3. Where money is held by a corporation or its directors, arising from a sale of its mortgage bonds, and the purposes for which the bonds or their proceeds are to be used by the corporation are set forth in the mortgage, and are such as are authorized by statute, it is a trust fund, to be used in good faith by the corporation for the purposes stated in the mortgage.

4. Where such trust fund, amounting to $8,000,000, has been used by the directors of the railroad corporation to purchase from a majority of themselves and from other persons the entire capital stock of a mining corporation, of the value of only $800,000, and such use of the fund was beyond the powers of the railroad corporation and contrary to the terms of the mortgage; held, that such use of the fund is prima facie a violation of the rights of the owners and holders of the bonds and an injury to them; which equity, upon their application, could have prevented by injunction.

5. The directors of a corporation are its agents, and their relation to it is generally one of confidence and trust. The law does not permit them to purchase for it, their own property, or property in which they are largely interested. Therefore, when the directors of a railroad company have purchased, from themselves and others, the entire capital stock of a mining corporation and paid for the same with the corporate funds, the contract is void, and an action lies against them in favor of the company, to account for the funds so received by them. And the rule is the same, though a minority of the directors had no interest as sellers in the property purchased.

6. The company is not estopped from maintaining the action by the fact that at the time of the purchase of the stock and use of the funds, the directors owned all its capital stock, and as stockholders unanimously ratified what they, as directors, had done.

7. The directors having, from the proceeds of the bonds, discharged a private indebtness due from them to a third party who held their stock in the plaintiff company as collateral thereto, the company may follow the funds so used into the stock and claim an equity in it.

8. Such collateral stock, after redemption, was held by defendants as trustees for the plaintiff, and the latter, though not empowered to traffic in its own stock, may, as cestui que trust, have an equity therein.

EVANS, J.

This case is now before the court on motions to dissolve the temporary injunction allowed, at the commencement of the action, against the individual defendants.

In July, 1881, the defendant, Burke and his associates (so called for convenience), purchased substantially all the capital stock of three railway corporations and consolidated them into one company (being the plaintiff herein). The authorized capital stock of the consolidated company was $20,000,000, of which one-half was, in August, 1881, issued to Burke and associates in exchange for their stock in the constituent companies, whereby Burke and his associates became owners and holders of all the capital stock of the consolidated company. They then held a stockholders' meeting and elected themselves directors. Afterwards, these directors purchased the entire capital stock of the Hocking Coal and Railroad Company for $8,000,000 of the mortgage bonds of the consolidated company, or their proceeds. At the time of the purchase, Burke and other persons, who constituted a majority of the directors, were the owners of a large portion of, and interest in, the stock so purchased, which was then of the par value of $1,500,000, and of the actual value of about $800,000. The directors having an interest as sellers in the stock, at the time of the purchase, remained in control of the board of directors of the plaintiff company, and constituted a majority thereof until January 12, 1887, at which time a new board of directors was elected, consisting entirely of persons other than said former directors.

Burke and other directors interested in the sale of the stock of the company, bore such a relation to the company as to render it extremely difficult to determine, from the evidence offered, whether the bonds, or their proceeds, were used to pay for the stock.

The mortgage executed by the plaintiff company to the Central Trust Company of New York, as trustee, to secure the bonds, is in evidence, but the petition sets forth none of its provisions. Its execution, however, and some of the matter contained in it, appear in some of the answers on file.

1. Corporations have such powers, and such only, as are conferred upon them by their charters or the statute under which they are organized. In the case of Thomas v. Railroad Co., 101 U. S., 71, the law is stated as follows: "We take the general doctrine to be in this country, though there may be exceptional cases and some authorities to the contrary, that the powers of corporations organized under the legislative statute are such, and such only, as those statutes confer. Conceding the rule applicable to all statutes, that what is fairly implied is as much granted as what is expressed, it remains that the charter of the corporation is the measure of its powers, and that the enumeration of these powers implies the exclusion of all others." This doctrine was approved and followed in Penn, Co. v. St. Louis, etc., R. R. Co., 118 U. S., 307. And the same doctrine was declared by the Supreme Court of this state in Straus v. The Eagle Ins. Co., 5 Ohio St., 59. The court says: "Corporations have such powers, and such only, as the act creating them confers, and are confined to the exercise of those powers expressly granted, and such incidental powers as are necessary for the purpose of carrying into effect powers specifically conferred." This principle has been the settled law of this state from the decision of Straus v. The Eagle Ins. Co. to the present time. (Bank v. Bank, 49 Ohio St., 351; State v. Vanderbilt, 37 Ohio St., 590; Kibbreth v. Bates, 38 Ohio St., 187; Bank v. Ins. Co. 12 Ohio St., 601, 610; Hays v. Gas Light Co., 29 Ohio St., 330, 338; Walsh v. Barton, 24 Ohio St., 28, 42).

The case of Davis v. Old Colony R. R. Co. 131 Mass., 257, contains a full and able review of all the important cases on the subject.

2. It is claimed by counsel for defendants that the plaintiff company had power to purchase the capital stock of the Hocking Coal and Railroad Company, and that such power was conferred by secs. 3300, 3863 and 3866, Rev. Stat. No such power was conferred by statute, unless by these sections. Section 3863 confers no power upon railroad corporations. It authorizes mining, quarrying and manufacturing corporations to purchase or subscribe for such an amount of the stocks of any railroad or other transportation company as its directors may deem necessary, in order to procure proper facilities for transportation for the manufactories, mines or other works of the company. Section 3866 provides: "Companies organized for the purpose of mining, quarrying or manufacturing may, when such purpose is stated in the articles of incorporation, construct a railroad, with single or double track, with such side tracks, turnouts, offices and depots as they may deem necessary to carry out the objects of the corporation, from any mine, quarry or manufactory to any other railroad or any canal, slack water navigation or other navigable water or place within or on the borders of this state; and shall in respect to such railroad be subject to and governed by the provisions of Chapter Two." Being the general railroad laws of Ohio.

Section 3300 provides : "Any [railroad] company may aid another in the construction of its roads by means of subscription to the capital stock of such company or otherwise, for the purpose of forming a connection, when the road of the company so aided does not form a competing line." The subscription to be within the power conferred by this section must be by a railroad company to the capital stock of another railroad company, and it must be made to aid a railroad company in the construction of its road.

The plaintiff company made no subscription to the capital stock of the Hocking Coal and Railroad Company. The directors purchased the stock, not from that company, but from its stockholders; the latter received the price paid therefor and the company received nothing. The purchase was not made and did not aid another company in the construction of its road; and for this reason, if for no other, the purchase was not authorized by sec. 3300.

The only capital stock a railroad company is authorized to subscribe for by sec. 3300, is the stock of another railroad company, and therefore, if the stock purchased was not that of a railroad company, the provision of the statute has no application to the case, and conferred no power on the company to make the purchase. The articles of incorporation of the Hocking Coal and Railroad Company show it was formed for the purpose of mining coal and iron ores, and for manufacturing ores into iron, and for the purpose of owning and constructing railroads. Under its articles of incorporation, the company was empowered by said sec. 3866 to carry on the business of mining coal and iron ores, and of manufacturing ores into iron, and to construct, own and operate a railroad. It had power to purchase or lease coal lands for mining purposes and to engage in the business of mining and selling coal without owning or operating a railroad, and it also had power to locate, construct and operate a railroad from its mine to any other place mentioned in sec. 3866. It, however, never owned or operated, or located a railroad, and never had any interest in or control over one. It was simply a mining corporation, incorporated under secs. 3862 and 3866, Rev. Stat., and empowered to construct such a railroad as is mentioned in sec. 3866. Its power to construct a railroad it never exercised, and it exercised only such corporate powers as belong to mining corporations. It is manifest that such a corporation, clothed with such powers, and under no legal or moral obligation to exercise them, is not subject to and governed by the railroad laws of the state, if it exercise the powers, and only those, conferred upon mining corporations. That such a corporation is to be subject to and governed by the statutes relating to mining corporations, and not the railroad laws of the state, is apparent from sec. 3866, which expressly provides that such a corporation "shall, in respect to such railroad, be subject to and governed by the provisions of chapter two," being the general railroad laws of Ohio. The Hocking Coal and Railroad Company had neither railroad nor asset to be governed by the laws of this state. Its sole asset was ten thousand acres of coal land, which it held for mining purposes.

Section 3268, Rev. Stat., provides: "No corporation shall employ its stocks, means, assets, or other property, directly or indirectly, for any other purpose whatever, than to accomplish the legitimate objects of its creation." The legitimate objects of the creation of the plaintiff company, as disclosed by its articles of incorporation, were such, and such only, as are those generally of Ohio railroad companies. It was not

incorporated to purchase, or own, coal lands for mining purposes, or to engage in the business of mining. The contract was not for the purchase of the land, but the entire capital stock of the Hocking Coal and Railroad Company, whose only asset was the coal land. The purchase of all the stock, if valid, would not make the plaintiff the owner of the land (Button v. Hoffman, 61 Wis., 20), but its board of directors could elect a board of directors for the Hocking Coal and Railroad Company, and through them control its affairs. As to the power of a corporation to purchase and own the stock of another, Judge Boynton, in the case of Franklin Bank v. Commercial Bank, 36 Ohio St., 350, 354 and 355, says : "There would seem to be little doubt, either upon principle or authority, and independent of express statutory prohibition of the same, that one corporation cannot become the owner of any portion of the capital stock of another corporation, unless authority to become such is clearly conferred by statute."

3. Preliminary to the issuing of the bonds and the execution of the mortgage, the board of directors of the plaintiff company, on September 21, 1881, passed a series of resolutions authorizing the company to issue $14,500,000 of its mortgage bonds. According to these resolutions, $6,500,000 of the bonds were to be held by the Central Trust Company, of New York, trustee for the purpose of being exchanged for, or providing for, the payment of the outstanding bonds of the constituent companies which had been consolidated into the plaintiff company; and the remaining eight thousand bonds, amounting to $8,000,000, were to be sold by the president and executive committee, and the proceeds applied to double-tracking, equipping and increasing the transportation facilities of, and improving the company's railways, and in purchasing real estate and other property. These resolutions, and a recital of the fact of their adoption by the board, were embraced in the mortgage and constituted part of it, and the rights of the bondholders touching the use of the proceeds of the bonds, must be worked out with reference to the terms of the mortgage, and the law applicable thereto.

The law enumerating the purposes for which a railroad corporation may issue its bonds, is contained in sec. 3286, Rev. Stat., and is as follows: "A company may issue its bonds, convertible or otherwise, bearing a rate of interest not exceeding seven per centum per annum, to an amount not exceeding two-thirds of its capital stock, actually subscribed, for one or more of the following purposes: completing or extending its road, constructing branch roads, laying double or additional track, increasing its machinery or rolling stock, building depots or shops, making improvements, paying its unfunded debts, or redeeming its bonds, and it may secure the bonds issued for such purpose by mortgage on its property or otherwise." The language of this section must be construed and understood with reference to all other statutory provisions conferring powers upon railroad corporations, or imposing limitations upon the powers thus conferred. Effect must be given to sec. 3268, Rev. Stat., which provides that: "No corporation shall employ its stocks, means, assets, or other property, directly or indirectly, for any other purpose whatever than to accomplish the legitimate objects of its creation."

The purposes set forth in the resolution, as well as in the mortgage, for which the proceeds of said $8,000,000 of bonds were to be used by the plaintiff company, were such as railroad companies were empowered by statute to issue their bonds for. And when said $8,000,000 of mortgage bonds had been issued by the plaintiff company, and sold upon the

market, the proceeds therefrom that came into the hands of its directors, were held by the company in trust, to be used in good faith for purposes stated in the mortgage.

4. If, however, the bonds or their proceeds had not been appropriated to specified purposes by the mortgage or act of the company, sec. 3286, Rev. Stat., limits the purposes for which they can be used.

Independent of the mortgage the bondholders, considered as general creditors of the corporation, and restricted to the rights of such creditors, had and have an interest in and a lien upon the general funds and assets of the corporation for the payment of their bonds. (Taylor on Corp., secs. 117-118,651-659; Morawetz on Corp., (2d. ed.) sec. 780; Field on Corp., sec. 403; Goodin et al. v. The Cin. & W. Canal Co., 18 Ohio St., 169; Wood v. Dummer, 3 Mass., 308).

Upon the well settled doctrine, that a corporation holds its funds. and assets in trust for the payment of its creditors, rests the right of the latter to interfere in the management of the corporate affairs. Those who give credit to a corporation, are presumed to be cognizant of its corporate powers and the limitations upon them, and to deal with it with reference thereto; and, therefore, as long as the corporate affairs are being carried on in good faith and within its powers, a creditor cannot interfere in the corporate management. But if the corporate funds are being applied to purposes beyond the scope of the corporate objects, in such a way as to imperil the solvency of the corporation and the lien of its creditors on its funds, a creditor can restrain the misapplication and he can follow the funds into the hands of any one receiving them, with notice of their misapplication. (Taylor on Corp., secs. 115-118, 653–659; Morawetz on Corp., secs. 784, 797; Field on Corp., secs. 406, 408; Conro et al. v. Gray et al., 4. How., Pr. 116.)

The bondholders have the rights of general creditors of the company, and such additional rights as are given them by the mortgage. The mortgage was drawn so as to cover all the property, real and personal, which the company then owned or might acquire, except stocks, notes or bonds of other companies (Pennock v. Coe, Trustees, etc., 23 How., U. S., 117), and it is set forth in the mortgage that the proceeds of the bonds were to be applied to double tracking, equipping and increasing the transportation facilities of and otherwise improving the company's railway, and in purchasing real estate and other property. These provisions of the mortgage are covenants between the plaintiff company and the trustee named in the mortgage to induce parties to invest in the bonds and for the better security and benefit of the successive bona fide owners and holders of these negotiable bonds, which are payable in fifty years from their date, and bear interest at five per centum per annum, payable semiannually. If the directors had in good faith, applied the proceeds of said $8,000,000 of bonds to the authorized purposes stated in the mortgage, the value of the property mortgaged to secure the bonds would have been largely increased. But the directors did not use the bonds or their proceeds, or any of them, for any purpose stated in the resolution or mortgage, or for any purpose within its corporate powers. They used all of said $8,000,000 of bonds or their proceeds to purchase, at ten times its actual value, the entire capital stock of a mining corporation in which, at the time of the purchase, a majority of the directors had a largeinterest, and for which they have received in payment a large portion of the bonds or their proceeds.