MR. JUSTICE BRANDEIS delivered the opinion of the court.
In 1888, and for some years prior thereto, the Southern Pacific Company dominated the Houston & Texas Central Railway Company, electing directors and officers through one of its subsidiaries, which owned a majority of the Houston Company stock. In 1888, pursuant to a reorganization agreement, mortgages upon the Houston Company properties were foreclosed and these were acquired by the Houston & Texas Central Railroad Company; the old company's outstanding bonds were exchanged for bonds of the new; all the new company's stock was delivered to the Southern Pacific; its lines of railroad were incorporated in the transcontinental system of that corporation; and the minority stockholders of the old Houston Company received nothing. In 1913, the appellees, suing on behalf of themselves and other minority stockholders, brought this suit in the Supreme Court of New York to have the Southern Pacific declared trustee for them of stock in the new Houston Company and for an accounting. The plaintiffs below being citizens and residents of New York, and the Southern Pacific, a Kentucky corporation, it removed the case to the District Court of the United States for the
In considering the many objections urged against the decree, it is important to bear constantly in mind the exact nature of the equity invoked by the bill and recognized by the lower courts. The minority stockholders do not complain of a wrong done the corporation or of any wrong done by it to them. They complain of the wrong done them directly by the Southern Pacific and by it alone. The wrong consists in its failure to share with them, the minority, the proceeds of the common property of which it, through majority stockholdings, had rightfully taken control. In other words, the minority assert the right to a pro rata share of the common property; and equity enforces the right by declaring the trust on which the Southern Pacific holds it and ordering distribution or compensation. The rule of corporation law and of equity invoked is well settled and has been often applied. The majority has the right to control; but when it does so, it
The facts on which the decree is based are carefully set forth in the bill of complaint; and the decree declares in terms that every allegation contained in it is true. No adequate reason is shown for challenging, in any respect material for the purposes of this opinion, the correctness of this concurrent finding of the two lower courts; and it is accepted as correct. Baker v. Schofield, 243 U.S. 114, 118. The detailed facts and the evidence upon which they rest are fully recited in the opinions delivered below or in the earlier litigation hereafter referred to; and the facts will be recited here only so far as necessary to an understanding of the several errors of law now insisted upon.
First. The Southern Pacific contends that plaintiffs are barred by laches. The reorganization agreement is dated December 20, 1887; the decree of foreclosure and sale was entered May 4, 1888; the sale was held September 8, 1888; and the stock in the new company was delivered to the Southern Pacific on February 10, 1891. This suit was not begun until July 26, 1913; and not until that time was there a proper attempt to assert the specific equity here enforced; namely, that the Southern Pacific received the stock in the new Houston Company as trustee for the stockholders of the old. More than twenty-two years had thus elapsed since the wrong complained of was committed. But the essence of laches is not merely lapse of time. It is essential that there be also acquiescence in the
Second. The Southern Pacific contends that adverse decisions in the earlier litigation are a bar either as an estoppel or by way of election of remedies; since the prosecution of some, if not all, of the earlier suits also was actively supported by the minority stockholders' committee, and the plaintiffs are bound as privies to the full extent to which the decrees therein constitute res judicata. But in none of these suits was the question here in issue decided. Except in so far as those cases were disposed of on objections to jurisdiction, they decided merely that the foreclosure could not be set aside as fraudulent; that the minority stockholders could not have the reorganization agreement declared fraudulent; and that they could not compel a reduction of the assessment made under it or enjoin distribution of the stock according to its terms. The minority stockholders sought, when presenting the case in the Court of Appeals of New York (MacArdell v. Olcott, 189 N.Y. 368, 372-373), to have declared the trust which was later decreed in this suit; but that court refused to consider the contention, for the reason that this claim to relief was based upon a theory "widely at variance" with that upon which that action was commenced and tried. Because of such wide divergence the earlier decrees do not operate as res judicata. And there is no basis for the claim of estoppel by election; nor any reason why the minority, who failed in the attempt to recover on one theory because unsupported by the facts, should
Third. The Southern Pacific challenges the claim for relief on the ground that it took the new Houston Company stock, not as majority stockholder, but as underwriter or banker under the reorganization agreement. The essential facts are these: While dominating the old company through control of a majority of its stock, the Southern Pacific entered into its reorganization, under an agreement by which the minority stockholders of the old company could obtain stock in the new only upon payment in cash of a prohibitive assessment of $71.40 per share (said to be required to satisfy the floating debt and reorganization expenses and charges), while the Southern Pacific was enabled to acquire all the stock in the new company upon paying an assessment of $26 per share (said to be the amount required to satisfy reorganization expenses and charges). The Southern Pacific asserts that unlike the minority stockholders it assumed an underwriter's obligation to take the new company's stock not subscribed for by the minority and also guaranteed part of the principal and all the interest on the new company's bonds, which were given in exchange for those of the old company. But the purpose of the Southern Pacific in assuming these obligations was in no sense to perform the function of banker. It was to secure the incorporation of the Houston Railroad into its own transcontinental system. And it was never called upon to pay anything under its guaranty.
Fourth. The Southern Pacific contends that the doctrine under which majority stockholders exercising control are deemed trustees for the minority should not be applied here, because it did not itself own directly any
Fifth. Equally unfounded is the contention that the Southern Pacific cannot be held liable because it was not guilty of fraud or mismanagement. The essential of the liability to account sought to be enforced in this suit lies not in fraud or mismanagement, but in the fact that, having become a fiduciary through taking control of the old Houston Company, the Southern Pacific has secured fruits which it has not shared with the minority. The wrong lay not in acquiring the stock, but in refusing to make a pro rata distribution on equal terms among the old Houston Company shareholders.
Sixth. The Southern Pacific also urges that the suit must fail because the old Houston Company is an indispensable party and has not been joined. The contention proceeds upon a misconception of the nature of the suit. Since its purpose is merely to hold the Southern Pacific as trustee for the plaintiffs individually of the property which it has received, the old Houston Company is in no way interested and would not be even a proper party.
Seventh. The Southern Pacific also contends that the decree is erroneous because the effect is to give to the minority their pro rata share in the new Houston Company without their having made any contribution towards satisfying the floating indebtedness of the old; whereas, the floating debt creditors had a claim against the property
Eighth. Objection is made by the Southern Pacific to the terms of the decree also on the ground that, in requiring distribution of stock in the old Houston Company to the minority stockholders instead of providing merely for an accounting and compensation in damages, the decree imposes upon it a heavy and unnecessary hardship. This it is said will result from the fact that all the stock of the new Houston Company (except seventeen shares to qualify directors) has been pledged by the Southern Pacific as part collateral for an issue of thirty-five year 4 per cent. bonds to the amount of 250,000,000 francs; and that by reason of a clause in the collateral agreement, by which the Southern Pacific covenants that it is the lawful owner of the securities and that they "are not subject to any prior pledge, charge or equity," a decree requiring distribution of stock to the minority stockholders may conceivably entitle the trustee for these bonds to declare them due; that such default might preclude it from withdrawal of the stock and from substituting other collateral; and that, in any event, if substitution of collateral is permissible, additional securities will have to be deposited, because the agreement provides that in case of withdrawal of any
Ninth. The Southern Pacific objects to the terms of the decree also on the ground that if the minority stockholders
The Southern Pacific asserts that the Morgan Company was and still is its subsidiary; that it owned and now owns a large part of the stock of that corporation; and that through such stock ownership it is, in effect, a large floating debt creditor of the old Houston Company. It suggests also that it has paid out monies to protect the property of the new company from other floating indebtedness. If the Southern Pacific had been allowed to retain all the stock in the new Houston Company, it would obviously lose nothing by the wiping out of its interest in the floating indebtedness of the old company; and any
The Circuit Court of Appeals recognized that there was great force in this contention of the Southern Pacific, but overruled it because it "was never raised in the case by pleading or otherwise until an exception was taken to the report of the special master" and because "there is nothing in the record to show what, if anything, the Southern Pacific Company did give up." The memorandum filed by the district judge on settlement of the interlocutory decree indicates that some such contention was made then. At all events it was clearly made before entry of the final decree; and it does not appear that the minority stockholders were in any way prejudiced by the failure to make the exact contention earlier. There is no reason to believe that the parties cannot determine now, as easily as they might have done a few years ago, to what extent the floating indebtedness due the Morgan Company represents money in effect expended by the Southern Pacific for the benefit of the old Houston Company and to what extent the wiping out of any indebtedness and any expenditure made by the Southern Pacific in connection therewith will enure to the benefit of such of the minority stockholders of the old company as receive stock in the new. Some adjustment should obviously be made so as to compensate the Southern Pacific for any contribution made at its expense to the value of the stock in the new company of which the minority stockholders
Tenth. The Southern Pacific objects to the orders permitting Gernsheim and the estate of Minzesheimer to intervene after the entry of the interlocutory decree, and objects also, to the final decree, in so far as it declares these interveners entitled to the relief granted other
Eleventh. The certiorari and return were filed May 3, 1918. On October 8, 1918, separate petitions were filed in this court by Henry J. Chase, by Fergus Reid, by Albert M. Polack, by Francis P. O'Reilly, and by The Corn Exchange Bank, alleging that they were respectively owners of stock in the old Houston Company and praying leave to intervene and that they be permitted to share in the benefits of the decree or, in the alternative, that they be permitted to make such application to the District Court. Action on these petitions was postponed to the hearing of the case on the merits. As the case must be remanded to the District Court for further proceedings as above stated, we deny these several petitions without expressing any opinion on their merits and without prejudice to the right to apply to the District Court for leave to intervene and to share in the benefits of the decree.
Decree modified and cause remanded to the District Court for further proceedings in conformity with this opinion, the costs in this court to be equally divided between the parties.
THE CHIEF JUSTICE took no part in the consideration or the decision of this case.
It seems to me quite clear that the judgment below is wholly wrong. Respondents' complaint should be dismissed.
This suit was brought in 1913, some twenty-five years after those who complain came into possession of all material facts. During that period they were parties or privies to suit after suit — the first begun in 1889 and all unsuccessful — which sought to upset what petitioner had done because of its actual fraud.
The original bill or complaint in the present cause alleges: — "As soon as the terms of the said Reorganization Agreement were announced and published,  S.W. Carey, Cornelius MacArdell, Walter B. Lawrence, plaintiffs' testator, and other stockholders of the Railway Company protested against the terms of the said agreement, claiming that it practically gave the Railway Company to the Southern Pacific Company in fraud of the individual stockholders." "Immediately after the entry of the said Consent Decree of May 4th, 1888, the said Carey, MacArdell, Lawrence and other stockholders of the said Railway Company formed a committee of stockholders to protect themselves from the frauds committed and proposed to be committed by the Southern Pacific Company under the said Reorganization Agreement and Consent Decree, and said committee of stockholders employed as counsel, Frederic R. Coudert, Edward M. Shepard and A.J. Dittenhoefer of New York City, Jefferson Chandler of St. Louis, and later on H. Snowden Marshall, Russell H. Landale, and David Gerber, and from the commencement of their first suit [December, 1889] hereinafter mentioned, to the present day, the firm of Dittenhoefer, Gerber & James has been their attorneys of record."
Having long emphatically condemned, attacked, and sought without success to annul petitioner's action, respondents
First. They are barred by laches. Rational men are presumed to know the law; knowledge of consequent rights and appropriate means of asserting them is necessarily implied from full acquaintance with the facts. Respondents' attempt to rely upon an alleged belated discovery of a well known remedy after years of litigation conducted in full view of all the circumstances, affronts both established principles and common experience. And this is emphasized by the names of distinguished counsel who have continuously represented the minority stockholders since 1888.
"Nothing can call a court of equity into activity but conscience, good faith, and reasonable diligence; and when a party with full knowledge of the facts, acquiesces in a transaction and sleeps upon his rights, equity will not aid him." Hayward v. Eliot National Bank, 96 U.S. 611.
Due diligence in asserting a constructive trust is incompatible with persistent denial of such relationship after full knowledge of all the circumstances and a furious chase for twenty-five years in the opposite direction by the soidisant beneficiary.
Second. Certainly the petitioner never consciously undertook to act as respondents' trustee — for years nobody seems to have thought any such relation existed. When the latter obtained full information of the real facts