On August 9, 1871, Mr. Latham presented, and the directors of the California Pacific at a formal meeting approved, resolutions to the effect that the sum of $1,600,000 was necessary for the purpose of constructing and completing an additional track, and for strengthening the California Pacific embankments across the tule lands. The directors further voted that the money be borrowed, and the necessary bonds be issued. President Jackson then stated to the board that a contract had been made, and the execution of this contract was approved.
Under date of August 9, 1871, the California Pacific covenanted with Stanford, Hopkins, and Huntington for the construction referred to in the previous paragraph. The associates agreed
... to enlarge the embankment of the railroad of the said party of the second part, where embankment is required, and erect and widen the trestle work, where trestle work is required, from the bridge across the Sacramento River to Davisville, in the county of Yolo, in the State of California, and place thereon a good and sufficient superstructure, consisting of timber and ties and iron railroad thereon, so as to make an additional railroad track from said bridge to said Davisville, fully equal to the present railroad on the present embankment and to connect the same with proper switches with both the main track to Vallejo, and the track to Marysville of the railroads of the party of the second part. Said parties of the first part to furnish all the material for the said additional railroad track, and embankment, and trestle work, and to have the same completed and ready for use on or before the first day of January, in the year one thousand eight hundred and seventy-three.
In consideration of this construction, the California Pacific was to pay the associates 1,600 second mortgage California Pacific bonds.
On August 19, 1871, the Huntington group, now controlling a majority of the board of directors of the California Pacific, entered into an agreement with the California Pacific under which the Central Pacific undertook to pay the California Pacific $5,000 per month, to furnish the equipment for passenger business, and to guarantee the interest on 1,600 second mortgage bonds, while the California Pacific in return agreed to transport to or from San Francisco, passengers beginning or ending their trips on the Central Pacific or connecting roads, and to maintain its fare for other passengers at $4 between San Francisco and Sacramento. On September 1, 1871, the Central Pacific took full control of the California Pacific, and moved its offices from San Francisco to Sacramento.[160]
Motives Behind Transactions
Two explanations of these transactions are possible. Counsel for the Central Pacific, in 1886, maintained that the contracts fell into two distinct classes or groups. The California Pacific, according to this point of view, arranged for an additional track between Sacramento Bridge and Davisville, and for still more important enlargement in embankments and widening and erection of trestle work, by the transfer to defendants of second mortgage bonds. These bonds, it was alleged, though considerable in amount, had little value because of the desperate financial condition of the California Pacific. In the second place, the Central Pacific gave value to bonds which it held by a guaranty, and used them to buy a controlling interest in California Pacific stock. Of this, the minority stockholders of the corporation had no right to complain.
Counsel on the other side maintained that the essential feature of the whole transaction was the purchase of California Pacific stock, and that the various contracts merely supplied a method of buying this stock without paying for it. Starting, therefore, with the contract of July 13, they pointed out that the defendants agreed to purchase California Pacific stock from Latham with California Pacific bonds which were not yet in existence, stipulating for full control of the California Pacific before payment should be made, in order that they might obtain the purchase price from that company. When Latham announced that he was ready to deliver the stock, it became necessary for the defendants to secure about $1,600,000 in California Pacific bonds. These bonds could be legally issued only for new construction, hence the contract for a second track from Sacramento to Davisville. When issued, and in the hands of the defendants, it was necessary to have the Central Pacific’s guaranty. For this the Central Pacific required the California Pacific to enter into the traffic agreement of August 19, obtaining thus a full quid pro quo. The result was that the California Pacific furnished first the bonds and then a consideration for the Central Pacific’s guaranty, which together served to purchase the California Pacific stock.
Plausible Explanation