Chase Nat. Bank v. Citizens Gas Co. of Indianapolis

• Citation: 96 F.2d 363
• Decision Date: 24 May 1938
• Docket Number: No. 6472.,6472.
• Parties: CHASE NAT. BANK OF CITY OF NEW YORK v. CITIZENS GAS CO. OF INDIANAPOLIS et al.
• Court: U.S. Court of Appeals — Seventh Circuit

96 F.2d 363 (1938)

CHASE NAT. BANK OF CITY OF NEW YORK v. CITIZENS GAS CO. OF INDIANAPOLIS et al.

No. 6472.

Circuit Court of Appeals, Seventh Circuit.

April 8, 1938.

Rehearing Denied May 24, 1938.

Howard F. Burns, of Cleveland, Ohio, and William L. Taylor, of Indianapolis, Ind. (Baker, Hostetler, Sidlo & Patterson, of Cleveland, Ohio, of counsel), for appellant.

William H. Thompson and Albert L. Rabb, both of Indianapolis, Ind. (Floyd J. Mattice, Corp. Counsel, and Michael B. Reddington, City Atty., both of Indianapolis, Ind., of counsel), for appellees.

Before EVANS, MAJOR, and TREANOR, Circuit Judges.

MAJOR, Circuit Judge.

Appellant is the trustee under a deed of trust executed by appellee, Indianapolis Gas Company, on October 1, 1902, to secure a total authorized issue of $7,500,000 of its first mortgage bonds due October 1, 1952, of which bonds aggregating $6,881,000 are outstanding. The deed of trust conveyed to the trustee all the properties of the Indianapolis Gas Company, including:

"* * * all corporate and other franchises, rights, easements, privileges and immunities, contracts and property, of whatever name or description, now belonging to or held, or which may hereafter be acquired or held by said Gas Company, together with the rents, issues, income, tolls and profits arising therefrom; * * *

"To Have and to Hold all and singular the above mentioned and described property, acquired, and to be hereafter acquired, * * * and the tolls, incomes, revenues, rents, issues and profits thereof * * *."

On September 30, 1913, the Indianapolis Gas Company leased its property to appellee Citizens Gas Company of Indianapolis for a term of 99 years, including in the lease all the mortgaged property. The lessee, among other things, agreed to perform all the obligations of the lessor under its mortgage, except its obligation to pay the principal of the bonds, which included, first, the interest on the lessor's bonded indebtedness, and, second, the sum of $120,000 per year to be distributed by the lessee direct to the lessor's stockholders, as dividends upon their stock and the expenses of maintaining the lessor's corporate organization not to exceed $300 a year. The Indianapolis Gas Company withdrew from active business and the Citizens Gas Company assumed the active management of its business and the mortgaged property. The Citizens Gas Company was a quasi public corporation whose purposes and objects were controlled by a franchise and contract entered into on August 25, 1905, between the city of Indianapolis and three individual citizens who assigned the franchise and contract to the Citizens Company. The franchise and articles of corporation of the latter company provide that all the capital stock of the Citizens Company should be held by trustees with complete and irrevocable power to hold and vote the stock as fully as if they were the owners thereof and to select the members of the board of directors; that upon the performance of certain named conditions, and after the expiration of 25 years, it was provided that the trustees and directors should convey to the city all the property of the Citizens Company, subject to the legal obligations of that company, to be held by the city for the use and benefit of its inhabitants.

In Todd v. Citizens' Gas Company of Indianapolis et al., 7 Cir., 46 F.2d 855, this court held the property of the Citizens Gas to be a public charitable trust and that the property might be conveyed to the city in continuance of the trust, the city being the successor to said Citizens Company as trustee.

For a period of 22 years after the execution of the aforesaid lease, the mortgaged property was operated by the Citizens Gas during which period it paid the interest on the bonds either direct to the trustee or to the bondholders themselves. During the same interval, Citizens Gas made extensive improvements on the mortgaged property and procured the issuance of some $2,000,000 additional bonds under the deed of trust of October 1, 1902, to provide for the payment thereof. On two occasions the validity of the lease was questioned and its binding effect upon the Citizens Company was sustained by the Supreme Court of Indiana. Fishback v. Public Service Commission of Indiana et al., 193 Ind. 282, 138 N.E. 346, 139 N.E. 449; Williams v. Citizens' Gas Company, 206 Ind. 448, 188 N.E. 212.

On September 9, 1935, in pursuance of a prior demand by the city, the Citizens Company conveyed all its property to the city of Indianapolis, as successor trustee, and executed and delivered to the city an instrument of transfer and assignment. This assignment was made subject to all legal obligations of the Citizens Company including its obligations under the lease. The Citizens Company also tendered to the city an assignment of the lease which the city refused to adopt or recognize as binding upon it. The city took actual possession of the property covered by the lease as well as the mortgage and advised the Indianapolis Company that it was ready to negotiate a new lease, and negotiations were instituted which looked toward the modification or the cancellation of the same.

On March 2, 1936, the Indianapolis Company and the city entered into an agreement providing that until the controversy between them as to the binding effect of the lease upon the city had been either adjudicated or settled, the city would pay a sum equal to the interest on the bonds and the dividends on the stock of the Indianapolis Company to the Indiana National Bank of Indianapolis, and that when such controversy was settled or adjudicated, the sum so paid should be disbursed as follows:

"(a) If an agreement of settlement is made, the fund shall be disbursed in accordance with that agreement.

"(b) If it is determined in a litigated case that the lease is binding upon the City or the property acquired by it from the lessee, the entire fund shall be paid to The Indianapolis Gas Company.

"(c) If it is determined in a litigated case that the lease is not binding upon the City or the property acquired by it, reasonable compensation for the use of the mortgaged property (fixed by agreement or by the court) shall be paid to The Indianapolis Gas Company and the balance, if any, to the City."

Appellant, concerning such agreement, alleges: "the purpose and intent of said agreement was to bring about a default in the payment of interest, to depreciate the value of the outstanding bonds, to place the income derived from the operation of the mortgaged property beyond the reach of the bondholders, and by these means to coerce the plaintiff and the bondholders for whom plaintiff is Trustee to surrender the rights secured to them under the mortgage and under the lease of September 30, 1913, and thereby make possible a settlement agreement acceptable to the stockholders of The Indianapolis Gas Company and to the City of Indianapolis."

It is claimed that the agreement of March 2, 1936, is tantamount to an agreement that no interest shall be paid upon the outstanding bonds by any of the defendants unless and until the city and the Indianapolis Company shall so agree, and that as a result of this agreement default was made in the interest payments due October 1, 1936, and April 1, 1937, aggregating more than $350,000.

Appellant's suit is brought for the purpose of protecting its interest, as trustee, in the security for its bonds, substantially all of which is in the possession of the city, and its right to be paid the interest on such bonds. The court was asked to declare the lease binding upon the city, so that it would be bound to pay the interest on the bonds and to perform and observe all the covenants and agreements of the mortgagor contained in its deed of trust. It was also prayed that the lease be declared binding upon the Indianapolis Company; that it be restrained from interfering with the lease in any way and that past-due interest be paid from the fund being accumulated in the Indiana National Bank.

In the court below, upon the request of the city for a separate determination of the question of that court's jurisdiction, it was decided that appellee, the Indianapolis Company, was an indispensable party to the suit and that it should be realigned as a party plaintiff, thus destroying the diversity of citizenship upon which federal jurisdiction rested. Appellant's bill of complaint was thus dismissed. Federal jurisdiction of this suit is based solely upon diversity of citizenship, appellant being a citizen of New York and each of the appellees, citizens of Indiana.

The contested issues are:

First. Is the Indianapolis Gas Company an indispensable party to the relief sought by plaintiff in its bill of complaint as amended and supplemented?

Second. Should the Indianapolis Gas Company be realigned with the plaintiff as a party plaintiff for the purpose of testing the jurisdiction of the federal court?

Third. Should the District Court have dismissed plaintiff's bill as amended and supplemented for want of jurisdiction?

We conclude that the first contested issue must be answered in the affirmative. While it seems apparent that the essential question involved is whether the lease in question is enforcible against the city, and that both appellant and the Indianapolis Company are so contending, yet there are other important questions which give rise to controversies between appellant and the Indianapolis Company. There is one thing certain, however, and that is that if the Indianapolis Company be omitted as a party to this litigation, it would be free to relitigate in another court the question of the validity of the lease against the city, irrespective of a final decree in this litigation, which it seems to us would permit an intolerable situation and one "wholly inconsistent with equity and good...