Southern Railway Company v. Carnegie Steel Company

• Decision Date: 29 January 1900
• Docket Number: No. 8,8
• Citation: 176 U.S. 257,44 L.Ed. 458,20 S.Ct. 347
• Parties: SOUTHERN RAILWAY COMPANY. Appt. , v. CARNEGIE STEEL COMPANY, Limited
• Court: U.S. Supreme Court

176 U.S. 257

20 S.Ct. 347

44 L.Ed. 458

SOUTHERN RAILWAY COMPANY. Appt.,

v CARNEGIE STEEL COMPANY, Limited.

No. 8.

Argued October 13, 14, 1898.

Decided January 29, 1900.

This case is here upon a writ of certiorari for the review of a final decree of the United States circuit court of appeals for the fourth circuit allowing certain claims of the Carnegie Steel Company, Limited, as preferential debts chargeable upon current receipts arising from the operation of certain railroad properties in the hands of receivers.

On the 15th day of June, 1892, William P. Clyde, John C. Maben, and William H. Goadby, citizens of New York, suing for themselves and other creditors and stockholders of the Richmond & Danville Railroad Company and of other defendant corporations, exhibited in the circuit court of the United States for the eastern district of Virginia a bill of complaint against the Richmond & Danville Railroad Company and the Richmond & West Point Terminal Railway & Warehouse Company, Virginia corporations. The bill made the following case:

The Richmond & Danville Railroad Company (hereafter called the Danville Company), in addition to its own line extending from Richmond to Danville, with a 12-mile branch, being 152 miles of road, through the purchase or the acquisition of stock, or by written lease or operating contracts, obtained the possession and control of more than twenty other railways built under the respective charters of and owned by the corporations named in the bill. It also owned the entire capital stock of the Baltimore, Chesapeake, & Richmond Steamboat Company, and through it operated a line of steamers between Richmond, West Point, and Baltimore. Its authorized and outstanding capital stock was $5,000,000 the larger part being owned by its codefendant company.

The lines of railway comprising this system, known as the Danville system, were in Virginia, North Carolina, South Carolina, Georgia, Alabama, and Mississippi, and reached many of the most important trade centers of those states.

For more than five years prior to the institution of that suit the Danville Company had held in possession and substantial control all the railways of the other companies in connection with its own road as a single system. Over a large portion of the mileage the engines and cars in traffic service were used without any fixed apportionment thereof to any specific portion of the system, and the income derived from the operations of the parent and auxiliary, leased, and operated liens was received and distributed through a common treasury with no separation of the earnings and expenses of the several properties, except by entries in books of account apportioning the gross income and expenses on some approximate but arbitrary basis of division as between the different lines over which the traffic yielding the revenue had passed.

The total mileage of the auxiliary portion of the Danville railroad, added to its own mileage, aggregated 3,320 miles, exclusive of its steamer service.

The aggregate outstanding capital stock of the lines constituting the system, together with the stock of the steamboat company, amounted to $43,482,950, of which $10,707,354 was neither owned nor controlled by the defendant companies.

Through the ownership of all or a majority of the stock thereof, some of the roads were operated by the Danville Company as proprietary lines. Others were operated upon the basis of a fixed rental or payment of net earnings, or a guarantee of interest on bonds or dividends of stock, or both.

In consequence of the absorption of such roads in its system by lease or contract, the bonded debts and rental obligations which the Danville Company had assumed and became liable for amounted to $71,128,126. Its own direct bonded debt was $16,136,000, making the total bonded and rental debt of the Danville system $87,314,126.

The bonded debt resting on the Danville road proper and equipments was in five separate issues of securities; that resting on its auxiliary and operative lines was embraced in fifty-nine different classes of securities issued by the several companies, secured by separate mortgages or deeds of trust covering different sections of the controlled roads or their equipment, capable of separate default or foreclosure, besides five stock guaranties, representing certain of its rental obligations, also secured by provisions for reentry on default.

The Danville Company also had outstanding car trust obligations of its own and leased lines amounting to $1,542,824, and a floating debt of over $5,000,000; also an emergency loan of $600,000, advanced by those interested in the property to prevent default on April 1, 1892.

Besides all such outstanding fixed liabilities on account of its own road and controlled lines, the directors of the Danville Company had pledged its credit and subjected it to other heavy liabilities, to enable its codefendant, the Richmond & West Point Terminal Railway & Warehouse Company (to be hereafter referred to as the Terminal Company) or certain of its controlled companies, to acquire the stock control of other lines of railroads not directly connected with or operated by the Danville Company and in which it had no interest whatever. Its board of directors had issued $6,000,000 of bonds of the Danville Company, executed jointly and severally with the East Tennessee, Virginia, & Georgia Company, and guaranteed by the Terminal Company 'Cincinnati Extension Bonds,' which were secured by a trust pledge of preference and ordinary shares of the Alabama & Great Southern Railway Company, Limited. Those bonds had been sold in open market, and apparently constituted an outstanding liability of the Danville Company, but for which it received no valuable consideration whatever. It had executed the same as mere accommodation paper and as a partnership adventure, and was only protected against loss by the above pledge of corporate stock of uncertain value, because it was subject to heavy prior mortgage debts, and the line of road of the particular corporation issuing such stock was a central link in the system of the East Tennessee Railway system over which the Danville Company had no control whatever.

By reason of the absolute stock control which the Terminal Company had over the Danville Company it compelled the latter company about June 1, 1891, to become the assignee and guarantor of a written lease executed by the Central Railroad & Banking Company of Georgia, of all its system of railroads and steamer lines for a long term of years to the Georgia Pacific Railway Company, whereby the Danville Company became bound to operate the Central System and to assume and pay all the interest on the bonded debts and all the rental obligations of the Central Railroad & Banking Company; and the Danville Company was compelled to execute and deliver a bond of $1,000,000 to faithfully perform all the covenants in such lease. The result of the operation of the Central-Georgia system of roads had been a constant and heavy loss to the Danville Company.

The bill next set out the relations between the Danville Company and the Terminal Company, and also describes what is known as the Tennessee system, having 2,318 miles in length of proprietary, leased, and operated roads.

It then stated that the five several issues of bonds of the Danville Company were secured by mortgages to divers trustees, and constituted liens of varying rank upon some portion of its road, franchises, and equipment; that the bonds issued by the Danville and Terminal Companies, as well as a large majority of the several issues of bonds resting on the different separately mortgaged sections of the Danville system, were owned by a large and constantly shifting number of persons and corporations, who were scattered in many different states and countries and had no organization or registration; that what was known as the emergency loan, for which the income of the Danville system was pledged, was advanced in equal sums by a considerable number of persons, many of whom preferred not to have their names or advances disclosed; that the plaintiff, Maben, was a registered stockholder of the Danville Company; that the plaintiffs were owners of a large amount of the common preferred stock of the Terminal Company and of its 6 and 5 per cent bonds, of the Danville Company's debenture and 5 per cent bonds, and of different classes of bonds resting on parts of the Danville system, and some of them were creditors of the Danville Company on account of advances made to the emergency loan, and entitled to the security given therefor; that while nominally distinct corporations, the actual transactions and financial arrangements between the Terminal Company, conducting no active business as a security company, with no assets except stocks and bonds (but holding nearly the entire capital stock of the Danville Company) and the Danville Company, as a corporation operating a large system of railways, separately organized and mortgaged, had resulted in serious complications; that such community of heavy and extra hazardous liability and hypothecation indissolubly connected the financial operations of the Danville and Terminal Companies, so that the unrelieved embarrassment of either company would necessarily force the insolvency of the other, 'and produce a disruption of the system of roads;' that the then financial condition of the two defendant corporations was alarming to the holders of their stocks and bonds; that in the latter part of 1891 the large and increasing floating debts of the several properties in which the Terminal Company was interested and the heavy losses incurred in the operations of some of the roads created much uneasiness among the stockholders and creditors; that by reason of such condition of things the management had invited prominent financiers to investigate the several systems and aid in perfecting the best plan for permanently...