Appeal from the Circuit Court of the United States for the Southern Division of the Southern District of California.

Suit in equity by W. H. Holabird,'as receiver of the California Development Company, and the California Development Company, against the Imperial Water Company No. 5, for cancellation of a written instrument. Decree for complainants, and defendant appeals.

The California Development Company, the complainant in this action, is a corporation organized and incorporated under the laws of the state of New Jersey on the 23d day of April. 1896, with a capital stock of $1,250,000, divided into 12,500 shares of $100 each. The general purpose of the corporation was to appropriate and divert a large part of the flow of the Colorado river at or near a point on the right or westerly bank of the river in the state of California, known as Hanlon’s Heading, and to conduct the water so diverted through a canal in a southwesterly course iuto Mexican Territory, and thence, for a distance of more than 50 miles, by artificial and natural channels, in a circuitous course northwesterly across the boundary line and back into the United States to a largo tract of unoccupied public land in the county of San Diego (later the county of Imperial) in the state of California, and known as Imperial Valley. The canal in the Republic of Mexico was placed in the name 1 of a Mexican corporation organized on May 15, 1898, as Da Sociedad de irrigación y Terrenos de la Baja California, and-referred to in these proceedings as the “Mexican Company.”

The capital stock of the Mexican Company was $62,500, divided into 625 shares of the par value of $100. All of the stock of the Mexican Company was owned by the complainant, and it is conceded that the Mexican Company was but a means employed by the complainant to carry out the purposes of its organization which were to manage the affairs of complainant’s canal in Mexican territory and deliver water at the international boundary line to corporations .formed in California by the complainant to receive such water.

It is stipulated by the parties to this action that at various dates commencing, as early as December 2, 1893, down to at least as late as December 2, 1908, the California Development Company and Its various predecessors in interest posted and caused to be duly recorded, in the recorder's office of the proper county,-notice of the appropriation in the statutory form of 10,000 cubic feet per second of the waters of the Colorado river for the irrigation of lands in the county of San Diego, later the county of Imperial, in the state of California, and of lands in Lower California, Republic of Mexico, and for other purposes.

The complainant mapped out for these corporations districts of territory of the public lands in Imperial Valley as units for irrigation, each one of which was to be occupied by the settlers who were to be stockholders in one of the companies. The first one of the companies to be organized was Imperial Water Company No. 1, incorporated March 23, 1900, with a capital stock of $1,000,000, divided into 100,000 shares of $10 each. The territory assigned to the stockholders of this company embraced an area of about 100,000 acres — corresponding to the number of shares of the capital stock of the company. Each share of the stock represented the right of the stockholder to receive water from the “Mexican Company” for one acre of land owned by him, which, under a contract with that company, was fixed at four acre-feet per annum for each share of stock, for which the stockholder was required to pay the Mexican Company a water rate of 50 cents per annum per acre-foot.

. In further execution of the project of the complainant to control the appropriation and diversion of the waters of the Colorado river for the irrigation of the lands in Imperial .Valley and to create convenient agencies for the distribution and sale of such waters, the complainant caused to be incorporated under the laws of the state of California a number of corporations to take and receive water for irrigation, domestic, and other purposes from the “Mexican Company,” and distribute the same among the stockholders, of the corporations for use only on lands owned by them within certain designated boundaries described/in the articles of incorporation. These corporations were all designated Imperial- Water Companies, and as originally projected were numbered 1 to 12, but the companies were not all brought into active corporate existence. No. 2 was merged with No. 4, and, as far as can be ascertained from the present records, Nos. 3, 9, 10, and 11 never became active.

The several companies were organized, one after another, by the complainant on the same general plan as Imperial Water Company No. 1, and embraced lands in assigned districts of different, but presumably of convenient, areas. The purpose of the complainant was to organize these water companies for assigned districts until all the irrigable public land in Imperial Valley should be assigned to a water company. The aggregate of the capital stock of Imperial Water Companies numbered 1, 4, 5, 6, 7, 8, and 12 amounted to $4,700,000, divided into 470,000 shares of $10 each, and representing 470,000 acres of land.

The defendant, the Imperial Water Company No. 5, was incorporated on February 21, 1901, with a capital stock of $1,000,000, divided into 100,000 shares of $10 each. The declared purpose of the corporation was to secure a supply of water for irrigation, domestic, and other purposes from the “Mexican Company,” and to distribute the same at cost among its stockholders only for use upon the lands owned by them within-the boundaries described in the articles of incorporation. The land assigned to this company by the complainant embraced 100,000 acres, and each share of stock, as in the other companies, represented an acre of irrigable land for which the Mexican Company, by an agreement with the defendant company dated March 15, 1901, agreed to supply the defendant company with four acre-feet of water per annum for each share of stock at the rate of 50 cents per annum per acre-foot. In consideration of this agreement on the part of the Mexican Company to deliver water for use on the lands represented by the stock of the defendant company, the latter agreed that the Mexican Company should have the exclusive right to sell the entire shares of its capital stock and receive for its sole use and benefit all the moneys obtained from such sale of stock.

But by an agreement, dated December 28, 1900, between the complainant and the Mexican Company, the former had agreed that it would build a system of canals for the diversion of water from the Colorado river, to keep such canals in repair, and deliver a sufficient amount of water for the irrigation of the lands situated in the Republic of Mexico and the United States which were irrigable by gravity by the system of canals to be constructed by the complainant. In consideration of this agreement, the Mexican Company assigned and transferred to the former all of the stock of Imperial Water Company No. 1 and ail the right to receive any of the moneys which would otherwise be due and payable to the Mexican Company under its contract with the water company; and it was further agreed that the Mexican Company would make like assignments in the future of all rights which it might acquire under similar contracts with other water companies for the sale of stock of such companies, or the proceeds to be derived therefrom. Under this agreement, and a subsequent agreement between the complainant and defendant dated December 24, 1901, all of the stock of the defendant company passed to the complainant for sale, together with the proceeds of the sale of the stock of the defendant company, with a stipulation contained in the later agreement that no stock of the defendant company should be issued except upon the order of the complainant, and that no stock of the defendant company should he issued or sold in the future by the complainant except upon there being paid into the treasury of the defendant company, at the time of such issue, $.1 for each share of stock so issued or sold; such sum of money to be used and to become a part of a fund for the construction of an extension of the canal system so as to furnish water for the land represented by the stock that might thereafter be issued.

The defendant had been organized as a corporation by agents of the complainant to whom one share of stock each had been given by the complainant. These incorporators had never at any time been landowners or settlers upon the public lauds within the territory assigned to the defendant company, nor had there been at the time of such organization any settlements made within such territory, and no settlements had been made upon the land before the time the contract was made with the Mexican Company for the delivery of water to such land and the surrender of its capital stock. The land belonged to the government of the United States, except such schoot sections in each township as belonged to tbe state, and except a few alternate sections in the northern part of Imperial Valley within the grant to the Southern Pacific Railroad. The land was in its original desert and arid condition, and so remained uniil occupied and reclaimed in part by settlers in accordance with tiie complainant’s irrigation scheme. In carrying out this scheme, it was recited in the agreement, between the complainant and the defendant, dated December 24, 1901, that, in order that an equitable division of the directory of the defendant company should be had, it was agreed that two members of the five members of the board of directors of tbe said company should resign, and that in their place should be elected two members eliosen as directors by the then outstanding stock in said company. It was further agreed that the board of directors as thus composed, being three of tbe then existing directors named by the complainant and the two newly elected directors named by the stockholders of the defendant company, should remain the directors of such company without change until the annual election to be held in January, 1903. The board ol directors was thereupon organized in accordance with this agreement, and so continued until January, 1903, when the hoard became composed entirely of representatives selected by the stockholders.

Settlers upon the lands within the district assigned by the complainant to the defendant company were required, as in other districts, before the delivery of any water to them, to buy from the complainant a, number of shares of defendant’s capital stock, equal in number to the number of acres claimed by the settler, and to pay therefor such arbitrary price as the complainant might fix. As there was no other source of water supply l'or that territory, the settler was compelled to submit to the conditions imposed by the complainant.

On August 27, 1901, the complainant fixed the price of stock in all the water companies on and after October 1, 1901, at $15 per sliare. On September 5, 1901, the price was fixed at $20 per share; and after July, 1905, the price was raised to $25 per share. In addition to this price for stock representing the right to have water delivered to a certain number of acres of land, the settler was required by the complainant, through the Mexican Company, under the agreement of March 15, 1901 to pay an annual rate of 50 cents for each share of stock sold and located; such payment to entitle the settler to one acre-foot of water for each share of located stock and the privilege of purchasing three additional acre-feet for each such share of stock owned by the settler.

By December 24, 1901, sales of stock of the defendant corporation had been made amounting to 15,000 shares, representing 15,000 acres, and agents of •the complainant had promised such purchasers that water would be delivered to them on their land on November 1, 1901. This was not done until February, 1903, when water was first delivered tó the settlers and stockholders of the defendant company, at which time the canal system then constructed had only the capacity to accommodate the 15,000 acres of l^nd for which stock had been sold. In this situation, controversies arose between the stockholders and the complainant respecting the alleged failure of the complainant to keep its contract, and respecting damages alleged to have been sustained by the stockholders by reason of such failure.

These controversies became the subject of negotiatious for a settlement between the officers of the complainant and defendant which finally resulted in the instrument in controversy in this action, designated as the “Heber contract.” This instrument is dated May 16, 1905, and is signed by the California Development Company by A. H. Heber, Pt., and R. T. Perry, Secy., and by the Imperial Water Company No. 5 by F. N. Chaplin, President, and Irving P. Silliman, Secretary. It recites that, for and in consideration of the mutual covenants and agreements of the parties thereto, it is agreed, among other things, that the California Development waives and surrenders to the Imperial Water Company No. 5 all right that the former company has as the assignee of the “Mexican Company” to sell, locate, or otherwise dispose of the unissued capital stock of the latter company, excepting from such waiver and surrender certain specified shares of stock amounting in the aggregate to 4,665 shares. In consideration of this waiver and surrender by the complainant of the unissued stock of the defendant company, the latter agreed to relieve and release the complainant from all further obligations to repair, complete, perfect, extend, or maintain the existing distributing canal system of the defendant, and to relieve and release the complainant from all obligations to construct a storm water drainage system for the defendant, or to take care of or carry off storm water that might prove injurious or destructive to the defendant’s canal system; and the defendant assumed the obligation of thereafter constructing, repairing, and maintaining its own canal system or any extension thereto it might ^ee fit to build. The instrument contained a number of other provisions binding the parties to conditions, which need not be stated here.)

It is alleged in the complaint that, after the signing of said instrument, it was not referred to or. acted upon by the board of directors of the complainant until in the early part of June, 1905, when it was declined, rejected, and repudiated by the complainant, and has ever since been repudiated by the complainant; that the instrument was executed without authority, and was not the contract of the complainant.

At the date of this instrument, the complainant had' sold about 35,000 shares of the. capital stock of the defendant company, and about 65,000 remained unissued.

It is alleged in the complaint in this action that the complainant is the owner of these unissued shares, and that they aré of the value of not less than $20 per share, or a total value equal to and in excess of $1,300,000.

The object of the present action is to have the so-called Heber contract adjudicated to be of no force and effect, and that it be surrendered up and canceled, and pending the action that the defendant be enjoined and restrained from disposing of its unissued stock.

Upon the filing of the complaint in the lower court, an order was issued restraining the defendant from selling or disposing of any of its unissued stock or in any wise parting therewith except upon the order of the complainant. The order also required the defendant to show 'cause why an injunction pendente lite should not issue.

TTpon the hearing the court refused the temporary injunction and vacated and discharged the restraining order. Thereafter the defendant filed its answer to the complaint, and the' complainant tiled its replication to the defendant’s answer.

On a motion for a rehearing on the order to show cause, the court \ reinstated the restraining order, and on the final hearing had on the pleadings and proofs the court entered its decree adjudging that the contract designated as the Ileber contract was void ab initio: that the defendant produce the original of said contract into court and render up the same for cancellation : that thereupon the same bo marked canceled; that the temporary injunction theretofore issued restraining the defendant from disposing or transferring any of its unissued stock be made perpetual. It was further ordered, adjudged, and decreed that the defendant issue, upon the order of the complainant, in the manner and upon the terms and conditions set forth in the decree, certificates for 58,376 shares of its capital stock. The difference of 6,624 shares between the number of 65,000 unissued shares of the defendant’s capital stock alleged in the complaint and 58,376 mentioned in the decree does not appear to be explained in the record before us; but, as the number of unissued shares mentioned in the decree is not made a subject of controversy, the difference mentioned is not deemed material.

From this decree the present appeal is prosecuted.