American Brake Shoe & F. Co. v. Interborough RT Co.

• Decision Date: 10 January 1935
• Citation: 10 F. Supp. 512
• Parties: AMERICAN BRAKE SHOE & FOUNDRY CO. v. INTERBOROUGH RAPID TRANSIT CO.
• Court: U.S. District Court — Southern District of New York

10 F. Supp. 512

AMERICAN BRAKE SHOE & FOUNDRY CO. v. INTERBOROUGH RAPID TRANSIT CO.

District Court, S. D. New York.

January 10, 1935.

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Miller, Boston & Owen, of New York City (Carl M. Owen and Mark F. Hughes, both of New York City, of counsel), for receiver of Interborough Rapid Transit Co.

Hughes, Schurman & Dwight, of New York City (Charles E. Hughes, Jr., and E. M. Bull, both of New York City, of counsel), for receiver of Manhattan Ry. Co.

Davis, Polk, Wardwell, Gardiner & Reed, of New York City (Edwin S. S. Sunderland and Chester F. Leonard, both of New York City, of counsel), for Guaranty Trust Co. of New York as trustee under the first and refunding mortgage of Interborough Rapid Transit Co.

Charles Franklin, of New York City, for Manhattan Ry. Co.

Samuel Seabury, Charles Dickerman Williams, and W. G. Mulligan, Jr., all of New York City, for City of New York.

John J. Curtin, of New York City, for Transit Commission.

MACK, Circuit Judge.

Consequent upon the Interborough receiver's application 52 for permission to disaffirm the Manhattan lease, two important issues have been raised in these proceedings: First, applications have been made by the city and separately by the transit commission as the city's agent, for leave to sue the Interborough, its receiver, and others in the state court for a declaratory judgment that the cessation of operation of through trains over elevated and subway routes, such cessation being the threatened result of disaffirmance, would be a breach of Interborough's obligations to the city; and, further, for an injunction against such threatened breach and specific performance by the Interborough and its receiver of their alleged contractual obligations, although without enforcement thereof during the receivership. Second, pending consideration of the applications for leave to sue, an amended and supplemental bill was filed by the American Brake Shoe & Foundry Company, the original plaintiff herein, against the city of New York and the transit commission as alleged agent of the city, seeking to make them parties to the receivership proceedings. This bill the city and the transit commission, appearing specially, have moved to dismiss.

The agreements between the Interborough and the city, upon which the petitions for leave to sue in the state court are predicated, are the so-called Contracts 1, 2, and 3, the Elevated Extension Certificate in connection with the Joint Trackage Agreement, and contracts of 1903 and 1906 in reference to the 149th Street spur, the details of which need not now be recounted. Petitioners assert that cessation of the operation of through trains over subway and elevated would be a breach of some or all of these agreements and that this would enable the city, at its option, to rescind them or to pursue other remedies therein provided for. The receiver and the other Interborough interests urge that under the contracts properly construed, it is clear that disaffirmance of the Manhattan lease would not be a breach of Interborough's obligations to the city and that leave to sue must be denied because no prima facie case is stated in the petitions.

Obviously no decision on the receiver's application to disaffirm the lease can properly be made unless there be also a binding determination of the effect thereof on the city's rights under the contracts with the Interborough, inasmuch as such effect must be considered and might be controlling as to affirmance or disaffirmance. Consequently, either here or in the state court, a final determination of the city's claim binding on both of the parties must, or at least properly should, be had preliminary to or as part of the decision sought in receiver's application 52.

On the Motion to Dismiss the Amended and Supplemental Bill.

The prayer of the supplemental bill is that "the rights and claims of the defendants the City of New York and the Transit Commission * * * may be ascertained and decreed along with the rights of the plaintiff and of all other creditors of said defendant Interborough Rapid Transit Company," and that "the Court enjoin and restrain the defendants the City of New York and the Transit Commission from taking any action by legal process or otherwise or asserting any claim in respect of its rights in and to, or in respect of, the assets of the defendant Interborough Rapid Transit Company, except in conformity with the rights of said defendants * * * as found and decreed by this Court." Further prayer is that the assets of the Interborough Rapid Transit Company be ordered sold, if necessary, free and clear of the city's claims. The city, appearing specially, has moved to dismiss the bill "for insufficiency of fact to constitute a valid cause of action in equity against the defendant, the City of New York," and "because such suit does not really and substantially involve a dispute or controversy properly within the jurisdiction of this Court." The city prays, in the alternative, that proceedings under the supplemental bill be stayed pending the determination by the state courts of its proposed action against the company and its receiver.

Equity Rule 37 (28 USCA following section 723) is the basis of complainant's supplemental bill. The relevant portion of this rule is as follows: "All persons having an interest in the subject of the action and in obtaining the relief demanded may join as plaintiffs, and any person may be made a defendant who has or claims an interest adverse to the plaintiff. Any person may at any time be made a party if his presence is necessary or proper to a complete determination of the cause."

Four principal issues are raised by the supplemental bill and the answers thereto: (1) Is the city a necessary or proper party within the purview of the rule? (2) Is a supplemental bill, filed by an unsecured creditor in the position of plaintiff, proper procedure under the rule? (3) Does the prayer of the bill that the city be joined as a party to the receivership proceedings pursuant to the rule, and that its rights be therein determined, present a case or controversy within the jurisdiction of the court? (4) Is the transit commission a proper party defendant? In my opinion, all of these questions must be answered in the affirmative.

First. That the city's presence is necessary to a complete determination of the issue of disaffirmance, and hence to a complete and final disposition of the receivership estate, seems obvious from the facts of the case as heretofore described. Equally clear are the authorities that, in such a situation, the city is a proper party to the cause. The test laid down by the Supreme Court in California v. Southern Pacific Company, 157 U. S. 229, 251, 15 S. Ct. 591, 600, 39 L. Ed. 683 (1895), for the determination of who are proper parties, is whether the court can "proceed to a decree * * * and do complete and final justice between the parties, without affecting other persons, not before the court, or leaving the controversy in such a condition that its final termination might be wholly inconsistent with equity and good conscience." Again, in Williams v. Bankhead, 19 Wall. 563, 571, 22 L. Ed. 184 (1873), the court said: "Where he a person not before the court is not interested in the controversy between the immediate litigants, but has an interest in the subject-matter which may be conveniently settled in the suit, and thereby prevent further litigation, he may be a party or not, at the option of the complainant." See, also, Consolidated Gas Co. v. Newton, 256 F. 238, 245 (D. C. S. D. N. Y. 1919); Vicksburg, S. & P. Ry. Co. v. Schaff, 5 F.(2d) 610 (C. C. A. 5th, 1925); Kuchler v. Greene, 163 F. 91 (C. C. S. D. N. Y. 1908); 3 Cyc. Fed. Eq. Proc. #715, n. 21 (1928). Applying this general rule in receivership cases strikingly analogous to the present one, the courts have uniformly found that persons in a situation similar to that of the city herein are proper parties to the cause, whether their joinder in the proceedings is voluntary, through intervention, or compulsory, by service of process upon them. Blair v. Chicago, 201 U.S. 400, 26 S. Ct. 427, 50 L. Ed. 801 (1906); Crawford v. Duluth St. Ry. Co., 60 F.(2d) 212 (C. C. A. 7th, 1932); Central Union Trust Co. v. Anderson County, 268 U. S. 93, 45 S. Ct. 427, 429, 69 L. Ed. 862 (1925); cf. Compton v. Jesup, 68 F. 263 (C. C. A. 6th, 1895).

Second. The city and the transit commission contend that even if they could be brought into the receivership proceedings, plaintiff as an unsecured creditor has no such interest in the assets of its debtor as to enable it to file this supplemental bill against them for this purpose. It is urged that to attain this end a dependent action must be instituted by the receiver. That the receiver would have such standing as to enable him to institute an ancillary suit against the city is settled by Blair v. Chicago, supra. But it by no means follows that the receiver is the only one who has an interest in the receivership estate sufficient to allow the bringing of such an action. In Central Union Trust Co. v. Anderson County, supra, the trustee under a railroad mortgage brought foreclosure proceedings against the railroad, and receivers were appointed. Anderson county threatened to enforce a state court decree requiring the railroad to maintain its general offices, shops, and roundhouse at the city of Palestine. An ancillary bill was brought by the trustee to remove the cloud on the title of the receiver's properties growing out of such state court decree. In holding the action properly brought, the Supreme Court said: "Ancillary suits are not limited to those initiated by persons who desire to come in and have their rights determined. Such a suit may be maintained by the plaintiff in the principal suit against strangers to the record to determine a controversy having relation to the property in the custody of the court and which, in justice to the...