract to Denny represented an absolute sale of a thirty-second interest in the project, and that the proposition of repayment of the amount contributed by him was a subsequent deal. We fail to see the materiality of the contention that it was a loan until there is an offer to redeem. Denny says he is willing to take the money.

7. It appears from the testimony that all of the stockholders and directors of the Railway Company in fixing the value of the property which the corporation was accepting in payment for one half of its stock, were acting in good faith. There was no actual fraud in the transaction. Under these circumstances the judgment of the stockholders and directors as to the value of the property was conclusive as to everyone who participated in and had knowledge of the transaction, and who did not dissent from the action taken: Section 6872, Or. L.;Farrell v. Davis, 85 Or. 213, 221 (161 Pac. 94, 713); 4 Thompson on Corporations (2 ed.), §§ 3988, 3904 and 3909. The latter section reads in part thus:

"The general rule is that a corporation which issues its stock as paid up, which is not so in fact, and does this with the consent of all the stockholders, cannot afterwards compel the holders of such stock to pay the difference between the par value of the stock and what has been paid or agreed upon as full payment, * *"

Section 3910 of the same volume reads:

"In other words, stockholders who participate in the issuance of stock at less than par value and give their consent thereto are estopped to question the legality of the transaction."

In the instant case the corporation had no creditors. All of the interested parties understood in regard to the assets and property the Railway Company was accepting as well, or better, than Lynott. All of them were attempting to boom the project to the best of their ability. Quite likely the figures should be scaled down. That is a matter for the parties, and not for the court.

Much space in the brief of cross-appellants is devoted to the conduct of Lynott in promoting the project, and the claim is made that by his fraudulent conduct he has in equity forfeited all of his rights in the enterprise. For some time he was pioneering the project in a rather crude way. No books or accounts were kept. He was not a bookkeeper. He endeavored to interest parties along the proposed line by giving a banquet and spending some money. Whether this was wise or not, we do not look upon the testimony as showing fraud in this respect. He seemed to treat the project as his own. Much complaint is made of Lynott's action at the meeting held with Ryan of New York, and it is argued that Lynott blocked the financing of the scheme. The second, or option contract, together with the pooling agreement, practically placed the policy of the Railway Company project in the hands of the Myler Construction Company. The option contract reads in part:

"Said Railway Company further covenants, stipulates and agrees that said Construction Company shall have the sole and exclusive right and option to finance or sell said railway project or to make any arrangements that would be advantageous to and approved by the stockholders or their trustees under such pooling arrangement as may be entered, regarding the further capitalization of the Railway Company; but the said Railway Company stipulates, covenants and agrees to transfer and convey its property and holdings upon any offer to purchase the same obtained through or by the agency of the said Construction Company, for a sum equivalent to thirty cents (30¢) of the par value of the stock held by the stockholders whose names are affixed to such pooling agreement, and that said option shall remain in full force and effect until the first day of January, 1920. * *

"Said railway company further covenants, stipulates and agrees that said Construction Company shall, except as hereinabove provided, have full powers of supervision and control over the future development and expansion of said projected railroad line and enterprise, and the right to formulate and control the policy to be pursued in connection therewith and to decide all questions regarding such policy that may arise during the life of this agreement."

Lynott testified on this point, that Watson, Spencer and Huson were at the meeting with Ryan and himself, and then as follows:

"I said, * * `We have got a contract with the Myler Construction Company, and we are hog tied, and we can't break it * *. We are going to live up to the contract.'"

Lynott further testified that Spencer and Watson told Ryan the contract provided for $300,000; that he never demanded $300,000 for himself; that he wanted it for the Railway Company; that Huson figured what he would get out of it; and that he said, "We must live up to the contract." Spencer testified as follows:

"Lynott said very little, but * * that the pooling agreement called for thirty cents on the dollar on the million shares, and that is all he would do. * * I think I did say to him (Ryan) the thirty cents on the dollar came from the other side; that it didn't come from our side, and that I thought that he had always known it; and he said he had not heard of it before he got out here."

It does not appear that the Myler Construction Company, or anyone, proposed to waive or change the terms of the contracts so as to meet the requirements of Ryan. The option was then in force. The Railway Company could not agree to sell its property to two different parties. Whether the financing scheme with Ryan would under any circumstances have been carried out the failure should not all be laid to Lynott. He is entitled to his legal share of the stock. The rights of the several parties are based upon contracts.

After a careful consideration of the record we conclude that the decree of the lower court, as to the ownership of the shares of stock in the Railway Company, should be modified so as to declare that the following parties are the owners of fully paid and nonassesable shares of stock of the Portland and Southeastern Railway Company, and are entitled to have such shares issued to them in the following amounts, to wit:

Name. No. of Shares. Par Value. Michael Lynott 1875 $187,500 H. S. Huson 1250 125,000 J. T. Barron 1250 125,000 M. G. Munly 1250 125,000 J. F. Watson 625 62,500 E. C. Denny 312.5 31,250 E. P. McMahon 2500 250,000 Mrs. Isabella Meredith 625 62,500 J. E. Chisholm 312.5 31,250 Myler Construction Company 2500 Myler Construction Company 734 3234 323,400 S. C. Spencer 1 100 J. F. Watson 1 100 J. F. Quirk 1 100 J. W. Foster 1 100

The decree of the trial court should be further modified so that J. F. Quirk, one of the directors of the Railway Company should not be restrained from acting as such, but allowed to act until his successor is regularly elected and qualified. It appears that Quirk was regularly elected as a director, and we find no good cause shown why he should practically be removed; and that any meeting of the stockholders for the purpose of electing directors should be called and held in accordance with the constitution and by-laws of the corporation and not by an order of the court. 2 Cook on Corporations (7 ed.), § 593, pp. 1744-45, reads: "Courts have no power to call corporate meetings except by mandamus." InBeard v. Beard, 66 Or. 512, 521 (133 Pac. 797, 134 Pac. 1196), andIn re Vinton, 65 Or. 422 (132 Pac. 1165), it was held that a proceeding in mandamus is a proceeding at law.

It appears that in the pleadings and the brief both defendant Munly and defendant Watson base their claim for shares of stock and interest in the project upon the amounts of money contributed thereto by them. Therefore, we conclude that they are not entitled to a money judgment against the Railway Company. It was not understood or agreed that the corporation should be responsible for any part of the money contributed by Munly or Watson.

Mr. Watson alleges in paragraph ten of his second amended answer, that on February 1, 1919, he contributed $1,800 and afterwards contributed $420 more, and is entitled to one-sixteenth interest. These were transactions between the promoters. The general rule obtains at law that corporations cannot be bound by acts done or promises made in their behalf before they came into existence. Until organized a corporation has no being, franchises, or faculties. Its promoters, or those engaged in bringing it into being, are in no sense identical with the corporation, nor do they represent it in any relation of agency, and they have no authority to enter into preliminary contracts binding the corporation, unless so authorized by the charter: 7 R. C. L., p. 80, § 59; Rockford, R. I. etc. Co. v. Sage, 65 Ill. 328 (16 Am. Rep. 587);Weatherford etc. Ry. Co. v. Granger, 86 Tex. 350 (24 S. W. 795, 40 Am. St. Rep. 837); Davis Rankin Bldg. Mfg. Co. v. Hillsboro CreameryCo., 10 Ind. App. 42 (37 N. E. 549).

In order for the corporation to be liable for these contributions it must have been understood and agreed by all parties concerned that the corporation should be so liable: 1 Thompson on Corporations (2 ed.), § 92.

In order to preserve the property of the corporation it was competent for the trial court to appoint receivers to care for and protect the same during the litigation.

The controversies between the parties having been adjusted in this suit as far as possible, the action in replevin should be perpetually enjoined.

The decree of the lower court will be modified in accordance herewith. Each party will pay his own costs upon this appeal. The costs in the lower court will be paid as therein decreed. MODIFIED.

Mr. Justice McCOURT did not participate in the consideration of this case.

Former decree modified and rehearing denied March 13, 1923.

ON PETITION FOR REHEARING.

(213 Pac. 408.)

REHEARING DENIED.

BEAN, J. — By a petition for a rehearing our attention is called to the necessity for further details in regard to the transfer to the Portland and South-eastern Railway Company of the property, consisting of right of way contracts, maps and plats of surveys, and all the assets acquired for the railway project. As shown by the record, the property was formerly held by E. P. McMahon as trustee. A document in the nature of a quitclaim deed and bill of sale, which is designated in the record as a "bill of sale" was executed by E. P. McMahon as trustee, and as beneficiary, but was not signed by all of the beneficiaries. In our former opinion we treated this as having been executed, for the reason that it ought to have been completed.

In order to perfect the corporate records of the Portland and Southeastern Railway Company, and to complete the transfer of the property in question the "bill of sale" should be signed by plaintiff H. S. Huson and by defendants James T. Barron, J. F. Watson, M. G. Munly and E. C. Denny, and all of the beneficiaries for whom E. P. McMahon as trustee held such property in trust, or in case of the decease of any of such parties, then the same should be signed by their heirs, legatees, executors, administrators or assigns. This should be done before the stock awarded to such parties is delivered to them as provided in our former opinion.

As soon as the officers of the Portland and Southeastern Railway are duly elected and qualified, all of the assets and property mentioned in the opinion herein shall be delivered to, and accepted by the Portland and Southeastern Railway Company. The order of the lower court enjoining the officers of the corporation from accepting the bill of sale, or property mentioned, should be dissolved.

It should be noted that this court does not find the property involved herein to be of the value of a million dollars, or any other sum. We do not pass upon the value of such property, and only use the estimated value of shares of stock, in apportioning the interests of the respective parties.

In order to serve the purpose of the replevin action, further proceedings in which were restrained by the trial court, the Circuit Court is hereby authorized and directed, in case of any necessity therefor, to hear and determine any matters of dispute in regard to the transfer of the possession of the property and assets held by the receivers, or any party to this suit, and to make any and all necessary orders and decrees to carry into effect the opinion and decree of this court herein, not inconsistent with the same, to the end that all of such property and assets may be transferred, and in order that all matters in controversy herein may be fully settled and determined in this suit.

After careful consideration of the other portions of the petition for rehearing relating to the award of shares of stock to the several parties, we adhere to our former opinion in regard thereto.

FORMER DECREE MODIFIED AND REHEARING DENIED. Motion to Recall MANDATE DENIED WITH SUPPLEMENTAL ORDER.