New York Security & Trust Co. v. Louisville, E. & St. L. Consol. R. Co.

• Decision Date: 19 May 1900
• Docket Number: 9,125.
• Citation: 102 F. 382
• Parties: NEW YORK SECURITY & TRUST CO. v. LOUISVILLE, E. & ST. L. CONSOL. R. CO. et al.
• Court: United States Circuit Court, District of Indiana

102 F. 382

NEW YORK SECURITY & TRUST CO. v. LOUISVILLE, E. & ST. L. CONSOL. R. CO. et al.

No. 9,125.

United States Circuit Court, D. Indiana.

May 19, 1900

Hornblower Byrne, Taylor & Potter and Charles W. Fairbanks, for complainant.

Humphrey & Davie, Miller, Elam & Fesler, Wm. Marshall Bullitt Alexander Gilchrist, St. John Boyle, Iglehart & Taylor, and Bluford Wilson, for defendants.

WOODS Circuit Judge.

The Louisville, Evansville & St. Louis Consolidated Railroad Company had its origin on May 21, 1889, in an agreement for the consolidation of railroad companies in Indiana and Illinois. For convenience, its road may be said to have been made up of two divisions,-- the eastern, extending from New Albany, Ind., opposite Louisville, Ky., to Mt. Vernon, Ill and the western, extending from Mt. Vernon to East St. Louis. The eastern division, itself in part the result of a prior consolidation, includes two branch roads, the Evansville Rockport & Eastern, called here the Evansville, and the Huntingburgh, Tell City & Cannelton, called the Huntingburgh. Until the consolidation of May, 1889, the Huntingburgh road remained an independent organization. It was subject to a mortgage for $300,000. The Evansville road, subject before to a separate mortgage for $900,000, had been consolidated with the road constituting the main line of the eastern division, under the name of Louisville, Evansville & St. Louis Railroad Company, which on December 26, 1886, executed two mortgages, called the first and second; the first for $2,000,000, and the second for $3,000,000. Included in the western division were the Illinois & St. Louis Railroad & Coal Company, which on June 1, 1875, had executed a mortgage for $200,000, and the Venice & Carondelet Railroad Company, which, prior to the consolidation, had executed two mortgages, each for $150,000. The bonds secured by the mortgages mentioned were each for $1,000, and were all outstanding and unpaid at the time of the consolidation. The second of the articles of consolidation is to the effect that existing mortgages on the properties of the constituent companies 'shall be taken up.' The fourth article required the issue by the consolidated company of '8,000 consolidated first mortgage, five per cent, fifty year, gold coupon bonds, of $1,000 each,' secured by a mortgage on the entire property of the consolidated company, derived from the constituent companies, to be placed in a safe place, by direction of the board of directors of the consolidated company, and 'thereafter held in trust for the purpose of exchange, according to the terms of these articles of consolidation,' except 925 thereof, intended for another designated use; 'and,' as the article concludes, 'in case any holder or holders of any of the bonds or stock of said constituent companies shall neglect or refuse to exchange any of such bonds or stock for the said consolidated bonds, as herein provided, the directors of said consolidated company shall be empowered to make such arrangements in regard thereto, not inconsistent with these articles, as in their opinion the interest of said consolidated company may require. ' The eighth article provided that the 'bonds, being prepared and ready for issue,' were to be deposited as follows:

'(a) To be used in taking up and in satisfaction of the first mortgage bonds of said Louisville, Evansville & St. Louis Railroad Company, and in redemption thereof, two thousand (2,000) of said bonds; (b) to be used in taking up and in satisfaction of three thousand (3,000) second mortgage bonds of said Louisville, Evansville & St. Louis Railroad Company, and in the redemption thereof, twenty-two hundred and fifty (2,250) of said bonds, exchanging old bonds at seventy-five (75) cents for new bonds at par; (c) to be used in taking up and in satisfaction of the first mortgage bonds on the Evansville division of the said Louisville, Evansville & St. Louis Railroad Company, and in the redemption thereof, nine hundred (900) of said bonds; (d) to be used in taking up and in satisfaction of the first mortgage bonds of said Huntingburgh, Tell City & Cannelton Railroad Company, and in the redemption thereof, three hundred (300) of said bonds.'

In like manner it was provided that 500 of the bonds should be used 'in taking up and in satisfaction' of the mortgage bonds of the constituent parts of the western division, and that 925 bonds should be sold and the proceeds used for the purpose of constructing and equipping the railroad of the Belleville, Centralia & Eastern Railroad Company, necessary to the construction of the line of the western division between Mt. Vernon and Belleville, a distance of about sixty-four miles.

The ninth article reads in this wise:

'Such of the bonds of any of said constituent companies as may be surrendered and exchanged as herein provided shall be stamped and defaced so that they shall not be negotiable; and the board of directors of said consolidated company may adopt such plan, not inconsistent with these articles, as shall protect the rights of the holders of new bonds issued in such exchange, as against a holder of any bond of any of said constituent companies who shall not exchange the same as herein provided, and upon the surrender of all of said bonds of all of said constituent companies they shall be destroyed.'

The consolidated mortgage bears date July 1, 1889, and, after reference in its preamble to the agreement of consolidation, asserts authority for the consolidated company to issue bonds 'for the purpose of exchanging the same for bonds now secured by mortgage upon any of the property of the constituent companies contemplated by said agreement and in said articles of consolidation.'

The bonds secured by the consolidated mortgage were delivered into the possession and custody of the New York Security & Trust Company, one of the two trustees in that mortgage, for disposition according to the agreement of consolidation; and before January 11, 1890, the bonds secured by the second mortgage upon the eastern division to the number of 2,330 had been surrendered by the holders to that company in exchange for consolidated bonds, and on surrender had been stamped on the back thereof 'Canceled.' An assistant secretary of the company has testified that when the surrendered bonds were so stamped the secretary of the company gave instruction that the bonds were to be held by the security and trust company as against the second mortgage; that they were to hold the bonds until they all came in, and then destroy or so cut and deface them as to make them nonnegotiable, and destroy the mortgages; that they examined the articles of consolidation at the time the bonds were received. There is other testimony to the same effect. The remaining 670 of the bonds secured by the second mortgage on the eastern division have never been presented for exchange, and are represented in this litigation by the Louisville Trust Company, trustee, successor to the original trustees named in the trust deed by which they are secured. Bonds secured by the consolidated mortgage were issued and are outstanding to the amount of $3,797,500, including, to the amount of $1,747,500, those exchanged for the 2,330 surrendered seconds.

On March 1, 1893, the consolidated company executed to the New York Security & Trust Company and Erastus P. Huston, trustees, a second mortgage, called in this record the 'general mortgage,' to secure bonds for $15,000,000, designed primarily for the purpose of taking up, dollar for dollar, all bonds secured by prior mortgages on the consolidated road and its constituent parts. Bonds secured on that mortgage to the amount of $2,000,000 or more were issued and are outstanding, but no exchange thereof for bonds of a prior issue was effected. In that mortgage the number of seconds outstanding is stated to be 670, the redemption of that number only is authorized, and it is further provided that the bonds surrendered for exchange 'shall be so canceled and defaced as to destroy their negotiability, and shall be held and kept alive by the New York Security & Trust Company, to the end that the holder of said bonds hereby secured may be subrogated in the outstanding mortgages, respectively, to the rights of the holder of said bonds now outstanding, and so exchanged and surrendered for said new general mortgage gold bonds hereunder issued. ' Each of the mortgages mentioned contains the customary after-acquired property clause.

On January 4, 1894, on the petition of Thomas Barrett and James H. Wilson, E. O. Hopkins and Wilson were appointed receivers of the consolidated property by this court. That was done in confirmation and extension of the previous action of the United States circuit court for the Southern district of Illinois. The bill on which the appointment was made purported to be brought by the complainants 'on their own behalf and on behalf of all creditors and stockholders' of the consolidated company; Barrett, it was alleged, being the owner of 5,069 of the 40,000 authorized shares of common stock and of $300,000 of general mortgage bonds, and Wilson the owner of 450 shares of the common stock. The insolvency of the company, its inability to meet its obligations including a floating indebtedness of $900,000, and other reasons for the appointment of receivers, were alleged, and the appointment was sought 'for the purpose of preserving the unity of the system, and preventing the disruption thereof by separate executions, attachments, or sequestrations, the occurrence of which,' it was alleged, 'will be inevitable, in view of the unavoidable defaults in payments of interest and other obligations which will presently occur. ' The consolidated company, the sole defendant named in ...