As thus seen, the question which will be presented for our determination on the trial of this case is one of the greatest importance. We express no opinion upon it, but invite for it the most thoughtful consideration of counsel. And in their discussions the control of the state over corporations of its creation, where a reserved power of amendment is embodied in their charters or imposed by the constitution, should be considered. The general tendency of modern decisions is to treat corporations with this reserved power as subject at all times to the will of the state as to their rights, powers, and liabilities. Such unlimited control, asserted in some cases, would, indeed, lift them not only out of the protection of the fourteenth amendment, but also out of nearly all protection, except such as the legislative pleasure of the hour may permit.

The motion to remand is denied.

TAYLOR v. S. & N. ALABAMA R. Co. and another.

(Circuit Court, M. D. Alabama. 1882.)

1. CORPORATIONS-CONTRACTS OF.

Contracts, which though invalid for want of corporate powers, yet if fully executed, shall remain as the foundation of rights acquired by the transaction. 2. SAME RIGHTS OF STOCKHOLDERS.

A stockholder of a corporation will not be allowed, after a reasonable time, to disturb and rescind a contract made by his corporation, after the same has been fully executed, on the ground that it is ultra vires, and in excess of the corporate powers granted by the charter of the corporation.

3. SAME.

Where a corporation issued preferred interest-bearing stock in excess of its authority, non-assenting stockholders must, within a reasonable time, dissent, and take steps to make their dissent effectual, or they will be held to have tacitly assented to the act of the corporation.

4. STATUTE OF LIMITATIONS-DISCOVERY OF FRAUD.

In actions seeking relief on the ground of fraud, where the statute of limitations has created a bar, the cause of action is not considered as having accrued until the discovery by the aggrieved party of the facts constituting the fraud complained of; but this does not absolve him from all effort or diligence to obtain such knowledge, and facts of which he might have obtained knowledge had he sought it from its natural sources of information which were at his command, will be deemed within his knowledge.

5. CORPORATE PROPERTY-CAPITAL STOCK.

The property of a corporation is a trust fund for the benefit of the stockholders in the hands of a corporate body, which is the trustee; but capital stock in the corporation in the hands of its owner, who has paid for it, is neither a trust fund, nor is its owner a trustee, and statutes of repose run to protect such owner in his right to such property.

In Equity. Heard upon demurrer to amended bill.

BRUCE, D. J. The amended bill assails the title and right of the Louisville & Nashville Railroad Company to the two millions capital stock in the South & North Alabama Railroad Company, issued to the Louisville & Nashville Railroad Company, as the successor and assignee of Tate and associates in their contract with the South & North Alabama Railroad Company, for the building and equipment of their road-the South & North Alabama Railroad.

By the terms of the contract between the South & North Alabama Railroad Company and Sam Tate and associates, of date March 21, 1871, it agreed to "issue to Sam Tate and associates, at 40 cents on the dollar, preferred stock bearing 6 per cent. interest, guarantied payable in kind from date of issue for 12 months after the completion of the road, and thereafter in cash.

*

By contract of May 19, 1871, which recites the assignment and transfer to the Louisville & Nashville Railroad Company of the contract of Sam Tate and associates with the South & North Alabama Railroad Company for the consideration therein named, the Louisville & Nashville Railroad Company "assumes and binds itself to perform all the obligations imposed by said contracts on said Sam Tate and associates.

* "

And by contract of same date-May 19, 1871-between the two railroad companies named, the South & North Alabama Railroad Company agrees that it will issue to the Louisville & Nashville Railroad Company the said $2,000,000 of preferred or interest-bearing stock specified in said contract with Sam Tatę and associates, if legally entitled to do so.

These contracts are made exhibits to the amended bill. The proposition of the complainant is that the South & North Alabama Railroad Company had no power under its charter to issue this two million of preferred or interest-bearing stock, and that its issue to the Louisville & Nashville Railroad Company was a fraud upon the other stockholders of the corporation who held common stock; that the issue was a fraud upon the law, is void, and confers no right upon the Louisville & Nashville Railroad Company to hold and own said stock.

To this amended bill the respondents, the Louisville & Nashville Railroad Company and the South & North Alabama Railroad Company interpose demurrers, and as they raise, substantially, at least, the same questions, they may be considered together. Many causes of demurrer are assigned, but the questions raised go mainly to the right and title of the Louisville & Nashville Railroad Company to

hold the two millions of stock in question, and to the legal right of the South & North Alabama Railroad Company to issue the preferred interest-bearing stock, which it is alleged it contracted and agreed to issue and did issue to the Louisville & Nashville Railroad Company. The demurrers also raise the question that even if the issuance of the stock was ultra vires and in excess of the powers granted by the charter of the South & North Alabama Railroad Company, that the contract being now a fully executed one, a court of equity will not at the suit of stockholders disturb the contract which has now become the foundation of the rights of the parties.

The question of the statutes of limitation of six and ten years of the state of Alabama is also raised, and held to bar the relief sought by the complainant in his amended bill, and that the complainant is chargeable with laches, and must be held to have acquiesced in the wrongs of which he now complains, and that his conduct since the issuance of the stock in question works an estoppel upon him in the matters as to which he now seeks relief.

Much argument has been made and many authorities cited to show that the South & North Alabama Railroad Company, under what are claimed to be the very ample powers given in its charter, had the right to issue interest-bearing stock at 40 cents on the dollar, as it did do, and that in so doing it did not act ultra vires of its charter powers, but within them; that such issue of capital stock was but a mode of borrowing money, which it had express power to do, and that the stock was assets of the corporation, and the directory who were authorized to manage the affairs of the said company had the power to dispose of it upon the best terms possible, to the end that the purpose and object of the corporation might be accomplished.

It is also claimed that as it is not alleged that the directory acted unfairly or in bad faith, and that they did not get all the stock was worth at that time, that a court of equity will not disturb the transaction.

It is not deemed necessary to discuss and pass upon these questions, and others which have been pressed upon the court in argument, because the case must turn upon the proposition that this contract for the issuance of the stock in question is an executed contract made in May, 1871, and by the allegations of the bill the stock was actually issued, delivered, and paid for in the year 1871, and since that time, which is more than 10 years prior to the filing of the amended bill, the respondent, the Louisville & Nashville Railroad Company, have held and voted at the meetings of the stockholders of

the company this stock, and the complainant, a stockholder in the company, took no steps during all this time, and instituted no proceeding to enjoin his company, or in any way to prevent the evils or obtain redress for the wrongs of which he now complains.

Admitting that the South & North Alabama Railroad Company had no authority under its charter to issue this stock, and that the Louisville & Nashville Railroad Company had no authority under its charter to purchase and hold it, still, the charters of the respective companies did not forbid it, and the rule is, that contracts which, though invalid for want of corporate power, yet, if fully executed, they shall remain as the foundation of rights acquired by the transaction. Authorities upon this point are numerous; a few only are cited: Hitchcock v. Galveston, 96 U. S. 351; Nat. Bank v. Graham, 100 U. S. 699; Nat. Bank v. Mathews, 98 U. S. 621; Spring Co. v. Knowlton, 103 U. S. 60; Thomas v. Railroad Co. 101 U. S. 82, in which it is said: "The executed dealings of corporations must be allowed to stand for and against both parties when the plainest rules of good faith require it."

I think that reason and authority alike sustain the proposition that a stockholder of a corporation will not be allowed after a reasonable time to disturb and rescind a contract made by his corporation after the same has been fully executed, on the ground that it is ultra vires, and in excess of the corporate powers granted by the charter of the corporation. It is to be observed, however, that the case at bar is not simply a case of the exercise of power in excess of that granted in the charter of the corporation, but it is a case in which the matter complained of is the issue by the corporation of preferred interestbearing stock, guarantied at 40 cents on the dollar to the amount of $2,000,000, for which only $800,000 was paid.

The proposition of the complainant is that such a transaction is in itself a fraud-a fraud upon the other stockholders of the company who hold common stock; and that an issue of such stock is not only voidable, but void--a fraud upon the law. In support of this proposition a number of authorities are cited: Burke v. Smith, 16 Wall. 395; Sturges v. Stetson, 1 Biss. 246; Fosdick v. Sturges, 1 Biss. 256.

The proposition that any action of a corporation which gives to one class of its stockholders a preference over another class in sharing the earnings of the corporation is a violation of the rights of the holders of non-preferred stock, and is illegal, seems to be sustained both upon reason and authority; but may not such illegality be cured by the assent, express or implied, of the holders of non-preferred

stock? Does the case of Sturges v. Stetson, cited supra, which holds such action to be a fraud upon the law, go so far as to hold that it is a fraud which cannot be condoned or cured, and that no conduct on the part of the holders of the non-preferred stock will work an estoppel upon them in making objection to it? What is the true quality, legal, and moral, of the issuance of preferred stock, such as the stock in question, by a railroad corporation with the charter powers of the South & North Alabama Railroad Company? Can it be said that such a transaction involves actual fraud and moral turpitude; that it is in violation of public policy, and fraught with harm to the state? By act of February 26, 1872, the law-making power of Alabama amended the charter of the South & North Alabama Railroad Company, and provided that the "capital stock of said company should be $3,000,000, or more if required, of which the sum of

$2,000,000 might be issued as preferred stock, the same to be made up of shares of $100 per share.”

I am not now speaking of the effect of this amendment, except to say that certainly the legislature of Alabama did not intend by this act to authorize this railroad company to do that which was a violation of public policy, or to shield the company and its officers from responsibility for having done that which was wrong in itself and an actual fraud.

The phrase "fraud upon the law," used in the opinion of the court in the case of Sturges v. Stetson, cited supra, must mean no more than that the issue of preferred stock, under the circumstances there stated, is in violation of the principle of equality of right among stockholders of a corporation who unite their capital upon equal terms in a common enterprise, and are therefore entitled to share equally and without preference in the profits or avails of the enterprise.

The issue of the preferred stock in question was not forbidden by the charter of the corporation; it was not in violation of any statute law, was no public evil, and did not affect the state to its harm, and if wrong and without legal justification, it was so only because it affected injuriously the private rights of the stockholders of the corporation who held common and non-preferred stock. The fact, then, that this issue of stock was preferred stock, does not take the case out of the rule that non-assenting stockholders in the corporation, if they do not in a reasonable time dissent and take steps to make their dissent effectual, they will afterwards be held to have tacitly assented. to the act. To this proposition there is not only reason, as I have attempted to show, but there is authority in the case of Hazelhurst v.