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tion. All this detail of specification would be unnecessary if the mortgage were not intended to define carefully what expenses and liabilities may be treated as an offset to gross income, and limit the offset to those incurred in the operation and improvement of the particular lines described. Within this limitation the amount that may be appropriated for the specified objects, and the manner in which the railway lines may be managed, are matters resting exclusively in the discretion and good faith of the directors.

An income railway mortgage, although it is a pledge of tangible property for the payment of the principal sum, is, as a security for the payment of interest, but little more than the pledge of the good faith of the company in managing its lines. It necessarily contemplates that such improvements as seem necessary to the efficient use and operation of such property, and such alterations in the corpus as appear desirable, are to be made, at the discretion of the directors; and unless it contains some limitations upon the powers of the directors, express or implied, the right of the company to conduct its operations as it may see fit, subject only to the conditions of its organic law, is unqualified; and consequently the company can lawfully extend its lines, acquire new ones, discontinue old ones, and thus essentially change the earning capacity of the property. It is important, therefore, that any limitations upon the general powers of the directors, intended to define the boundaries of their discretion, should be given due effect if such a mortgage is to afford any substantial security to bondholders for the payment of their interest; and if these are found in the instrument they should not, be nullified by a latitudinarian interpretation calculated to relegate bondholders to the position of stockholders. They are not stockholders, but creditors, who contract upon the assurance that the income fund upon which they rely when they purchase the bonds is to continue to exist during the life of the mortgage. When the mortgage implies that the income fund is to consist of the profit of the future transactions of the company from all sources, as may be the case when the property pledged to the fund includes not only what is owned by the company at the time of the execution of the instrument, but also all that may be thereafter owned or acquired by the company, the bondholders cannot complain if, when the interest periods occur, it is found that the profits which would have been made by operating the original lines exclusively have been depleted by the losses arising from the operation of new lines in conjunction with the old ones. Day v. Town of New Lots, 107 N. Y. 148, 13 N. E. Rep. 915; Buck v. Seymour, 46 Conn. 156. But where, as here, the terms are that specific lines are granted, and that income is to be ascertained by taking the gross earnings of those lines and deducting from them specified expenses and liabilities, the bondholders are entitled to hold the company to its promise. It is to be inferred that they have invested upon the faith of the earning capacity of the particular property, basing their expectations for the future upon the results of the past, and not intending to trust wholly to the integrity and good judg ment of a body of directors whose personnel may change at any time.

The case, then, presents the question whether the board of directors are justified in deducting the expenditures and expenses, including interest charges, incurred by operating the new lines acquired by the company from the earnings of the original lines. Clearly they are not, unless these new lines are to be deemed "betterments requisite to maintain the line of railway [described] in first-class condition." The mere statement of the proposition is the only answer it requires. If it is said that the successful operation of the old lines may have demanded the acquisition of new ones, the answer is that, nevertheless, the income fund consists of the earnings of the old lines, less the expenses of operation, and the bondholders have the right to look to that fund exclusively. The mortgage intrusts the directors with a wide discretion in determining what is to be treated as net income. Their conclusions, when embodied in a resolution of the board, are not vitiated by an error of judgment, and can only be disturbed when the circumstances establish bad faith. But their duty to the bondholders requires them to make an honest effort to ascertain the net earnings of the original lines at the several interest periods; and this they have not done; nor can they do so practically, unless a separate account of the earnings and expenses of those lines are kept. Barry v. Railroad Co., 27 Fed. Rep. 1; Mackintosh v. Railroad Co., 34 Fed. Rep. 582. The perfunctory ceremony of passing a resolution that no income has been earned, without an attempt to ascertain the fact, is not a compliance with the letter or the spirit of the contract. The condition in the bonds and mortgage, whereby the interest is payable as and when fixed by the action of the board of directors, does not preclude the bondholders from all remedy whenever the directors improperly neglect or refuse to take the necessary action. No corporation can shelter. itself behind a contract that it shall not be liable for its own wrongful acts.

It has seemed proper to consider these questions fully, because both parties are anxious for the opinion of the court as to their respective rights and obligations under the bonds, and the argument at the bar has been principally directed to the discussion of them. Nevertheless no relief can be granted to the complainant under the present bill, because, having alleged a case of fraud, he cannot be permitted to support it on any other ground. Wilde v. Gibson, 1 H. L. Cas. 626; Eyre v. Potter, 15 How. 56; Fisher v. Boody, 1 Curt. 206; Price v. Berrington, 7 Eng. Law & Eq. 254. The present bill does not even proceed upon the ground of a willful neglect of duty on the part of the directors of the defendant to make the ascertainment and adjudication respecting the income provided for in the mortgage, but it charges them with actual fraud and conspiracy designed to compel the complainant to surrender his bonds and accept consol bonds in lieu, and alleges the failure to make the ascertainment as one of the evidential facts supporting the conspiracy. There is nothing in the facts, as they appear by the pleadings, to justify any inference of mala fides on the part of the directors; and it would seem that they have acted under an honest misapprehension of their duties to bondholders, supposing that the position contended for by their counsel

was correct, and that the income of all the lines, the new as well as the old, was the fund pledged by the mortgage. The bill is therefore dismissed, with costs.

TERBELL et al. v. LEE et al.

(Circuit Court, S. D. New York. October 5, 1889.)

1. MORTGAGES-SALES ON FORECLOSURE-SUPPRESSION OF BIDDING.

In a suit to stay prosecution of an action on bonds executed to commissioners as part payment for certain property purchased by complainants at a sale under foreclosure, it appeared that on a resale thereof for complainants' default in the payment of such bonds the purchasers represented a portion of the bondholders, who had combined to bid in the property in case the amount of the original sale should not be realized. Before such resale, the purchasers had agreed, if they should buy such property, to sell it, on the terms of the original sale, to a certain syndicate, who did not intend to bid at the resale. One M. had agreed with said syndicate not to bid at such resale in consideration of an interest in the property, to be transferred to him on the terms which they should have to pay. The purchasers on the resale sold the property to the syndicate for $86,000 more than they paid. The commissioners who conducted the resale were not aware of the agreement which had been made between the purchasers and the syndicate, or the agreement between the syndicate and M. Held, that the agreement between the purchasers and the syndicate, not being intended to suppress competition at the sale, was a legitimate one. 2. SAME-ACTION TO SET ASIDE SALE-PARTIES.

Neither the purchasers at the resale, nor the bondholders for whom the sale was made, being parties to the action, the cause cannot be determined in their absence. 3. SAME-ORIGINAL SUIT.

An original suit to set aside a sale under a decree of foreclosure, by the party to a foreclosure suit, where relief can be obtained by a summary application to the court in the foreclosure suit, should only be sanctioned in exceptional cases.

4. SAME LACHES.

Where complainants failed to apply to have such resale vacated in the trial court, and an unexplained delay of six years has intervened since such resale, it will not be vacated as fraudulent.

5. SAME.

The court will not decree a deduction of such $86,000, paid by the syndicate to the purchasers in excess of the purchase price, from the amount due on the bonds, as neither the commissioners nor the boudholders not represented by such purchasers were participants in any wrong.

In Equity. On motion for an injunction pendente lite.
Joseph H. Choate and John Winslow, for complainants.
John T. Mason and H. O. Cloughton, for defendants.

WALLACE, J. The complainants have filed the present bill to stay the prosecution of a suit at law brought against them by the defendants, and have moved for an injunction pendente lite. The suit at law is brought to recover the sum due upon four bonds, for the payment of $135,000 each, executed by the complainants and others under the following circumstances: A bill was filed in the circuit court of the city of Richmond, Va., to foreclose a mortgage executed by the Washington & Ohio Railway Company upon its railway, and the suit proceeded to a decree of foreclosure appointing the present defendants special commissioners to make sale of the railway, and execute a conveyance to the purchaser.

The complainants and others, associated with one Best, became the purchasers, and the purchase was ratified by the court, and a deed was executed pursuant to the decretal order of the court, May 23, 1882, conveying the property to Best and his associates, who thereupon executed the bonds. The decree provided that upon delivery of the deed Best and his associates should, in accordance with a statute of Virginia, be constituted a corporation under the name of the "Washington & Western Railroad Company," and also provided that the special commissioners should have a lien upon the property for all unpaid purchase money represented by the bonds, to be enforced by a rule for a resale of the property. Default having been made in the payment of the bonds, after possession of the property had been surrendered to the new corporation the court duly ordered a resale of the property, and on the 9th of May, 1883, the property was resold by the special commissioners to Oakman and Bates, who were the highest bidders at such resale, for the sum of $400,000. On an application made in the cause to confirm the resale, exceptions were filed by Best, alleging, among other things, that the property was sold at an inadequate price; that certain creditors, who were entitled to a distributive share of the proceeds, combined together to suppress competition at the bidding; and that other irregularities occurred. These exceptions were supported by affidavits. The exceptions were overruled, the proceedings on the resale were ratified, and the court made a decree for a conveyance to the purchasers on the resale. Subsequently the court directed the special commissioners to enforce payment of the bonds. They brought suit in this court, and have obtained a verdict.

In the present bill the complainants allege that the resale was not conducted in good faith, and that, by a secret agreement and combination between parties holding 51-100 of the mortgage bonds, represented in the decree of foreclosure, and other capitalists, a scheme to suppress competition was formed, and was carried out at the resale, and that, pursuant to this agreement, the capitalists mentioned paid Oakman and Bates $86,000 more than the sum for which the property was struck off to them, and took a conveyance from them of the property. They allege that at the resale the property was sold at an inadequate price. They do not allege that the special commissioners were parties to a scheme to suppress competition. They insist that if they are not entitled to any other relief they are entitled to have the amount due upon their bonds reduced by the sum of $86,000. Among the papers used upon this motion is the stenographic report of the testimony introduced upon the trial of the suit at law, in which suit the present complainants. set up as a defense substantially the same matters alleged in their present bill; and upon the trial they were permitted to introduce full testimony in reference to the alleged combination to suppress competition at the resale. From this testimony it appears that Oakman and Bates represented a party of bondholders who had associated together to protect their own interests in the foreclosure proceedings. When the resale was ordered, they determined to bid in the property, unless it should bring as much as it did upon the original sale. Before the time of the

resale they were approached by Martin, representing persons known as the "Cooke Syndicate." Martin suggested that the Cooke syndicate would be willing to buy the property of Oakman and Bates in case the latter should buy it, and it was finally arranged that, if Oakman and Bates should become the purchasers, the Cooke syndicate would take the property of them on terms by which they should realize as much as their bondholders would have realized if the purchase money on the original sale had been paid. Mr. Martin had distinctly stated that under no circumstances would the Cooke syndicate become bidders or purchasers at the sale; that they would be willing to buy the property from Oakman and Bates, but they needed a term of credit which the terms of the resale would not permit. The Oakman and Bates party intended all along to buy in the property at resale as cheaply as they could, unless some other purchaser was willing to bid the price at which it was originally sold. They intended to protect themselves, so that they would get as much as they would have got originally. The arrangement with the Cooke syndicate could have had no influence upon the bidding at the resale, because that syndicate would not have bid under any circumstances. The arrangement was a perfectly legitimate one on the part of Oakman and Bates to protect the interests of their party. There is testimony also of Mr. Miller, who was a bondholder, but not of the Oakman and Bates party, who had tried to form a syndicate to buy the property in order to protect his own interests. He testifies that he conferred with Martin, and made an arrangement with him by which he was to have an eighth interest in the property, on the basis of the price which the Cooke syndicate might have to pay for it. According to his testimony this arrangement was brought about upon his representations to Martin that he would otherwise bid at the sale, and in order to prevent him from doing so. After the Cooke syndicate acquired the property, Miller refused to take the eighth interest on the basis of $486,000, (the price they paid,) because he thought it was too much. He was not willing to come in on a basis beyond that of $400,000, claiming that they could have bought it for a good deal less than $400,000.

Upon such a case, if the cause were here on final hearing the court would not vacate the sale, or grant the complainants any relief. It is apparent that Miller would not have bid more than was bid by Oakman and Bates, and there is nothing to justify the inference that anybody else would have bid more. It was entirely competent for the bondholders represented by Oakman and Bates to combine for the protection of their interests, (Kearney v. Taylor, 15 How. 494;) and equally competent for them to make an arrangement in advance by which, in case the property should be bought by them, they should dispose of it at an advance. In no event, by the arrangement, did they have any interest. in preventing competition. It was just as much their interest to have the property bring the highest price obtainable as it would have been if there had been no such arrangement. Such agreements are not illegal unless meant to prevent competition, and induce a sacrifice of the property sold. Wicker v. Hoppock, 6 Wall. 94.

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