Central Trust Co. of New York v. Chattanooga, R. & C.R. Co.

• Decision Date: 16 May 1899
• Docket Number: 784.
• Parties: CENTRAL TRUST CO. OF NEW YORK v. CHATTANOOGA, R. & C.R. CO. et al. OWEN et al. v. JONES.
• Court: U.S. Court of Appeals — Fifth Circuit

94 F. 275

CENTRAL TRUST CO. OF NEW YORK v. CHATTANOOGA, R. & C.R. CO. et al.

OWEN et al. v. JONES.

No. 784.

United States Court of Appeals, Fifth Circuit.

May 16, 1899

L. A Dean and C. P. Goree, for appellants.

Alex. C. King, for appellee.

Before PARDEE, McCORMICK, and SHELBY, Circuit Judges.

McCORMICK Circuit Judge.

The Chattanooga, Rome & Columbus Railroad Company, by a different name, was chartered by an act of the legislature of the state of Georgia approved August 30, 1881. The company was given power to issue bonds in such amount as it desired, and to mortgage all of its railroad, right of way, rolling stock and franchise for the purpose of securing its bonds. Laws Ga 1880=81, p. 246, Sec. 13. By an amendment approved December 22, 1886, it was provided that the company should have power and authority to issue income bonds, and to secure the same by a mortgage of its property and franchise, or by pledging the income of its railroad, either or both, as the company should deem proper. Laws 1886, p. 137, Sec. 2. The company was authorized to construct a railroad from Chattanooga Tenn., to Carrollton, Ga.,-- a distance, by the route proposed, of about 140 miles. It began the construction of its road, placed a mortgage on that part of its property lying between Rome and Cedartown to secure an issue of bonds amounting to $150,000, but up to September 1, 1887, had only completed 20 miles of its railroad. On September 1, 1887, it executed the deed of trust foreclosed in this proceeding. This deed conveyed to the trustee all of the railroad constructed and to be constructed extending from Chattanooga, Tenn., to Carrollton, Ga., with all the rights of way, depot grounds, yards, terminal property and rights, and all such real and personal property as might be germane to and necessary for the construction, operation, and maintenance of its line of railroad, whether then owned and possessed by the mortgagor or thereafter to be acquired,-- specifying exhaustively the materials necessary to be used in the construction, maintenance, and operation of the railroad, whether then owned and possessed by the mortgagor or thereafter to be acquired by it; also all the rights, power, privileges, and franchises of, or belonging to, or thereafter to be acquired by, the mortgagor. This deed of trust was subject to the former mortgage as to so much of the property as that mortgage embraced. It was given to secure an issue of bonds amounting in the aggregate to the sum of $2,240,000. It provided that, in case of default for three months in the payment of any interest coupon when due, the principal of the bond to which the coupon was annexed should immediately become due; and if such default should be made in the payment of interest, and in the payment of principal thereby or otherwise matured, upon the written request of the holder of any bond or coupon the trustee was authorized, empowered, and directed to take and hold possession of the railroad and all its property, rights, etc., and to maintain and operate the same until the day of sale thereafter to be fixed, or, in its discretion, proceed by bill in equity or other appropriate proceeding in any court of competent jurisdiction, whether of the United States or of the state of Georgia, to foreclose the mortgage, and enforce the rights, liens, and securities of the trustee and bondholders thereunder. On September 2, 1887, the defendant railroad company (mortgagor) issued income bonds, and, to secure their payment according to their terms, executed and delivered to the same trustee a mortgage, covering the same property, declared to be subsequent and subordinate in all respects to the mortgage dated September 1, 1887, pledging as security for the payments stipulated to be made by the income bonds and coupons thereto attached the net earnings of the railroad, after providing for the interest on the $2,240,000 of first mortgage prior lien bonds. After the execution and delivery of these mortgages, the mortgagor company sold and conveyed all of its property, including the property covered by the mortgages, to the Savannah & Western Railroad Company, which last-named company came under the control of the Central Railroad & Banking Company of Georgia, all of whose property was placed in the hands of receivers in March, 1892. On September 1, 1892, default was made in the payment of interest on the bonds secured by the mortgage of September 1, 1887, and on March 1, 1893, and on September 1, 1893, default was made in the payment of interest respectively maturing on those dates. On December 15, 1893, the trustee in the deed of trust exhibited its bill, with proper averments, asking for a foreclosure of its lien, a sale of the mortgaged property, and showing that the property was inadequate security for the debt, that the mortgagor and its assigns were insolvent, and praying that, pending foreclosure proceedings, the mortgaged property be taken possession of by a receiver to be appointed by the court, with such powers and authority as may be requisite to preserve the property until sale thereof, and to secure the earnings for the use of the bondholders. The appellee Eugene E. Jones was thereupon duly appointed receiver by an order passed February 1, 1894. He took possession of all of the railroad property, and operated it pending the progress of the foreclosure suit, under the customary orders in such cases. The decree of foreclosure and sale was passed July 12, 1894. It ascertained the amount due on the bonds at that date. It provided that the funds to be realized from the sale should be appropriated--First, to the payment of costs, including expenses and allowances indicated; second, to the payment of the principal and interest due and unpaid on the bonds secured by the mortgage of September 1, 1887; third, to the payment of the principal of the income bonds secured by the mortgage of date September 2, 1887; and, fourth, should there be any surplus remaining, after making the payments above directed, it was to be paid into the registry of the court to abide such order and decree as the court should make in respect thereto. For reasons which the record does not fully disclose, the sale was not made until some time in the early part of 1897. At the sale a reorganization committee became the purchaser. They complied with the terms of the sale, and the same was confirmed to them by a decree passed June 30, 1897. On September 25, 1897, the interveners filed their petition, showing that they were judgment creditors of the mortgagor company, whose judgments were obtained in the several state courts of Georgia prior to the filing of the bill by the Central Trust Company of New York to foreclose the mortgage. They claimed that, as such judgment creditors, they had a superior lien-- First, on the proceeds of the sale of all of the road, except the 20 miles that had been constructed at the date of the mortgage; and, second, on the whole amount of the net earnings in the hands of the receiver acquired by him from his operation of the road pending the foreclosure proceedings. To this petition the receiver (appellee) demurred, on the ground that the lien of the mortgage attached to all of the proceeds of the sale of the railroad property and to the alleged income earned by the receiver, and was superior to the alleged lien of the petitioning creditors' judgments. On September 16, 1898, the circuit court passed its decree, sustaining the demurrer of the receiver, and dismissed the petition of the interveners. 89 F. 388. From that decree this appeal was taken.

The errors assigned are: (1) That the circuit court erred in holding that the mortgage is a valid lien upon the property acquired by the railroad company after the execution of the mortgage; (2) in holding that the mortgage creditors are entitled to the income earned by the receiver while operating the railroad; (3) in holding that the judgments are not liens on the after-acquired property and the incomes, superior to the mortgage lien. The appellants contend-- First, that the defendant railroad corporation (mortgagor) had no authority, under its original or its amended charter, or the general laws of Georgia, to mortgage on September 1, 1887, any part of its railroad not then constructed, or any part of its equipment or other property which had not theretofore been acquired and was not then held by it; and, second, that the mortgagor company had no authority, under its charter or under the general laws of Georgia, to mortgage its income.

By the act of the legislature of the state of Georgia approved September 27, 1881, a general law for the incorporation of railroads, it is provided that future-acquired property may be mortgaged by railroad corporations formed under that act. Laws Ga. 1880-81, p. 160, Sec. 9. The supreme court of Georgia, by a decision rendered on August 20, 1894, held:

'(1) There

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