Lisman v. Knickerbocker Trust Co.

• Decision Date: 13 January 1914
• Docket Number: 2145.,2121,2120
• Citation: 211 F. 413
• Parties: LISMAN et al. v. KNICKERBOCKER TRUST CO. et al. SAME v. UNITED STATES MORTGAGE & TRUST CO. et al. (two cases).
• Court: U.S. Court of Appeals — Sixth Circuit

211 F. 413

LISMAN et al. v. KNICKERBOCKER TRUST CO. et al.

SAME v. UNITED STATES MORTGAGE & TRUST CO. et al. (two cases).

Nos. 2120, 2121, 2145.

United States Court of Appeals, Sixth Circuit.

January 13, 1914

The Detroit, Toledo & Ironton Railroad Company, which is the successor of the Detroit Southern Railroad Company, was organized May 2, 1905, under the railroad laws of Michigan the organization being effected through the investment brokerage firm of Hollins & Co. Its main line extended from Ironton, Ohio, which is on the southern line of that state in a generally northerly direction through Dundee, Mich., to Detroit. It owned all of its main line except three small portions, over which it had trackage rights. On its organization it gave to the Knickerbocker Trust Company (hereafter called the Knickerbocker Company), as trustee, its so-called 'consolidated mortgage,' securing items for which bonds of unquestioned validity to the extent of $4,357,000 were immediately certified and issued. This mortgage also provided for the issue of further bonds to the extent of $8,252,000, to be used for the purchase or construction of extensions, branches, or spurs, the improvement of certain terminals, the construction of a bridge or bridges across the Ohio river, and 'the acquisition of additional terminals, rolling stock and equipment, the construction of betterments and improvements and such other purposes as the board of directors of the railway company may deem calculated to increase the business and earning capacity of the property. ' Soon after this reorganization the railroad company purchased, through the brokerage firm of Rudolph Kleybolte & Co., for $5,000,000, a considerable majority of both the preferred and common stock of the Ann Arbor Railroad Company, a corporation likewise organized under the Michigan Railroad Laws, its road extending from Toledo, Ohio, in a generally northwesterly direction, through Dundee, Mich., to Frankfort in that state. To secure this purchase price, as well as the additional sum of $500,000 obtained through Kleybolte & Co., the Detroit Toledo & Ironton issued its so-called collateral trust notes, semiannual interest coupon bearing, maturing December 1, 1908, in the amount of $5,500,000, securing these notes by pledge and deposit of the Ann Arbor stock, together with $5,000,000 of bonds issued under the consolidated mortgage; this pledge being evidenced by a so-called collateral trust agreement between the Detroit, Toledo & Ironton Railroad Company and the United States Mortgage & Trust Company (hereafter called the United States Company), as trustee, which agreement contemplated the purchase of further amounts of Ann Arbor stock and the issue of collateral trust notes therefor. By a supplementary arrangement, the lien of the consolidated mortgage was made to extend to such equity in the pledged stock and bonds as might remain after the satisfaction of the collateral trust notes. Since this purchase the Detroit, Toledo & Ironton Railroad Company, through directors elected by virtue of such stock ownership, has operated and controlled the Ann Arbor road.

The meritorious questions presented by this record concern the legality of this Ann Arbor purchase and the validity of the $5,000,000 of consolidated bonds issued therefor. Underlying this consolidated mortgage were two mortgages, one on the middle or Ohio Southern Division, under which about $4,500,000 of bonds had been issued and were outstanding; the other, a new mortgage called 'the general lien and divisional first mortgage,' given by the Detroit, Toledo & Ironton Railroad Company to the New York Trust Company, as trustee, which constituted a second mortgage upon the Middle Division and a first mortgage upon two other divisions. Under this latter mortgage $4,253,000 of bonds were issued and outstanding.

On February 1, 1908, the Knickerbocker Company filed its bill in the court below against the Detroit, Toledo & Ironton Railroad Company, for the foreclosure of the consolidated mortgage on account of nonpayment of semiannual interest, that day maturing upon the entire issue of $9,357,000; two receivers were immediately appointed, a third being later added upon the application of the so-called Ramsey Committee, which represented the holders of a considerable majority of the collateral trust notes. Later Courtney, a preferred stockholder in, and the Citizens' National Bank, of Springfield, Ohio, a creditor of, the Detroit, Toledo & Ironton Railroad Company, were allowed to intervene; their proceeding was consolidated with the foreclosure suit, and the receivership extended to railroad property alleged not to be embraced within the lien of the consolidated mortgage. In December following, the United States Company, under power of sale in the collateral trust agreement, gave notice of sale at public auction of the Ann Arbor stock and the $5,000,000 of consolidated mortgage bonds. The proposed sale having been temporarily enjoined in a proceeding instituted in the Supreme Court of New York by one Redmond, who assailed the validity of the Ann Arbor purchase and the $5,000,000 bond issue, the railroad receivers then filed their petition in the Consolidated Mortgage foreclosure suit, calling attention to the contest over the validity of the $5,000,000 bond issue and the proposed auction sale in New York, and asking that the court below, which had jurisdiction of the res and of the persons interested, determine the questions involved. Under this proceeding the proposed sale of the pledged stock and bonds was restrained until further order. The United States Company immediately obtained permission to intervene in the consolidated mortgage foreclosure suit, and filed therein a petition, setting up the conflicting claims concerning the validity of the Ann Arbor purchase and the issue of the mortgage bonds thereon, and praying that the trustee's title under the collateral trust agreement be determined, for permission to sell the pledged stocks under the power of sale in that agreement, for injunction and for general relief. The Ramsey Committee intervened and asked relief similar to that prayed by the United States Company. This petition of the trustee was immediately followed by the filing, in the consolidated mortgage foreclosure suit, of its dependent bill, asking substantially the same relief as in the petition mentioned. Appellants comprise: First, the members of the investment brokerage firm of F. J. Lisman & Co., who are owners of a considerable number of consolidated mortgage bonds disconnected with the Ann Arbor purchase and certain Detroit, Toledo & Ironton preferred stock; and, second, the members of the so-called King Committee, which represents holders of such preferred stock. Upon the filing of the receivers' petition appellants asked leave to intervene and file a cross-bill, making defendants thereto the Knickerbocker Company, the United States Company, Hollins & Co., and the Ramsey Committee. A few months layer it filed in the consolidated mortgage foreclosure suit a further intervening petition and dependent bill, making defendants thereto (in addition to those named in the proposed cross-bill) the Detroit, Toledo & Ironton Railroad Company, the three railroad receivers, and the Ann Arbor Railroad Company.

In all these proceedings by appellants the invalidity of the Ann Arbor purchase and the consolidated mortgage bonds issued therefor was asserted; and in the later pleadings it was among other things, further alleged, in substance, that the Ann Arbor purchase was in pursuance of a fraudulent scheme between the promoters of the reorganization, whereby Ann Arbor stock, which cost the promoters but $3,500,000, was sold, practically to themselves as directors, for $5,000,000; that the default on the collateral trust notes was brought about by collusion between Hollins & Co., the United States Company and the controlling power of the two railroad companies, in the interest of a contemplated reorganization; it being alleged that a large amount of Ann Arbor funds available for the payment of dividends on its stock, and which if paid would have prevented default, had been wrongfully loaned to Hollins & Co.; also that the certification by the Knickerbocker Company of the $5,000,000 consolidated mortgage bonds was unlawful. Appellants asked that the collateral trust bond issue be declared invalid and not secured by the consolidated mortgage; that Hollins & Co. be required to pay into court the value of certain stocks and bonds of the Detroit, Toledo & Ironton Railroad Company, claimed to have been issued to that firm in connection with the reorganization, and for other relief unnecessary to be stated. No formal leave was given appellants to file either the cross-bill or the dependent bill, or to intervene in any of the proceedings connected with the foreclosure suits. Although not made defendants to the dependent bill of the United States Company, or to the intervening petition of that company or of the Ramsey Committee, appellants filed answers to both petitions and entered appearance in the other proceeding, motion being made to strike the appearance and answers from the files. The Ramsey Committee and Knickerbocker Company filed formal objections to appellants' first petition to intervene and for leave to file cross-bill. Upon the filing of appellants' dependent bill subpoena was issued and order made for the appearance of nonresident defendants; a similar order of appearance being made under the amendment to the former petition for intervention and cross-bill. Motions to set aside the order of appearance and to quash service were made by the United States Company and by the Ramsey Committee, with respect at least to the dependent bill. The ...