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the directors of a corporation “from controlling the corporate property for the enhancement of their personal and private interests.” Furthermore, the court found that Dolbeer and Carson belonged to a syndicate which had limited the lumber product of its members, and that from all the facts there was no prospect that the road as extended would be profitable to the stockholders; but it declined to consider the question of probable profits as one that should control the decision. The uncontroverted facts as to the business and prospects of the road are "that the timber accessible to the road is practically exhausted"; that the road will become valueless unless another source of supply is reached; and that the proposed extension will reach “large bodies of valuable timber, which will give the road business for years to come.” The court below was of the opinion that it might be conceded that the road, as now existing, will soon be valueless, and that by the proposed extension such large bodies of valuable timber will be reached as will make it, if operated to its full capacity, profitable to its stockholders; but that, notwithstanding this, the private interests of Dolbeer and Carson to be served by such extension, the limitations they are under to the lumber trust, the fact that they are the only present patrons of the road, and the conclusion therefrom that there is no present prospect that the investment would be profitable to the stockholders, require the intervention of the court by its injunction to prevent such extension. In short, the conclusion is reached that the case is within the established principle which precludes a person from acting for himself and at the same time for another in respect to the same matter, when the two interests are conflicting.
The Bucksport Railroad Company was organized to build the road in question, and this power was assumed, not merely as a provision for contingencies that might arise in the future, but as one fairly within the main scope of the organization. It was a vital part of the enterprise, the object of which was to reach with a road valuable redwood-timber lands of the parties on both forks of Elk river. The stockholders of the complainant were the organizers and beneficiaries of the California Redwood Company of California. That company was largely interested in timber lands, and in mills and vessels engaged in the lumber manufacture and trade, which it carried on at the time the Bucksport & Elk River Railroad Company was incorporated. The new enterprise was intended primarily to serve the interests of the California Redwood Company and Dolbeer and Carson as a means of outlet for their own timber,—to carry their own freight and supply their own mills. It was, in effect, a private road for the private use of the two interests that combined to organize the company that built it. At least, it was mainly for such use that the venture was gone into. Evans, one of the original stockholders in the California Redwood Company, and its manager in 1881 and 1885, testified, as a witness for defendants, that the railroad was built for the purpose of hauling logs for Dolbeer and Carson and the California Redwood Company. Carson testifies that he was first approached by parties in the California Redwood Company with the proposition to incorporate the railroad company, and that their prop
osition was that, if Dolbeer and Carson would take half the stock in such a company, they would furnish more than one-half its business. Bell, a witness for complainant, testified that, if Dolbeer and Carson had not furnished any freight for the road, the amount of profit left to the railroad during the seven years it has been operated would have been “on the wrong side.” As it turned out, the redwood company furnished but little, if any, business for the road; having sold its timber to Dolbeer and Carson, to be by them cut and hauled over it. It is not a ground of complaint that the road is to be used to haul the freight of Dolbeer and Carson, nor that, being so used, Dolbeer and Carson do not concede to the minority in the board the right to fix the rate of freight to be paid by them. Upon the principle contended for by complainant, the road cannot be used by one of the two parties concerned in building it, although it was intended for both, for the reason that the management, including the right to fix rates of freight, must necessarily be in the control of one.
The complainant also contends that the defendants are forbidden by section 18, art. 12, of the constitution of California, to have an interest as a carrier in the freight transported. That provision forbids an officer of a company to engage “in the business of transportation as a common carrier of freight or passengers over the works owned, leased, controlled or worked by the company,” etc. Such officer is prohibited from using the road under his control to engage in the business of common carrier on his own account. There is no relation between such business and the act of an officer of a company in carrying his own freight over the company's lines.
In one case he takes the company's place as a carrier and diverts its earnings to himself; in the other, he originates business for the company, and becomes himself a payer of tolls to it.
The North Fork extension was presumably one of the inducements for the undertaking in question. It may have been the controlling inducement so far as Dolbeer and Carson are concerned, since, in addition to their joint interest with complainant in lands to be reached by the proposed extension, they own large bodies of timber further up this fork, ultimately to be reached by the road. Good faith requires that the parties shall keep to their undertaking until its substantial ends are accomplished. In no case can the court enjoin the building of a road because of what is proposed upon the one side or feared upon the other as to the rates of toll that will be adopted when the road is built. Carson is bound to the exercise of good faith in this, as in all other matters relating to his office as director. The contention of the complainant that his relation to the road as a patron disqualifies him from fixing a rate of toll is an attempt to apply a general rule that obtains where a party, as the agent of others, attempts to deal with himself, to a case not within the rule. Such rule cannot, in the nature of things, be applied with reference to matters of legitimate and necessary corporate administration. These are matters that compel action, and the obligation to act is devolved upon the majority. It is the abuse of the right, and not the exercise of it, that furnishes the occasion for legal remedies,
There is nothing in this case that tends to show bad faith on the part of the defendants. It is proposed to build an extension of road four miles in length up the North Fork of Elk river, in accordance with the object for which the company was incorporated. The cost of this road is variously estimated. One witness, a surveyor, testifies that he has made a careful estimate of the cost, which he places at a little below $44,000, not including rolling stock, with which the company is presumably supplied. There has already been considerable work done on the line,-$5,800 having been expended therefor. This first extension will make available some 300,000,000 feet of logs, without further expense than the construction of a mile and a half of what is called a “donkey-engine road," which Dolbeer and Carson propose to construct at their own expense. The extension is to be built with earnings of the road on hand and advances to be made by Dolbeer and Carson, for which they are to look only to earnings for reimbursement. The net earnings of the road have averaged 31 per cent. per annum, and this is referred to for the purpose of showing that the extension will be a poor investment. In this estimate the cost of building the road into Tom's Gulch and of repairing and maintaining it are included. This cost has been exceptionally great, due to the fact that there were two or three heavy freshets, to which that section is especially exposed, that greatly damaged the road. This section is exceptional, also, in respect to grades, some of them being as much as 300 feet in a mile. The proposed extension is free from both of these difficulties. The admitted fact is, as already stated, that the present source of freight supply is practically exhausted, and the road will soon be without business, and valueless. The net earnings from business created by the proposed extension, in determining the advisability of it, should not be estimated with reference to the cost of the road as now built. That is beyond recovery. The estimate of net earnings at 31 per cent. per annum, made by complainant to show that the proposed branch is a poor investment, and is therefore prompted by bad faith, makes no account of the benefits that have accrued to the stockholders in disposing of timber owned by them. The California Redwood Company sold its timber to Carson and Dolbeer at the rate of $1.50 per 1,000 feet. The road was built to enable the parties to realize on this timber, or its manufactured product. By its means the California Redwood Company sold timber upon about 1,000 acres owned by it in Tom's Gulch and Clapp's Gulch, and the undivided half of the timber upon more than 800 acres in Tom's Gulch owned jointly with Dolbeer and Carson. It must have realized a large amount of money from these sales, and
. it is shown by the testimony of complainant's witnesses that the road has increased the value of this timber land from $30 per acre to $90 per acre. The complainant omits to credit the railroad enterprise with this benefit, although it is apparent that such credit is necessary to a correct estimate of the value of the road to its owners as an investment.
The complainant is willing that the road shall be extended, pro vided a freight rate to be paid by Dolbeer and Carson can be agreed
upon beforehand agreeable to it. In the brief filed in its behalf, it is stated that complainant is opposed to the extension of the road “unless a freight rate be agreed upon which shall furnish the company some adequate return for the moneys to be invested, and it has objected strenuously to the extension upon any other condition." As already stated, the court is not required by the justice of the case, nor authorized, to pass upon the adequacy of the $2 per 1,000 feet freight rate in question. Nevertheless, so far as appears, such
, rate is not inadequate. It was the rate adopted when the California Redwood Company controlled the board of directors of the railroad company. That rate was adhered to, without objection or complaint, for many years. It was proposed by the officer who represented complainant's interests. The haul over the proposed extension will be but little longer than that from Tom's Gulch. The witnesses for the complainant say that this increased haul increases the cost of transportation 15 cents per 1,000 feet. But, admitting this to be true, for this increased haul complainants, demand, not 15 cents, but $1. The extension will have better grades than the Tom's Gulch extension, and, while portions of the latter have been frequently washed away by freshets, the proposed road will be free from such danger, and will be maintained and kept in repair at a much less cost. One witness for the defense testified that it will cost less to haul logs from the North Fork than it costs to haul out of Clapp's Gulch, owing to the excellence of the timber on the North Fork and the little waste there is in sawing it into lumber. It is probable that these advantages in favor of the proposed road will compensate for the increased length of haul over it; and, besides this, the $2 rate was established many years ago, and it is common knowledge that wages and supplies of all kinds are lower now than then, and that fares and tolls throughout the country have been correspondingly reduced. Carson testifies that if he was not interested in the road it would be cheaper for him to get his logs from other sources of timber supply owned by him than by the proposed road; and he testifies, with reference to his relations with the trust, that half his product goes to foreign markets, while the limitations of the trust apply only to the San Francisco market, and that this does not affect the output of his mills, which run right along, the lumber being stacked in the yard. There is nothing in the case that conflicts with these statements or renders them improbable.
The entire road to be operated when the proposed extension is built will be about 12 miles. The complainant, through a trust company, owns, jointly with Dolbeer and Carson, more than 2,600 acres of timber lands and nearly 1,000 acres of stump land, besides some land of which it has the entire beneficial interests. Its own witness testifies, and the fact is not questioned, that a road is necessary to make these lands available, and would increase their value threefold. When, for these advantages, it is considered that complainant is only required to risk its interest as a stockholder in about $24,000 of money on hand belonging to the railroad company; that Dolbeer and Carson are to advance what more is required, and take their chances for reimbursement on the earnings of the road; that the entire investment as now made will be lost without the ex: tension,-it is difficult to avoid the conclusion that the complainant does not wish to prevent the proposed extension, otherwise than as a means to force Dolbeer and Carson to concede in advance a rate of freight for their business satisfactory to itself, and one-half greater than that in force by the agreement of its agents during all the years the road has been operated. It is enough that the defendants, in what is proposed, are merely carrying out the objects for which the company was organized, and are in the legitimate exercise of the authority conferred upon them, as directors of the company, to determine its policy and manage its business. The decree appealed from is reversed, and the cause will be remanded to the court below, with directions to dismiss the bill of complaint.
SPOKANE COUNTY V. FIRST NAT. BANK OF SPOKANE et al.
(Circuit Court of Appeals, Ninth Circuit. June 24, 1895.)
TRUSTS-FOLLOWING TRUST PROPERTY.
The owner of property intrusted to another, by whom it has been misapplied, is not entitled to a general lien upon the assets of the trustee for the value of such property, and can only follow the same so far as it can be traced, either in its original form or in other forms into which it has been converted.
Appeal from the Circuit Court of the United States for the Eastern Division of the District of Washington.
This was a suit by the county of Spokane, Wash., against the First National Bank of Spokane and F. Lewis Clark, its receiver, to impress a trust upon assets of the bank in the receiver's hands. The circuit court sustained a demurrer to the bill for want of equity. Complainant appeals. Affirmed.
James E. Fenton and D. W. Henley, for appellant.
Before McKENNA and GILBERT, Circuit Judges, and KNOWLES, District Judge.
GILBERT, Circuit Judge. The county of Spokane brought a suit against the First National Bank of Spokane and its receiver to recover the balance of public funds deposited with said bank by the treasurer and tax collector of said county between the 9th day of January, 1893, and the 26th day of July of the same year, alleging that between said dates there was deposited with said bank by said officer for safe-keeping $81,257.55, all of which had been repaid to the complainant save and except the sum of $11,355.68, “which said sum the said defendant the First National Bank does now wrongfully retain and hold, and has wrongfully retained and held ever since the 26th day of July, 1893.” It is further alleged in the bill that on or about the 26th day of July, 1893, the bank became insolvent and suspended payment, and has not since resumed business, and that