Central Trust Co. v. Ohio Cent. R. Co.

• Decision Date: 29 August 1888
• Parties: CENTRAL TRUST CO. v. OHIO CENT. R. CO. et al. (McGOURKEY, Intervenor.)
• Court: U.S. District Court — Northern District of Ohio

36 F. 520

CENTRAL TRUST CO. v. OHIO CENT. R. CO. et al. (McGOURKEY, Intervenor.)

United States Circuit Court, N.D. Ohio, Western Division.

August 29, 1888

Geo Hoadly and James Irvine, for petitioner, McGourkey.

Stevenson Burke and Doyle & Scott, for the Central Trust Company and the Ohio Central Railway Company.

JACKSON J.

The original or main suit herein was brought by complainant to foreclose certain mortgages executed by the Ohio Central Railway Company, January 1, 1880, to secure $3,000,000 of first mortgage bonds and $3,000,000 of income bonds. The mortgage or trust deed securing the first mortgage bonds conveyed to said Central Trust Company of New York, as trustee, in very broad and comprehensive terms, all the line of railroad of the mortgagor, with all rights of way, roadbed made and to be made, track laid and to be laid between the designated terminal points, including all the stations, depot grounds, fences, rails, bridges, sidings, engine-houses machine-shops, buildings in any way then or thereafter appertaining unto said described line of railroad 'together with all the engines, cars, machinery, supplies, tools, and fixtures now or at any time hereafter held, owned, or acquired by said party of the first part for use in connection with its line of railroad aforesaid. ' This mortgage, as well as the income mortgage securing the $3,000,000 of income bonds, was duly recorded. The railroad company made default in paying the interest on said bonds, and the said trustee thereafter, in pursuance of and in conformity with the terms and provisions of said mortgages, commenced proceedings in this court to foreclose said mortgages by a sale of the property covered thereby. Such proceedings were had in the cause as resulted in a sale of the franchises and property of the said Ohio Central Railway Company in the summer of 1885, when, under a scheme of reorganization participated in by a large majority of the bondholders and a considerable portion of the stockholders, said property and franchises were purchased for this account, and then conveyed to a newly-organized corporation, called the 'Toledo & Ohio Central Railway Company, ' which thus became the successor of the said Ohio Central Railway Company in and to franchises and property of the latter covered by said mortgages. At or about the time of commencing said foreclosure suit, John E. Martin was, on September 30, 1883, appointed receiver of the road and property of said Ohio Central Railway Company, and said receivership continued for the period of 21 months, extending from October 1, 1883, to June 30, 1885. The regularity of these proceedings, not being called in question or anywise involved in the present controversy, need not be noticed with more particularity or detail.

On April 2, 1884, during the pendency of said foreclosure suit, George J. McGourkey, trustee, filed his two intervening petitions in the cause, alleging that under three certain lease contracts entered into and executed between himself and said Ohio Central Railway Company, bearing date, respectively, August 20, 1880, March 1, 1881, and March 1, 1882, he had leased and delivered to said railway company 27 locomotives, 3,300 coal cars, and 340 box cars, designated and identified by serial numbers mentioned, and the letters 'O.C.C.T.' marked thereon, for which the railway company had agreed to pay him certain rentals during the period stated in each lease, when said locomotives and cars were to become the property of said railway company. The petitions, after setting out the terms of said lease contracts, and the payments that had been made thereunder, both by the company and the receiver, alleged that said cars and locomotives had gone into the possession of said receiver, and were then being used by him in conducting the business of said railroad, and prayed that said receiver be directed by the court either to perform the covenants of said leases by paying the balance due petitioner thereunder, or that he be directed to deliver up said equipment, and pay petitioner for the use thereof; and asking for a reference to a special examiner to ascertain and report the value of such use. On the 18th of June, 1887, said McGourkey, trustee, filed a third petition in the suit, claiming that there was due him as rental under said leases from March 1, 1883, to October 1, 1883, when said equipment went into the hands of the receiver, the sum of $124,000, which, though accruing before the receivership, should be paid him, because cash assets, personal property, and earnings to a large amount had come into the possession of the receiver, and been applied towards permanent improvements, new equipment, and betterments placed upon the property, etc. The Central Trust Company, complainant in the foreclosure suit, and the Toledo and Ohio Central Railway Company, as the purchaser of the mortgaged property sold thereunder, answered said petitions, denying the title of McGourkey, trustee, to the equipment claimed by him, and disputing his right to any rental for the use of the same while in the hands of the receiver. a reference was directed to a special master, who took proof, and reported that the petitioner, McGourkey, trustee, should be paid about the sum of $80,000 as rental while said equipment was used by the receiver between October 1, 1883, and June 30, 1885, in addition to what had been paid during said period, which amounted to about $129,000. The petitioner and the complainant, together with the Toledo & Ohio Central Railway Company, each filed exceptions to said report; the petitioner claiming that he has a valid title to said equipment, and is entitled to a much larger rental therefor; and the complainant, in behalf of the first mortgage bondholders, and the Toledo & Ohio Central Railway Company in its own behalf, insisting that the title to said cars and locomotives was vested in said Central Trust Company, under and by virtue of the 'after-acquired property' clause of the mortgage of January 1, 1880, executed to secure the railway company's first mortgage bonds. That said McGourkey, trustee, under and by virtue of said leases acquired nothing more than a lien upon said equipment, subject to the prior lien and title of said mortgage, and that he is not entitled to any rent or purchase money therefor as against said bondholders or their trustee; but, if mistaken in this view of their rights, that the surplus earnings derived from the receivership, and now in court, amounts to only about $80;000, and that petitioner should in no event be awarded a greater allowance than such surplus earnings, as any greater allowance would have to be paid out of funds or property belonging to and purchased by the bondholders under the foreclosure suit. It is conceded by counsel for petitioner, McGourkey, (and, as the court thinks, properly so,) that complainant and the Toledo & Ohio Central Railway Company are not estopped by anything that has occurred during the progress of the foreclosure suit from setting up the claims they insist upon in respect to said equipment.

But counsel for complainant and the Toledo & Ohio Central Railway Company have gone further, and contended that the leases under which petitioner asserts his claim to said equipment and to compensation for the use thereof while in the possession of the receiver, were a part and parcel of a fraudulent scheme contrived and put in operation by the pool or syndicate which originally organized the Ohio Central Railway Company. It appears that, in 1879, what is called the '$3,000,000 pool' was formed to acquire and complete certain lines of railroad, which were to constitute the Ohio Central Railway Company. This syndicate, through its committee, composed of George I. Seney, Dan P. Eells and George F. Stone, representing the subscribers to said pool, contracted with Brown, Howard & Co., also members of said syndicate, to acquire and construct the lines that were to form said Ohio Central Railway Company; to organize said company with a capital stock of $5,000,000, and, when completed and organized, the company's capital stock of $5,000,000, together with its first mortgage bonds for $3,000,000, and its income bonds for $3,000,000, were to be issued. This stock and these bonds, aggregating $11,000,000, were to be turned over by Brown, Howard & Co. to the subscribers to said pool or syndicate, which was to and did pay to Brown, Howard & Co. the $3,000,000 for acquiring, completing its lines, and organizing said railway company. Brown, Howard & Co were also to furnish the road with $560,000 worth of equipment. They completed and organized the company under this contract, received from the syndicate the $3,000,000, and turned over to the pool the $11,000,000 of stock and bonds of the company, which were distributed between members of the syndicate in proportion to their respective subscriptions to the $3,000,000 pool; the result of the transaction being that the promoters of the enterprise obtained $11,000,000 of the railway company's securities at and for an actual outlay of only $3,000,000. The securities so received were at the date of issuance, or very soon thereafter, worth in the market largely more by several millions than the sum of $3,000,000 paid out therefor. Following this transaction, and as a part of the same alleged fraudulent scheme, it is claimed that said syndicate having control of the railway company adopted and carried into execution a fraudulent plan and contrivance to make a third issue of bonds secured by mortgage upon the terminal property and facilities of the company at Toledo, and then take said terminal properties out of the operation of the first mortgage made to secure the first mortgage bonds. The report made by the officers of...