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with any view to their use in proceedings of this character. Upon this bill and answer a temporary receiver was appointed on August 29, 1916.

Under date of September 5th a stockholders' meeting was called to see what action the stockholders of the respondent would take with reference to the bill of complaint and the proceedings of the board of directors regarding it, and their action in filing the answer above referred to. The call for the meeting was broad enough to bring the conduct of the directors in reference to the receivership up for action by way either of disaffirmance or ratification. The meeting was held on September 19, 1916. By a vote of 325,000 shares to 8,000, the action of the directors was fully ratified. No sufficient reason has been shown why the stock owned by the Boston Holding Company (i, e., that controlled by the federal trustees, amounting to 225,000 shares) should not be considered on this vote. But, even if it be disregarded, more than 10 times as many shares voted to ratify the action of the directors as voted against such ratification.

[1] From the foregoing statement it is clear that the receivership proceedings were in reality brought about by the respondent itself. Its representatives, in doing so, acted after careful consideration, in entire good faith, and in the belief that a receivership was the best, if not the only, course open to the respondent in the circumstances in which it was placed; and their action was approved by the stockholders. The minority stockholders do not contend that they are being treated differently from the other stockholders. No disadvantages are being imposed on them which are not also imposed on the majority. No advantages are being received by the majority stockholders which are not equally shared by the minority stockholders. There is no suggestion that the owners of the majority stock are profiting in any way at the expense of the minority.

It is said by the objecting minority that one purpose which the directors had in mind in bringing about a receivership was to accomplish a reorganization of the company; that most of the directors have expressed approval of the principle of a certain plan of reorganization; that this plan is grossly unfair to the common stockholders of the respondent; and that a receivership is asked for as a means of coercing them into acceptance of it. There is no dispute that the directors regard a reorganization of the company as essential, nor that the majority of them are in accord with the outlines of a plan for such reorganization, nor that, after the hope of legislation was abandoned, a receivership was sought in part for the purpose of making it easier to accomplish a reorganization. That there was any intent on the part of the directors, or of the majority stockholders, to coerce the minority into such a reorganization through a receivership, is not established. Judge Knowlton, who is strongly opposed to the proposed plan of reorganization and has publicly stated his dissent therefrom, advised receivership and voted for it as a director,

The proposed plan of reorganization is in no sense fraudulent; under it the objecting stockholders are treated exactly like all other common stockholders. They object to it, not because of inequality or

discrimination in the treatment accorded them, but because in their judgment the respondent can go on without a reorganization, and because they fear an unfair reorganization. It is not to be overlooked that under a receivership the affairs of a corporation are, to a considerable extent, under the control of the court; and it is at least probable that the power of the court could be so exercised as to prevent an oppressive and unjust reorganization, if that were attempted. The management of a corporation rests with the owners of the majority of the stock. So long as they act honestly, they are entitled to carry out their judgment on business questions which arise, and in business difficulties to take such course as they deem best. The case presents to my mind nothing but an acute difference of opinion upon a matter of business policy and action between the directors and the owners of an overwhelming majority of the stock on one side and a comparatively small, but contentious, group of minority stockholders on the other, who appear to have resorted to charges of "fraud" or of "breach of duty” in an effort to obscure the exact nature of their real complaint.

The majority of the stockholders were not obliged, as a matter of law, to wait until the corporation was actually in default in the payment of its notes, and its property had perhaps been attached on mesne process for large amounts, nor to make efforts to secure further extensions which they believed it unwise, and perhaps unfair to noteholders, to ask for, before applying for a receiver. They had the right, if not the duty, to consider, not merely the present emergency, but the future conduct of the company's business, and its performance in a proper way of its duties to the public as a common carriera point to which the minority interests pay insufficient attention, as it seems to me. Whether the directors alone had power, without express authority from the stockholders, to initiate proceedings looking to the appointment of receivers and to the transfer of the corporation's property from its own hands to those of a receiver, it is not necessary to determine, because what the directors did in that respect was fully and completely ratified by the stockholders.

It is still true that, even if the directors and the majority of the stockholders acted in good faith and, as they believed, for the best interests of the corporation, the court is not absolutely bound to appoint a receiver as prayed for. It might, in the exercise of its discretionary power, refuse to do so, if confident that there was no real necessity for such action, and that the application was improvidently and unwisely made. The facts above stated sufficiently indicate that this is not such a case. Upon the facts as they appear, a receiver for the purposes of the bill ought to be appointed. The complainant may present a decree on due notice to other parties.


(District Court, D. Massachusetts. April 17, 1917.)

No. 744.



It is the duty of a temporary receiver of a railroad company to preserve the property in statu quo as nearly as practicable, and where the defendant had recognized its obligation under the lease of a leased line to pay interest on notes of the lessor, and the failure to pay maturing interest would raise a serious question of the right of the lessor to forfeit.the lease for such nonpayment, the receiver may properly be instructed to advance the money to the lessor to make such payment, reserving the right to a permanent receiver to disaffirm the lease, and to all parties in interest to litigate any question arising out of it in the further progress of

the case.
In Equity. Suit by the Intercontinental Rubber Company against the
Boston & Maine Railroad. On receiver's petition for instructions.
Instructions given.

Boyd B. Jones, of Boston, Mass., for plaintiff.
George L. Mayberry, of Boston, Mass., for defendant.

MORTON, District Judge. The temporary receiver petitions for instructions whether he shall pay interest on certain notes issued by the Connecticut River Railroad Company. At the hearing before me counsel appeared and were heard for the Connecticut River Railroad Company, for the commonwealth of Massachusetts, for the complainant, and for the respondent; and Mr. French, counsel for old and large stockholding interests in the Boston & Maine Railroad, was asked by the court to present his views as an amicus curiæ, and did so.

The facts are substantially as stated in the receiver's petition. The notes in question, amounting to $2,000,000, were issued by the Connecticut River Railroad Company, bearing date of July 1, 1914, payable in one year, to the order of the maker. They were indorsed by it and turned over to the Boston & Maine Railroad, by which they were negotiated. They have been extended from time to time.

The circumstances which led to the issue of the notes were as follows: The Boston & Maine Railroad holds the property of the Connecticut River Railroad Company under a long-term lease, under which it had the right to make improvements and additions, which were to be paid for by the lessor. The Boston & Maine Railroad made improvements, for which it paid about $500,000, and as to the legality and propriety of which no question is now made. It also constructed an extension of the lessor's railroad from Dole, N. H., to Brattleboro, or rather to the Vermont line, near Brattleboro, at a cost of about $1,500,000. By the terms of the lease the lessee was to be paid for such expenditures, assuming them to be proper, by the issue of "stock or bonds” by the lessor. When the lessee called upon the lessor for the repayment of the expenditures referred to, both of them agreed

For other cases see same topic & KEY-NUMBER in all Key-Numbered Digests & Indexes

that it was an inopportune time for the lessor to issue stocks or bonds. They both agreed, therefore, to the issue of short-term notes, which resulted in the indebtedness now before the court. The Boston & Maine Railroad is not a party to these notes, which are an obligation of the Connecticut River Railroad Company alone.

Under the lease the lessee agrees to pay the interest on stock or bonds issued by the lessor in repayment of expenditures by the lessee; and there is a right of immediate forfeiture and re-entry reserved to the lessor for the lessee's failure to make such payments. As to certain other indebtedness of the lessor, arising during the continuance of the lease, and as to the payment of which the lessee is under certain obligations, there is no right of immediate forfeiture for the lessee's failure.

It is contended by the Connecticut River Railroad Company that the notes in question are covered by the word “bonds” in the lease, and that, if the interest on them be not paid, the Connecticut River Railroad Company will have the right to terminate its lease. On the other side, it is contended by the commonwealth, as a large creditor of the Boston & Maine Railroad, and by Mr. French, that railroad bonds stand on a very different footing, under our law, from notes for a term of one year or less, and that when the lessor and lessee agreed to an issue of notes, instead of stock or bonds, they must have understood that no right of forfeiture for nonpayment of interest would exist in favor of the lessor under the lease. This is also the view of the respondent.

Mr. French goes much farther, and suggests that the expenditure of $1,500,000 for the Brattleboro extension was unauthorized by law, and was illegal; that the present notes, having been issued for the purpose of obtaining funds to make an illegal payment, are invalid; and that the receiver ought to be instructed to pay neither interest nor principal on them.

The suggestion seems premature. The petitioner for instructions is only a temporary receiver. As such it is his duty to keep the property along in substantially the same condition as he finds it. To some extent this may require new work in carrying out policies previously entered upon; but, generally speaking, his proper function is to preserve things in statu quo as nearly as practicable. Prior to the receivership the Boston & Maine Railroad had been paying interest on the indebtedness represented by these notes and treating it as a valid obligation. The temporary receiver has been paying, without prejudice to anybody's rights, and without in any way binding the respondent, sums equal to the rentals under the various leases, and to interest or dividends where payments thereof were included as rent under leases.

While the contention that these notes are not “bonds," and that there is no right of forfeiture for failure to pay interest on them, has much to support it, it cannot be said that there are not weighty arguments the other way. It is obviously undesirable to pass on the validity of the notes without having the holders of them in court, so as to be heard and be bound by the decision, if adverse to them. The temporary receiver ought not to take any step which might result in changing the

situation of the respondent in such a vital matter as the cancellation of this lease. As between paying a sum equivalent to rent, which might perhaps be avoided, and refusing to pay it and thereby perhaps forfeiting the lease, the former is, in my opinion, the alternative which should be taken by him.

Without passing on the validity of the notes in question or deciding whether nonpayment of the interest here in question would give the lessor an immediate right of forfeiture and re-entry, and without prejudice to the rights of any party to raise again all questions presented by this petition for instructions, the receiver will be instructed to tender to the Connecticut River Railroad Company a sum equal to the interest on the notes in question. Said sum is to be paid and received under an express agreement that such action by the temporary receiver is not an affirmance or adoption of the lease, and is not to alter or affect any rights either of the respondent, the receiver, or the Connecticut River Railroad Company, under or growing out of the lease in question.

(District Court, N. D. Ohio, E. D. September 11, 1917.)



Even though an assignment or transfer of a lease by a partnership to one of its members was not a breach of the covenant therein against assignment without the lessor's consent and gave the lessor no right to avoid the lease, the assignee nevertheless took the lease subject to such cove



An adjudication in bankruptcy against a partnership operates as a transfer to the trustee by operation of law of a lease held by one of the partners, within a covenant in the lease authorizing the lessor to avoid the lease and retake possession if the lessee should become bankrupt, or if the lease should pass by transfer, operation of law, or otherwise from the lessee to any other party without the lessor's written consent, even though the partnership alone, and not the members of the firm, was ad



A lease may be so framed that a transfer by operation of law will

avoid it, at the lessor's option. 4. LANDLORD AND TENANT C112(1)-TRANSFER OF LEASE-WAIVER OF FOR


Where the receiver in bankruptcy of a partnership was in the possession of leased premises from the date of the filing of the petition until possession was taken by the trustee, and the lessor did not assume any position inconsistent with his right to avoid the lease, or do any act which could be construed as waiving such right, but notified the partnership and the members thereof of his election to avoid the lease, and appeared and filed an answer claiming that the lease had been forfeited, and asked for an order surrendering the premises to him, he did not waive his

right to avoid the lease under a provision therein authorizing him to avoid For other cases see same topic & KEY-NUMBER in all Key-Numbered Digests & Indexes

245 F.-9

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