St. Paul & Chicago Railway Co. v. McDonald

Exemption from Taxation — Swamp Land granted to Railroad — Contract to Sell. — By Sp. Laws 1865, e. 9, the swamp lands granted by the state to the St. Paul & Chicago Railway Company, to aid in the construction of its road, are subject to taxation whenever contracted to be sold, conveyed, or leased by the company. Same — Intention of Contract. — In determining whether a transaction constitutes a conveyance of these lands, equity will not permit its external form to control, but will look beyond the mere form or words of the contract on its face, and inquire into its real character. Same — -Contract Construed. — Upon the evidence in this case, held, that the transaction between the railway company and the Minnesota Railway Construction Company, although inform a mortgage, amounts in effect and substance to a conveyance of the lands in controversy, and hence that the same are subject to taxation within the meaning and spirit of the statute.

Plaintiff brought this action in the district court for Hennepin county, to restrain the defendants, the auditor and the treasurer of Hennepin county, from proceeding in the levy and collection or enforcement of taxes upon certain lands situated in Hennepin county, claimed by the plaintiff to be owned by it and to be exempt from taxation. The action was tried by Young, J., without a jury, and judgment was ordered for the plaintiff. Defendants appeal from an order refusing a new trial. The complaint, after alleging the creation and existence of the plaintiff corporation, under the laws referred to in the opinion, the exemption from taxation, the granting of swamp lands to aid in the construction of plaintiff’s railroad, and the statute authorizing the issue and sale of preferred stock, sets out that, on August 6, 1868, for the sole purpose of providing requisite means for the construction and equipment of its railway from St. Paul to Winona, no part of which had then been constructed except a portion of the grading between St. Paul and Hastings, the board of directors of plaintiff adopted the following resolution, viz.: “Whereas'it is necessary that the St. Paul & Chicago Railway Company, in order to provide the requisite means for the construction of the railway to connect the cities of St. Paul and Winona, should create a special preferred stock; * * * Now therefore, to this end, resolved that the St. Paul & Chicago Railway Company will create and issue, and does hereby authorize the creation and issue of, $3,000,000 of special preferred capital stock, divided into 30,000 shares of $100 each, which is hereby made, constituted and declared to be a special preferred railway and land stock, and shall represent and control and have the entire property of said railway company in and to all lands which have been or which shall hereafter be granted or donated to said company by the state or United States, or by any municipality, corporation or individual, not actually used and occupied or required for use and occupation by the railway track, or for right of way, gravel pits, or for station or depot grounds; and in addition to said special ownership of lands, the said special preferred stock and land stock shall be entitled to a dividend of ten per cent, per annum from the net earnings of the railway of each current year after payment of interest on all mortgage bonds, if the railway earn so much during the current year, and before the payment of any dividends to other class of stockholders.” (Then follow certain provisions as to the method and manner of paying this ten per cent dividend.) The complaint then alleges that under this resolution the plaintiff entered into the following agreement with the Minnesota Railway Construction Company for the building of said railroad, viz.: “This agreement, made and entered into this 6th day of August, 1868,” (the contract introduced in evidence bears date in dune, 1869, —the date stated in the opinion,) “by and between the St. Paul & Chicago Railway Company, party of the first part, and the Minnesota Railway Construction Company, party of the second part, both of said corporations being duly and legally incorporated under the laws of the state of Minnesota— “Witnesseth, that whereas the said St. Paul & Chicago Railway Company is desirous of securing the construction and equipment of its line of railway to connect the cities of St. Paul and Winona. “Now, therefore, in consideration of the premises and of the undertakings and promises of the said St. Paul & Chicago Railway Company herein set forth, the Minnesota Construction Company hereby agrees to obtain the necessary right of way and to build and equip said railway according to the directions, and in the manner and time which shall be prescribed by said railway company, so that the same, when completed, shall, upon the average, in every way equal in its construction and equipment the First Division of the St. Paul & Pacific Railroad, extending from St. Paul to Sauk Rapids. “The said St. Paul & Chicago Railway Company, in consideration of the premises and of the undertakings of the said Minnesota Railway Construction Company, hereby agrees to sell, transfer and assign, and by these presents does sell, transfer and assign, to said Minnesota Railway Construction Company, for building and equipping said railway as aforesaid, as follows, viz.: “First, $3,000,000 of the first mortgage land-grant bonds of the St. Paul & Chicago Railway Company, secured by mortgage or deed of trust to the Farmers’ Loan and Trust Company of the city of New York, dated February 1st, 1868, or an equivalent amount of similar first mortgage bonds, to be secured either by a new first mortgage on the same premises, or by a supplement or amendment of the present mortgage to said Trust Company. “Second, $3,000,000 of special preferred capital stock, which special preferred capital stock is to be limited to $3,000,000 in amount, and is to be created and issued under and in pursuance of an act of the State of Minnesota, entitled ‘An act to amend the charter of the St. Paul & Pacific Railroad Company,’ approved February 6, 1864; also ‘An act to amend certain laws relating to the St. Paul and Chicago Bailway Company,’ approved March 8, 1868, both of which laws are hereinbefore set out so far as they relate to said special stock, and also any other laws of the state relating to this subject, and shall give the holders thereof a preference from said railway company of ten per cent, per annum from the net earnings of said railway, and absolute separate ownership of all the lands which have been or which shall be hereafter granted to or acquired by said railway company, in aid of the construction of said railway, either by or from the United States, or by or from the State of Minnesota, or by or from any municipality or corporation or individual whatsoever, excepting lands used or necessary for right of way, gravel pits and depot purposes. “Third. All their right, title, and interest in and to any and all of the present capital stock of six millions ($6,000,000) of dollars of said St. Paul & Chicago Railway Company now outstanding, however the same may have been issued, whether hypothecated or held in trust or for any other purpose whatever. “Fourth. All gifts, donations, bounties or aids in any form or shape which have been or may hereafter be made or given by any person, corporation, municipality or state to aid in the construction of said railway. “It is mutually agreed that the road shall be built according to the directions and in the manner which shall be prescribed by the railway company, and that the construction company are to be paid and are to receive all their payments for the construction in advance, and that they are to assume the contracts heretofore made with Reynolds, Saulspaugh & Co., and Charles A. F. Morris, under which the road has been partly graded, and is to be completed ready for superstructure from St. Paul to a point near Hastings, a distance of about twenty miles.” The complaint further alleges that no use was ever made of said preferred special land and railway stock; that the construction company found it impossible to negotiate the same to raise funds to build the road, and on Feb. 3, 1871, while the road was unfinished and the contract unperformed, and the construction company was unable to perform this contract for want of funds and inability to raise funds, it submitted a proposition to the plaintiff to modify this contract so far as the preferred stock was concerned, and to relinquish all claims thereto, and receive in place thereof land grant and mortgage bonds for the same amount, secured by a mortgage from the plaintiff on the same lands, which proposition was contained in the following letter: “Minhesota Railway Construction Company, New Yoric, Feb. 3rd, 1871. “Hon. E. Rice, Preset, St. Paul & Chicago Ry. Co. “Dear Sir: By the terms of our contract with your company for the construction and equipment of the railway from St. Paul to Winona, we are to receive in part-payment $3,000,000 of special preferred stock, bearing ten per cent, interest per annum payable* from the earnings of your company, and representing the exclusive and absolute ownership of all lands donated to aid in building the railway, excepting the land used or necessary for right of way, gravel pits and depot purposes. “At the time of making the contract, June 29th, 1869, the capital stock of railway companies was, as compared with their mortgage bonds, a popular investment, and much sought after by persons investing in railway securities. This feeling has now entirely changed, very little capital is now seeking investment in railway securities of any kind, and we find the special preferred stock which you have heretofore issued to us almost useless in our hands. We cannot sell it at any price commensurate with its cost to us, nor can we borrow money by hypothecating it. Our capital, as you are aware, is $2,000,000. This is now substantially exhausted , by the cost of the work done and in progress to this time, and the road is not finished, nor can its construction and equipment be completed or anywhere nearly completed on our present capital. The bonds received by us have been used to secure this $2,000,000 of capital. ■ “We regret to say that if payment is to be made under our contract in the special preferred stock, we cannot build and equip the road as agreed; we cannot raise the necessary additional capital required. We do not propose to repudiate our contract, but we do propose to you to so modify and change it that instead of giving us the $3,000,000 of special preferred stock, you will allow us to return the same to you to be cancelled, and that you will give us in lieu thereof a land-grant mortgage bond of the same amount as the stock, and at the same rate of interest, and secured by a mortgage on all the lands the ownership of which is now represented by the special preferred stock. “This change will release your road from the ten per cent, interest on the special preferred stock, and will restore the ownership of the fee-simple title of the lands to the common stockholders of your company, who will then own the lands subject to the mortgage; it will enable us, as we hope and believe, to build and equip the road as per contract. “Minnesota Bail way Construction Co. “By Bussell Sage, “President.” That such proposition was accepted, and the original contract modified and changed by the following contract, viz.: “Whereas, The St. Paul and Chicago Bailway Company has paid to the Minnesota Bailway Construction Company, in part-payment of their contract made June 29, 1869, three million dollars of special preferred stock, having a preference of ten per cent, per annum upon the net earnings of the railroad, and an absolute ownership of the lands donated to aid in building said road, with exceptions as set forth in the original- contract, and “Whereas, The said Bailway Construction Company, for reasons given in a letter to the directors of the St. Paul and Chicago Bailway Company, dated February 3, 1871, are willing to and desirous of surrendering said special preferred stock to the St. Paul and Chicago Company, to be cancelled, and to receive in lieu thereof a mortgage upon all the lands donated to aid in building said line of railroad, to secure the payment of an indebtedness of three million dollars, bearing interest at the rate of ten per centum per annum, thus releasing the net earnings of the railroad from a liability of ten per cent, per annum. “Noio, therefore, in consideration of the premises, it is agreed by and between the parties to said contract, • “First, That said contract be so changed as that the said Minnesota [Railway Construction Company shall surrender to the St. Paul and Chicago Railway Company the said $3,000,000 of special preferred stock, and that the same shall be cancelled; that the St. Paul and Chicago Railway Company acknowledge themselves to be indebted under said contract to the Minnesota Railway Construction Company in the sum of three million dollars, with interest thereon at the rate of ten per cent, per annum from July 1,1871, until paid, which indebtedness they agree to secure by a mortgage .or trust deed, with all the usual covenants and guarantees, conveying and embracing all of their lands now had or hereafter to be acquired, donated to aid in building their railroad either by the United States or the state of Minnesota, or both, or from any other source, except land used or necessary for Tight of way, gravel pits or depot grounds. “Second, That the Minnesota Railway Construction Company hereby renew their obligation to build and equip said railroad as set forth in the original agreement, made June 29, 1869. In witness whereof,” ■etc. The complaint further alleges that the defendants pretend that the acts and proceedings hereinbefore set forth have rendered the lands •of plaintiff subject to taxation, and are proceeding to assess, levy and enforce taxes thereon. That such threatened proceedings are in •direct disregard of the contracts between the state and the plaintiff •company and its predecessors the St. Paul & Pacific Railroad Company'and the Minnesota & Pacific Railroad Company. That plaintiff and its predecessors have complied with all the provisions of the laws relating to the payment of taxes on gross earnings in lieu of taxes on its railway or land grant, and have regularly and in strict compliance therewith paid the per centum of their gross earnings into the treasury of the state of Minnesota as required by law, and that the plaintiff has no adequate remedy at law. . The answer denies that the land mentioned in the complaint has not been sold and conveyed or contracted to be sold, conveyed or leased by the plaintiff, and alleges that the same was sold and conveyed by the plaintiff long prior to the commencement of this action, and that in and by the agreement set forth in the complaint the land described, and all the other lands of the plaintiff, were sold and conveyed, and contracted to be sold and conveyed, to the said construction company. The answer further denies that said construction company found it impossible to negotiate the said special land and railroad stock, or that said road was unfinished or said contract unperformed, or that said construction company were unable to perform their contract for want of funds or inability to raise funds as alleged in the complaint or otherwise; and alleges that the sole object, intent and purpose of the parties in making such modified agreement was to retain or replace the normal title of said land in said plaintiff in trust for the sole use and benefit of said construction company, so that the same should escape taxation, and that it was never intended thereby to vest or re-convey to said plaintiff any beneficial or equitable interest or title therein or thereto. The answer admits all other allegations of fact contained in the complaint. The court found the following facts, viz.: That, at the time of the creation of said special preferred stock, the railroad had not been constructed and it did not appear that the lands had been selected by, and been conveyed to, the railroad corporation, as provided in all the granting acts; that after the execution of the contract of August 6, 1868, the construction company made no use whatever of the stock, nor did it appear that the certificates of stock were ever in fact issued and delivered to the construction company; that on or about February 3, 1871, the construction company, by agreement with the plaintiff, surrendered said special preferred stock, which was cancelled, and a mortgage on the lands named in the stock was executed and delivered to the construction company, as security for the building and equipping of the railroad; that the reason for such surrender of stock and the modification of the contract was because the mortgage was more available than the stock as security for the rest of the money with which to build the road. From such findings and the admissions of the pleadings the court found, as conclusions of law, that the creation and issue of the special preferred stock did not operate as a sale and conveyance of the land described in the stock, within the meaning of the act of the legislature by which the lands were granted to the plaintiff, and which provided upon what conditions said lands should become subject to taxation; that plaintiff never has, so far as appears, sold and conveyed the land in question since it became possessed of the title thereto, and hence the land has never become subject to taxation, and is still exempt; that plaintiff is entitled to the relief demanded, and that the injunction prayed for be made perpetual. cited State v. Winona & St. Peter Ii. Co., 21 Minn. 472, and State v. Trustees, 21 Minn. 344. An absolute deed to the company which built the road, for the sole purpose of transferring the land grant to it, to enable it to stand in the place of the original company, and obtain from their sale and disposition reimbursement for the funds employed in constructing it, would not render the lands taxable. The compact of 1857, as modified by that of 1865, is not an exemption nor a gratuity. It is a compact or contract upon abundant consideration, viz.: a payment throughout all time by the railroad company and its successors of a percentage of its gross earnings. “The rule that statutes creating exemptions are to be strictly construed does not apply where the legislature commutes the amount of tax imposed in the usual manner upon railroads, for a certain percentage upon their annual income. The percentage is regarded as a fair equivalent for the taxes released. The construction in such a case should not be strict against the company, nor liberal to the public, but a fair and liberal construction for the company.” Burroughs on Taxation, 133; City of St. Paul v. St. Paul & Sioux City R. Co., 23 Minn. 469. The gist of this compact is to protect the lands, no matter what successor to the original corporation holds them, until they have been actually disposed of and their proceeds applied in reimbursement of persons who have put their money into the construction of the roads. First Div., etc., R. Co. v. Parcher, 14 Minn. 224, (297,) 254, (331;) County of Nobles v. Sioux City é St. Paul R. Co., 26 Minn. 294; State v. Winona & St. Peter R. Co., 21 Minn. 315; Minnesota Cent. Ry. Co. Y. Melvin, 21 Minn. 339. The issue of special preferred land stock was not a conveyance or an agreement to convey or a lease of the lands so as to render them taxable. Holders of preferred stock are entitled to the same general rights and privileges, and are subject to the same liabilities, as holders of the original or common stock. Field on Corporations, § 120; Boone on Corporations, § 115; In re Bangor Slate & Slab Go., L. R. 20 Eq. 59; Kent v. Quicksilver Mining Co., 78 N. T. 159-179; St. John v. Erie Ry. Go., 22 Wall. 136 ; Branch v. Jesup, 106 TJ. S. 468; Pierce on Railroads, 125; Burt v. Rattle, 31 Ohio St. 116; Warren v. King, 108 U. S.389. The special stock never had aught but a potential existence. A mortgage was substituted for it, and the law expressly declares that a mortgage interest is not taxable.