Shadford v. Detroit, Etc., Railway , 130 Mich. 300 ( 1902 )

(after stating the facts). 1. The defendant and the several other organized companies involved in this controversy were organized under the tram or street railway acts, and not under the railroad law of the State. It is urged that the acts under which these companies were organized do not authorize a consolidation, and that, therefore, any attempted consolidation would be illegal and void. In this case the conclusive reply to this proposition is that the defendant is not in position to raise the question. If there was in fact a consolidation between the Ann Arbor Street-Railway Company and the Ann Arbor Ypsilanti Street-Railway Company and the Ann Arbor Ypsilanti Electric Railway Company, and between the last company and the defendant, the latter cannot deny its liabilities, either for contracts or torts, or its liability resulting from such consolidation, upon the plea that its organization is illegal. The legality of its organization cannot be attacked collaterally in suits by and against it, based upon dealings with it. Its legality can be attacked only in a direct proceeding by the State for that purpose. So long as the State chooses to recognize its validity by keeping silence, it is a corporation de facto, though not de jure, and liable the same as any other corporation in its dealings with others.Swartwout v. Railroad Co., 24 Mich. 389, and note; HallManfg. Co. v. Railway Supply Co., 48 Mich. 331 (12 N.W. 205);Coe v. Railway Co., 31 N.J. Eq. 105; Washburn v. County ofCass, 3 Dill. 251 (Fed. Cas. No. 17,213); Tarpey v. SaltCo., 5 Utah, 494 (17 Pac. 631); Bell v. Railroad Co., (N.J. Ch.) 10 Atl. 741, and note; Whitney v. Wyman, 101 U.S. 392.

2. Did the transactions between these companies constitute consolidations or sales? It is manifest that the Ann Arbor Ypsilanti Electric Railway Company was organized for the purpose of uniting the two old organizations under one management, or of absorbing them, and taking over to itself all their properties and business. It exercised no other function, and evidently it was not the intention to construct a new road between Ypsilanti and Ann Arbor. It did nothing but to absorb these roads and run them as one. The stockholders, managers, and directors of the old companies were the parties who created and organized the electric company, and who transferred all the stock to the new company. The directors of the two old companies all became stockholders in the new, and most of them as well bondholders. The electric company paid not a dollar to the other companies as compensation for the transfers of all their properties to it. The arrangement left the two old companies without assets and without business. They were virtually out of existence by the arrangement. They had not only disposed of all their property, but all the business which they were organized to do. Under defendant's contention, their creditors had no remedy except by suit in equity to compel the stockholders to pay assessments to the full value of their stock, or to reach the stock and bonds of the electric company which had been received by the stockholders of the old companies, upon the theory that they were assets of those companies. If the stock was fully paid, such proceedings would be valueless. Whether the stock in the electric company, in the hands of the stockholders who had been stockholders in the Ann Arbor Company, could be reached by a proceeding in equity, is a doubtful question, but it is unnecessary to discuss it. We think that the law will not permit such a transaction upon the theory of a sale. Those who managed the transaction evidently thought so too; otherwise they would not have taken the precaution to take a bond from the Ann Arbor Street-Railway Company to indemnify the electric company against the plaintiff's claim. Every layman knows that by the purchase of property the vendee does not assume the vendor's debts, and that this rule applies as well to corporations as to individuals. Mr. Beach says:

"The word `consolidation' is used to denote any conjunction or union of the stock, property, or franchises of two or more corporations, whereby the conduct of their affairs is permanently, or for a long period of time, placed under one management, whether the agreement between them be by lease, sale, or other form of contract, and whether its effect be the dissolution of neither of the companies, or whether one of them be dissolved and its existence be merged in the corporate being of the other, or whether it result in the dissolution of both companies, and the creation of a new corporation out of such portions of the original companies as enter into the new." 1 Beach, Priv. Corp. § 326.

We are of the opinion that each transaction was a consolidation in fact, or, as it is termed in England, an "amalgamation." The law will not permit the creditors of two corporations to be deprived of the assets of such corporations in payment of their debts, and turn then over to suits in equity against the stockholders, when the union or consolidation with another corporation is effected without the passage of a dollar or other valuable consideration between the corporations themselves. The effect here is precisely the same as though the stockholders of the Ann Arbor Street-Railway Company and of the Ann Arbor Ypsilanti Street-Railway Company had united to form the electric company, and had pooled their stock and bonds into the one company. The purpose and result of both proceedings would have been the same. Chicago, etc., R.Co. v. Ashling, 56 Ill. App. 327; Hurd v. Steam LaundryCo., (Sup.) 60 N.W. Supp. 813. Not a dollar was paid, in either of these consolidations, into the treasury of those companies whose existence was thereby terminated. What we said in Grenell v. Gas Co., 112 Mich. 70 (70 N.W. 413), is equally applicable here:

"A corporation cannot sell all of its property, and take in payment stock in a new corporation, under an arrangement that has the effect of distributing the assets of the vendor among its stockholders, to the exclusion and prejudice of its creditors."

Even if this were a purchase, it was a purchase under similar circumstances to those in the Grenell Case, wherein we held that the purchase was subject to the rights of creditors.

3. It is also contended that the Ann Arbor Street-Railway Company was insolvent, and that therefore plaintiff was not prejudiced by the consolidation or transfer. The consolidated company cannot raise this question. The question is not whether either of the old companies was solvent or insolvent, or whether both were solvent or insolvent. By the consolidation the new company is burdened with the debts of the old, and the sole question then is, Has the new company sufficient assets to pay its debts, which then include those of the old companies?

The judgment is affirmed.

HOOKER, C.J., MOORE and MONTGOMERY, JJ., concurred. LONG, J., did not sit.