Opinion
07-12-1912
JONES v. YOUNGSTOWN-SHARON RY. & LIGHT CO.
John Mulford Enright, of Jersey City, for complainant. McCarter & English, of Newark (Leighton Calkins, of counsel), for defendant.
Suit by E. Clarence Jones against the Youngstown-Sharon Railway & Light Company. On application for inspection of books. Denied.
John Mulford Enright, of Jersey City, for complainant.
McCarter & English, of Newark (Leighton Calkins, of counsel), for defendant.
EMERY, V. C. This is a suit brought by the holder of 1,500 shares of stock of the Youngstown-Sharon Railway & Light Company, a New Jersey corporation, against this company, and also against another, the Mahoning & Shenango Railway & Light Company, a Pennsylvania corporation, which owns all the balance of the stock—over 20,000 shares. The individual directors of the Youngstown Company are also defendants, together with a trust company, which is alleged to control the stock of the Mahoning Company, the majority stockholder. The complainant's company is a holding company purely; and the gravamen of the bill is that the majority stockholder, in connection with and by means of its control over the Youngstown & Sharon Railway & Light Company, is wrongfully refusing to declare dividends upon its stock, and is diverting the assets of this complainant to the benefit of subsidiary companies owned or controlled by the Mahoning Company. The acts complained of in the bill, against which relief is claimed, are:
(1) The setting aside of $300,000 as working capital up to February 1, 1909, and the accumulation since that date of further earned profits. As to this, it is alleged that in the carrying on of the business of the Youngstown Company, which is purely a holding company, no substantial working capital is required, and the retention of this sum is wrongful and ultra vires.
(2) That this working capital so set aside has been loaned to the subsidiary companies of the Mahoning Company and of the Youngstown Company.
(3) That the Youngstown Company has, in addition, loaned its credit to these subsidiary companies by borrowing money on its own obligations, and taking in return for the money so loaned the securities of the subsidiary companies. The amount so loaned,up to the end of 1909, is stated in the bill to have been $1,233,327.79, and has been Increased up to the filing of the bill (October 7, 1910). This method of financing is charged to be the conducting of a banking business ultra vires.
(4) The deposit of the securities of the subsidiary companies with the trust company defendant as subject to liens of two certain collateral trust mortgages given by the Youngstown Company to the trust company. This deposit is charged to have been voluntary, and without consideration.
(5) The guaranty by the Youngstown Company of the bonds of one of the subsidiary companies to the amount of $500,000 which is charged to be illegal and ultra vires.
The above are the specifications made in the bill under the general charge that the management of the company under the control of the majority stockholder has been conducted for the purpose of depreciating the value of the complainant's stock, and compelling him to sell or exchange the same.
Discovery was asked as to all these charges, and the answer of the defendants, admitting the reservation of working capital, as alleged, gives the amount, and also the additional earnings, as required by the answer. The legality of the reservation of working capital is insisted on. The amount of loans to subsidiary companies charged in the bill is also admitted, and the additional amounts loaned to these companies up to the time of filing the answer is also given by the answer. The loans are alleged to have been made for the purpose of enabling the subsidiary companies to make improvements and betterments on their properties, and to be legal and authorized under the charter of the Youngstown Company. The guaranty of bonds of the subsidiary company is admitted as charged, and its validity asserted. The deposit of the securities of the subsidiary companies with the trust company, and to subject them to the lien of the collateral trust mortgages, is also admitted, and is defended as being required by the terms of the mortgage, which is set out in the answer.
The discovery made by the answer has, as it seems to me, reduced the issues of fact in the case to issues that do not depend on the books of the company for proof of the complainant's case. The facts charged by the complainant as showing intention to wrong him, viz., the reservation of working capital, the loans of credit and surplus to the subsidiary companies, the method of financing these companies, the deposit of their securities with the trust company under the mortgages, and the guaranty of the bonds, are all admitted; and, for the purpose of proof of these facts alleged as the basis of relief in the bill, no preliminary examination of the defendant's books would seem to be necessary, in the absence of any allegation or proof that the answer on these points is not true.
The present application to order defendant to bring into this state all its hooks for complainant's inspection here does not, therefore, seem to be necessary for the purpose of preparing for trial on the issues which are involved on the bill and answer. The court, in acting on the present application, is acting under the thirty-first and thirty-second rules, relating to the inspection of papers, and, on determining what books, etc., relate to the merits of the suit or defense, is restricted to the merits and defenses set up in the pleadings on which the suit is brought on for hearing. These rules express the principle controlling the exercise of the general jurisdiction of the court over inspection of documents pending suit. Fuller v. Hollander & Co., 61 N. J. Eq. 648, 651, 47 Atl. 646, 88 Am. St. Rep. 456 (Err. & App. 1900).
Other objections to an order for inspection of the defendant company's books were based on matters of fact set up in the affidavits, which are claimed to show that the application is not made in good faith, and that full discovery and information has already been actually given to complainant or his agents. But, without passing upon these questions, I reach the conclusion that, for the reasons above stated, appearing in the bill and answer, the order for preliminary inspection should not be allowed. This applies not only to the application to inspect the defendant company's books, but also the books of companies not parties defendant, but alleged to be controlled by the majority stockholder, the Mahoning Company.
As the case, however, is one which had been previously referred to another Vice Chancellor for hearing, and is now before him, this order should be made without prejudice to any application to be made to him for such order upon or after the cause has been set down for hearing. The delay in bringing the cause to a hearing has been so considerable as to make it advisable that any further application for inspection should be considered only in connection with a proposed hearing.