Watts v. Missouri-Kansas-Texas Railroad Company
Decision Date | 20 September 1967 |
Docket Number | No. 23608.,23608. |
Citation | 383 F.2d 571 |
Parties | Edward S. WATTS et al., Appellants, v. MISSOURI-KANSAS-TEXAS RAILROAD COMPANY, Appellee. |
Court | U.S. Court of Appeals — Fifth Circuit |
Sidney Stahl, William Van Dercreek, Ray Besing, Geary, Brice & Lewis, Dallas, Tex., for appellants.
Monroe E. Clinton, John B. Webster, Dallas, Tex., Harry G. Silleck, Jr., Thomas W. Evans, New York City, for appellee, Nixon, Mudge, Rose, Guthrie & Alexander, New York City, of counsel.
Before GEWIN, COLEMAN, GOLDBERG, Circuit Judges.
This is a class action brought by eight individuals and a corporation1 (the Holders), who hold 5½% subordinated income debentures due January 1, 2033, on behalf of all other holders, against the Missouri-Kansas-Texas Railroad (Katy).2 The Debenture is an unconditional promise to pay 5½% interest out of income as defined in Article 2 of the Indenture, dated January 1, 1958, made and entered into between the Katy and the New York Trust Company (now the Chemical Bank New York Trust Company) as trustee.3 The Holders allege that the value of the outstanding debentures is $58,000,000, and that the Katy owes approximately $8,000,000 in current and accumulated unpaid interest. The Holders allege further that the Katy has realized certain gains, including gain from the sale of land ($5,634,389), from income tax refunds ($2,229,858), and from cancellation of indebtedness by the Katy's acquisition of its own debentures at less than their face value ($14,704,990), which sums should have been credited as "available income" (a term of art defined in the Indenture; see footnote 2, supra), and used to pay the interest obligation owing on the Debentures.
The Katy's answer interposed two defenses relevant here: first, that the Holders' pleadings had failed to meet certain conditions precedent for maintaining the suit (see footnote 4, infra), and second, that the Interstate Commerce Commission, and not the district court, had primary jurisdiction of this action.
The district court granted the Katy's motion for judgment on the pleadings (F.R.Civ.P. 12(c)), and it dismissed the cause, without stating its reasons. The Holders appeal. We reverse the district court and hold that the suit may now be maintained, and that jurisdiction over it should be retained by the district court while the questions in the case which concern the Katy's accounting practices are referred to the Interstate Commerce Commission under the primary jurisdiction doctrine.
I. Standing to sue. The Katy argues that the Holders, in order to bring this action, must satisfy Section 6.06 of the Indenture,4 which requires notice to the trustee, demand upon the trustee to sue by bondholders who hold 25 per cent of the aggregate principal amount of the outstanding bonds, and refusal to sue by the trustee, before the bondholders themselves can sue. With these conditions the Holders have not complied.
The Holders rely on Section 6.07 of the Indenture.5 They argue that Section 6.07 is an exception to Section 6.06, and permits suits by individual bondholders on the "unconditional and absolute" obligation to pay principal and interest, as they become due.
We agree with the Holders. The result is compelled by the wording and construction of the Indenture, especially in the light of the long history of cases which reach the same result.
It is common for indentures to restrict suit by bondholders unless conditions similar to those in Section 6.06 are met. These restrictions are justified where they prevent rash, precipitate, or harassing suits by bondholders who disrupt corporate affairs by seeking to reach and deal with the security underlying the bond obligations.
No such justification exists where a bondholder seeks merely to collect the interest or principal due and owing him under the bond. Courts have recognized this distinction and have limited "no-action clauses" as the provisions setting forth the restrictions on suit are often called) so that they do not restrict suits by individual bondholders for interest or principal due and owing. In Noble v. European Mortgage and Investment Corp., 1933, 19 Del.Ch. 216, 165 A. 157, the Court had before it provisions virtually identical to those in this case.6 The opinion states in part:
19 Del. Ch. at 221, 165 A. at 159.
Halle v. Van Sweringen Corp., 1936, 7 W.W.Harr. 491, 37 Del. 491, 185 A. 236. See Putnam v. Pittsburgh R. Co., 1938, 330 Pa. 210, 199 A. 211; Japha v. Delaware Valley Utilities Co., 1940, 1 Terry 599, 40 Del. 599, 15 A.2d 432.
Birn v. Childs Co., Sup.Ct.1942, 37 N.Y.S.2d 689, was a suit to enforce a covenant in the indenture which required the corporation to pay certain sums into a sinking fund. The New York Supreme Court distinguished that case from cases like the present: "This suit is one for the enforcement of a covenant of the indenture, the sinking fund provision, and is not one to enforce payment of the debentures or their coupons, and it thus falls within the scope of the section of the indenture with requirements similar to those of Section 6.06 here." 37 N.Y.S. 2d at 696.7 See Betts v. Massachusetts Cities Realty Co., 1939, 304 Mass. 117, 23 N.E.2d 152.
Another major reason for limitation and strict construction of no-action clauses has been the desire to keep the bond, or debenture, negotiable. This aspect of the problem is discussed in Mendelson v. Realty Mortgage Corp., 1932, 257 Mich. 442, 445, 241 N.W. 154, 155:
The New York cases have taken this line. Cunningham v. Pressed Steel Car Co., 1933, 238 App.Div. 624, 265 N.Y.S. 256, aff'd per curiam, 1934, 263 N.Y. 671, 189 N.E. 750; Medwin v. 11 West Forty-Second Street, Inc., 1941, 261 App.Div. 721, 27 N.Y.S.2d 551; Lubin v. Pressed Steel Car Co., N.Y.City Ct.1933, 146 Misc. 462, 263 N.Y.S. 433. In Guardian Depositors Corp., v. David Stott Flour Mills, Inc., 1939, 291 Mich. 180, 188, 289 N.W. 122-123, Chief Justice Butzel discusses this problem with candor:
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