author: Emery, Y. C.

text:
    William N. Coler, Jr., v. Tacoma Railway and Power Company et al.
    [Filed November 24th, 1902.]
    1. The charter of the defendant the Tacoma, &c., company, a New Jersey corporation, declared one of its objects to be “to acquire, build, construct, own and operate outside of the State of New Jersey railway properties of all kinds and descriptions -and with any kind of motive power, and to sell and lease the same.” Another object was “to acquire, by purchase or otherwise, the stocks, bonds and other evidences of indebtedness of persons, firms or corporations, * * * and unlimitedly to -hold, purchase, mortgage and convey real and personal property of any kind or description in any state or territory of the United States.” The by-laws of the company provided that “with the consent, in writing, and pursuant to a vote of the holders of -a majority of the stock issued and outstanding, the stockholders having been formally convened in a meeting, the directors shall 'have power to sell, mortgage or otherwise dispose of the whole property of the corporation.” The company acquired and operated an electric street railway system in the city of Tacoma, -in the State of Washington, and, pursuant to the by-laws, the stockholders authorized a sale of the railway -and entire property of the company to a Washington company, to be paid for by stock of the Washington company to be issued to the New Jersey corporation.—Held, that this sale and transfer was authorized under the Corporation act (section 6) making it lawful to form a company to construct and operate railroads outside of this state, and (section 7) authorizing it to hold and convey real and personal property out of this state, provided such powers are included within the objects set forth in its certificate.
    2. At the meeting of stockholders which approved the sale, resolutions were also passed for the dissolution of the New Jersey company. The dissolution of the company and the distribution among its stockholders of the stock or its proceeds was part of the entire plan, but the resolution for dissolution was a separate and distinct resolution of the company. This resolution was ineffective because of failure tO' give the notice for the meeting required by the statute. The directors propose to carry out the resolution for sale independent of proceedings for dissolution.—Held, that the separate and distinct resolution for sale still remained effective, and the powers of the directors as to tlie terms of sale under the Charter and by-laws were not to- be governed by the provisions of the Corporation act (section 54) restricting' a sale after dissolution to sales for cash or part credit on mortgage.

      3. The circumstance that the stock oí the Washington company, if received by the New Jersey company, would become subject in- its hands to its mortgage previously given on existing and subsequently acquired property, is not an- equitable reason for enjoining the sale.
    4 Under the laws of the State of Washington-, the Washington company had legal authority to issue full-paid stock for the purchase, on a valuation fixed in good faith, by the directors, and when so issued, the stock is not assessable for the debts of an -existing creditor or of a subsequent creditor with notice. (Statutes and decisions of Washington examined.) The sale therefore should not be enjoined because of this alleged liability.
    5. The Corporation acts of Washington do not expressly authorize the purchase by one corporation' of the stock of another, and the courts of Washington have decided that a -corporation- created under their law has no power to purchase the stock of another similar corporation or to vote upon such stock if purchased.—Held, (1) that the New Jersey corporation having the power under its -chanter to purchase th-e stock of a Washington corporation, its power to make the purchase and vote on the stock in the State of Washington depends upon the law or rule of comity between the states, which law or rule authorizes the purchase, unless it has been affirmatively declared by the -constitution, statutes or decisions of the courts of Washington to- violate its public policy; (2) -th-e decisions of the courts of Washington construing the statutory powers of its own corporations to purchase stock :of its own corporations and vote thereon, are not to be taken as decisions on it® public policy under this law of comity, -and in the absence of any provision by th-e constitution-, statutes or decisions by its eoui-ts, affirming- that such purchase by a foreign corporation of the- stock of a domestic corporation is against its public policy, .the general law of comity will govern. The purchase of the stock is valid, and the New Jersey company will have the right to vote thereon.
    6. The advisability of the sale in- its business aspect is, in the absence of fraud, a matter for the decision of the stockholders and directors, and upon al-1 the affidavits, it is considered that no such case of fraud is made out -as -entitles the complainant to a preliminary injunction. Donald v. American Smelting and Refining Co., 17 Dick. Ch. Rep. 729 (Errors and Appeals, 1901), distinguished.
    On application for preliminary injunction, heard on bill and affidavits and answer and affidavits.

      Mr. Chandler W. Iiilcer and Mr. Adrian Riher, for the complainant.

      Mr. Richard V. Lindabury, for the defendants.
   Emery, Y. C.

The substantial situation on this application is this: Two-corporations, owning two separate electric street railways in the State of Washington, propose to combine tlieir properties and to capitalize the combined roads at an amount equal to the present capitalization of the two roads. One of the systems is operated entirely within the city of Tacoma, and the company owning and operating this road is a New Jersey corporation, the corporate defendant the Tacoma Railway and -Power Company. The other company has constructed, or nearly constructed, a railroad between the cities of Seattle and Tacoma. This corporation is incorporated under, the laws of the State of Washington, and is the Seattle and Tacoma Interurban Railway. It is not a party to this suit. The two companies, for the purpose of avoiding competition or controversies within the city of Tacoma, have already a tracking or traffic right agreement as to running the interurban traffic on the Tacoma 'company line. This'arrangement was made by the New Jersey company when the Washington company proposed to secure independent routes in the city of Tacoma. The conditions and the operation and proposed operation of the two lines and their branches are such that, in the judgment of the stockholders and directors of both companies, .their substantial ownership and operation should be vested 'in one company. The legal form by which the transaction is to be carried into- effect is that of a sale and conveyance by the New Jersey company to the Washington company of all the property and assets of the New Jersey company (except its franchise to be a corporation), in return for which the New Jersey company is to receive common stock of the Washington company to- an amount equivalent to the New Jersey company’s stock—$2,000,000. The present capitalization of the interurban company is, bond debt, $1,350,000; preferred stock, $500,000; common stock, $1,500,000; total, $3,350,000. The capitalization of the New Jersey company is, first mortgage bonds issued, $1,310,000; second mortgage bonds issued, $114,812.50; capital stock (common), $2,000,000; total, $3,424,812.50. The Washington company proposes to issue $2,000,000 of common stock for the purpose of making the purchase of the New Jersey company’s property,-and the proper steps for increasing its capital, under the laws of Washington, have been taken. As a part of the plan, the Washington company is to issue a new funding mortgage for $5,500,000, which will be subsequent to the New Jersey company mortgages on its property conveyed, but as all of the bonds to be issued under this new mortgage are for the purpose of retiring outstanding bonds of the two companies secured by existing mortgages, or of securing additional money to be expended for improvements, extensions and additions to an amount equal to- or exceeding the bonds to- be issued, this provision as to the new mortgage is not material on the questions now presented. These questions arise out of differences between complainant and defendants as to the valuation and capitalization of the properties of the two companies.

All of the increased capital stock of the Washington company is at present practically owned or controlled „by one Miller, to whom it is to be issued, and the offer to purchase the New Jersey company property is made by him. He is to deliver the stock of the Washington company therefor upon the conveyance to his nominee, the Puget Sound Electric Company, which is the name to be assumed hereafter by the Washington company. Owners of sixteen thousand four hundred and forty-two shares of the total number of shares (twenty thousand) in the New Jersey company, consent to- the sale, and all of its directors approve and recommend the sale as advantageous. Complainant, who is the owner of seven hundred and eighteen shares in the New Jersey company, seeks to enjoin the sale as illegal and ultra viras of the New Jersey company, and also as fraudulent against the minority o-r non-assenting stockholders. So far as relates to the purely business aspects of the transactions, I am satisfied, after considering all the affidavits, that there is no reason to attack or impugn the good faith of the directors of the New Jersey company, and I see no reason to restrain the sale for the purpose of fuller investigation at final hearing so far as the transaction involves the question of good faith.

The main fact upon which complainant relies in challenging the good faith and honest judgment of the directors in the transaction is the difference between the present and probable comparative earning capacity of the two roads. ' The Few Jersey company’s line is altogether within the city of Tacoma and its travel is claimed to be increasing, and it is claimed that in the not distant future dividends upon its stock to the amount of five per cent, may be earned. The Washington company, connecting the two- cities, has just been constructed; its carrying power has not been demonstrated and it is claimed by complainant that by reason of the sparsely settled country through which it runs, it will probably be unable to meet its fixed charges. The affidavits filed by the defendant show, or tend to show, on the other hand, that the road of the Few Jersey company was constructed about ten years ago> and that its physical condition and equipment are such as to require the expenditure of largo sums in order to operate it profitably; that the interurban line is new and well constructed, and that the district through which it runs may fairly be expected to give a valuable patronage both for passengers and freight, and that it is so situated, with reference to exercising its franchises in Tacoma, that unless operated in combination or connection with the Few Jersey company it will be able to bring about a competition or rivalry with the Few Jersey company for the Tacoma travel which will be disadvantageous. These and other considerations of a like character, urged by the respective parties, plainly relate to the business aspect of the proposition for sale. The directors of the Few Jersey company unanimously declare their opinion that the sale is one which is beneficial to their company and should be carried out. These directors are business men, many of them of high standing, and represent in the board- stockholders of the company who own the majority of the stock-in the company, and who are able to protect its interests; and as they own no stock or interest in the Washington company and control the policy of the Few Jersey company, their judgment must be taken to be influenced and controlled solely by the interest in the Few Jersey company and its stockholders. The claim made by the bill that the directors are controlled by the same interests as the Washington company is shown by the defendant’s affidavits to be unfounded. Under these circumstances, I think, no such ground for interfering with the sale, upon the ground of bad faith or franc! in the directors, has been made out as will -entitle this court to decide upon the question of the propriety of the sale in its business aspects, and the only question which the court is called on to settle is that of the power of the company and the directors to make the sale. If the New Jersey company and its directors have the power to carry out the sale and to hold the stock of the Washington company with the same powers as other holders of the stock, this court should not interfere with their judgment in making the sale and receiving the stock. The power of the New Jersey company to make a sale of its property in a foreign state depends, first, upon the powers under the Corporation laws of New Jersey and its charter thereunder; and second, upon its powers under the laws of Washington, where the property to be conveyed is located. The charter of the company confers very broad powers in reference to sales of the company’s property. Among 'the many objects for which the company is formed is the following:

“To acquire, build, construct, own 'and operate outside of the State of New Jersey railway properties of all kinds and descriptions and with any kinds of motive power, and to soil and lease the sam/3.”

Another of the objects of incorporation is

“to acquire, by -purchase or otherwise, the stocks, bonds and other evidences of indebtedness of persons, firms or other -corporations, and to sell, mortgage, pledge or otherwise dispose of such stock, bonds or other evidences of indebtedness * * * and unlimitedly to hold, purchase, mortgage and convey real and personal property of every kind and description in any state or territory of the United States.”

Our Corporation act (section 6) malms it lawful “to form a company for the purpose of constructing, maintaining and operating railroads outside of this state,” and authorizes (section 7) any corporation of this state to

“conduct business in other states 'and to hold, purchase, mortgage and convey real and personal property out of this state, provided such powers are included within the objects set forth in ’its certificate of incorporation.”

Iii reference to the sale of the entire property of the company, the charter provides''(seventh (b) :

“With the consent, in writing, and pursuant to- a vote of the holders of a majority of the stock issued and outstanding, and not otherwise, the stockholders having been formally convened in a meeting, the directors shall have power to sell, -assign, transfer, mortgage, or otherwise dispose of the who-l-e property o-f -the corporation.”

This consent, in writing, has been given, and, so far as relates to the power given under the laws of New J-ersejr, the transaction now questioned seems to come plainly within the powers expressly given to the directors by the charter, and expressly contemplated by the charter. The company owns and operates a railway outside of New Jersey, and pro-poses to -execute one of its express charter objects, in the sale of the same, and by this sale to acquire the stock of the Washington company.

The terms of the offer which is made by Miller to the New Jersey company are, in this respect, as follows:

“I will p-ay for the property and franchises of your company $2,000,-000 in the common capital stock of the Puget Sound El-ec-tric Railway at par, and will deliver to you the undertaking of that company to- -assume and p-ay all the debts and obligations of your company, and to save harmless the stockholder’s and directors of your company -against any liability -arising out of any claim -against your company, or out of •the sale aud transfer -hereiu proposed, or -out of the disposition of the proceeds thereof.”

The Puget Sound Electric Railway is designated by Miller as his nominee to receive the transfer o-f the New Jersey company property. The agreement for sale seems to contemplate the delivery by the purchaser to- the New Jersey company of all the stock of the Washington company, and not an exchange of the stock of the individual holders for the stock of the Washington company. There is a further provision in the offer that

“if any stockholder of you-r [the N-e>w Jersey] company objects to the acceptance -of this offer and is unwilling to- exchange ‘his 'stock of your company for a-n equal number of -shares of the -stock of the Puget Sound Electric Railway [-the new n-a-me o-f the Washington company], I will pay to you in cash $35 for each share of th-e stock of your company belonging to sudi stockholders in lieu of a number of shares of the stock of the Puget Sound Electric Railway equal to the number of shares of the stock of your company owned by such stockholder.”

Taking the entire arrangement for payment in stock or in cash, it seems to be one by which the purchaser pays to the New Jersey company, and not to the individual stockholder, by way of exchange, the entire amount of the purchase price in stock. The further provision is then made to pay to the company $35 in cash for each share of the stock of any stockholder who does not wish to exchange his stock for stock of the Washington company. These shares of the New Jersey company so purchased for $35 each are to he delivered, as I take it, to the purchaser, and he will then hold the stock just as any other holder. The agreement for purchase does not expressly undertake to provide for the distribution of the stock received on the sale among the holders of the New Jersey company, by way of exchange or otherwise, hut as between the New Jersey company and its stockholders it was proposed, as part of the entire plan, to dissolve the corporation and to distribute among the stockholders either the stock or its proceeds. Proceedings for such dissolution of the New Jersey company were taken, pari passu, with the proceedings to authorize the sale of the company’s property, and resolutions approving the sale and for the dissolution of the company were passed at the same meeting. The resolutions were, however, distinct, and were separately passed, and the resolution approving the sale was passed first. The resolution for dissolution is admitted to- he ineffective, by reason of the failure to give the statutory notice of the meeting. The answer, however, states

“that it the proposed sale of the property and franchises of the company is consummated, there will be no further occasion for the continuance of the corporate existence of the said company, and that the directors thereof will recommend to the stockholders the dissolution'of the company, if the proceedings for that purpose should not be effective, * * * but in view of the fact that the company has not yet been dissolved, these defendants cannot now say what course will be adopted in that behalf, and that it is not the intention of the company to accept in payment of the property and franchises a sum less than the full value of such property and franchises, and that the consideration for the sale of said property is to be distributed among the stockholders of the Tacoma Railway and Power Company, and no part of it is to remain an asset to bo mortgaged by the Puget Sound Electric Railway or the Seattle-Taeoma Intermrban Railway to- secure any bonds whatever.”

The position taken by the answer and by defendants’ counsel at the argument that the proceedings to authorize the sale are separate and distinct from the proceedings for dissolution is, I think, correct. That the two proceedings are technically and in form separate and distinct is not, as I understand, contested by complainant, but the contention is that the sale of the company’s entire property for stock of a new company was intended solely as the first step in a proceeding for final dissolution of the company, and (following such dissolution) a distribution of the stock of the purchasing company among the stockholders of the New Jersey company, as the distribution of the assets of the company. This being the ultimate object to be accomplished, it is insisted that the staius of the ease, on the present application, must, in this feature of it, be considered in the same light that a sale of the property by trustees on dissolution is to be considered, and that such sale being made for the purpose of winding-up, cannot, under our Corporation act, he made for shares of stock. Under the act (section 54) the directors are trustees for settlement of the corporation’s affairs,

“and may prescribe the terms and conditions of the sale of such property and may sell all or any part for cash, or partly on credit, or take mortgages and bonds for part of the purchase price for all or any part of said property.”

My view is that this provision of the act as to credit would not include the right to sell for shares in a new company organized to take the assets, with a view of distributing tírese shares among the stockholders, and that the stockholder could not he obliged to share in such new enterprise if he did not wish to. In the cases of such sales to new companies of the assets of a company on dissolution whidh have come before me, and any stockholder or creditor has objected to receiving the shares in' the new company, I have refused to approve sales of the assets for stock in a new company, except upon the terms that as to every stockholder or creditor not desiring to take stock as his share oil distribution, the purdiaser must, as to such dissenting stockholder or creditor, pay in cash the same amount offered in stock, and that the total amount thus offered in stock is the fair value of the property in money. And if the status of the present case was that of a proposed sale by trustees on dissolution, I should consider that a stockholder who declined to accept shares in the new company in satisfaction of his rights in distribution, must be offered in cash the par value of the new stock, and that an offer of only thirty-five per cent, in cash of the par value could not be sufficient. In other words, so far as the court of chancery, in its control over the liquidation 'of corporations, insolvent or otherwise, has any right of review over fixing the basis of capitalization of the new company, it can only approve a capitalization on the basis of the actual present value in money of the property conveyed.

But tire present case is not a sale by trustees on dissolution, nor do I think it can be so treated. It is a sale expressly authorized by our statutes and the charter of the company, in carrying out one of the express objects for which it was incorporated, viz., the sale of a road owned and operated in a foreign state under its charter; and, on the sale, another of the objects of the company is effected, viz., the acquiring of the shares of stock in another corporation. The sale has been approved by more than the. proportion of stockholders required by. the charter, and the consideration is to- be received by the company, which, upon the sale, will hold the stock as its property for the equal benefit of all stockholders. There is no question of bad faith on the piart of the directors which would justify me in enjoining the sale pending further inquiry on that point at final hearing, and the directors of the company must be allowed to carry out the sale, unless Hie other objections to the proposed sale, based on its invalidity as a sale by the Hew Jersey company as a going concern, and for the purpose of receiving the proceeds under its charter, are held to' be valid. One of these objections is that the stock of the new company when received by the Hew Jersey company will at once become, in the possession of the Hew Jersey company, subject to its mortgages already given to the Old Colony Trust Company, which cover

“the property of the Tacoma Railway and Power Company, real, personal and mixed, whether now held or hereafter acquired by it, together with * * * stocks, bonds and other securities, contracts, claims and demands of the Tacoma Railway and Power Company, whether now owned or hereafter acquired.”

It may be that the Old Colony Trust Company, upon the consummation of the proposed sale, might be entitled under its mortgage to- require the delivery to it of the shares of stock as covered by the mortgage, but the ownership of the stock in such case would still be in the STew Jersey company, subject to the mortgage. Complainant’s objection to this result is based on the view that distribution of the stock among the stockholders is thus prevented. This may be a consequence of the proposed sale which the directors are to' consider, hut as the mortgage debts have not been paid, I fail to see how it can be urged as a valid objection to. the sale, except upon the theory that the court is to enjoin the mortgagor company against improving the security for the debt, and is to assist in making a distribution of the assets of the company before its debts are paid. If the company is dissolved, all creditors, including the trustee mortgagee, will have an opportunity to prove their claims under the statute, and a distribution made without providing for the payment of these debts would or might subject directors to a personal liability for the debts, and stockholders to the return of the assets, if necessary, for payment of the debts. It cannot be assumed that the directors, if the company is dissolved after the sale, will distribute the assets of the company among the stockholders, except under the authority and protection of the statutes.

Another objection taken to the proposed sale is that the stock of the Washington company to be received by the New Jersey company on the sale of its property, although issued as full-paid stock, will not he fully-paid stock, because of the 'overvaluation of the property, and that under the laws of the State of Washington the stock received for the sale will be hereafter liable to assessment for the payment of the debts of the Washington company. The proof of the fact that the stock is to be issued at an overvaluation mainly relied on is that only $35 in cash per share of $100 par value are offered to stockholders who do uot wish to exchange their stock on the par basis. As to the other proofs relating to- the overvaluation of the New Jersey company’s property, the complainant’s affidavits tend to- show that the property has a value and earnings, present and prospective, which make its own stock worth much more than $35 per share, while the proofs filed by defendants on this point tend to show that this is its full cash value. Defendants claim, moreover, that this question of valuation of the property conveyed in payment of stock is one which, under the laws of the State of Washington, is to he determined by the directors, and that in the absence of fraud their judgment is final and conclusive, not only as to the company and its stockholders, but as to creditors, either existing or subsequent, of the company whose stock is issued. Upon examination of all the cases and statutes of the State of Washington referred to by counsel, the conclusions I reach as to the laws of that state, in reference to the power to make the sale and the assessability of the stock, are as follows:

First. The power of the Washington company, under the laws of Washington, to receive the conveyances, seems to be clear, under the provisions of their Corporation act (1 Hill Stat. & C. §§ 1497, 1500) which authorizes corporations to be formed for the purpose of building, equipping and running railroads, or engaging in any other species of trade or business, and when formed, to purchase, hold, mortgage, sell-and convey real and personal property. The power of the New Jersey company to transfer its railroad or other real estate in Washington is covered by the provision (Ibid. § 1524) :

“Any corporation incorporated under the laws of any state in the United States for 'any of the purposes for which domestic corporations •are authorized to- be formed, shall have power * * * to- acquire, purchase, hold, mortgage; sell, convey or otherwise dispose of, in the corporate name, all real or personal property necessary or convenient to carry into effect the objects and purposes of its corporation * * * and generally to do -and perform every act and transact -every kind of business within this state in the same manner and to the same extent as corporations incorporated un-d-er its laws are authorized to do-; * * * provided, however, this shall not be so construed as to allow such foreign corporations to transact business within the state on more favorable conditions than are prescribed by law for a similar corporation organized under the laws of this state.”

Second. Corporations of the character of the Washington company may issue full-paid stock for property purchased. Turner v. Bailey, 12 Wash. 634 (1895). In Manhattan Trust Co. v. Seattle Coal and Iron Co., 19 Wash. 493 (1898), it was said (at p. 958): “The rule is too firmly established in this state to be called in question that property may be taken in payment of shares of stock of corporations generally.” The provision of the constitution, article 12, section 6, that “all fictitious increase of stock or indebtedness shall be void,”' does not seem to have ever been held applicable to make void the issues of stock for property purchased.

Third. As between the company issuing stock as the vendee of property, and the vendor, the valuation placed upon the property and stock by the parties is, in the absence of fraud, binding and conclusive, as in the case of any other purchase. Adamant Manufacturing Co. v. Wallace, 16 Wash. 614 (1897). Under this rule either party may, as I understand, attack the contract of sale for fraud in the other party and for the purpose of rescission. 'And as the vendor in the present case is a corporation whose directors are, in respect to the sale, trustees of the complainant and other stockholders, -and the directors, as such trustees, are bound to exercise an honest judgment in reference to the sale, the complainant, if he could show, on the part of his trustees, a fraudulent undervaluation of the property conveyed, and that the consideration to be received was fraudulently put too low, he would be entitled, I think, to enjoin the sale. So far as relates to the amount of the stock (par value) of the Washington company to be received by the Hew Jersey company, complainant claims that the property of the latter is overvalued, not undervalued; The claim of undervaluation of the Hew Jersey company’s property refers to relative values and rests on the charge that the existing property of the Washington company is worth nothing beyond its bonded debt and preferred stock; that its existing common stock—$1,500,000—is worthless, and it is therefore claimed that the increased stock—-$2,000,000— which is to be issued to the Hew Jersey company for its property will be depreciated by reason of the participation of this alleged worthless $1,500,000 common stock of the Washington company in the ownership of the property conveyed. So far as relates to the companies concerned and their respective directors and stockholders (and leaving out of view for the present any question as to the. creditors of either company), the whole question is one of the relative valuation of the property of the two companies proposed to be united in their operation by this sale. On this question and as between these interests the judgment of the directors, approved by the stockholders, as required by the charter, must be conclusive, in the absence of fraud; and this court cannot, in the absence of fraud, undertake to revise this judgment of the owners and managers of the property.

Fourth. A subscription for capital stock creates under the laws of Washington a contractual obligation to pay' for the amount of stock either money or money’s worth to the full par value of the stock. As to such subscriptions for stock the estimate of the value placed upon the property by the corporation is not conclusive upon the courts. And, in favor of subsequent creditors of the company, the contractual obligation will be enforced. Manhattan Trust Co. v. Seattle Coal and Iron Co., 19 Wash. 493 (1898); Dunlap v. Rauch, 24 Wash. 620 (1901).

Fifth. Where stock of a corporation (other than 'the stock originally subscribed for) is issued in payment for property honestly believed by the parties to be of the par value of the stock, a subsequent creditor must show that the purchase at the price agreed on was made in bad faith. And if such subsequent creditor had knowledge or was put upon inquiry as to the terms of the issue of the stock, no fraud upon him will be imputed, and, as to him, the stockholders receiving full-paid stock for property purchased will not be held liable for -further payment on the stock. Adamant Manufacturing Co. v. Wallace, 16 Wash. 614 (1897); Manhattan Trust Co. v. Seattle Coal and Iron Co., 19 Wash. 493 (1898).

The liability of the stock to assessment would therefore, under the decisions of the supreme court of Washington, depend (1) upon the bad faith of the directors and the intentional overvaluation of the property for which full-paid stock is to be issued, and (2) upon the existence of a subsequent creditor who did not know or was not put upon inquiry, that the stock was issued as full paid-up stock for the property purchased. Neither of these conditions is shown to exist in the present case, and in the absence of any such clear proof of fraud on the part of the directors in relation to the valuation of the property, as to justify the arrest of the proceedings in limine, the directors, with the approval of the stockholders, are entitled to carry out the sale upon the valuations which seem to them honest and beneficial, leaving to them, as representing the company, the defence and support of the valuation if it be hereafter attacked by-any creditor entitled to call it in question. I find no case authorizing an existing creditor, whose debt was not created in reliance upon the subscription or valuation, to question the valuation made between the parties to the purchase. The other objections to the transactions raised either in the bill or by counsel at the hearing, relate substantially to the advisability of the sale in a 'business point of view, and, in the absence of fraud, these questions, as I have said, must be left to the final decision of the stockholders and directors, under the rule so-constantly applied in such cases. The decision in Donald v. American Smelting and Refining Co., 17 Dick. Ch. Rep. 729 (Errors and Appeals, 1901), strongly relied on by the counsel for complainant as giving the eourt the power to review the judgment of the directors, does not apply to this case. In that case the statute of this state, as construed by the court, gave to the 'stockholders of the company whose stock was proposed to be issued for property at an alleged overvaluation the right to have the value of the property ascertained by the court before the transaction was consummated by the issuance of the stock, if a proper case for inquiry as to valuation was shown. In the case in hand all of the stockholders of the purchasing company consent to the issuance of the stock, and the real question is whether the valuation made by the directors of the vendor company, with the approval of the stockholders, is a breach of the duty of the directors to the company and all its stockholders, including complainant. This is a question clearly of bad faith.

Another question arises out of the late decision of the supreme court of Washington in Parsons v. Tacoma Smelting and Refining Co., 25 Wash. 492 (July, 1901), to which I have called the attention of counsel on both sides since the argument, and upon which I have received briefs. One of the points involved in this case was whether a corporation of the State of Washington (called the new company) which had bought the majority of the stock of another Washington company (called the old company) was authorized under the laws of Washington to vote on this stock of the old company so purchased, at a stockholders’ meeting of the old company. The stock, although owned by the purchasing or new company, and carried on its books as its property, seems to have been carried in the name of one of its officers, as trustee, and as such holder he voted on the stock at a stockholders’ meeting of the old company called to vote upon the question of ratifying a lease made to the purchasing company by the other company. The charter of the new company seems to have authorized the purchase of the stock of the old company, but the statutes of Washington did not expressly authorize such purchase. One question involved was whether the new corporation had the right to vote on this stock so purchased. The opinion of the chief-justice of the supreme court, unanimously concurred in by three other judges, declared that the power to own the stock of another corporation must be expressly conferred by statute; that the statutes of Washington did not authorize such ownership, and that the expression' of the power in the articles of incorporation of the new company could not extend the corporate powers beyond those expressed in the statutes. And it was therefore held that the stock of the old company owned by the new company could not be used in voting at stockholders’ meetings in the old company; and an injunction against such use was granted. Under this decision the questions fairly arise' (1) whether under the laws of Washington the New Jersey company could hold or vote upon the stock of the Washington company, and (2) if it could not, whether the sale should not be enjoined.

In reference to the first question, it is to be considered that the New Jersey companjr, by the Corporation laws of this state (Corp. act 1896 § 51), has power to purchase the securities of corporations, of any other state, and that by the terms of its charter such purchase is one of the objects of its incorporation. The shares of stock of the Washington company are, by the statlites of Washington (1 Hill Stat. & C. 1506) declared, to be personal estate. A settled rule of American jurisprudence, re-* laing to the contracts and acts of a corporation of one state made or performed within another, is that a corporation created’by one state may exercise the powers conferred by its charter within the boundaries of another state, but only by the comity and. consent of the latter state. This comity is a comity between the different states, not between the courts of the states, and has been exended to apply to the exercise, within a foreign state, of such powers, under its charter, as do not contravene the public policy of the state in which they are sought to be exercised. The leading case declaring these general principles is Bank of Augusta v. Earle, 13 Pet. 519, 589, &c. (United States Supreme Court, 1839), and'the later cases are collected in the text-books and digests. 6 Thomp. Corp. Off. 7882, 7885; 13 Am. & Eng. Encycl. L. (2d ed.) 837, 839; 2 Morawetz Corp. ¶ 961, &c.

In these respects each state settles for itself its own public policy,- and the policy of any state is to be ascertained from its constitution, statutes and the settled adjudications of its courts. That these are the ultimate and the only sources by which the court of one state or jurisdiction can ascertain the public policy of another state or jurisdiction has always been the accepted doctrine in American courts. The reason was declared by Mr. Justice Story in the Girard Will Case (Vidal v. Girard’s Executors, 2 How. 127, 197, 198 (1844) as follows: “The question, what' is the public policy of a state and what is contrary to it, if inquired into beyond these limits (its constitution and laws and judicial decisions), will be found to be one of great vagueness and uncertainty and to involve discussions which scarcely come within the range'of judicial duty and functions, and upon which men may and will complexionally differ.” This limitation was expressed, it is true, where the question was whether the support of the Christian religion was part of the public policy of a state, but it was based on the fundamental nature of the question of the public policy of a state and its judicial ascertainment by the courts of another state. The rule has. therefore been' applied to all classes of cases, and especially to cases involving the exercise of powers by foreign corporations within another state. Bank of Augusta v. Earle, supra. And in this class of cases the further principle has been declared that the public policy of a state, restricting a foreign corporation from acquiring or holding property or transacting business within its limits must be expressed in some affirmative way, and cannot be inferred from, its mere failure or omission to authorize its own corporations to acquire the property or transact the business in question. In Cowell v. Springs Co., 100 U. S. 65 (1879), lands in Colorado territory were conveyed by a patentee to a corporation created under the laws of Pennsylvania, with power to receive, hold and grant real and personal property; explore, locate and improve lands; transport emigrants and merchandise; construct houses and buildings; manufacture, trade and traffic; colonize, organize and form settlements, &c. By the laws of congress in force in the then territory of Colorado the legislature of the territory was prohibited from granting private charters and was authorized to create, by general law, corporations only for mining, manufacturing and other industrial pursuits. It was contended that the limitations of the purposes of corporations by the act of congress were fixed for reasons of public policy, and that the-act should be considered as a declaration of public policjq under which powers denied to domestic corporations should not be extended to foreign corporations acting within the territory. Mr. Justice Field, upon this point says (at p. 59) : “The answer to this position is found in the general comity which, in the absence of positive direction to the contrary, obtains through the states and territories of the United States, by which corporations created in one state or territory are permitted to carry on any lawful business in another state or territory, and to acquire, hold and transfer property there equally as individuals. If the policy of the state or territory does not permit the business of the foreign corporation in its limits or allow the corporation to acquire or hold real property it must be expressed in some affirmative Avay; it cannot be inferred from the fact that its legislature has made no provision for the formation of similar corporations, or allows corporations to be formed only by general law. Telegraph companies did business in several states before their legislature had created or authorized the creation of similar corporations; and numerous corporations existing by special charter in one state are now engaged, without question, in business in states where the creation of corporations by special enactment is forbidden.” This is the leading case and authority upon the point that the public policy of a state, in reference to the exercise of powers by a foreign corporation within its limits, must appear from express affirmative legislation or decisions, and that the mere failure or omission to confer the powers in question upon its own corporations is not sufficient, and it has been followed without question. In Christian Union v. Yount, 101 U. S. 352 (1879), the language of Mr. Justice Field is approved and it is further said by Mr. Justice Harlan (at p. 356) : “In harmony with the general law of comity obtaining among the states composing the Union, the presumption should be indulged that a corporation of one state, not-forbidden by the law of its being, may exercise within any other state the general powers conferred by its own charter' unless it is prohibited from so doing either in the direct enactments of the latter state or by its public policy to be deduced from the general course of legislation or from the settled adjudication.” In cases involving questions of this interstate character, the opinions of the highest federal court have been treated as of controlling weight, and the rules declared in these two leading cases -appear to have been followed in the courts of all the states. The only conflict, or apparent conflict, between the decisions of the courts of different states seems to be in the application of the rules, and on the question as to the character of the constitutional or legislative provisions which are to be construed as affirmative prohibitions against the acts or transactions of foreign corporations.

Neither in the constitution, statutes or judicial decisions of Washington are there any express declarations prohibiting a foreign corporation from owning stocks of a Washington corporation. These stocks are by its statutes personal property, which therefore are transferable in other states to the same extent as other personal property, or to the extent allowed by the laws of foreign states, and if their acquisition by persons and corporations of other states is against the public policy of the State of Washington, such declaration of its public policy, restricting the general rules of comity, as to the ownership of personal property, should appear by some authoritative declaration. The decision in the Parsons Case cannot be considered as having this effect. The case on this point was decided solely on the question of the construction of the statute of Washington as giving or not giving to a domestic corporation exercising its powers within the state the power to purchase stock of another domestic corporation, and upon this question of power it was held- that inasmuch as the power was not expressly given by the statute, the statute must be construed as not giving the power to hold stock, or the power to vote on it if held. It would be giving the decision altogether too broad a scope to consider it as an adjudication by the highest courts of Washington upon the question of the public policy of that state as to the rights of a foreign corporation to own stock, and to consider it as deciding that the general rule of comity that corporations, as well as individuals of other states, may own stocks of their corporations has been held by the courts of Washington to contravene the public policy of the state. That question of public policy and the application of the rules of national and state comity was not involved in the case and was not considered. It is claimed that the logical result of the decision in the Parsons Case is to decide this question of public policy adversely to the defendant, but whether it has such result is a question fqr the decision of the Washington courts alone, and in the absence of any express affirmative declaration either by the constitution, statutes or courts of Washington settling its public policy, in reference to a transaction of the present character, adversely to the defendant, this court should not assume to declare or ascertain its public policy. This policy is something which the State of Washington has the sole right to determine itself. Bank of Augusta v. Earle, supra (at p. 594). Counsel have cited cases and authorities as holding or declaring that the rule of comity does not extend so far as to permit foreign corporations to exercise within the state powers which a domestic corporation of the same kind is not permitted to exercise under its constitution and policy. These are cases in which the courts of the state (not the state of the foreign corporation) are expressly, and directly deciding the question of their own public polic3r, in reference to the act which is challenged in their jurisdiction, and the proceeding upon that direct adjudication. They are therefore, so far as they decide the question of public policy, affirmative declarations which the courts of other jurisdictions must accept as settling what the public policy of the particular state is 'when that question is involved. They do not support the complainant’s claim in this case, which is that this court (a court of foreign jurisdiction), in advance of any adjudication of the Washington courts, should decide what is the public policy of Washington, in reference to the matter now in question. And in reference to the decisions in these cases, it should also be added that in determining the question of public policy of their respective states the cases generally rest upon the express provisions of their respective constitutions and statutes prohibiting the acts in question to domestic corporations, and not upon the mere omission or failure to give them the power to do or perform the acts. In Clarke v. Central Railroad Co., 50 Fed. Rep. 338, there was a constitutional prohibition of purchases to defeat competition or encourage monopoly. See pp. 339, 344. In Empire Mills v. Allston Grocery Co., 4 Tex. App. Civ. Cas. 346, it was held that the repeal of an act authorizing the formation of mercantile companies in the state superseded the rule of comity as to foreign corporations. The cases cited in 2 Morawetz Corp. 965, note 4, are, with one exception, all cases where the courts of the state (or of the-United States within the state) pass directly and authoritatively upon the question of their own public policy. The exception is the leading case of Bank of Augusta v. Earle, supra (at p. 592), where, on a writ of error from the supreme court of the United States to the United States circuit court for Alabama, one of the questions involved was whether the purchase of certain bills of exchange by a foreign corporation in the State of Alabama was contrary to the policy of the constitution and laws of the State of Alabama. The supreme court held (at p. 594) that the state had not, by its constitution and laws or judicial decisions, made known its policy upon the point in question, and declined to decide the questions of public policy raised, holding that this was a matter to be determined by the state itself. And following the same principle, the court also held (at p. 596) that the decisions of the courts of the two other states—New York and Virginia—upon, like questions of the public policy of their respective states, were not to be considered as justifying the inference that the State of Alabama would adopt the same rule of public policy.

I conclude, therefpre, that as the case now stands, the New Jersey company would, under the rules of comity, be allowed to hold the stock of the Washington company, and having the right to hold, it follows, necessarily, in my judgment, that it would have the right to vote on the stock, in the absence of any declaration 'in the constitution, statutes or judicial decisions of the State of Washington that it could not vote on stock it was entitled to hold. I cannot give my assent, however, to the contention of defendants’ counsel that tire sale should not be enjoined, even if the power to vote on the stock was denied. This would allow a transfer of the entire property of the corporation to another corporation with no voice in its management or control of*the latter, although its holdings of stock constitute one-half of the entire stock of the corporation. A transfer of the property, as well as of the rightful share in its control, would, in my judgment, amount to an abandonment of the duties of the directors and a surrender of the stockholders’ rights to a voice in the’ control of their property. Prima facia, at least, a transfer which would have this result would seem to be fraudulent, and should not be allowed without further inquiry. As- the company will have, in my opinion, the right to vote on the stock, I will, for this and the other reasons above stated, advise a decree denying the application for preliminary injunction.


source: Caselaw Access Project

author: Emery, V. C.

license: Public Domain

text:
    Jacob L. Schwarz v. Mary Regan and James Regan, her husband.
    [Filed January 6th, 1903.]

      P. L. of 1898 p. 685 § 39, provides that no interest of a feme eovert in lands shall pass 'by her deed or conveyance without previous acknowledgment made by her on a private examination apart from her husband, and that the same is her voluntary act and deed, freely, without any fear-, threats or compulsion of her husband.—Held, that where a contract by a married woman and her husband to convey, her lands is not acknowledged by her as required by the statute, the vendee cannot enforce the contract.
    On motion to dismiss bill.

      Mr. Frederick Jay, for the complainant.

      Mr. Henry Hahn, for the defendant.
   Emery, V. C.

This bill is filed to compel the specific performance of a contract by a married woman and her husband to convey lands belonging to the married woman. The contract (as alleged by the .bill) is evidenced by a memorandum, in writing, signed by the husband and wife on June 2d, 1902, containing the terms of the" contract which are set out in the bill. The contract does not appear to have been acknowledged by the married woman in the manner provided by the thirty-ninth section of the act respecting conveyances (revision of 1898). P. L. of 1898 p. 685. The invalidity of the contract, by reason of the omission of the married woman to acknowledge it, is one of the reasons specified for striking out the bill. That this reason is well founded is settled in this court by the decision of Vice-Chancellor Stevens in Corby v. Drew, 10 Dick. Ch. Rep. 391 (1897), where it was expressly held that under the then existing laws a contract for sale of lands which had not been acknowledged according to law could not be specifically enforced in equity against a married woman. In Goldstein v. Curtis, 18 Dick. Ch. Rep. 454 (May, 1902), Vice-Chancellor Pitney held that by virtue of the additional provision made in this section 39 as to the effect of the acknowledgment of the deed upon the married woman’s estate, a contract which had been acknowledged could not be enforced. The decision in Corby v. Drew has not been questioned in any .court and it has been followed by Vice-Chancellor Stevenson in a late case—Osten v. Oesman (September, 1902, memorandum decision)-—as settling the law in this court. In this ease, also, the bill for specific performance against a married woman was dismissed because the contract had not been acknowledged according to law. '

So far as relates to the.present question, the law as to married women is still the same as when the decision in Corby v. Drew was rendered.

Upon the authority of these decisions the bill must be dismissed.


author: Reed, Y. C.

text:
    The Atlantic Safe Deposit and Trust Company v. The Atlantic City Laundry Company et al.
    [Filed November 5th, 1902.]
    1. To transmute chattels into realty, it must appear—first, that the chattels were actually annexed to the real estate, or something appurte.nant thereto ; second, that they were applied to the use to which that part of the realty to which they were connected was appropriated; third, that they were annexed with the intention to make a permanent accession to the freehold.
    2. Office furniture, safes, tables, chairs, clocks, desks, small clothes-press, soap kettle, &c., found in a laundry plant, and none of which was in any way attached to the building, constitute personal and not real estate.
    8. A mortgage executed by a laundry company, after describing the lands mortgaged, continued: “And all personal and mixed estate, * * * and also all machinery, boilers, engines and fixtures of -every description.” The machinery included an engine, boiler and shafting, the engine being bolted to a stone, brick or cement foundation; ironing machines made of steel rollers, connected above to the shafting by a pulley and belt and connected underneath, as well as from above, with the boiler by steam pipes; an “annihilator,” fastened by lag screws and connected with the boiler and with the shafting; washing machines bolted to the floor and connected with the shafting -by pulley and belt; and other laundry machinery similarly attached.—Held, to be part of the real estate and covered by the mortgage, though it was recorded only as a real and not as a chattel mortgage.
    On bill to foreclose a real ’estate mortgage and cross-bill to foreclose a chattel mortgage.
    The real estate mortgage was executed on December 1st, 1899, by the Atlantic City Laundry Company to the . Atlantic Safe Deposit and Trust Company. It covered a tract of laud, with the buildings thereon, at Atlantic City. It was made to the Atlantic Safe Deposit and Trust Company, in trust for all persons who should at any time be the owner of bonds of the Atlantic City Eaundry Company, to secure the payment of which bonds the mortgage was given.
    It is admitted that $35,000 of bonds are outstanding, and that upon $2,2,200 of them interest is due from December 1st, 1901, and upon $12,800 of them the interest is due from September 21st, 1901.
    On September 23d, 1901, the Atlantic City Laundry Company executed another mortgage, upon the same premises, to Margaret Paul Irvin, to secure $2,000. The contest in the cause is between these mortgagees, respecting the character of the machinery in the building standing upon the said premises used by the laundry company in its business. The complainant insists that all.the machinery are fixtures, and are covered by its. mortgage. Mrs. Irvin contends that they are personalty, unencumbered by the mortgage to the Atlantic Safe Deposit.and Trust Company, but, covered by her mortgage.

      The first-named instrument, while including personal property, was recorded as a real estate mortgage and not registered as a chattel mortgage. The second mortgage, while including the land described in the first mortgage (with other land), also included the machinery therein contained and all the goods and chattels or personal property, of any kind or character then upon the said premises, belonging to the mortgagor. This mortgage was recorded as a chattel, as well as a real estate, mortgage.
    In addition to these two mortgagees, another party appears in the contest. This party is the receiver of the Atlantic City Laundry Company, appointed by this court on insolvency proceedings taken against that company. The receiver has answered, setting up that all the machinery, excepting the engines and boilers, are personalty; and further, insisting that a part of this machinery was in the possession of the laundry company under a conditional sale or lease, made to it by the Adams Laundry Machinery Company, from which it was purchased, and that an action to replevy such portion of the machinery is now pending against the laundry company.

      Messrs. Thompson & Cole, for the complainant.

      Mr. William M. Clevenger, for the receiver.

      Mr. Harrison H. Voorhees, for the defendant Margaret Paul Irvin.
   Reed, Y. C.

The main question, it is perceived from the foregoing statement, concerns the real or personal character of the machinery in the laundry plant. This machinery consists of the following articles:

Engine, boiler and shafting. The engine is bolted to a stone, brick or cement foundation.

Ironing machines, made of steel rollers, connected above to the shafting by a pulley and belt, and connected underneath, as well as from above, with the boiler by steam pipes. It is a heavy machine, and stands in position by its own weight, and was taken into the building in sections.

An “annihilator,” fastened on a base and to the floor by lag screws, and connected with the boiler by a two-inch steam pipe, and with the shafting- by belt and pulley.

Tumblers, a small machine, screwed to the floor, and connected with the shafting by pulley and belt.

Washing machines, made of wood and iron, bolted to the floor, and fastened to a pipe, which feeds them with water, and connected with the shafting by pulley and belt.

Watkins injectors, about three feet in dimensions, made of iron and copper, fastened to the building by being riveted to the floor, and connected with the shaft by belt and pulley.

Snyder drying machine, about eighteen feet long, made of wood, lined with galvanized iron, with coils of pipe running along the side. It is nailed and bolted to the floor, and connected with the boiler by a large pipe, and with the shafting by pulley and belt.

Small clothes-press, made of iron and wood, not fastened to the floor.

Collar and cuff ironer—“Sharp’s Monarch”—made of wood and iron, bolted to the floor, and connected in the usual way with the shaft.

Steam table and appliances, nailed to the floor.

Hand ironing'tables, with little stoves in them, nailed to the floor.

Ironers, starch machines and starch kettles, bolted to the floor, and connected with the shaft by belt and pulley.

“Columbia Washers,” bolted to the floor, and connected with the shaft by belt and pulley.

Soap kettle, standing upon the floor.

Clock, safe, desk, chairs and tables and office furniture—disconnected from the building.

The tests to be applied, in ascertaining whether any or all of the mentioned articles became a part of the realty, have been repeatedly stated by the court of appeals.. Feder v. Van Winkle, Receiver, 8 Dick. Ch. Rep. 370, 372, and cases cited in the opinion of Mr. Justice Van Syckel. To transmute a chattel into realty, it must appear—first, that the chattels were actually annexed to the real estate, or something appurtenant thereto; second, that they were applied to the use or purpose to which that part of the realty with which they were connected was appropriated ; third, that they were annexed with the intention to make a permanent accession to the freehold.

In respect to the first test, it is clear that the office furniture, safe, tables, chairs, clocks, desks, small clothes-press, soap kettle, none of which were in any way attached to the building, are still personalty. All the remaining machinery are in some way fastened to the floor, excepting the ironing machines, which are not. They, however, are connected with the boiler by steam pipes and with the shafting by belts.

To answer the first test, the degree of annexation is not important. As to the permanency, that does not depend so much upon the degree of physical force With which the things are attached, as upon the motive and intention of the party attaching them. Quinby v. Manhattan Cloth and Paper Co., 9 C. E. Gr. 260, 264. While the degree of stability and apparent permanence of the annexation may be important in considering the remaining tests, the annexation is here sufficient to answer the first test, regarded by itself. So, also, do the annexed articles respond favorably to the complaint in respect to the second test. It is true that the machinery was such as is used in other laundries, and that it was not made for, or specially adapted to, this building. But, in the language of Mr. Justice Van Syckel, in Feder v. Van Winkle, 8 Dick. Ch. Rep. 370, neither is the fact that the thing in question may be removed and sold for other uses, nor that they were not made for special adaptation to the building in which they are placed, decisive of their character. Those facts are mere circumstances to be considered, and the mere presence of them does not necessarily withdraw machinery from the real estate mortgage.

In the present case there is a building erected for the prosecution of a particular business, with machinery bought and kept-in position in the building for executing the purpose of the business to which the building was devoted. I can hardly eonceive of a stronger instance of the application of a chattel to the use to which the realty was appropriated. '

Then, thirdly, were they annexed with the intention to make them a permanent accession to the building?

It is not necessary that there be an intention to make the annexation perpetual. Feder v. Van Winkle, supra. It is sufficient if they are attached, with the intention that they shall remain there until they are worn out. in business. Speiden v. Parker, Trustee, 1 Dick. Ch. Rep. 292, 293.

At the same time there must be an intention that the machine shall remain in the place where it is put, to be there used as a part of the business conducted in the building. If the machines are to be used in whatever part of the building it may, from time to time, be convenient to employ them, then, to use the language of Mr. Justice Knapp, in Blancke v. Rogers, 11 C. E. Gr. 563, 568, they are mere implements—-heavy and complicated tools.

The intention in the present case must be gathered from the manner of annexation, from the purpose and methods of use, and from any verbal or written expression of intention. The mortgage itself expressly includes machinery. The mortgage, after describing the land mortgaged, has the following clause:

“And all personal and mixed estate of wliich tJje said party of the first part is seized or possessed, and also all 'machinery, boilers, engines and fixtures of every description.”

This clause seems to disconnect the personal property from the machinery. It also rather seems to include machinery as fixtures. This inference is not so strong as it would have been had the word “fixtures” been preceded by the word “other,” but, nevertheless, a distinction between the personal and fixed property is clearly dravra; and the association of the word “machinery” with boilers, engines and fixtures leads strongly to the conclusion that the machinery was regarded as an accession to the realty.

In respect to the intention to be gathered from the manner of annexation and use, it is to be observed that while many, perhaps most, of the machines can be moved from one place to another in the building, there is no evidence that any have been so moved. This is evidential of an intention to make the position in which they were originally placed their permanent station. Then, again, many of the machines are connected, not merely with the building by lag screws, or nails, or by bolts running 'to the pulleys upon the shafting, but they are connected with the boiler by steam pipes. Now, a removable belt is not regarded as a permanent annexation, for it can be used upon one pulley as well as upon another in any part of the building. But a steam pipe, attached by plumbing to a boiler, is of a much more permanent character, and resembles the connection with a shaft by cog wheels or other similar apparatus. In these respects the present case differs from Knickerbocker Trust Co. v. Penn Cordage Co., 17 Dick. Ch. Rep. 624.

Applying the tests named to the facts as I find them, my conclusion is as follows:

The engine, boiler and shafting are realty. So, also, are the ironing machines, attached to the boiler by pipes, which run through holes cut in the floor.' So, also, is the “annihilator,” attached in the same way. So, also, are the washing machines, riveted to the floor and connected with the water pipe. So, also, are the drying machines, bolted to the floor and connected with the floor by pipes. So, also, the Watkins and other extractors, which are riveted through the floor. So, also, the “Sharp Monarch” collar and cuff ironer, which is bolted to the. floor. So, also, the starcher and .starch machines, which are bolted to the floor; and so, also, the “Columbia Washers,” also bolted to the floor.

As already remarked, those articles unattached remain personalty, and those articles which are merely nailed or simply connected by a belt with the shafting are to be regarded as personalty, This conclusion, I think, sufficiently separates the two classes.

The decree on the first mortgage will cover, of course, the one, and the decree on the second mortgage the other.

In respect to the matter raised by the answer of the receiver, I can say nothing. If it be true that the title to a portion of the articles now in the building is not in the Atlantic City Laundry Companj’-, but is in the Adams Laundry Machinery Company, no title can pass to a purchaser under the mortgage sales. The Adams Laundry Machinery Company, not being a party to this suit, its rights are not in issue, and cannot be determined.

A decree will be' signed upon notice to the respective solicitors.


author: Reed, V. C.

text:
    Hattie H. Murray v. Veronica Pannaci et al.
    [Filed November 11th, 1902.]
    Where it appears that the excavation of sand from a portion of the seashore by the owner thereof will, by the laws of gravitation and by wave motion, result in the removal of adjoining soil of another, and that such latter removal will expose the land of a third party to the action of the waves, the third party is entitled to an injunction restraining the excavation.

      Mr. John T. Bird, for the complainant.

      Mr. Franlc P. McDermoit, for the defendants.
   Reed, V. C.

This bill is filed by Mrs. Murray, the complainant, to have the defendant Mrs. Pannaci restrained from excavating and carting away sand from the seashore in front of thé properties of the complainant and defendant.

The parties own adjoining land bordering on the Atlantic ocean at Seabright. The relative situation of the tracts appears from the following rough plan:

The lot of the complainant is protected by a bulkhead, situated some distance inland from the ordinary high-water mark. The ordinary high-water mark is from forty-six to fifty-six feet easterly from the bulkhead. The property of the defendant is not so protected. Upon the defendant’s property is a row of bathhouses, beginning outside the line of ordinary high-water mark and running back eighty or ninety feet.

The evidence discloses the fact that Mrs. Pannaci has caused sand to be taken, not only from the beach in front of Mrs. Murray’s, but large quantities have been removed from the shore in front of her own property, and sold for filling purposes elsewhere. The claim of the complainant is that the removal of this sand has lowered the beach in front of her property, and destroyed the protection which its presence gave to her upland.

The defendant, while admitting that sand was taken from the shore in front of Mrs. Murray’s property, disclaims any right to do so, and any intention in the future to do so. The present contest is confined to the right of the defendant to excavate and remove sand from the shore in front of her own property.

It is to be remarked that the defendant holds a riparian grant from the state for the shore in front of her property. The complainant has no such grant.

The defence is rested upon three grounds—first, that the defendant is using her property for natural and reasonable purposes; second, that the removal of such sand works no injury to the complainant, because the sand taken is almost immediately replenished by the action of the waves; third, that if any injury results to the complainant, it is damnum absque injuria.

In respect to the first ground, the testimony seems to show that, in many instances, sand has been removed from the beach by others, mainly for the purpose of filling in and building up lowlands along the coast. This has been so frequent that it may be said to have been a customary act to take sand, not only from in front of the taker’s-own property, but elsewhere. The evidence, however, only shows that other persons have taken, from time to time, more or less sand from the beach, without having their right to do so challenged by a riparian owner. No local custom or common law conferring such a right upon citizens at large or the owners of riparian grants is proved to exist in instances where the taking of sand results in substantial injury to other property.

The second ground of defence, as already remarked, is that the sand excavated during the day is restored by the next high tide, and that there is no appreciable permanent depression of the beach following such excavations.

The defendant struggled to support the theory that the places from which the sand was removed were filled up by sand which the ocean waves brought in from the ocean floor and from distant points.

It is undoubtedly true that storms, with their high winds and consequent high waves, effect wonderful changes along the coast. Winter tempests sometimes form hills of sand at one point and sweep it away entirely from another point. This, however, is exceptional. The action of ordinary tides is a leveling process, sweeping the loose particles of comminuted stone from the higher and lodging them in the hollow places of the beach. It seems too obvious for discussion that if the sand from one point is removed day after day, leaving capacious cavities, these pits will be filled principally at the expense of the neighboring beach; and so it will result in a depression of the vicinage. That the large quantities of sand removed by the defendant resulted in lowering the beach in front of the complainant’s property I have no doubt whatever. It removed the barrier which nature had placed in front of her property, and left it more and more to the mercy of the ocean tides. It practically caused the line of ordinary high tide to move landward at that point, and thus diminish the area of the complainant’s property.

Assuming that the acts of the defendant threaten to remove the protection which the natural accumulation of sand afforded to the property of the complainant, and so menaces her property, the third question supervenes: Has she a legal right for complaint ?

I think the sand was taken almost entirely outside of the ordinary high-water mark of the ocean. Although it was taken from under the outer end of the range of bath-houses upon the Pannaci property, yet they projected beyond the present ordinary high-water mark.

As I have already remarked, for the land in front of Mrs. Murray’s property, outside of the ordinary high-water mark, she has no grant, the title for it being still in the State of New Jersey.

It is true that it is insisted that the title of the complainant runs to the low-water mark of the Atlantic ocean. A deed from the Wardell heirs, executed October 28th, 1865, is in evidence, which deed conveys to Arthur Y. Conover a tract of land, including, it is alleged, the locus in quo to the Atlantic ocean at low-water mark. It is insisted that this description, coupled with acts of possession for over twenty years, carries complainant’s title below the line of ordinary high-water mark down to low water. This position, however, is not tenable. If the grantees under the Wardell deed could have obtained title against the state below ordinary high-water mark by adverse possession, under the provision of our act for the limitation of actions (Gen. Stat. p. 1978 § 27), such a possibility is of no use to the complainant, for several reasons:

First, there is no evidence of such acts of adverse possession by the grantees in the War dell conveyance to low-water mark; secondly, the chain of title does not connect Conove.r, the grantee of Wardell, with the Seabright Beach Club, the grantor to Mrs. Murray; thirdly, if the title of the beach company ran to' low-water mark, its deed does not convey, by proper words, any title below ordinary high-water mark. So I must assume that Mrs. Murray’s title runs to the line of ordinary high tide, wherever that may be. But assuming that the title to the foreshore is in the state, or even that it was in the defendant, nevertheless, if the defendant had removed the'sand in front of the complainant’s lot along the ordinary high-water mark, so that, by gravity or by the action of the waves or other natural causes, the land of the complainant’s above that line would have been swept away by reason of the absence of the remaining sand, it seems to me there could be no question of the defendant’s liability.

In England a party who collects or conducts water in upon his land is responsible for its escape upon, and its damage to,, neighboring land, irrespective of any degree of care exercised to preclude such a consequence.

In this state he is liable for a similar result for a like act, unless such a degree of care is used to prevent damages as will relieve the collector from the charge of negligence.

No one, I think, will question the proposition that, if a landowner digs a canal, by which water from a river or from the ocean is brought upon his land, without taking any precaution to confine the water to his land, he will be liable for its escape and for any injury inflicted upon other property.

In England, in the case of Attorney-General v. Tomline, 5 Ch. Div. 750, an injunction was decreed to prevent the owner of a foreshore from removing shingle, so as to expose the complainant’s land to the inroads of the sea, although the shingle was removed for sale in the natural and ordinary use of 'the land. The injunction was allowed upon the theory that it was the duty of the crown to protect the realm from the inroads of the sea; therefore, no subject was entitled to destroy the natural barriers against the sea. In this case the attorney-general was merely asserting the jus privatum of the crown in the land, and admittedly stood as any other' private owner of land abutting on the foreshore. This case was affirmed by the court of appeals, upon the ground stated. S. C., 14 Ch. Div. 58. Is the doctrine of this case applicable in this state ?

The right of control and of dominion over the sea, its coasts and tide-waters, when ¡relinquished by a foreign country, vested somewhere, and, as between the several states and the federal government, it is settled that it vested in the several states in their sovereign capacity, respectively. Commonwealth v. Alger, 7 Cush. 53, 82; Pollard v. Hagan, 3 How. 212; Arnold v. Mundy, 1 Halst. 1.

“The legislature,” said Chief-Justice Kirkpatrick, in the*’last ease, “may lawfully bank off the waters, and reclaim the land upon the shores at public expense.”

As the royal right in the coast and waters of this state, after the Revolution, became vested in the people of the state, represented by the legislature, so it would seem that the royal duties, in respect to these shores and waters, then existing, devolved upon the people of the state, including the duty (imperfect, because unenforceable against the state, as it was against the crown) of preserving the land of the state against the inroads of the ocean.

The supreme court of Massachusetts has, upon more satisfactory grounds, laid down the rule that a person who excavates on his land in such a manner as to let in the sea, which undermines and injures the adjoining land of another, is liable for the injury so caused. This result was reached upon the reasoning of Chief-Justice Shaw, in his opinion in Commonwealth v. Alger, 7 Cush. 53, 86.

In that case the defendant, having title to low-water mark, violated a statute, which limited the lines to which a wharf could be extended. The question was whether this statute was an infringement of the vested rights of the owner of the shore. In his opinion in that case Chief-Justice Shaw said: “All real estate, inland or on the seashore, derived immediately or remotely from the government of the state, is .taken and held under the tacit understanding that the owner shall so deal with it as not to cause injury to others; that when land is so situated, or such is its conformation that it forms a natural harrier to rivers or ticlal water-courses, the owner cannot justifiably remove it to such an extent as to permit the waters to desert their natural channels and overflow and, perhaps, inundate fields and villages; render rivers and harbors shallow, and consequently desolate and thereby destroy the valuable rights of other properties, both in the navigation of the stream and in the contiguous lands.”

Again, he said: “Ordinarily, and when no such circumstances exist, the owner of the land has a perfect right to use and remove the earth, gravel or clay of which the soil is composed, as his own interest or convenience may require. But can he do this when the same materials form the natural embankment of the water-course ? He may say, perhaps, that he merely intends to make use of materials which are his own, and to which he has the right, and for which he has other uses. But we think the law will admit of no such excuse. He knows that when those materials are away the water, by law of gravitation, will rush-out, and all the mischievous consequences of diverting a watercourse will follow.”

In the case of Mears v. Dole, 135 Mass. 508, the plaintiff and defendant owned lands adjoining by the sea, the land of the defendant being bounded easterly and northeasterly and, in part, northwesterly by the land of the plaintiff. Part of the complainant’s land extended between the defendant’s land and the sea. The defendant excavated and carried away, for sale, the soil and gravel from his land down to low-water mark for a considerable distance inland, and near the line of the plaintiff’s land, but not so near (except for the action of the sea) that his land would have been undermined and would have fallen in. The consequence of the excavation was that, through the action of the sea, the plaintiff’s land was undermined and washed into the excavation of the defendant.

The court said, after citing the language of Chief-Justice Shaw, already displayed: “The defendant, by his excavations on his own properties, brought the sea upon his land, where it would not have been but for the excavations; and, as a consequence, it has escaped and acted upon the plaintiff’s land so as to cause damage, and for this he must be held responsible.”

The principle thus enunciated is, in my judgment, sound. It is applicable to the present case, where the sand has been removed in such quantities as to produce a substantial injury, and no precautions were taken to prevent the resulting damage. If the property from which the sand was taken had adjoined the land of .the complainant, the application of the doctrine to the facts of this case would be at once manifest.

The question remains whether the fact that the place of excavation adjoins lands of the state, and not the lands of the complainant, deprives the complainant of her right to redress.

If the act of the defendant resulted in a material injury to the land of the complainant, and such injury was the proximate and.reasonable result of such act, I am of the opinion that the complainant is entitled to relief. Adjacency is not the ground upon which protection to property for such acts rest. The rule to be applied is analogous to that underlying the doctrine of lateral support. The liability of an excavator is not limited to the injury done to the adjacent owner, but includes any injury to any owner of land within the zone of support. Birmingham v. Allen, L. R. 6 Ch. Div. 284; Keating v. Cincinnati, 38 Ohio St. 141; Gillmore v. Driscoll, 122 Mass. 199.

In the present case, if it be conceded that the owner who brings the ocean upon his land is responsible for its effects upon other land, it must follow that the responsibility includes any land an injury to which is the proximate result and reasonable sequence of such conduct.

To put the proposition in a shape better fitting the facts of this case: If the excavation of the soil by the defendant was so great that, by the law of gravitation or of wave motion, it resulted in the removal of the adjoining soil, and the removal of this soil exposed the property of a third party to the erosive action of the ocean, then, if the last result was the reasonable and proximate sequence of the original act, the excavator is liable for the ultimate event.

I will advise a decree for the complainant.


author: Seed, V. C.

text:
    Lizzie [Elsie] H. Harter v. The Capital City Brewing Company et al.
    [Filed December 1st, 1902.]
    1. Evidence examined and held insufficient to show a contract between a husband and wife whereby, she was to take stock in a corporation of which he was an officer, in part payment for land which she had sold to the corporation through him as its agent.
    2. One who took a mortgage on land, with knowledge at the time that a portion of the purchase-price therefor had not been paid, took subject to the vendor’s lien.
    On bill to enforce a vendor’s lien.

      Mr. B. M. J. Smith, for the complainant.

      Mr. James Buchanan, for the defendants.
   Seed, V. C.

In 1899 the complainant owned four lots of land in the city of Trenton. On August 10th of that year she made a deed for the said lots to the Capital City Brewing Company. The consideration expressed in the deed is $5,000. The sale was negotiated for the Capital City Brewing Company by the husband of the complainant, Mr. John W. Harter. He and several others had, on June 19th, 1899, filed a certificate of incorporation of a company for conducting a brewery business. Several sites for the erection of the buildings for such business had been examined, among them the four lots of the complainant. Mr. Harter was deputed by the copipany to acquire these lots.

It is undisputed that the price agreed to be paid for them was, not $5,000, but $3,500. It is admitted that only $50 of this sum has been paid. The ground upon which the defending company .resist the imposition of the vendor’s lien is that for $2,500 of the consideration the complainant had agreed to take stock of the company. There is no doubt that the taking of stock for this portion of the consideration was the subject of conversation between Mr. Harter and his wife. But the question is whether there was a contract, binding upon both parties, that such stock was to be issued and accepted. The evidence in respect to the contract rests almost entirely upon the testimony of Mr. and Mrs. Harter. Mrs. Harter says:

“At the time of the sale I told them I would sell-them this property for $3,500, and they should give me $1,000 in cash and the. $2,500 I would take in stock, two for one, as the rest of them had got their stock.”

She says that the conversation in respect to the taking of stock was at the time she agreed to take $3,500 for the lots.

John Harter, the husband of the complainant, was treasurer of the company. He says the matter was placed in his hands to negotiate with Mrs. Harter. He says that the $3,500 were to be paid $1,000 in cash and $2,500 she was to get in stock, at the rate of two for one, as every other one got, except one or two other men, and they got two and a half for one.

Mr. Harter subsequently, when asked why the stock was not issued to his wife, said:

“It was only for the reason that Mrs. Harter was not to be in the matter, so far as the other gentlemen were concerned in the company, she never told them that she would take the stock; that is only a matter that I know of. The other people in the concern did not know of it. But Mrs. Harter told me—she said, ‘If everything goes on all right I will take my $2,500 in stock at the rate of two for one, and I will take my $1,000 in cash.’ ‘All right,’ I said, ‘we will fix it up in that way.’ Now, that was only to myself, the other people in the brewing company knew nothing about it.” •

Again, lie said: •

“Mrs. Harter said this to me understand, as. my wife, I was working for the company; and she said, when I mentioned the matter to her in the first place, she said, T do not really need all this cash. Now, if you put me in same as the rest at two to one, same as the rest of you, I would be satisfied.’ And I said, ‘All right, we will try to put you in at two to one, same as the rest us.’ ”

Being asked, “When was this referred to ?” he replied, “This was after onr stock was issued—when the first shares of stock were issued.”

It appears, also, that the deed was dated August 10th, 1899, and a check for $1,000 was drawn by the company in favor of Mrs. Harter on August 23d. It is in evidence that this check, by the request of Mr. Harter, was not presented to the bank for payment, because of the then financial condition of the company they wished delay.

Ho stock was ever issued to Mrs. Harter. On March 2d, 1901, a disagreement occurred between Mr. Harter and the other stockholders of the company, which resulted in his resignation as treasurer. Eollowing his resignation, Carl Hauser, the president, of the company, made a verbal tender of stock to Mrs. Harter, who was then present. She said she would not accept it.

The present position of the parties is that the defendant admits liability for the land sold, and the right of complainant to enforce the vendor’s lien for $950, the unpaid portion of the $1,000 already mentioned. But it insists that all the complainant is entitled to, apart from this sum, is stock of the corporation of the face or par value of $2,500.

On the other hand, the complainant insists upon a lien for the whole amount still unpaid.

I will here remark that it is not to be conceded that the law is settled that if the contract was such as to permit the corporation to pay in shares of stock, the vendor’s lien for such portion of the consideration was thereby lost.

In the case of Fisk v. Potter, 2 Keyes 64, 77, the New York court of appeals held, apparently without much consideration, that if the price for land is payable in some commodity other than money, the vendor’s lien is lost. And it appears that the rule, as settled by the great weight of authority, that where the consideration for land sold is other land or personal property, with no monetary price fixed for which the land or personal property shall be delivered, there can be no lien. Thus, in the case of Harris v. Hanie, 37 Ark. 348, the consideration for the land sold was cotton to be delivered. In holding that there was no vendor’s lien, the court said that a vendor’s lien does not arise to secure the performance of any act, the breach of the performance of which would create a claim for unliquidated damages. In this case there was no money consideration for the land expressed in the deed. But in the case of Young v. Harris, 86 Ark. 162, there was a price fixed for the land, and an agreement that this price should be paid for in personal services, and it was held that the vendor’s lien existed. The amount of the consideration in that case was liquidated, and for that amount a lien existed until paid.

In Plowman v. Riddle, 14 Ala. 169, a note was given for a money consideration, which, by the terms of the contract of sale, the vendee had the right to discharge by delivering leather. In Deason v. Taylor, 53 Miss. 697, the consideration was a note payable in Mississippi certificates of indebtedness. In Beal v. Harrington, 116 Ill. 113, the consideration was certain lots of land and certain personal property, the prices of which lands and the price of which personal property were fixed. In each of these three cases the existence of a right to a vendor’s lien was recognized.

A definitive statement of what should be the rule in this state under an agreement to take stock for a definite amount of the consideration expressed in money for a sale of land need not be made until it is ascertained whether such a contract exists.

To that point I will now direct my remarks.

It is to be first observed that the agreement to take stock must arise out of the testimony of Mr. and Mrs. Harter. The consideration for the property sold by Mrs. Harter to the company, expressed in the deed accepted by the company, was, as already remarked, $5,000. This is presumably the amount due from the company to Mrs/ Harter. The only way the $5,000 is reduced to $3,500 is by the testimony of the two Harters. So, also, must the claim that $2,500 of the $3,500 were to be paid in stock rest upon the same testimony. There is no reliable testimony that, before or at the time of the execution of the deed, any person other than Mr. Harter spoke to Mrs. Harter about the amount to be paid or the manner in which it should be paid. How, the' testimony of these two is conclusive that in all the conversations between them concerning the stock which she was to take it was understood that she was to have $2 worth of stock, at its par value, for each dollar of the $2,500. The accuracy of this testimony is rendered probable from the. fact that no one of those who put m/money received for it a less proportion of stock, and from the further fact that the money value of the property sold by Mrs. Harter seems to have been fully $3,500.

Nor is there any reliable testimony that either Mr. Harter or his wife ever represented to the officers of the company that the latter would take stock upon any other basis. I have no doubt that Mr. Harter stated to the company that his wife would take stock for $2,500, and it is probable that the matter of taking stock was mentioned in her presence. There is little doubt that both Mr. Harter and his wife expected that she would take stock to the amount mentioned, but it does not appear that Mr. Harter ever reported to the company that Mrs. Harter had agreed to take $2,500 of stock at its par value. Nor does it appear that Mr. Harter ever reported that his wife had agreed to take stock in the proportion of two to one. It seems entirely clear, therefore, that no such agreement as the defendant sets up was ever entered into between Harter and his wife.

Indeed, Mr. Harter seems to have regarded the proposal to take stock as only provisional; it was to be dependent upon whether everything turned out all right.

I think that his primary purpose in negotiating with his wife was to get her to forego her right to a cash payment of the consideration. He requested her to forbear the presentation of the $1,000 check; and I have no doubt he suggested the taking of stock for the remainder. He, at the same time, wished to protect his wife. His delay in seeing that she was put in the company as a stockholder, on the footing discussed between them, looks as if he was waiting to see how the business developed. She relied upon his judgment in respect to the investment of this portion of the consideration in stock. The entire transaction impresses -me with the conviction that the first step in the negotiations was the adjustment of the money value of the property at $3,500. Then came the question of the manner of payment, and she consented to receive $1,000 in cash and to permit her husband to endeavor to put her into the company as a stockholder for the remainder of the consideration at the rate of two to one. That she was likely and willing to take stock was undoubtedly spoken of among the members of the family, who controlled the company; but the proposition that she should receive stock in the proportion of $2 in par value of stock to $1 of the consideration was never presented to the company, and was never accepted by it.

Should the defendant be now permitted to pay the $2,500 by stock to the amount mentioned? I say permitted to do so, because it .seems to me clear that it is not obliged to do so. It is not obliged to do so for the reason that any contract entered into by Mr. Harter to give stock in consideration of the land acquired was entirely aside from his authority. It is true that the scope of his agency in the matter is left quite indistinct, but I am sure that it amounted to no more than a power to see on what terms his wife would sell her property. I do not think he was authorized to close • any contract until he had reported to the company. His position as an officer of the company and husband of the vendor made him a proper person to procure terms, but not a proper person to fix the terms of the sale. But even if he was equipped with the power to buy, that would not have authorized a barter.

Now, it is true that although Mr. Harter was not empowered to enter into a contract with his wife that she should receive stock, the corporation could have ratified his contract had it been called to its attention, and so could have put itself in the same posture as if it had originally authorized it. This, however, it has never done, for the terms were never reported to its officers. The point of doubt in my mind is, the arrangement being now disclosed, whether if it exhibits a contract between Mr. Harter and his wife, the corporation should now be permitted to elect whether it will ratify Mr. Harter’s contract.

I doubt, however, whether a ratifiable contract was entered into between Mr. Harter and his wife.

Notwithstanding the general terms used by both husband and wife, to the effect that she was to take stock to the amount of $2,500, the whole testimony and the entire transaction impressed me with the conviction that the arrangement between them was designed to permit her husband, in his discretion, to take stock. No doubt, as an officer of the company, he was concerned to have her forbear from insisting upon the payment of cash. I have no doubt that he explained to those concerned with him in the enterprise that he had avoided the payment of cash, and that she would probably come into the company by taking stock for a portion of the amount. Nevertheless, as I have already observed, he, and I think she also, regarded this arrangement as provisional. His delay in putting her into the company, and his refusal to issue stock to her, and his failure to state even the footing upon which she was to come in, seems to show that he was waiting to see how the business would develop. The confidence placed in his judgment by his wife, the fact that he was in the management of the company, induced her to empower him to make the investment.

I incline, however, to the opinion that it was a mere power, revocable by her at any time before its execution.

I am of the opinion that there should be a' decree for the complainant.

I am also of the opinion that the mortgages of Mr. Charles Hauser a.re subject to the lien of the complainant, for it is entirely clear that he was aware, at the time he took his mortgages, that the consideration for the purchase of the property had not been paid to his daughter.