438
FEDERAL REPOWrEP..,
voL 45.
withwhioh the Charleston, Cincinnati & Chicago Hailroad oonneots, and ali order will be passed aooordingly.Unless in cases of imperative necessity,no person will be appointed receiver of a railroadeompany who is a party to or of oounsel in the cause, or who has been an officer in, orah official of, the insolvent Sns:ONXON,
J., concurs.
CAREY
et al.
17. HOUSTON
& T. C. Ry. Co. et al.
(Oircuit Oown, E. D. Texas. March,1891.) L &ILJtOAD CoIlfPANIES-INSOLVENOT-,RIGHTS OP STOCKHOLDERS.
An, !I11s01vent railroad company bad issued several series of mortgBg'e bonds, some of which mortgages covered all of its property, alld others only part. The principal of some of the mortgages was due, and the company had defaulted on the inteJreSt on all of them.. In addition, it had a large floating debt, running into millions. There was no fair possibility of its being able to pay the accrued inter. est on the bonds and the floating debt without a sale of all Its properties. Held, all the mortgages, entered by consent of the creditors, not lle "et aside at the suit of some of the stockllolders on the ground that the 'principal of some ot the mortgages was not yet due, as it was to the interest of tbe railroad company that the rights of all the mortgage bondholders should be outolfto enable the company to elfect Ilo' reorganization which would secure and extend' its bonded and reduce the rate of interest thereon, and provide the . J\ecessai'y means to BaT4sfy the floating debt;
S.
A prdposed reorganization of the company, to be elfected In connection with the foreclosure sale, by which the bonded indebtedness Is refunded on longer time !Uldat reduced intel'est,and which allows each stockholder to retain his stock on the payment Of his pro rata share of the lioating debt, is not a fraud on the stockholders, and will not be enjoined at the Buit of some of them, who do not suggest any.othermethod by whicll the financial embarrassments of the company call be met. .
.
Bill by S. the Houston & Texas Central Railway and others. Complainant· alleged that they were stockholders in defendant railroad company, and that the latter had issued se\'eral series of bonds, secured by distinot m'ortgages on its property. Some of these mortgages covered all its property, and some only part. Most of the bonds were owned by the Farmers' Loan & Trus't Company and by the Southern Development Company, in which C. P. Huntington was a large stockholder, and by the Southern Paoific Railroad Company, of which Huntington is The bill alleged: "(5) That il1nooe of thesilid several, mortgages is it provided that the failure to pay interest upon any onhe boilds shall be takt'll to precipitate the turity of the principal,nor do they prl!lvidefor or permit the sale of the said railway priortothe maturity ·of the pl'incipaI of the bonds referred to in the either of them. , "«(j) That the main lIne.first said billNo. 198 was. founded and based, provided by its terms that, if default be made in the payment of interest which should become.dul;! :upon the said bonds, the trustees, at the request of any bondholder, were requfred to make a demand in writing
In 'Equity.
CA.UE\" 'v-' HOl1STON
T.f)."RY. 00.
439
on the president' or secretary of the i company for the payment of interest in arrears, and, if the compatty made (Jefault for:stxty days after said time, the trustees were empowered to take possession of the road, and use, operate, and work the same, and. after paying the expenses of running and operating the road and for needful and neeessary repairs, apply the net profits to the payment and discharge of the interest, when and whereilpon the said railway, with its appurtenances, was to besul'l'endered and delivered back to the said railway company; and it was further provided that, if default be made in the principal at maturity, the trustees should proceed to sellthe lands which wer-e conveyed and which remained unsold. and. ,if the proceeds of Buch sale should: not be sufficient to pay oft the said bonds and iriterest in full. then the trustees were directed, at the end of six morths from the time of the maturity of the bonds, to sell the road to the highest bidder at public auction; to which mortgage, ref..rred totn the decree hereinafter mentioned.complainants beg leave to refer. and make part hereof. The western division first mortgage, npon which said Easton and Rintoul flIed their bill No. 199, contains provisions substantially:Similar in all respects. ,The general'mortgage, executed Aprill, 18lU; embraced in said consolidated cause, contains substantially similar provisions. The mortgages known as the 'main line and western' division consolidated mortgage.' and' Waco & Northwestern division consolidated mortgagt>i' provide that in case the company failed'to pay the principal or the interest upon hands as they become due. and for sixty dayB after demand, the trustees were empowered to enter upon the road, operateand manage the paying taxes and counsel fees, and necessary expenses in connection with the operation of the road. and for proper repairs, apply the Burplustothe payment of interest or principal due, and assumtl the management of tIJe road until the principal and interpst are paid. or the property sold, as provided ;in the moitgage; but such' sale was to be had only in case default should be marle in the principal sum of the bonds at maturity, and proper proceed,ings were commenced to procure a decree of sale of said premises and property, which proceedings the trustees were quired ,to commence at the request in ,writing ofa majority of the holders of the bonds so in default. "(7) Complainants further allege that the answer of the railroad company in said Buits expressly placed in issue, by denying. that the principal'sum of the said bonds had become due or demandable, and averred that the court was not auUH>rized to set aside the terms and 'provisions of the deed of trust, and-decree the principalofthe bonds issued under the said deed to be dne, when the same were not due until years after the the bill;alld, that the court had no power to decree that the railways belonging t() the said Houston & Texas <JenlralRailway Company should be sold prior to the ma,turity of the bonds, or sold' prior to the sale of all the landEi covered by the said deeds of trust; and in the answeJ' it Was furlheraverred that if the lands received by grants from the state of Texas were carefully administered and eonverted into money ata 'reasonable price by the railroad company. or by the receivers, the proceeds of the sale would so materially reduce the indebt-. edness of. the company that it might reasonably hope to be able to pay tbe whole of its tloating debt and the principal of its bonds upon the dates they become due., "(8) Complainants further aver, on informational1d belief, that after the filing of the -said ans weI',and until ,after the making Of the reorganization agreement :hereinafter referre<J to, no -testimony was taken in the said, 'suit; That while the SUlt was in that. conditiolJ,andon or about December 27. 1887. an agreement was entered intO, as complainants have'since learned/bra majority oHhe holders of the mortgage bonds{with thepossibleexceptlon of those u:poQ tbeWaco&Northwestern divisk).n, as to which' di vi$iDn, a 8uffi-
440
F.B:DEBAL REPORTER,
c1ent number of bondholders could not be brought into an agreement for reo organization] and the Southern Pacitlc Co. and the Central Trust Co., for the reorganization of the said Houston & Texas Central Railway Company, by the terms of which agreement a plan of reorganization was agreed upon be· tween the parties to said instrument, by which they agreed to a foreclosure of the said mortgages, and by which it was further agreed that a new com· pany should be organized. which shall acquire an tl1e property and fran· chises of the present company designated herein as the' Houston & Texas Central Ry. Co. No.1.' and thereafter issue new bonds. equal in amount to the principal of the outstanding consolidated mortgage and general mortgage bonds. in the following proportions: the present holders of the first mort· gage bonds were to receive new bonds in equal amount. and, in addition, to be paid the face value. without interest. of the unpaid coupons, up to and inclUding the coupons maturing July 1,1887, and also a bonus of fifty dollars In cash upon each bond. The interest upon the said bonds was to be guar· antied by the Southern Pacific Company. The holders of the consolidated mortgage bonds were to receive new bouds, with interest at the rate of six per cent., and, in addition, to receive debenture bonds. with interest payable semi.annually at the rate of six: per cent., for three-fourths of the face value, without interest, of the unpaid coupons, to and inclUding those maturing October I, 1887; both the principal and interest of the said debenture bonds to be guarantied by the Southern Pacitlc Oompany. The holders of the general mortgage bonds, including nine hundred and forty-five bonds alleged to have been hypothecated with the Southern Development Company, Morgan's Louisiana & Texas Railroad Steam-Ship Company, and the National City Bank, to receive new bonds, bearing four pel' cent. interest. and, in addition. to receive debenture bonds bearing interest for two-thirds of the face value, without interest. of the unpaid coupons. ,to and including the coupons mao turing October I, 1887; both the principal and interest of the debenture bonds to be guarantied by the Southern Pacitlc Company, and the interest upon the general mortgage bonds was also to be guarantied by the Southern Pacitlc Company, and the new company was to issue stock in the sum of ten million dollars. That, though none of the stockholders of the company No. 1 as such were parties to the said agreement, it was, in and by the said agree. ment or plan of reorganization, provided that the present holders of the capital stock of the said Houstod & Texas Central Railway might, within a time to be prescribed by the Central Trust Company, receive, if they elect so to do, a share of the capital stock of the new company equal in proportion to the stock held by the said stockholders, on paying a proportionate amount of the sums necessary to discharge the whole doating debt of the old company, and the cash payments to be made under the said plan for interest and bonus, and the necessary charges and expenses to be incurred in the said That in said agreement it was further provided that in the event that any portion of the capital stock should not be taken up by the said stockholders, or holders of the doating debt, as provided in said agreement, then the South.ern Pacific Company, on paying only the cash necessary to pay the interest and bonus to the holders of the tlrst mortgage bonds and coupons. and other charges and expenses to be incurred in the said reorganization, were to be entitled to the capital stock of the new company not so taken up. That the said Central Trust Company was agreed upon as the purchasing trustee, with whom the bonds were to be deposited, and who was authorized to bid in and pay for the road on foreclosure, and to carry oot the proposed reorganization. s copy of which plan of .reorganization is on file with the clerk of this court, and to which reference ill hereby made. That the negotiations in reference to the said plan of reorganization wore had mainly. all complainants have since learned, with the said Hnntington, and many meetings to arrange the ssme
CAREY 17. HOUSTON &: T. C. RY. CO.
441
were held at his office, as complainants allege, upon information and· belief; but, as hereinfore stated, none of the stockholders of said company No.1, as such, were parties to the sald agreement, were notified of or in any manner agreed or consented to the same. "(9) After the execution of the said agreement, or plan for reorganization by the said bondholders, and in pursuance thereof, and of the scheme mapped out, the complainants in said consolidated causE', during the May term of 1888 of this court, applied for, and, on consent, procured to be entered, a decree in the said consolidated cause, as complainants learned on examination of said record. That the only testimony in the cause were certain formal depositions of the trustees and others on behalf of the complainants, taken after the making of said reorganization agreement, as complainants are informed and believe, to which depositions, on file with the clerk of this court, complainants beg leave to refer. That, as appears from the docket of the clerk, the depositions were filed May 3, 1888, and publication made May 4, 1888, though the cause is purported to have been submitted on May 3d, and the decree, which consisted of about one hundred and fifty folios, filed and entered May 4th, to which docket complainants beg leave to refer; but no testimony was taken or submitted on behalf of the defendants in said suit, Ol"to sustain the defenses interposed in the answer, nor any evidence offered by the complainants, or submitted to the court, rebutting the defenses which were raised and presented by the pleadings." On the foreclosure sale the entire property of the railway company was purchased by Frederic P. Olcott. Complainants alleged that the de<;ree of foreclosure was void, and that it was procured by the fraud and collusion of Huntington and his associates and the officers of the Houston & Texas Central Railway Company, and is a part of a scheme to acquire possession of said railway in the interest of Huntington and the Southern Pacific Company. The bill then proceeds: "(11) Complainants have since learned and allege that, on acquiring the possession of the said railway under the said foreclosure sale, sald Huntington and his associates caused to be filed articles of incorporation under the laws of the state of Texas, organizing and incorporating a railway company known as the · Houston &; Texas Central Railroad Company,' (which is herein designated as No.2,) taking almost the Same title and name as the corporation of which the complainants are stockholliers, for the purpose of operating the said railway and its franchise, claimed by them to have been purchased and acquired at the said foreclosure sale; and thereupon, and on or about the 1st of September, 1889, issued a notice to the stockholders of the said Houston & Texas Central Railway Company, (No.1,) inclUding these complainants, that they could participate in and become entitled to an equal number of shares of the Houston & Texas Central Railroad Company (No.2) as may be held by them in company No.1, provided they pay an assessment of seventy-three dollars upon each share of stock held by them. That said assessment was wrongfully and fraudUlently contrived and made up by said Huntington and his associates as a part of their scheme and plan for obtaining possession of the said Houston & Texas Central Railway, and that said assessment was not fixed and determined by the Central Trust Company, who alone and exclusively was authorized by said articles of reorganization to fix and determine said amount; and no assessment has been fixed or determined. by said Central Trust Company at any time, nor is the ftoating indebtedness of the company No.1 corrE'ctly stated, but the same is ttl uch less than is alleged by said Huntington and his associates. That said assessment is an attempt to compel the stockholders of company No.1 to turn over their stock to said Huntington
442
DDERA;[; REPOR'I'ER,vol. 45.
and his and to purchase'frol11 said Huntington and' his associates Iltock hdbe new company. .. ': , . "COmplainants prayed that the of foreclosure be set aside, and that, defendants be enjoined from ,carrying out the plan of reorganization, and from issuing any stock or bonds of the Houston & Texas Central Railroad Company, (No.2.) Defendants denied all allegations of fraud, and alleged that the decree of foreclosure was valid,and that the propbsed plan of reorganization had been entered into in good faith. R. H. Landale, Clark, Dyer BoUinger, and Jeff Chandler, for com' FUrrar, JfY1Ul8 Kl'utt8chnitt, Butler, Stillrnan Hubbard, and A. H. JoUne, for; defendants·
lite. I have considered the bill, exhibits, affidavits, and arguments submitted, and refuse the injunction pendente lite for, among:others, the following reasons: '. 1. Ontl1e showing made the charges in the bill of collusion and fraud to the prejudice of the company and stockholders are groundless; in fact the coq.trllrry appears, to-.wit:Thatin the proceedings sought to be rethe)nterests of the defendant company and its stockholders were corisidereq. and protected to a degree beyond just legal demands, and, by the. decree complained of and the reorganization agreement referred to in the bill. the stockholders are placed upon a better footing than would have resulted from the strict enforcement of the bondholders' mortgage rights. 2. Defects and informalities charged in the bill as existing in the proceedings an,d be reviewed, if considered as well taken, do not, in my opinion,render the decree void ,-at worst, only voidable, -and do not prejudice or injure the complainants to any such extent as would warrant granting the relief prayed' for inthe bill. From the showing'made,inthe,()riginal case and on this hearing the Housto'l & Texas Company had been, and long prior to the plained Of w!J.$. insolvent. . It had delimIted for years in the payment of its interest. At no time ,for years had it. in any one year earned its fixed charges. Ithad exhausted its borrowing capacity. ,It had a large floatingdebt, running into the millions, and there was no reasonable hope nor fair possibility of its being able to pay its accrued interest arid conceqed floating debt without ,a sale of all its properties, so as to permit of a which ",ould extend, its bonded debt, and l'educe the rate of interest provide the necessary means to payoff or satisfy its floating debt. Whether or not the principal of the debts by the 'several issues of mortgage bonds was due, it seems that the several bills for foreclosure allege such 'principal to be due, and it of the <;:ompanyand all parties concerned that it should be declared. due, so thatonforeclp8ure sale and reorganization. a lower rate:of.interest could be obtaiued, and IQeans provided for the floating debt.,
J. This. cause has been submitted upon motion for an in-
CAREY 11. :O:OUSTON '" T
RY. 00.
443
3. The principal, as well as the interest, on the issue of bonds known as the "Income and Indemnity Bonds" was due. Interest was overdue on all the issues of bonds, and floating indebtedness to the athoupt of several million dollars was due. AJorec1osure for the principal and terest of the income and indemnity bonds, or for the interest alone on any of the other issues, would have extinguished the rights of the company, as there was no possibility of its raising the large sums necessary to prevent a sale. A forced sale of the lands would have impaired the already insufficient security held by the creditors, without in any wise benefiting the company. Some of the mortgages covered all of the prop.. erty, others'covering only parts. Under these circumstances it· was absolutely necessary, in order to prevent further confusion and complicaequitable rights, tions and to save each set of creditors all their legal to decree foreclosures for the entire debt, principal and interest, of each issue of bonds. Any other decree not cutting off the rights of some of the mortgage bondholders would have been impracticable. As the creditors were agreed as to the decree rendered, and as the company was not injured thereby, the stockholders ought not to complain. 4. The now complaining stockholders made no offer to provide for the large sums of interest, amounting to millions of dollars, conceded to be due, nor to pay the costs in executing the decree complained oL Their bill sets forth no reason why such offer is not made, nor any inability on the part of the complainants (except as can be inferred from the large amounts involved) to provide for the conceded exigible indebtedness, Their bill neither shows nor suggests any methods or means by which the financial embarrassments of the company can be met in case complainants obtain the relief sought in their bill; and it seems to me, after a consideration of the whole case, that to grant complainants the relief they seek. would not benefit them, but would unnecessarily injure and oppress the mortgage and other creditors of the company with the final result of more complications,-more indebtedness,-all to be finally settled by an absolute sale of all the property of the defendant company. The arrangement provided by the reorganization agreement seems to have been the best possible for all the creditors of the defendant company; also the best for the company and the stockholders,-bellt for the stockholders,as it provides for refunding'the bonded debt on longer time, at a reduced rate of interest, and allows each stockholder to retain his stock and his interest in the company, its railway and lands, upon paying his pro rata share of the floating indebtedness and the expense of the reorganization. A. foreclosure and sale for the payment of interest would have closed out all the interest of the stockholders in the company. This result has been avoided by the reorganization. Without payment of the floating indebtedness, the' stockholders could not hope to retain any interest in. the company, and this floating indebtedness is practically all that they are required to pay. To this it may be added that, if any of the stockholders think the agreement is not beneficial, they need not in my opinion, they are in no worse position than accept it; and they would have been if foreclosure had been had for the mortgage in-
444
.FEDERAL REPORTER,
vol. 45.
terest conceded to be due. If any stockholder does accept the provisions of the reorganization agreement, of course, in a proper suit, he can enforce, if necessary, the carrying out of the provisions of the agreement, and protect himself and the company from the allowance of fictitious or fraudulent floating debt.
CuTTING 'D. FLORIDA Ry. &; NAV. CO. et al., (Wilson, Intervenor.) MEYER 'D. SAME. BROWN v. SAME. CENTRAL TRUST Co. v. SAME. GUARANTY TRUST &; SAFE-DEPOSIT Co. V. SAME. Oourt, N. D. Flortcla. Maroh 14, 1891.) RAILROAD MORTGAGE-FoRECLOSURE-INTERVENTION.
In proceedings to foreolose railroad mortgages an petition was filed by one olaiming under a oontract for the purchase of land from the land-agent of the company. It appeared that the land in question, together with other lands, was specially excepted by the orders appointing the receiver from the property thereby put into his hands, and that he had never come into possession thereof j that in none of the several principal causes was there any controversy about the lands, nor 4ny declaration of lien thereon in the respective decrees. It further appeared that both intervenor and defendant company were citizens of the same state. Held, that the petition was properly dismissed, both as thrusting a foreign litigation into the suit, and forwllnt of jurisdiction.
In Equity. On exceptions to the master's report, on the intervention of George E. Wilson. Flef£her & Wurtz, for intervenor. John A .. Henderson, for receiver. PARDEE, J. Although the exceptions were not filed in this matter within the delay allowed by the rules, nor with any'leave of the court, 8S the matter was submitted without objection, I have examined the case on its merits. The report of the master on the facts seems to be fully sustained by the evidence. The intervenor contracted with Wailes, landagent of the railroad company, for 2,120 59-100 acres, as alleged, but the contract included only 116 70-100 acres, to-wit, those in section 19, township 22 S., range 22 E., which the laud commissioner or the company had authority to sell at the date of the transaction; but the quantity of land actually sold does not affect the proper decision of the case. On this intervention the intervenor can only recover by reason of superior equity to the complainant trustees in relation to property and moneys in the hands of the receiver in the above- entitled cases. 1. As to the lands. Although the receivel's answer filed does not specifically deny that the lands came into his possession under the order of court made in the above-entitled cases,yet the record of the case shows that in the orders appointing a receiver, under which he took into 'possession the property of the Florida Railway & Navigation Company, there was specially excepted from the operation of said orders any and all lands acquired by said company under grants from :he state of Florida