Kissel v. Chicago & Eastern Illinois Railroad (126 A.D. 852, 1908)

Ingraham, J. :

The situation as it existed at the time this contract, which the court has set aside, was made, was as follows: The defendant Colonial Trust Company was the owner of substantially all of the stock of the Chicago and Eastern Illinois Railroad Company in trust to secure the payment of certain obligations of the St. Louis and San Francisco Railroad Company under an agreement between the St. Louis and San Francisco Railroad Company, called the San Francisco Railroad Company, of the first part, and the Colonial Trust Company, the predecessor of the defendant, the Trust Company of America, of the second part. It recites that the Chicago and Eastern Illinois Railroad Company, called the Chicago company, was a corporation organized under the laws of the States of Illinois and Indiana, and was the owner of a line of railroad in the State of Illinois; that the railroad of the Chicago company and of the San Francisco company connect and form a continuous line of railroad; that the Chicago company has a capital stock of $25,000,000, being 250,000 shares of stock, of which the plaintiffs own 7,500 shares; that the San Francisco company proposed to purchase all the shares of common stock of the Chicago company, and, in payment of the purchase price of the shares of said common stock which the railroad company might purchase, had determined to issue a ten per cent stock trust certificate of the railroad company ; that the San Francisco company would pay to the registered holder of these stock trust certificates on the 1st of July, 1942, at the office of the trust company in the city of Kew York, the sum of $250 in respect of each share of said stock represen'ted by the stock trust certificate's on the surrender thereof, and on such payment the railroad company would be entitled to receive from the trust company certificates of common stock of the Chicago company to the amount therein enumerated; that until the 1st day of July, 1942, or the earlier redemption of the stock trust certificates, the San Francisco company would pay to the registered holders thereof a dividend of $5 on each share of said stock represented by the stock trust certificates semi-annually on the first days of January and July ensuing the sale of the certificates; that if the San Francisco company should fail to pay any such dividend within thirty days after demand shall have been made on the company, then such default so continuing the registered holders of the certificates might surrender the same to the trust company and in exchange therefor upon demand should be entitled, subject to the provisions of the trust agreement, to receive certificates for shares of common stock of the Chicago company to the amount enumerated ; that the San Francisco company had the right to pay the amount provided for on any day when a dividend was payable, whereupon the company would be entitled to receive from the trust company the shares of common stock held by the trust company and all liability on the part of the San Francisco company would then cease; that the stock certificate was issued under the trust agreement between the San Francisco company and Colonial Trust Company to which reference was made for the nature and extent of the security, the rights of the holders of the stock trust certificates, and the terms and conditions upon which the stock trust certificates could be issued and were secured. The agreement then provided that to secure the payment of these- stock certificates and of the dividends secured thereby, the San Francisco company assigned, transferred, pledged and set over to the trustee all shares of common stock of the Chicago company which the railroad company might have acquired, or might at any time acquire, to have and to hold all and singular said shares of common stock unto the trustee and its successors in the trust, and its or their assigns, in trust, nevertheless for the common and equal use, benefit and security of all and singular the person or persons who should from time to time be holders of the stock trust certificates, and without preference, subject to the terms, provisions and stipulations in the stock trust certificates contained, and for the uses and purpose and upon and subject to the terms, conditions, provisos and agreements thereinafter expressed and declared. It was then provided that upon payment of the sum of money in the stock certificates mentioned, for principal and dividends, that the estate', right, title and interest of the trustee in the trust and in the trust estate should cease, determine and become void, and the trustee should assign or cause to be assigned and should deliver the stock held in trust to the San Francisco company or its assigns, and should cancel and satisfy the trust agreement; that the trustee should cause to be transferred into its name or into the name or names of its nominee or nominees, all shares of the common stock of the Chicago company, certificates of which should be delivered to the trustee thereunder, and until some default be made in the obligations of the San Francisco company to pay the amount required to be paid to the trustee, or default be made in the payment of the principal or interest on any mortgage bond of the Chicago company, or default be made in the payment of the rent reserved under any lease made to the Chicago company, or default be made in the payment or performance of any other of the covenants, conditions and agreements on the part of the San Francisco company in the stock trust certificates or in this trust agreement contained, or until a permanent receiver of the Chicago company should be appointed, that the trustee should not collect or be entitled to collect any of the dividends from time to time declared on the stock of the Chicago company held by the trustee under the trust agreement; and that the trust company shall pay over to the San Francisco company all dividends collected by it. The agreement further provides that the San Francispo company should have the right, not being in default under the stock trust certificates or under this trust agreement, to vote upon all shares of the stock of the Chicago company at any time held by the trustee thereunder for every purpose not contrary to the covenants or guaranties on the part of the railroad company set forth in article I of the agreement, to which attention will be called, and without prejudice to such general power.the San Francisco company should have the right to vote to authorize the Chicago company to issue its stock, common or preferred, or to issue bonds for the purpose of paying, redeeming or refunding the outstanding obligations of the Chicago company or bonds or other obligations of other corporations secured by a mortgage or deed of trust upon property then owned or operated by the Chicago company or in which the Chicago company may then have an interest, or for constructing, purchasing or acquiring in some other manner other lines of railway or other property or interest therein or stock or bonds or other obligations of other railway companies or of acquiring additional property or of providing means for betterments, improvements or additional equipment for the use of the Chicago company; or of reimbursements to the Chicago company » for expenditures made by it after the 1st day of July, 1902, or for some one or more of the foregoing purposes, and for general refunding or repaying purposes, and to vote to authorize the Chicago company to mortgage its railways, franchises and property to secure any bonds so issued; and the San Francisco company, not being in default as aforesaid, the trust company should from time to time on the demand of the railroad company cause to be executed and delivered to the railroad company or its nominees, suitable powers of attorney to vote on such shares. It was further provided that if the San Francisco company should make default in the payment of the principal of any of the stock trust certificates or of the dividends to accrue thereon, or in the observance or performance of any other of the covenants or guaranties of this trust agreement on its part, then from and after such default and as long as such default should continue, the trustee should exercise in its absolute discretion for the sole a/nd exclusive benefit of the holders of the stoch trust certificates from time to time outstanding, all the rights of owners of such common stoch from time to time held by the trustee and not withdrawn by holders of the stock trust certificates, and should exercise the voting power on said stoch in its discretion and should collect the dividends on said stoch and apply the same as provided m section 3 of article 6. Article 6 of the agreement provides for the event of a default of the San Francisco company in the payment provided for in the stock trust certificates in case such default should continue for the space of thirty days after demand therefor should have been made on the San Francisco company at the office of the trust company, or in case of the other events which are called default by section 2 of that article. In such a case the trustee should upon the written request of the holders of two-thirds in amount of the stock trust certificates then outstanding, and not otherwise, by notice delivered to the San Francisco company declare all stock trust certificates then outstanding to be due and payable immediately, and the holders of the stock trust certificates should then become entitled to receive the shares of stock therein specified from the trustee; that if any one or more of the “ events of default ” should happen, then and in every such case, during 'the continuance of such default, the trustee might vote upon all such shares of stock in its discretion, and should revoke any powers of attorneys or proxies which it may have executed at the request of the railroad company; in the event of a default the trustee might, subject to any right of withdrawal under the article, in its discretion, and should at the request of the holders of a majority in amount of the stock trust certificates then outstanding, proceed to sell and convert into money the stock held in trust; the trustee, however, instead of exercising the power of sale, might, in its discretion, proceed by suit or suits as the trustee may be advised by counsel to enforce the payment of the stock trust certificates and to enforce the trust agreement, gnd all remedies conferred by the trust agreement should be deemed cumulative and not exclusive; that the holders of not less than two-thirds in amount of the stock trust certificates outstanding should have the right from time to time, if they so elect, to direct the method and place of conducting any and all proceedings for any sale of the trust estate or for the enforcement of the trust agreement or any action or proceeding thereunder, and two-thirds in amount of the stock trust certificates at the time outstanding might waive by written notice to the San Francisco company and to the trustee any default under the trust agreement or under the stock trust certificates, and waive the exercise by the trustee of any power conferred upon the trustee under the trust agreement, and might waive any right consequent upon such default to withdraw common stock in exchange for stock trust certificates, and such action or waiver by holders of not less than two-thirds in amount of the stock trust certificates should be binding on all holders of the stock trust certificates. Article 7 of the agreement imposes certain obligations upon the San Francisco company. That company becomes bound to pay the principal and dividends accruing under the certificates without deduction from either principal or dividend for any tax or taxes, to pay and discharge all taxes, etc., imposed upon the trust estate or any part thereof, the principal and interest of all bonds of the Chicago company, all rent reserved in any leased property to the Chicago company, all taxes and assessments which might be imposed upon the property of the Chicago company, and undertakes that until all the stock trust certificates shall have been paid that it (the San Francisco company) will not sanction or permit the issue or use of any stock, bonds or certificates of indebtedness of the Chicago company or the use of the proceeds thereof except for certain specific purposes; but any bonds, stock or certificates of indebtedness that might be issued to refund, repay or reimburse any sinking fund payments theretofore made should be used only for some one or more of the preceding purposes in this covenant stated; until all the stock trust certificates should be paid, no part of the property and assets standing on the 15th of August, 1902, on the books of the Chicago company charged to the account thereon designated “ trust assets ” or the proceeds of any such assets should be applied otherwise than f >r some one or more of the purposes in the preceding covenant stated, for which, as therein stated, the Chicago company may issue bonds; that until all the stock trust certificates shall be paid the San Francisco company would not sanction or permit the sale by the Chicago company of the railways constituting its system or of any essential part thereof; but such covenant notwithstanding, the trustee, upon the happening of any default, might exercise in its absolute discretion the voting power on the stock of the Chicago company held by it under the trust agreement for any purpose the trustee should deem expedient. Article 8 provides that the trustee should not be under any obligation to take any action towards the execution or enforcement of the trust thereby created unless the holders of the stock trust certificates should furnish reasonable security and indemnity against such expense and liability, nor should the trustee be required to take notice of any default thereunder unless notified in writing of such default by the holders of at least twenty per cent -in amount of the stock - trust certificates then outstanding and reasonable security and indemnity supplied; nor should this provision affect any discretion given to the trustee to determine whether or not the trustee would take action in respect to such default or to take action without such request. Article 9 provides for the acceptance by the trustee of the trust. It is provided that the trustee should, until it shall have received written notice to the contrary from the holders of twenty per cent in amount of the stock trust certificates outstanding, for all the purposes of the trust agreement, assume that the Chicago company is not in default; that no receiver has been appointed of the Chicago company; that the San Francisco company is not in default under the trust agreement, and that none of the events denominated “ events of default ” had happened. Article 10 provides that no holder of any stock trust certificate should have the right to institute any suit, action or proceeding at law or in equity upon or in respect to this trust agreement or for the execution of any trust or power thereof, or for any other remedy under or upon this trust agreement save subject to the provisions of section 13, article 6 thereof; nor unless the holders of twenty per cent in amount of the stock trust certificates then outstanding should have previously given to the trustee written notice of any existing default and of the continuance thereof as therein provided; nor unless the holders of twenty per cent in amount of the stock trust certificates then outstanding should have made written request upon the trustee and should have afforded it a reasonable opportunity to proceed itself to exercise the powers therein granted or to institute such action, suit or proceeding in its own name after such right of action should accrue to the trustee, nor unless such holder or holders should have offered to the trustee security against the costs, expenses and liabilities incurred; it being intended that no one or more of the holders of the stock trust certificates should have any right in any manner, whatever to affect, disturb or prejudice the lien of the trust agreement by his or their action, or to enforce any right thereunder except in the manner therein provided; but the foregoing provision is to protect the trustee and should not be construed to affect any discretion or power by any provision of the trust agreement given to the trustee to/determine whether or not it should take action in respect of any default without such notice or request from stock trust' certificate holders, or to affect any other discretion or power given to the trustee.

Under this agreement the plaintiffs and other shareholders of the Chicago and Eastern Illinois Railroad Company transferred their stock to the trust company and received stock trust certificates, whereupon the trust company caused the stock to be transferred upon the books of the Chicago company in its own name and is now the holder of a large majority of the stock of the Chicago company. As between these holders of the stock deposited under this agreement and the San Francisco company, the San Francisco company became the owners of the stock. The plaintiffs and their associates became the owners of the obligations of the San Francisco company to pay at a date named $250 for each share of the stock of the Chicago company and became obligated in the meantime to pay an amount equal to ten per cent of the par value of the Chicago company’s stock per year. As long as it continued to make such payments and none of the events designated defaults in the agreement had occurred, it became entitled to receive all dividends declared by the Chicago company. The stock of the Chicago company was deposited with the trustee to secure performance of the obligations of the San Francisco company to pay the amounts that the San Francisco company had agreed to pay. The San Francisco company purchased the stock and had become its owner subject to the trust and entered into certain covenants with the trust company which for the protection of the trust property the trustee could enforce. But the holders of the stock of the Chicago company who received these stock trust certificates were not directly parties to the agreement and could acquire no rights under it except those rights which were reserved to them by its terms. Kot being parties to it, but having by their voluntary action constituted the trustee their trustee for the protection and enforcement of their rights, it is quite clear that they could maintain no suit at law or in equity in relation to the trust property or to enforce the rights of the trustee under the agreement except after a request to the trustee to enforce such rights and a refusal of the trustee to comply with that request. But as to the conditions upon which they were entitled to request the trustee to enforce the trust agreement, it seems to me that they were clearly bound by the terms of the trust agreement itself and in the absence of fraud or collusion their right to insist upon default in the performance of any of the obligations imposed upon the San Francisco company or upon the Chicago company must be governed by the instrument itself by the terms of which they were bound when they entered into the agreement and delivered their stock to the San Francisco company or to the trust company under the agreement, and under which they had actually sold their stock to the San Francisco company. There is no justification for a suspicion that the trust company has not acted in entire good faith in carrying out the wishes of a vast majority of the holders of these stock trust certificates. The agreement contains provisions- regulating in detail the terms and conditions upon which the trustee can be required to enforce the agreement, it being entirely clear that it was the understanding of all the parties that until at least twenty per cent of the stock trust certificates then outstanding should join in a request to the trustee to enforce the agreement that it was under no obligation to take any action for that purpose. The trustee became the record owner of the stock and upon that stock the trustee had the right to vote. It obligated itself to give that right by power of attorney or proxy to the San Francisco company, but the power thus given to the San Francisco company was not to be used to accomplish certain results specified. But there was nothing in this agreement that restricted the power of the trustee if it was considered for the benefit of the stock trust certificate holders to vote to accomplish any of those purposes. There is no provision in this agreement that prohibits the trustee, as the owner of the legal title of the stock, from voting on such stock in any.way that it considered to be to the advantage of the trust for which it is trustee, and when there was presented to the trustee a question as to whether or not the trust company would revoke its proxy or power of attorney or whether it would take into its hands the management of the property because of a proposed violation of this covenant, the agreement in perfectly plain terms provided that there should be no obligation upon the trustee to enforce the provision of the agreement except upon the request in writing of twenty per cent of the outstanding stock trust certificate holders.

The complaint seems to be based upon the existence of some trust relation between the San Francisco company and these certificate holders. But it seems to me that the agreement will be searched in vain for the slightest trust obligation that exists either as between the trust company and the San Francisco company, or the holders of the stock trust certificates and the San Francisco company. The allegations.of the complaint that there is an obligation that the Chicago company should not issue any securities except for the purposes named is expressly negatived by the agreement itself. The Chicago company was not a party to it and there is no provision in it that the Chicago company should not exercise any of its corporate franchises not prohibited by law. The San Francisco company agreed that in pursuance of its control of the Chicago company by virtue of any power of attorney or proxy that it might receive from the trustee it would not cause such securities to be issued. By section 3, article 5, it is provided that the railroad company'should have the right, not being in default, to vote upon all shares of stock of the Chicago company held by the trustee for the full performance by the Chicago company of all its corporate duties and the maintenance of its corporate authority and franchises and for every other purpose not contrary to the covenants or guaranties on the part of the railroad set forth in article 7 thereof. The provisions of article 7 are all obligations imposed upon the San Francisco company and the clause limiting the objects for which the stocks, bonds or certificates of indebtedness of the Chicago company are to be issued is a covenant on behalf of the railroad company that it will not sanction or permit the issue or use of any stocks, bonds or certificates of indebtedness except for certain purposes therein named.

The original plaintiffs, Kessel and Raumer, were the owners of these stock trust certificates of the par value of $1,377,000, which was something less than eight per cent of the total amount of outstanding certificates. The San Francisco company under this trust agreement had received a proxy to vote upon the stock held by the trust company and had elected directors and officers of the Eastern Illinois company under its control and identified with the San Francisco company. There was also a corporation known as the St. Louis, Memphis and Southeastern Railroad Company the stock of which was also owned by the San Francisco company and which it also controlled. The three companies, therefore, the San Francisco company, the Southeastern company and the Eastern Illinois company, were substantially controlled by those in control of the San Francisco company.

That being the situation, the persons in control of these three railroad companies devised this agreement that has been set aside, which has been called a traffic agreement. I will assume without deciding that this traffic agreement violated the spirit if not the letter of the trust agreement, and imposed an obligation upon the Chicago company which the San Francisco company had agreed that it would not impose. I will also assume that this agreement until actually ratified by the stockholders of the three companies was voidable by either of the corporations who were parties to it, and particularly by the Eastern Illinois company, which appears to have been the most responsible of the three and to have apparently received less benefit from the agreement than either of the others. This traffic agreement was then presented to the stockholders of the various companies for their action in relation to it. I will also assume that the Colonial Trust Company, who was the owner of substantially all of the stock of the Eastern Illinois company, could have repudiated the agreement and refused to vote the stock held by it to ratify it, and upon the refusal of the stockholders to ratify the agreement it would have been void and of no effect. The original plaintiffs, owning something less than eight per cent of the outstanding stock trust certificates, notified the trust company that this agreement was in violation of the trust agreement, and insisted that the trust company should refuse to vote the stock held by it in trust to ratify the agreement, and should take measures t© prevent the agreement from being executed' or ratified. They failed, however, to induce the holders of twenty per cent of the outstanding stock trust certificates to join with them, and as under the agreement no holder or holders of stock trust certificates unless they held twenty per cent of those outstanding could require the trustee to enforce the agreement or compel the trustee to take any action under it, the trustee refused to proceed. The trustee, therefore, had full knowledge of the situation that an agreement had been executed by the officers of the Eastern Illinois company, which it was claimed by a substantial number of stock certificate holders was in violation of the trust agreement, and that those certificate holders insisted that the agreement should not be ratified.

It is clear that this agreement was not ultra vires. All of the parties to the agreement had power to make it, and the question presented to the directors of these -three companies and subsequently to the stockholders when asked to ratify the contract was whether the contract was for the interest of the company that they represented. The San Francisco company had agreed with the trust company that it would not “sanction or permit” the imposition of any obligation upon the Eastern Illinois company except for certain specified purposes. It proposed to authorized the Eastern Illinois company to execute a contract which did impose an obligation upon that company, and it asked the corporation with whom it had made this agreement, who held substantially all of the stock of the company, to ratify and approve the agreement. The stock trust certificates contained certain provisions which each holder of them would be entitled to enforce. But as to the details of the management of the road pending the creation of the trust, the obligations which were to be imposed upon the Eastern Illinois company, or which the board of directors of that company should have the right to impose upon it, the method by which the trust company as the owner of the stock should vote upon the shares held by it or the purposes for which the proceeds of any obligations of that company were to be used, was left to be determined by the trust company acting for the benefit of all the holders of the stock trust certificates. The parties to the trust agreement could waive any stipulation in the contract not included within the obligations of the San Francisco company to the holders of the stock trust certificates. Instead of attempting to vote under its proxy or power of attorney to ratify this contract the San Francisco company applied to the trust company for a proxy to vote upon the shares of stock held by the' trust company to ratify this agreement. There was no secrecy, fraud or deceit about this transaction. The trust company understood perfectly well what it was doing. The original plaintiffs had protested against such action on behalf of the trust company, and insisted upon it that the trust company should refuse to vote to ratify the agreement, but the trustee considering it, as we must assume, for the benefit of its cestuis que trustenf, and for the benefit of the Eastern Illinois company, issued its proxy to certain persons named to vote at'a meeting of the shareholders of the Eastern Illinois company to ratify the traffic agreement. Such action was had, the stockholders of all three companies ratified it, and it became thereby a valid contract between the three companies.

Immediately after the ratification of this contract a large number of bonds of the Southeastern company were issued, based upon the rights that had accrued to the Southeast era company under this ratified agreement, which had become a valid contract upon its ratification by the stockholders of the three companies who were parties to it. Those bonds, which were expressly secured by the advantages which accrued to the Southeastern company by this ratified contract, were delivered for a valuable consideration to bondholders, who received them relying upon the rights secured to the Southeastern company by this contract. These bonds were actually issued, as I understand the record, before the commencement of this suit. The original plaintiffs then, as the owners of less than eight per cent of the stock trust certificates, commenced this action to have that contract declared void. The trustee for the bonds issued by the Southeastern company was made a party to the action, and it is alleged that that trustee had notice of this claim made by the plaintiffs prior to the issuance of those bonds. It is insisted by this trustee that the rights of the bondholders that it represents could not be affected by the subsequent action of the minority holders of the stock trust certificates, disapproving of the action of their trustee in voting stock held by it to ratify this contract. But the holders of the bonds of the Southeastern company are not ¡parties to the record ; they had no opportunity of being heard before their rights to have this contract enforced for their benefit was destroyed; and those substantial rights that have accrued to these bondholders have been swept away without giving them their day in court or an opportunity to be heard. But beyond this objection it seems to me that the court had no power to declare this contract void at the suit of the minority holders of the stock trust certificates after it had been ratified, when, so far as appears, a very large majority insists that the contract is for the advantage of the Eastern Illinois company, and wish it to remain as a binding contract. As before stated, the contract was voidable, and not void. It became a binding contract upon its ratification by the shareholders of the three corporations who were parties to it. A large majority of the stock of one of the corporations was held in trust for certain stock trust certificate holders, and their trustee voted to ratify the agreement. A majority of the holders of the trust stock certificates have certainly, by acquiescence, ratified the action of their trustee in ratifying the agreement, and have never in any way elected to disaffirm that act or to repudiate the action of their trustee, and as before stated, so far as appears, now insist that the ratification of the agreement was an essential benefit to the company, the stock of which was held in trust for them, and desire that it should be ratified and not repudiated or rescinded. There is no charge that the Colonial Trust Company acted in collusion with the San Francisco company or any one else in ratifying this contract; that it did not act in entire good faith and considered it for the interest of its eestuis que trustent that the contract should be ratified. There is no element of fraud or deceit, and, so far as I can see, the question is one simply of a disagreement between a minority and majority of those interested in this stock, by which the minority seeks to control the majority and to upset an arrangement which has been made by the majority, and which, so far as appears, is entirely satisfactory to it, and by this action repudiate an agreement in which other parties have in good faith, and 'relying upon its terms, acquired a vested interest without making such persons parties to the action.

Since the decision of the Court of Appeals in Continental Ins. Co. v. N. Y. & H. R. R. Co. (187 N. Y. 225) it is not necessary to discuss the question as to whether minority stockholders have a right to a judgment reversing the action of the majority as to a matter about which there is a disagreement which is not ultra vires of the corporation and where no fraud is alleged or proved. The crucial point in this case is that the trustee acting for all the certificate holders has deliberately ratified this agreement; that it acted in good faith in so doing; that a majority of the certificate holders have raised no objection to the action of their trustee, and that third parties, relying upon the existence of this contract, have acquired substantial rights thereunder. Under those circumstances it seems to me that the court will not, at the request of a minority of the certificate holders, inquire as to whether the majority or minority are right as a question of policy, or allow by its judgment the action of the minority to control the majority merely because of a dispute as to a question of policy in relation to an act which is clearly within the power of the corporation, and which has been exercised by it.

I am also inclined to concur with the presiding justice in the conelusion arrived at by him, that if this traffic agreement imposed upon the Chicago company an obligation in excess of that contem plated by the trust agreement, the proper relief would be for the Chicago company to attack such an agreement when it was sought to be enforced as against it; and that an action to set aside the agreement by the holders of the trust stock certificates before a default by the San Francisco company cannot be maintained.

For these reasons I think the action cannot be • maintained, and that the judgment should, therefore, be reversed and the complaint dismissed, with costs.

McLaughlin, J., concurred; Clarke 'and Scott, JJ., dissented.

Patterson, P. J.:

It is unnecessary to restate the facts of this case. They sufficiently appear in the opinions of my associates. ■ .

The principal subjectJto be considered is the relation of the San Francisco company and the former owners of the preferred and common stock of the Chicago and Eastern Illinois Company sold by them to the San Francisco company to and with the Colonial Trust Company. As I understand it the holders of the stock made an absolute sale to the San Francisco company; they parted with title and with possession and retained no proprietary right whatever in the stock. The only evidence we have of what contract or arrangement existed between such holders and the San Francisco company is contained in the certificates issued by the San Francisco company and the trust agreement. When the stock was sold the stockholders changed their position to that of holders of the certificates of the San Francisco company, and whatever rights the plaintiffs or others similarly situated have are derived from or attributable to the stipulations of the certificates and the trust agreement.

The stock was deposited by the San Francisco company as purchaser and owner with the Colonial Trust Company under the terms of the trust agreement. The Colonial Trust Company did not become the owner of the stock; it acquired no power or right in the administration of the Chicago and Eastern road or to do anything connected with such contracts as that road might make in the course of administration. The voting power on the stock was expressly given to the San Francisco company. The Colonial Trust Company did not become the real, but only the nominal stockholder. Title was placed in it only for the purpose of protecting the holders of the certificates of the San Francisco company, and the provision was made in the trust agreement for giving proxies by the trust company to the San Francisco company or to those who might represent the interests of the San Francisco company in the Chicago company. The Colonial Trust Company had nothing whatever to do with anything connected with the holding of the stock, except to furnish the instrument necessai’y to enable the San Francisco company to exercise the right to vote, inasmuch as the record holder of stock would be entitled otherwise to vote upon it, and the proxies of the trust company were merely auxiliary to the right of the San Francisco company to vote as it chose. Hence, I do not agree with Hr. Justice Ingraham on the point that the Colonial Trust Company was the owner of the stock in such a way as to exercise a control or power over the right to vote, which was expressly lodged in the San Francisco company by the terms of the trust agreement. I think that the San Francisco company had the complete control of the Chicago company, the intention being that the Chicago company should be connected with it in the management and control of what might be called a combined line of road, and that the Colonial Trust Company had no duty whatever to perform except to give proxies as required, and, of course, to see that the provisions of the trust agreement were duly performed. When that trust agreement was made the whole of the proprietary right •in the road- of the Chicago company was virtually vested in the San Francisco company. It had an absolute right to do whatever it pleased with the net revenues and with the product of the operation of the Chicago road, except that it could do nothing that would be an infraction of the trust agreement or of the provisions of the certificates issued by it.

The right of the San Francisco company to make any disposition it pleased of the net income derived from the operation of the Chicago road, and to bind that company by contracts connected with operation was complete. It was competent to the San Francisco company in the control of the Chicago company to make a traffic agreement with itself or with any other company that it deemed to be for its benefit as the real -owner of the Chicago stock. Therefore, the San Francisco company and the Chicago company under its control had the right to make a contract and to perform it so long as there is no act done in violation of the rights of the holders of the certificates. They made a contract which on its face is one of traffic and nothing else. The motive which impelled the San Francisco company to make that contract is of no consequence so long as the Chicago and Eastern Illinois company remains in its control and ownership.

Here is a traffic agreement valid in every respect, except in so far as by its terms there may be carried over an obligation of the Chicago company to pay to the Southwestern company after default made by the San Francisco company of its obligations under the trust agreement. As I regard it, the San Francisco company has the right until default to use the revenues of the. Chicago company for any legitimate purpose. We cannot say that the traffic'agreement is wholly void, as was determined by the court below. It is not; but it will not be enforcible against the Chicago company or the holders of the certificates after a default that may accrue. The only infirmity in the traffic agreement is that there may be claimed under it a liability of the Chicago company after default is made. I agree that such a stipulation is unenforcible against the holders of the certificates; but that being so, such holders have no cause of action against the San Francisco company or the Chicago company until some act is done or threatened, or an attempt is made to impose upon them an obligation which cannot be placed upon them or the Chicago company after default. This is not a case of a cloud upon property or title which a court of equity can remove. It is simply a case where there is only potentiality of detriment to the holders of the certificates in circumstances which may never arise, and it is nothing more and nothing less.

In that view of th"e case an action in the nature of a bill quia timet will not lie, for such an action (assuming it may be brought as to instruments of the character here involved) is never entertained upon a mere possibility, but must be founded upon an actually threatened invasion of the rights of plaintiffs. When default occurs and an attempt is made to enforce the traffic agreement against the Chicago company, it will be time to bring or resist an action. These plaintiffs having, as I think, no present claim to relief, the court should not enjoin what may be done lawfully under the traffic agreement.

If I am right in this view of the case, the consideration of other matters connected with it is unnecessary, but I should add that if I am in error in my understanding of the rights of the parties, I think the complaint should not be dismissed because of a failure on the part of the plaintiffs to comply with the provisions contained in the trust agreement respecting the preliminaries to the institution of an action against the Colonial Trust Company. Those provisions were made for the benefit of that company and might be waived, and by the attitude which it took upon the trial I think they were waived. A court of equity having jurisdiction of the person and of the subject-matter awards relief according to the rights of the parties as they appear at the close of the proofs, and if the traffic agreement can on these proofs be set aside in toto, I see no reason why it may not be done in this action.

Clarke, J. (dissenting):

Defendant Chicago and Eastern Illinois Railroad Company owns, and has for many years owned, certain railroads in the States of Illinois and Indiana. For a considerable number of years prior to October 1, 1902, these railroads had been successfully operated as an independent system. Its net earnings were steadily increasing and for the fiscal year ending June 30, 1902, its surplus, after payment of operating expenses, taxes, rental, interest charges and dividends on its preferred stock, amounted to more than fourteen per cent on its common stock. Dividends on its outstanding common stock were declared as follows: 1898, two and one half per cent; 1899, three and one-lialf per cent; 1900, four and one-half per cent; 1901, five and one-lialf per cent; 1902, six percent. It had accumulated in it's treasury a surplus amounting to $10,353,448.08 in quick assets. These were free assets subject to no mortgage or trust lien.

In the year 1902 the defendant St. Louis and San Francisco Railroad Company operated and still operates a large system of railroads lying west of the Mississippi river and extending across the Mississippi river at Memphis to Birmingham, Ala. It acquired a large portion of this system by issuing its own obligations in exchange for the stock or securities of the acquired properties. In the year ending June 30, 1901, the capitalization of the Frisco system, including the stocks, bonds, notes, trust certificates and bonded obligations, amounted to over $200,000,000, and the surplus income applicable to dividends amounted to less than one per cent of that sum.

In August, 1902, the Frisco company issued an offer to the stockholders of the Eastern Illinois company to acquire the shares, common and preferred, thereof. It desired to purchase the Eastern Illinois without any present payment for the stock thereof. It promised to pay in 1912 or upon any dividend day upon thirty days’ notice $250 a share for the common stock and to pay $10 per year dividends; $150 a share for the preferred stock and $6 a year dividend. The stock, when deposited, was put in the name of the trust company, which became the owner thereof upon the books of the Eastern Illinois, but which held such stock, under the terms of the trust agreement, as security to the former owners, the sellers, to whom were issued trust stock certificates, and for the benefit of the Frisco railroad who, by the proxy which the trust company agreed to deliver to it, exercised full voting power therein and so controlled the railroad. But this power of control was limited by the terms of the agreement and for the benefit of the old stockholders by providing that the Eastern Illinois should be continued and kept up as a going concern with the exercise of all of its corporate powers, rights, privileges and uses, and by the provision that the voting power given by the proxy issued by the holder of record, the trust company, to the Frisco company should not be used to issue stock, bonds or certificates of indebtedness for any other purpose than the legitimate purposes of the preservation, improvement and betterment of the Eastern Illinois, and that the trust assets which stood upon the Eastern Illinois’ books on the -15th of August, 1902, amounting to upwards of $10,000,000, should only be used for the same purposes, that is, the payment of debts and obligations and for the improvement and betterment of the Eastern Illinois as a complete corporate individuality and a going concern, and this because upon any default of thirty days in the payment of dividends or a default at the end of the forty years in the payment of the amount agreed to be paid, the stock of the Eastern Illinois was to be given back to the original sellers in place of their trust stock certificates, and so, of course, the road surrendered to them. And by the terms of the offer of deposit and by the terms of the agreement itself, the certificate holders were in express terms made parties to that agreement and were possessed of the rights, privileges and beneficial interest therein provided for. The object of the agreement was to give to the Frisco road the benefit of the earnings of the Eastern Illinois above the amount necessary to pay its operating expenses, fixed obligations and the dividends agreed to be paid to the certificate holders, but as security for the payment ,,of those dividends and the keeping of the contract, the road was to be kept intact and the new management made possible by the ownership of the stock was limited by the trust agreement in the things which it could do. This, then, was move than a conditional sale where possession of the thing itself, that is, the stock, was to be given back in case of default. It was a controlling agreement that while possession of the railroad, evidenced by the stock, the thing sold, or agreed to be sold, was in the hands of the conditional purchaser, it should be managed, controlled and preserved according to the prescribed conditions and within the prescribed limitations of the trust agreement.

The defendant St. Louis, Memphis and Southeastern Railroad Company, a Missouri corporation, hereafter called the Southeastern company, was organized on or abopt January 8, 1902, and has constructed and otherwise acquired certain railroads situated in the States of Missouri and Arkansas and lying west of the Mississippi river and south of St. Louis. On or about January 10,1902, there were executed with reference to the Southeastern company certain agreements to wit, (a) a construction contract between the Southeastern company and the Missouri and Southeastern Construction Company ; (b) an agreement between the said construction company and the Frisco company; (c) a traffic agreement providing for the interchange of traffic between the Frisco company and the Southeastern company; (d) a trackage agreement providing for certain trackage rights between the Frisco company and the Southeastern company; {e) the first mortgage of the Southeastern company to the Old Colony Trust Company and John F. Shepley as trustees to secure a proposed issue of bonds of the Southeastern company. Under this mortgage $9,188,500 bonds were issued and were outstanding on April 14, 1904. The foregoing papers were all dated the same day, were executed with reference to each other and constituted a single plan or scheme for the construction or acquisition of the proposed railroads of the Southeastern company. Thereafter and prior to April 14, 1904, and pursuant to the said plan or scheme, certain of the proposed railroads of the Southeastern company were constructed or acquired and operated under the supervision and management of the engineers and traffic managers of the Frisco company. Pursuant to said plan or scheme, the Frisco company, long prior to April 14, 1904, acquired all of the capital stock of the Southeastern company at a price of about $32 per share in | the collateral trust notes of the Frisco company. For the purpose of said acquisition the Frisco company prior to said date issued about $4,000,000 of such collateral trust notes under an agreement with the Eastern' Trust Company, dated November 1, 1902, of a somewhat similar nature to the stock trust agreement made between the Frisco company and the Eastern' Illinois. During the period of construction and prior to April 14, 1904, the earnings of the railroads of the Southeastern company were credited to construction account, which account was in the control of the officers of the Frisco company, and the expenses of said construction were paid by said officers. The said earnings of the Southeastern company at no time during said period equalled its running expenses and the cost of construction and completion of its said railroad lines exceeded the amount realized from its stock, bonds and other securities by more than $3,500,000, which sum was, prior to April 14, 1904, advanced by the Frisco company for the purpose of such construction. On or about November 30, 1903, all of the railroads constructed or acquired, and to be constructed and acquired, and all of the appurtenant property of every description of the Southeastern company were leased to the Frisco company for a term of ninety-nine years. Under said lease the Frisco company was entitled to the immediate possession and use of all railroads and other property of the Southeastern company and to receive all the rents, issues and profits thereof and was obligated to apply the net earnings of the leased properties to the taxes and interest on the bonds of the lessor, , and thereafter to apply them in payment of dividends on the stock of the lessor, said stock being then owned by the Frisco company itself.

In substance and effect the organization of the Southeastern company was merely a means devised by the Frisco company to acquire a certain railroad route. The Frisco company participated in the creation of the Southeastern company, built and operated its road under the supervision of the Frisco company’s officers, absolutely controlled its traffic policy, owned all its stock, elected its directors and officers, and eventually leased its railroads and property to itself.

Shortly prior to December 18, 1902, the St. Louis and Gulf Railway Company, a Missouri corporation, hereafter called the Gulf company, was organized to construct, acquire and operate and has constructed and acquired certain railroads and other property within the States of Missouri and Arkansas lying south of the city of St. Louis. For the purpose of such construction and acquisition, the said Gulf company executed its first mortgage to the St. Louis Union Trust Company, dated December 18, 1902, under which mortgage there were issued and outstanding on April 14, 1904, bonds of the par value of $5,852,000. Some time after the date of its organization, and in or about 1903, the entire capital stock of said Gulf company was acquired by the Frisco company and the said Frisco company guaranteed the principal and interest of the entire issue of said bonds. On or about June 1, 1904, all the railroads and property of the Gulf company were conveyed to the Southeastern company. For a considerable time prior to April 14, 1904, and ever since, the operation and traffic policies and the corporate policy and actions of the Gulf company have been completely controlled by the Frisco company, and the said Gulf company has had no separate or independent action as distinct from the Frisco company.

The railroad of the Southeastern company connects physically with that of the Eastern Illinois company at Thebes, 111., and with that of the Frisco company at Liudenwood, Mo., near St. Louis. Under trackage agreements with the Frisco company, the Southeastern company operates into St. Louis over the tracks of the Frisco company, which trades connect in St. Lonis with the tracks of the Big Four system running from St. Lonis to Pana, 111., at, which, point the tracks of the Eastern Illinois company physically connect with the said tracks of the Big Four system. Both the Frisco company and the Eastern Illinois company, by trackage agreement have the right to operate fully all through traffic over the said tracks of the Big Four system between St. Louis, Flo., and Pana, 111., for a period of 999 years. Prior to April 14, 1902, it became greatly to the interests of the Frisco company to devise a moans of refunding the various obligations and securities aforesaid created with reference to the properties of the Southeastern and Gulf companies, and to devise a means of carrying said obligations which would be less burdensome to the Frisco company. The earnings of the Southeastern and Gulf companies were insufficient to meet their fixed charges, including their issues of bonds above mentioned, and the said bonds were selling below par. The said bonds of the Southeastern company and Gulf company were held, to a very large extent, by certain syndicates, some of which syndicates were about to expire by limitation in the spring and summer of 1904, on which expiration the said bonds were likely to become scattered. The collateral notes of the Frisco company, issued for the purchase of the Southeastern company’s stock, were also largely held by one of said syndicates, and the Frisco company had an option for the purchase or redemption of said collateral notes at eighty-two and one-half per cent of their face valué, which expired on July 1,1904.

Accordingly, the Frisco company attempted to put into execution certain plans for refunding the said obligations and securities. It first proposed to organize a new corporation to acquire a through line from Chicago to New Orleans. It was proposed that said corporation should, take over the properties of the Eastern Illinois and Southeastern and Gulf companies and should construct the remaining railroad necesssary to reach New Orleans.

This was a large proposition, about $175,000,000. This plan was abandoned for the time on the advice of the bankers who were to finance the plan, to the effect that the securities could not be floated at that time.

Thereafter the Frisco company proposed a second plan, to the effect that the above-mentioned obligations and securities of the Southeastern and Gulf companies should be purchased by the Eastern Illinois company, and that the Eastern Illinois company should issue its bonds for about $26,000,000 in payment therefor. Upon learning of said plan, the plain tiff Kissel and certain other large holders of the common stock trust certificates issued under the stock trust agreement, with reference to the Eastern Illinois company stock, protested and the said plan was abandoned.

Thereafter the Frisco company offered to the syndicates holding the Southeastern and Gulf debt to issue in exchange therefor bonds of the Frisco company secured by a mortgage of said railroads and property of the Southeastern company; but the said proposition was rejected by the syndicates as not satisfactory. They said they were satisfied with the securities they had and did not want to exchange them unless they could get something better than they had ; that they had practically the first mortgage on the St. Louis, Memphis and Gulf lines, and they had the Frisco collateral trust notes, and they practically had the Frisco as a guarantor of the bonds, because the Frisco owned all the stock that was underneath them, and they stated that they wanted something more or they preferred to stay where they were, and refused to accept the new scheme unless the bonds and obligations to be issued were guáranteed by the Eastern Illinois company.

Thereafter, and as appears conclusively from the evidence, for the sole purpose of ‘refunding said Southeastern and Gulf debt and of repaying to the Frisco company the advances upon the construction account of $3,500,000 which it had advanced, the Frisco company devised‘and put in execution the, plan under review in this case. Its basis was the so-called traffic agreement at bar. It did not have its inception in the operating or traffic departments of any of these railroads. It was not necessitated by any emergency in traffic conditions. It was not caused by any disruption of amicable relations or any prospect thereof. The parties to it were all operated and conducted as one road under the same management. The Frisco road dominated and controlled each of the subsidiary companies. It nominated, elected and kept in office all their directors and operating officers. The traffic had been and continued to be as it ordered and required, and there was absolutely nothing in the practical management of the railroads concerned which instigated or required this agreement. It was, from all of the evidence and as evidenced upon the face thereof, purely a financial measure dictated by the financial necessities of the situation, brought forward as the fourth of a series of plans to refund the outstanding obligations, the syndicates holding whieli were about to be dissolved, the members of which had demanded as a condition of their consent to a new refunding scheme the guaranty of the one successful and dividend-paying well-to-do road in the combination possessed of a handsome surplus, to wit, the Eastern Illinois.

It is impossible to read this record and to reach any other conclusion than the one just stated. It was not a traffic agreement as called, but a financial device to procure a solvent guarantor for a refunding scheme for the benefit of the dominant interest, the Frisco road, and to enable it to extricate itself from the difficulties in the refunding of its debts and obligations. Indeed, counsel for the railroads unwittingly corroborates this view, for he says in his brief: “ With this substantial guaranty of income to the Southeastern Company, the then holders of the Southeastern securities were willing to part with their securities and to accept in lieu thereof a materially less amount of short term securities.”

I said that its character was evidenced upon the face of the agreement. It was dated April 14, 1904, was between the Frisco company and the Eastern Illinois company as parties of the first part, and the Southeastern company as party of the second part. In other words, it was made by the Frisco company with itself. It provides: “ Whereas all lines of railroad and the appurtenant franchises, equipment and property of the Southeastern Company are subject to a mortgage dated January 10,1902, made to the Old Colony T