Railway Steel Springs Co. v. Chicago & E.I.R. Co.

• Decision Date: 21 June 1917
• Docket Number: 57.
• Citation: 246 F. 338
• Court: U.S. District Court — Northern District of Illinois
• Parties: RAILWAY STEEL SPRINGS CO. v. CHICAGO & E.I.R. CO.

246 F. 338

RAILWAY STEEL SPRINGS CO. v. CHICAGO & E.I.R. CO.

No. 57.

United States District Court, N.D. Illinois, Eastern Division.

June 21, 1917

[Copyrighted Material Omitted] [Copyrighted Material Omitted] [Copyrighted Material Omitted]

Holt, Cutting & Sidley and Charles S. Holt, all of Chicago, Ill., for Equitable Trust Co. of New York.

Arthur H. Van Brunt, of New York City, and William W. Gurley, Howard M. Carter, and Charles S. Babcock, all of Chicago, Ill., for Central Trust Co. of New York.

Sullivan & Cromwell, of New York City, Royall Victor, of New York City, and Brode B. Davis, of Chicago, Ill., Scott, Bancroft, Martin & Stephens, of Chicago, Ill., and Frank H. Scott, of Chicago, Ill, for Metropolitan Trust Co. of New York.

White & Case, Roberts Walker, and Henry B. Stimson, all of New York City, and Adams, Follansbee, Hawley & Shorey, Samuel Adams, and Mitchell D. Follansbee, all of Chicago, Ill., for Bankers' Trust Co.

Homer T. Dick, of Chicago, Ill., for Chicago & E.I.R. Co.

Will H. Lyford, of Chicago, Ill., for Receiver.

Spooner & Cotton, Charles P. Spooner, and Joseph P. Cotton, all of New York City, for Reorganization Committee.

Burry Johnstone & Peters and William Burry, all of Chicago, Ill., for Farmers' Loan & Trust Co.

Levinson, Becker, Cleveland & Schwartz, Solmon O. Levinson, and Jerome N. Frank, all of Chicago, Ill., for stockholders' committee.

John S. Miller, of Chicago, Ill., amicus curiae.

CARPENTER, District Judge (after stating the facts as above).

The question before the court is: Did the Chicago & Indiana Coal Railway mortgage of December 1, 1885, become a lien on railways and other properties in Illinois by virtue of the consolidation agreement of June 6, 1894?

Counsel for the Metropolitan Trust Company contend:

First. That article 7 of the consolidation agreement of June 6, 1894, is to be construed as giving to the Coal Railway mortgage a lien upon the then existing Chicago & Eastern Illinois property, subject to that of the Chicago & Eastern Illinois mortgage to the Central Trust Company of November 1, 1887; and a lien equal to and sharing with the lien of that Chicago & Eastern Illinois mortgage upon the property acquired by the consolidated company after June 6, 1894. Counsel point out that the salient provisions of article 7 here are in the same language as is found in the earlier Chicago & Eastern Illinois consolidated agreement of November 12, 1887, which was inserted in order to comply with the provisions in the Chicago & Eastern Illinois mortgage of November 1, 1887, for the issue of bonds for the consolidated company of 1887; and that in the consolidation of 1894 the language of the previous consolidated agreement was repeated in order to protect the security of the Coal Railway bonds and to provide for the issue of bonds under the Chicago & Eastern Illinois mortgage by the consolidated company.

Second. That the provision in article 7 that the two mortgages should have the force and effect of first mortgages executed by the consolidated company means the same with respect to one mortgage as the other. If the Central Trust mortgage became the mortgage of the consolidated company by virtue of this provision, so, also, the Coal Railway mortgage became the mortgage of the consolidated company. The provision means the same as if the two mortgages were reexecuted by the consolidated company. The covenants and provisions of the Coal Railway mortgage, including the after-acquired clauses, became the covenants and provisions of the consolidated company, and applied to its after-acquired property. It was within the intention of the parties to the Coal Railway mortgage, at the time it was made, that the Coal Railway might be extended into Illinois and to Chicago. If they had in mind a particular line, that is not important; and, when afterwards the Coal Railway Company acquired property which brought its line into direct communication with Chicago, that line into Chicago was, upon the consolidation, after-acquired property within the intent of the after-acquired clause in the Coal Railway mortgage. So also as to the extensions and additions by the consolidated company through Illinois. That upon a consolidation the mortgage of a constituent does not cover property afterwards acquired by the consolidated company unless there comes in, in legal effect, a new mortgagor by the consolidation. The Central Trust Company mortgage became a lien upon the lines acquired by the consolidated company from Danville to Brazil, and from Sidell to Tuscola, and from Tuscola to Thebes and to East St. Louis only by the terms of article 7 of the consolidation agreement, by which the Coal Railway mortgage also became a lien upon that property. That the Central Trust Company mortgage became a lien upon the property acquired after the consolidation by virtue of the after-acquired property clause in its mortgage and the consolidation agreement. But that the after-acquired property clause of the Metropolitan Trust Company mortgage is almost identical in terms, and also came into operation under the same provision as that of the Central Trust Company. As the bonds issued under the Chicago & Eastern Illinois mortgage after the consolidation, as contemplated by article 7, were to be secured by the after-acquired property of the consolidated company as well as by the existing property, so the bonds already issued under the mortgage must be so secured, and a fortiori the bonds issued under the Coal Railway mortgage must also be so secured; otherwise the two mortgages, which are to have the effect of first mortgages executed by the consolidated company, would not 'equally secure the payment of all bonds which have been issued under either of said mortgages.'

Such, briefly, are the contentions of counsel for the Metropolitan Trust Company.

The articles of consolidation of 1894 provided that, thereafter, bonds should continue to be issued under the Eastern Illinois general consolidated mortgage, and that mortgage was the only recourse which the consolidated company then had for raising necessary additional capital. That mortgage contained the following provisions:

'Whenever any additional mile or miles of single-track railroad shall be acquired or created by the railroad company by purchase, construction, consolidation or otherwise, and such fact shall be made to appear to said trust company, by the affidavits of the president or a vice president, and the chief engineer of the railroad company, showing among other things, the exact length of the railroad or railroads so acquired or created, and where the same begin and end; and upon the recording of said mortgage or deed of trust, as required by the laws of the state or states in which any of said additional railroad shall be situate, said trust company shall, upon the request of the board of directors of the executive committee of the railroad company, certify and deliver to the railroad company a further issue of bonds hereunder at the rate of, but in no event exceeding, the amount of eighteen thousand dollars per mile of single-track railroad so acquired or created.

'Provided that, if any railroad acquired by purchase, consolidation or otherwise, shall be incumbered by any mortgage which remains unsatisfied, bonds secured by this mortgage (the general consolidated and first mortgage) shall be issued thereon only for the difference between said incumbrance and the amount for which bonds might be issued hereunder if such incumbrance did not exist.'

Commencing with the consolidation of 1894, and continuing until the appointment of the receivers, the Eastern Illinois, first, under the domination of Mr. H. H. porter, and later under the domination of the 'Frisco' System, more than a dozen times issued general consolidated bonds at the rate of $18,000 a mile, for additional railroad acquired by the Eastern Illinois, and no deduction from that amount per mile was made by reason of any existing mortgage on the newly-acquired property.

The record contains the affidavits and certificates furnished by the officers and directors of the Eastern Illinois, on which these additional general consolidated bonds were issued, and in each case of new construction or purchase no deduction was made for any existing lien created by the Coal Railway mortgage. In the case of the acquisition of the line from Danville to Terre Haute and Brazil a deduction was made for the amount of the prior mortgages which had been made by the former owners of those properties, but no deduction was made on account of the Indiana Coal Mortgage.

If the Metropolitan Trust Company contention is to be adopted, and the parties intended that, by the consolidation of 1894, the lien of the Coal mortgage was to be extended over all property thereafter acquired by the Eastern Illinois Company, not a single one of these general consolidated bonds could have been lawfully issued; as, in each case, the amount of the Indiana Coal mortgage lien was far in excess of $18,000 per mile of new railroad for which general consolidation bonds were issued and certified.

The practical construction thus placed upon the articles of consolidation of 1894 must be seriously considered, and all parties interested seemed to believe that the Indiana Coal mortgage was to be regarded a first mortgage upon the Indiana Coal Railway as it then existed, and the Eastern Illinois mortgage was to be regarded a first mortgage upon the Eastern Illinois Railroad as it then existed, and upon any acquisitions thereafter made by the consolidated company.

When Mr. Porter acquired the Eastern Illinois stock, the Eastern Illinois Company was a successful railroad, and its general credit was a sufficient guaranty of the...