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It is not necessary to take much time over the suggestion that there was any duty on the part of the directors to raise money for the company personally. There might be exigencies, when they would see fit to do so, but they were not bound to. And as to the financing of the project, in the interest of the company, outside of this, the fact is, as appears from the evidence, that a number of financial institutions were approached in New York, Philadelphia, and elsewhere, in the effort to do so, but without success. No one indeed could be expected to advance money on the mere project to build, particularly in a new and undeveloped mining region of uncertain stability, such as Bullfrog then was. It is possible that the $350,000 of treasury bonds were available and could have been marketed. But the road cost nearly a million dollars, and called for cash, and the balance could hardly have been made up out of income. Nor was a second mortgage to be thought of, the company being already heavily bonded. Besides that, the 'stockholders were opposed to using the money of the company to build the extension, if they did not actually vote against it. thing left was a friendly syndicate, such as was formed, and the case is thus brought down to the fairness of the arrangement proposed to be made with it.
The exact proposition to the company was that the syndicate would build and equip at their own cost and expense the extension from Goldfield to Bullfrog, a distance of 79 miles, according to the location and survey which had been adopted, making it equal in all respects to the road operated by the defendant company; and when so completed, equipped, and paid for, without any liens or incumbrances, excepting a first mortgage for $1,250,000 to secure 6 per cent. 15-year bonds, and capital stock of the same amount, all of which stock and bonds were to be acquired by the syndicate, thereupon, upon the company undertaking to guarantee the bonds, the syndicate agreed to turn over 51 per cent. of the stock, reserving to themselves the benefit of the balance. Or, in other words, without any risk except the contingent liability which it assumed by its guaranty—the road being all built and paid for—for the mere loan of its name the company was to get stock of the face value of $637,500, putting it in control, the guaranty simply enabling the syndicate to float the bonds and get back the money which they had put into the enterprise, with whatever profits there might be above that. Looking at it practically, the fairness of this seems hardly open to question.
The complainant does not object, if a syndicate is the only alternative, to the general arrangement which is so outlined. He recognizes that it would be disastrous if the extension to Bullfrog is not secured and incorporated into the company's railroad system, and that a guaranty of the bonds may be necessary to get this. But he wants all the stock in exchange, and not simply a part of it. He seems to think that not only the directors, but their associates, can be made to take all the risk and forego any of the benefits, and that he and his fellow stockholders, who have advanced nothing, and assumed no responsibility, are entitled to all of them, and this, upon the principle that a trustee can take no advantage to himself out of his position. There is no question of the principle, but it is not applicable. Upon the same basis, not only the other half of the stock, but all the bonds not needed to reimburse the syndicate for its outlays, would be equally demandable as a part of the profits, which seems to have been overlooked by the complainant or he possibly would have claimed them.
There are several things, however, which stand in the way of adopting his contentions. In the first place it is to be noted that there are 32 members of the syndicate, only 10 of whom, holding considerably less than a controlling interest, are directors in the defendant company. And it can hardly be expected that those who are not will give up what is coming to them out of the enterprise, or that they can be constrained to do so by those who are. The bill is not to compel the directors as trustees to account for and surrender the profits which they will make, assuming that this could have been done upon the present showing. It aims to prevent the carrying out of the arrangement both as to the company and the syndicate, because of the complicity of the directors, who are charged with having used their position to favor it. Its purpose thus is negative, and except as it may possibly force better terms outside of these proceedings, it can effect a negative only. The complainant by these means may hold up the proposition in hope of a better one, but he is not in a position to compel it, nor can the court, if it had the power, be expected to bargain for it in his behalf. The bill is to be sustained, in other words, because the proposed arrangement is tainted or against conscience, and so to be prohibited, and not in order to have the parties come forward with something possibly more favorable.
The alternative, in case the arrangement should not go through, has therefore to be carefully looked to. The members of the syndicate, outside of the directors, who have put their money into the road, and taken the chance of success (which the complainant to the contrary notwithstanding, and by no grace of his, was not so assured in the beginning as it seems now), cannot be expected or required to get nothing out of it. The enterprise was a perfectly legitimate one, as to which they are not in the least beholden to the company, and upon every consideration they are entitled to the full benefit of it. If, then, they cannot secure the terms which they offer, and it must be everything or nothing in dealing with the company as the complainant would have it, they are likely, if indeed they will not be compelled, to go elsewhere with the property. And if, as the result, the road gets into the hands of a rival, as it may, it would be a blow to the company in comparison to which the half of the stock which is haggled for would be trifling. The complainant thinks that self-interest can
. be relied on to prevent this; enough of the syndicate, outside of the directors, being stockholders in the company. But this is taking large risks. And what right has the complainant to force the issue, or to impose any such extreme and obstructive policy upon the other stockholders? He comes into court as the champion of the company, but as all, except possibly a hesitating contingent, have declared against him, it: is simply a question of his own interests. He admits, however, that there will be no direct injury to these, and that his stock will be worth just as much if the arrangement is put through as if it is not. His only complaint is that it would be worth more with a better bargain, which seems to be his idea of irreparable damage. But, looking to the possibilities, his own bill is the real menace to his holdings, not to say those of others. And while he may be willing to take the chances upon it for himself, he cannot ask that others shall be put at any such hazard.
The complainant's case is thụs clearly destitute of equity. It may be that the directors are on both sides of the proposed arrangement, and to a certain extent are to profit by it. But that does not necessarily condemn it. It merely calls upon them to justify it. Jesup v. Railroad (C. C.) 43 Fed. 483. And this they have abundantly done. The proposition made to the company is not an unfair one. The directors have not used their position to unduly favor it. It is to the decided interest of the company that it should be accepted. It would be disastrous, if as a result of these proceedings or for any cause it should be diverted and go elsewhere. The syndicate was made up with considerable difficulty, parties who were approached being reluctant to go into it, for which the pendency of the complainant's previous bill was not a little responsible. It was organized as the only alternative to promote the interests of the company and put through the road for its benefit, giving it control and heading off other roads which were talked of. A better bargain, giving up less stock, could admittedly be made with Senator Clark, who has large interests in the direction of Bullfrog and is seeking a similar entry into it. The guaranty of the company is of course of value, and, enabling the syndicate to float the bonds, as it will, they can afford to pay for it. But the liability assumed is not large, being indirect and contingent and the property good for it, the road having been completed and equipped while these proceedings were pending and being now successfully operated. The price to be paid is substantial, the stock offered to be turned over having a par value of $637,500, which is likely to be, if it has not already been, realized. And it gives control of the property, which is all important. To demand more than this, upon an all or nothing policy, makes the bill little better than an attempted financial hold-up. By every consideration, therefore, being opposed to the best interests of the company instead of conserving them, it must be dismissed, and the arrangement complained of be allowed to be proceeded with.
Let a decree be drawn in favor of the defendants, with costs.
CRUCHET V. RED ROVER MIN. CO.
(Circuit Court, D. Massachusetts. July 10, 1906.)
BANKRUPTCY_EFFECT OF PETITION-EXCLUSIVENESS OF JURISDICTION.
A federal court was without jurisdiction to entertain a creditors' suit against a foreign corporation, and to appoint a receiver therein, where at the time such suit was commenced a petition in bankruptcy was pending against the defendant in the district of its domicile, which was afterward followed by an adjudication; and, on the facts being made known to the court, such suit will be dismissed.
[Ed. Note.-Jurisdiction of federal courts in suits relating to bankruptcy, see note to Bailey v. Mosher, 11 C. C. A. 313.] In Equity. On plea to the jurisdiction and motion to dismiss. H. H. Armington, for plaintiff. James A. Tirrell, for defendant. Franklin & Tedrow, for trustee in bankruptcy.
COLT, Circuit Judge. On March 18, 1905, a petition in involuntary bankruptcy was filed against the defendant in the United States District Court for the District of Colorado, and on May 22, 1905, the defendant was adjudged a bankrupt. The defendant is a mining corporation organized under the laws of Colorado, and its property is located within that state.
On April 21, 1905, this creditors' bill was filed in the United States Circuit Court for the District of Massachusetts, and a receiver appointed; the counsel for the defendant appearing and consenting to the entry of the decree.
The bill did not allege the pendency of bankruptcy proceedings in Colorado, nor was this fact in any way brought to the attention of the court. If it had been, the court would have refused to take jurisdiction of this bill, since it would be manifestly destructive of the fundamental purpose of the bankrupt act, and lead to endless confusion, for the Circuit Courts to entertain creditors' bills like the present one, after the commencement of proceedings in bankruptcy against the insolvent. Nor are we aware that any Circuit Court has ever entertained such a bill, and appointed a receiver, where it had notice that bankruptcy proceedings had already been commenced against the defendant.
The jurisdiction of this court under this bill, and of its receiver, is limited to the district of Massachusetts; and, since no property of the defendant has come into the possession of the receiver, the rights of creditors and of all parties having any interest in the bankrupt's estate have been up to the present time in no way affected by the entry of this decree appointing a receiver. Under these circumstances, it is clearly the duty of the court to dismiss the bill and discharge the receiver. The authorities upon this point are numerous and conclusive.
The jurisdiction of the bankruptcy court “is absolute, paramount, and exclusive to adjudicate the question of bankruptcy, to settle and liquidate the estate of the bankrupt, and as to all matters and questions arising in bankruptcy proceedings touching the persons and property of the bankrupts, their relations to their creditors, and the rights of creditors in and to the bankrupt's estate, from the commencement of the proceedings to their close. Brandenburg on Bankruptcy (3d Ed.) $ 36, and authorities cited; Loveland on Bankruptcy (20 Ed.) Š 18, p. 75; In re Watts & Sachs, 190 U. S. 1, 27, 35, 23 Sup. Ct. 718, 47 L. Ed. 933.
In Bank v. Sherman, 101 U. S. 403, 25 L. Ed. 866, the Supreme Court said:
“The filing of the petition was a caveat to all the world. It was, in effect, an attachment and injunction. Thereafter all the property rights of the debt
or were ipso facto in abeyance until the final adjudication. If that were in his favor, they revived, and were again in full force. If it were against him, they were extinguished as to him, and vested in the assignee for the purposes of the trust with which he was charged. The bankrupt became, as it were, for many purposes civiliter mortuus. Those who dealt with his property in the interval between the filing of the petition and the final adjudication did so at their peril. They could limit neither the power of the court nor the effect of the final exercise of its jurisdiction. With the intermediate steps they had nothing to do. The time of the filing of the petition and the final result alone concerned them."
In the case of In re Benedict (D. C.) 140 Fed. 55, the court said:
"It must be remembered, however, that this is strictly a proceeding in rem, contemplating only temporary control of certain property. A proceeding in bankruptcy is sui generis. The filing of an involuntary petition is not the commencement of a suit against the failing debtor to recover debts due. It contemplates rather the collection and distribution of an estate. Such proceedings do not abate by the death of the alleged bankrupt occurring after the petition and before the adjudication. In re Hicks (D. C.) 107 Fed. 910; In re Spalding (D. C.) 134 Fed. 507. Another fact must be kept in mind. The very property sought to be reached has been by virtue of the act of Congress brought sub modo under federal influence and control by the filing of the involuntary petition, which has, so to speak, imposed a status upon all the property of the alleged bankrupt everywhere. Bank v. Sherman, 101 U. S. 403, 25 L. Ed. 866; Mueller v. Nugent, 184 U. S. 1-16, 22 Sup. Ct. 269, 46 L. Ed. 405. Such petition, when filed, is held to be 'a caveat to all the world, and to operate upon such assets like an attachment or injunction. Such legal result is not expressly provided for in the text of the law, but is predicated by the court upon the general scope of the act and the purpose of Congress.”
See, also, State Bank of Chicago v. Cox (United States Circuit Court of Appeals for the Seventh Circuit, October, 1905) 143 Fed. 91, 74 C. C. A. 285, published in the Central Law Journal of April 6, 1906, with an exhaustive note reviewing the authorities by William Ritchie.
A decree may be entered dismissing the bill.
A. OVERHOLT & CO. V. GERMAN-AMERICAN INS. CO. (and nine other
Nos. 64-66, 94-100.
Under the removal statute as amended by Act Aug. 13, 1888, c. 866, 25 Stat. 433 [U. S. Comp. St. 1901, p. 508], which permits a petition for removal to be filed on or before the time when the defendant is required by the laws of the state or rules of the state court to answer or plead to the declaration or complaint, a petition must be filed by the time an affidavit of defense is required by the Pennsylvania practice, which, under the rules of the court, is an answer to plaintiff's claim and frames the issues to be tried.
[Ed. Note.-For cases in point, see Cent. Dig. vol. 42, Removal of Causes, 141.]
On Motions to Remand to State Court.