Lake St. El. R. Co. v. Ziegler (NS) minority bondholders to assent to a reorganization scheme by which they are required to scale their bonds, accepting in lieu thereof new bonds for a smaller amount, without additional security; the benefits of the scheme, if any, inuring solely to the stockholders. Appeal and Cross Appeal from the Circuit Court of the United States for the Northern Division of the Northern District of Illinois. On December 31, 1895, the Lake Street Elevated Railroad Company, a corporation of the state of Illinois, the appellant in the first and the appellee in the second of these causes, filed its bill, and on the 16th day of January, 1896, filed its amended bill, in the circuit court of Cook county, Ill., against the appellants, William Ziegler and 12 other individual defendants, each being a citizen of a state other than the state of Illinois, the Farmers' Loan & Trust Company, a corporation of the state of New York, and the American Trust & Savings Bank, a corporation of the state of Illinois, the two last-named corporations being trustees in the trust deed executed by the appellant. This bill sought to charge William Ziegler, one of the defendants, and who was a director of the Lake Street Elevated Railroad Company, with certain bonds and stock received by him from the contractors who constructed the road, upon the ground that he, being a director, was interested in the contract which the company, with his participation, had made with the contractors, and which was improvident; and that he was interested with the contractors in the profits to be made. These charges having been, at the hearing, abandoned by the complainant below, it is not necessary to state them in detail. The other individual defendants were charged to have received bonds from Ziegler with notice of the facts charged in the bill, or to hold them in secret trust for him. The amended bill charged that Ziegler and the other individual defendants had demanded of the trustees that, by reason of default in payment of interest upon the bonds held by them, respectively, they should take possession under the trust deed, or proceed to foreclose it, which the complainant feared would be done by the trustees upon such demand by reason of their ignorance of the facts stated in the bill. The prayer of the bill was that an accounting might be had between the complainant and the individual defendants, and that, upon payment by the complainant of the amount paid by Ziegler to the contractors for the bonds and stock now held by him and the other individual defendants, such bonds, stock, and other property, if any, should be surrendered to the complainant, it offering to pay the amounts paid by Ziegler therefor. The bill also prayed for an injunction pendente lite restraining disposition of the bonds and stock held by the individual defendants, and from commencing suit at law or in equity upon the bonds or coupons pertaining thereto, and from collecting the interest due thereon; and that the trustees might be enjoined from taking possession R Cas Lake St. El. R. Co. v. Ziegler of the road and from foreclosure of the trust deed at the request of the individual defendants. At the commencement of the suit a temporary injunction was allowed as prayed, but process was not served upon the defendant. On the 22d day of January, 1896, the individual defendants filed their petition for the removal of the suit into the circuit court of the United States for the Northern district of Illinois upon the ground that the suit was a controversy wholly between citizens of different states, to wit, a controversy between the complainant, an Illinois corporation, on the one hand, and Ziegler and the other individual defendants, citizens of states other than the state of Illinois, on the other hand, and which could be fully determined as between them. An order was thereupon entered by the state court, removing the cause into the federal court. The individual defendants, other than Ziegler, answered, setting forth their respective holdings and bonds, and asserted themselves to be bona fide holders, for value, and without notice of the facts set forth in the amended bill. The defendant Ziegler also answered fully, denying the equity of the bill, and asserting his holdings and the sources thereof. The facts, so far as they are necessary to be stated to present the questions submitted to the court, are these: The Lake Street Elevated Railroad Company was incorporated in the month of August, 1892, with a capital stock of $5,000,000, for the purpose of constructing and operating an elevated railway some seven miles in length, and within the city of Chicago. Prior to December, 1892, the company had issued $3,500,000 of its stock. It had constructed one mile of its railway. It had issued $812,000 of bonds, the proceeds of which presumably had been used in the construction of the one mile of road. The company was in straitened circumstances, and unable to proceed further with the construction of the railway. The enterprise was moribund. Under these circumstances the directors applied themselves to the task of devising plans for the completion of the road. On December 23, 1892, William Ziegler, a resident of New York, was elected a director of the road, and took his seat as director at a meeting of the board on the 2d day of February, 1893. On September 1, 1892, one Miller, a law clerk, financially irresponsible, subscribed for $1,500,000 of unissued stock. On February 3, 1893, this subscription was approved by the directors, who agreed to receive in payment thereof the notes of Miller, dated September 23, 1892, payable at six months and one year from their date, upon the condition that those who should become contractors for the construction of the road would agree to take these notes of Miller in part payment of the work to be done. This condition was afterwards carried into effect, the notes were delivered to the company and received in payment by the contractors, and the stock was issued to Miller; and presumably this stock passed to the contractors from Miller, the transaction being a device for Lake St. El. R. Co. v. Ziegler (NS) the issue of stock, and being resorted to, probably, because the subscription of Miller antedated by some months the letting of the contract. Negotiations were entered upon in the fall of 1892 with Underwood and Green for the construction and equipment of the road. At a meeting of the directors of the company held on February 3, 1893, the committee of the board having the matter in charge reported, and proposals were submitted to and considered by the board. On the 4th day of February, 1893, a contract was agreed upon with Underwood and Green as follows: They were to build and equip the road, and were to receive in payment thereof $11,710,000, of which $6,500,000 was to be in the capital stock of the company at par, $5,150,000 in the first mortgage bonds of the company at par, and $60,000 in cash, an amount received by the company from one Wheeler upon subscription to stock, which was to be considered as a part of the fund provided to be paid for the expenses of the company during the time of construction, but the directors might use any part of it to pay bills for the construction of the road. It was further arranged that an underwriting agreement should be made to aid the contractors in their work. By this agreement bonds and stock were to be deposited in trust, and monthly estimates should be had as the work progressed, and a proportionate amount of bonds and stock delivered to the contractors upon such estimate. Underwood and Green were to procure subscribers to this underwriting agreement, by which the subscribers were to take from the contractors the bonds of the company at 90 per cent. of their par value, and also such amount of stock, as, taken at par, would equal the number of bonds so purchased. To enable the company to carry out the contract, the shareholders agreed to an increase of the capital stock so that the capital stock of the company should amount to $10,000,000. Ziegler, prior to his connection with the company, had loaned to Underwood and Green the sum of $30,000 upon their note. After the maturity of the note, and after the contractors had received from the company bonds in payment of the work done in the construction of the road, he received from the contractors payment of the note in such bonds at ninety per cent. of their par value. He also subscribed the underwriting agreement for $250,000 of the bonds of the company upon the terms of that agreement. Afterwards, at the solicitation of the president and attorney of the company and of the contractors, and in order that the subscription might be completed within the time limited, and the contractors be enabled to comply with their contract and build and equip the line as therein agreed, he subscribed for an additional $250,000 worth of bonds upon the agreement by the contractors that, in consideration thereof, they would give to Ziegler an additional bonus in stock received by them in payment of the construction of the road of $125,000 at its par value. These facts were known to the president and attorney R Cas Lake St. El. R. Co. v. Ziegler of the company at the time, and the proposition therefor was made in their presence, and they knew, and Ziegler was at the time assured, that the contractors had offered such terms to others, who had and would accept thereof, and so the underwriting agreement would be fully executed within the time limited. This was a matter wholly between the contractors and Ziegler, and in no way affected the rights of the company under the contract. The underwriting agreement was thereby completed, and the contractors enabled to proceed with the construction of the road. The stock received by Ziegler under the underwriting agreement was sold by him in July, 1894, at 18 cents upon the dollar,-a price above its market value. Ziegler at the time of suit owned 400 bonds of the company, of which 8 had then recently been purchased by him in the open market, 145 purchased by him of the company in the year 1894 at 52 cents on the dollar, and the remaining 247 were part of the 500 bonds received by him under the underwriting agreement at 90 cents on the dollar. The bonds purchased of the company were not the bonds delivered by the company to the contractors, but were part of those reserved by the company, all of which were sold by the company to different parties at the same price. At that price Ziegler purchased them at the solicitation of the officers of the company, and at a price not less than, if not greater than, their market value at the time. The other individual defendants purchased their bonds of Ziegler, being part of those received by him from the contractors under the underwriting agreement. They were bona fide purchasers thereof, for value, without notice. On April 7, 1893, the company executed to the two corporations defendants, as trustees, its trust deed upon its road, to secure $6,500,000 of bonds, of which $5,150,000 were to be issued to Underwood and Green under their contract. This trust deed was in the usual form, except that it provided that the holders of bonds should have no right of action at law or in equity upon the bonds, except only in a case of the refusal of the trustees to act. It further provided that, upon default in interest continuing for six months, the trustees might, upon request of the holders of one-fourth in interest of the outstanding bonds, and shall, if requested by the holders of a majority in interest of the outstanding bonds, declare the principal matured. It further provided that upon default in the payment of interest, and upon request of a majority in interest of the outstanding bonds, the trustees, on being indemnified, should take possession of the road. These provisions were not in curtailment of the power of the trustees upon default by the company, and of their own motion, to institute such proceedings as they might deem necessary in protection of the trust. The railroad was completed by the contractors, and on the 4th day of March. 1894, the directors of the company, by resolution, accepted possession, without prejudice Lake St. El. R. Co. v. Ziegler (NS) to any claim that the work was not in compliance with the contract, and the company has since continued in the possession and operation of the railway. In October, 1894, the company had a settlement with the contractors, and for the balance then found due gave them its promissory notes due in January, and February, 1895, and upon maturity of the notes made further claims against the contractors with respect to alleged defects in their work; whereupon a further, complete, and final adjustment was made in March, 1895, and mutual releases passed between the company and the contractors. The company paid the interest upon these bonds up to January I, 1895, paying the interest then due on the bonds held by the individual defendants below in October, 1895. On January 8, 1895, the president of the company reported to a meeting of its stockholders that the company could not pay the interest upon its mortgage debt, there being a deficit therein of $146,725.75; that to meet the interest upon its bonds would require an increase of 90 per cent. in the traffic of the company, which was impossible within its territory; that the situation was serious and pressing; and he requested that a committee of stockholders be appointed to confer with a committee of bondholders to devise some plan of readjustment by which foreclosure would be avoided. A committee was accordingly appointed, and in March, 1895, a plan was devised and proposed to the bondholders that they should scale their bonds to 60 per cent. of their face value. The plan contemplated a deposit of the bonds by the bondholders with a trustee, the holders to receive the debentures of the company for 60 per cent. of the par value of the bonds. Ultimately, and upon the assent to the plan of all bondholders, the debentures were to be surrendered, 40 per cent. of the face value of the bonds was to be canceled, and the owners to receive back their bonds at 60 per cent. of their face value; also to receive an income bond of the company for 15 per cent. of the face value of their bonds, the interest upon which was noncumulative, and was payable only out of the income, and after the payment of all fixed charges upon the road. The debentures were to be guarantied by the Northwestern Elevated Railroad Company, which guaranty was to be extended upon surrender of the debentures to the bonds so scaled to 60 per cent. The proposed guarantor was a company having a franchise, but no road or equipment, and then indebted to an amount not disclosed; the guaranty to be given in consideration of a right of way over a portion of the complainant's railway. The plan involved no contribution by stockholders, nor any scaling or surrender of stock. Until this plan should receive the assent of all, the bonds of assenting bondholders were to be held simply as security for the debentures to be issued, but was to be effective, and the debentures were to be issued upon the assent of the holders of 3,800 of the 7.474 bonds. More than the necessary number assented to warrant the issue of |
