Union Trust Co. v. Missouri, K. & T. Ry. Co.

• Decision Date: 01 January 1880
• Citation: 26 F. 485
• Parties: UNION TRUST CO. OF N.Y. v. MISSOURI, K. & T. RY. CO. and others. (Original Bill.) MISSOURI, K. & T. RY. CO. v. UNION TRUST CO. OF N.Y. (Cross-Bill.)
• Court: U.S. District Court — District of Kansas

26 F. 485

UNION TRUST CO. OF N.Y. v. MISSOURI, K. & T. RY. CO. and others. (Original Bill.)

MISSOURI, K. & T. RY. CO. v. UNION TRUST CO. OF N.Y. (Cross-Bill.)

United States Circuit Court, D. Kansas.

November Term, 1880

On the first of February, 1871, the railway company executed a first mortgage to the Union Trust Company of New York, as trustee to secure bonds, amounting to more than $14,000,000, drawing 7 per cent. interest. In 1874, the company made default in the payment of interest, and a receiver was appointed under a second mortgage. In 1875, the trust company filed a bill to foreclose the said mortgage of February 1, 1871; the receiver continuing in possession. On March 1, 1876, the first mortgage bondholders, as parties of the first part; the second mortgage bondholders and all other creditors, parties of the second part; the Missouri, Kansas & Texas Railway Company, party of the third part; and the Union Trust Company as party of the fourth part,-- entered into an agreement known as the 'March agreement.'

Briefly stated, that agreement having recited that the railway company is unable at present to pay its existing indebtedness, etc., provides that the first mortgage bondholders will accept 4 per cent. interest for the years 1876, 1877, and 1878, and 5 per cent. interest for the year 1879, 1880, and 1881, to be paid semi-annually on the days mentioned in the bond, to-wit, February and August 1 of each year; and the said first mortgage bondholders agreed that for all past-due interest, and the difference between the reduced rate and the mortgage rate, as it became due, they would accept income bonds under an income mortgage to be made and dated April 1, 1876, at 80 cents on the dollar; the said income bond to draw interest at the rate of 6 per cent payable semi-annually, from the net or surplus earnings of the railway company. Bill, Schedule A, 14, 15. The floating debt creditors and the holders of the second mortgage bonds under the original second mortgage of September 1, 1873, who held first mortgage bonds as collateral security, were authorized to retain said first mortgage bonds, and credit them upon their indebtedness at 65 cents on the dollar, flat. For the balance, after crediting these collaterals, they were to receive income bonds under the income mortgage, at 80 per cent. of their par value. Bill, Schedule A, 17, 18. The persons holding preferred stock, issued under the agreement of April 27, 1874, were to receive income bonds therefor.

The third article of the said agreement provides how said net surplus earnings should be applied. Adjustments were to be made semi-annually, as each coupon upon the first mortgage bonds became due. The net or surplus earnings were to be applied-- First, to the payment of the interest on the first mortgage bonds at the reduced rate; second, any excess, to the payment of the interest on incomes; third, any excess beyond this, to be applied towards increasing the payment of the interest on the first mortgage bonds up to the mortgage rate; fourth, if there is no excess of the net earnings over the reduced rate, the first mortgage bondholders were to take, semi-annually, income bonds for the balance at 80 cents on the dollar; fifth, if there should be no net earnings applicable to the income bonds, they were to accept, semi-annually, interest-bearing scrip, which it was provided was to be redeemed, with 6 per cent. interest, before any dividend could be declared upon the stock.

On April 1, 1876, the income mortgage was executed, pursuant to that agreement. This is strictly an income mortgage, whereof the principal is due in the year A.D. 1911; and it provides that, from the net or surplus earnings of the said railway company the interest thereon shall be paid semi-annually, at the rate of 6 per cent. per annum, on the first days of April and October in each year.

Article 3 of said income mortgage provides that the railway company, after it shall have received its property, 'shall thereafter pay, from its net or surplus earnings remaining after the payment of the expenses of operating and keeping in repair its railway and property herein described, and the interest of the several incumbrances prior hereto, the interest on the said bonds, semi-annually, at the rate of 6 per cent. per annum, on the first days of April and October of each year. If the said net or surplus earnings, so remaining as aforesaid, shall not be sufficient to pay the interest of the said bonds as the same becomes due and payable, the said railway company shall issue to the holder of the coupons or interest warrants of the said bonds scrip certificates, payable only from the net or surplus earnings of the railway company, which, with the interest thereon, at the rate of 6 per cent. per annum, shall be redeemed and paid by the railway company before it declare or pay any dividend on the capital stock.'

The sixth article of the income mortgage, which is the one which contains the company's covenant, and the only one referred to in the scrip as the authority under which the scrip is issued, is as follows:

'Art. 6. The said party of the first part (railway company) hereby further agrees that it will pay, or cause to be paid, the said bonds to be issued and secured by this mortgage as aforesaid, and that it will pay the interest thereon semi-annually, in lawful money, from its net or surplus earnings remaining after the payment of the expenses of operating and keeping in repair its railway and property herein described, and of the interest on the several incumbrances prior thereto and hereinbefore described, provided said net or surplus earnings shall be sufficient therefor, and that in case its said earnings in any six months shall be insufficient therefor, then, for any such deficit, said party of the first part agrees to issue a scrip certificate, redeemable, with six per cent. interest, before any dividend shall be declared upon the stock of said company, (which follows, in this respect, the language of article 3 of the March agreement.) Said party of the first part further agrees to pay all taxes, levies, and assessments imposed and assessed, and which may hereafter be imposed or assessed, upon the premises, franchises, and property hereby conveyed, or intended so to be, and also the United States government tax upon the interest payable on said bonds, and each of them, and that it will, at its own expense, do or cause to be done all things necessary to preserve and keep valid and intact the lien and incumbrance hereby created.'

Under certain orders of court and the March agreement, the receiver surrendered to the trust company, and that company took possession of, the railway, July 1, 1876, and remained and was in possession in November, 1880, when the tender below mentioned was made.

Under the operation of the agreement of March 1, 1876, and the corresponding provisions of the income mortgage of April 1 1876, the interest up to December 1, 1880, on the first mortgage bonds, at the reduced rate, had been paid in full, but not promptly, in cash, out of earnings, except the coupon which fell due February 1,...