American Brake Shoe & Foundry Co. v. Pere Marquette R. Co.

• Decision Date: 18 April 1913
• Docket Number: 2,442.
• Citation: American Brake Shoe & Foundry Co. v. Pere Marquette R. Co., 205 F. 14 (6th Cir. 1913)
• Parties: AMERICAN BRAKE SHOE & FOUNDRY CO. v. PERE MARQUETTE R. CO. BLAIR et al. (BANKERS' TRUST CO. et al., Interveners) v. FARMERS' LOAN & TRUST CO.
• Court: U.S. Court of Appeals — Sixth Circuit

205 F. 14

AMERICAN BRAKE SHOE & FOUNDRY CO. v. PERE MARQUETTE R. CO.

BLAIR et al. (BANKERS' TRUST CO. et al., Interveners) v. FARMERS' LOAN & TRUST CO.

No. 2,442.

United States Court of Appeals, Sixth Circuit.

April 18, 1913

The original Pere Marquette Railroad Company, which was a Michigan corporation, was organized in 1899 by the consolidation of three Michigan railroad companies-- the Flint & Pere Marquette, the Detroit, Grand Rapids & Western and the Chicago & West Michigan. The road was in the hands of a receiver from 1905 to 1907. In the latter year the present Pere Marquette Railroad Company (defendant herein) was organized under the laws of Michigan and Indiana, by the consolidation of the Pere Marquette Railroad Company (the Michigan corporation) and the Pere Marquette Railroad Company of Indiana. At the time this suit was begun the defendant was operating about 2,320 miles of railroad, of which about 1,840 miles were in Michigan, about 15 miles in Ohio (part of its Toledo line), about 60 miles in Indiana, about 70 miles in Illinois (both being parts of its line into Chicago), and about 355 miles in Ontario, Canada; the principal part of the Canadian mileage being the line from Detroit to Buffalo and Suspension Bridge. The Pere Marquette owned absolutely nearly all its Michigan mileage. Parts of its Ohio, Indiana, and Illinois mileage were owned in fee; other portions, as well as the Ontario mileage, were operated under leases and trackage agreements. Its entire mileage constitutes a single railroad system, controlled and managed by defendant. When the bill was filed there were outstanding so-called 'divisional mortgages,' executed by the respective companies forming the 1899 consolidation, amounting to nearly $26,000,000. These divisional mortgages affected only the Michigan property. There were also outstanding the following junior securities: (a) The 'consolidated mortgage' given to appellant in 1901, under which bonds to the amount of $8,382,000 were outstanding, in the hands of the general public. It was the first mortgage covering the entire system in Michigan. (b) The mortgage given in 1903 by the Pere Marquette Railroad Company of Indiana, securing a bond issue of $675,000, and covering about 20 miles of railroad between the Michigan-Indiana line and Porter in the latter state. (c) Two mortgages, aggregating $5,870,000, issued in 1903 secured respectively by the stock and bonds of the Lake Erie & Detroit River Railway Company, which owned the 198 miles of railway in Ontario west of St. Thomas, and the entire of whose stock and bonds were owned by defendant. (d) The so-called refunding mortgage of 1905 and the 'improvement and refunding mortgage' of 1911. The total unpaid principal of all these mortgages (including certain bonds pledged to secure certain notes), plus certain unsecured debentures, amounted to about $72,000,000. There was due and unpaid more than $300,000 interest on certain of the divisional mortgages; and further large installments of interest on mortgages, both divisional and system, were soon to mature.

A substantial part of the motive power and equipment of the defendant railroad was held under equipment trusts, of which there were six, and on which there was unpaid more than $4,500,000, of which principal over $300,000 was already matured; other large amounts falling due in the near future. There was also over $70,000 semiannual interest due on the equipment obligations, and still further amounts soon to fall due. During the month of April defendant's March pay roll of about $650,000, and its Michigan taxes, amounting to over $600,000, were payable. There was a large floating indebtedness several times greater than the cash on hand, and several million dollars of debentures and notes were maturing on and before July 1st then next. No provision had been made for paying or extending such debentures and notes, nor for paying interest on underlying bonds, or the principal on equipment obligations so falling due; and the earnings and income up to July 1st following would be insufficient to cover any considerable part of the sums so payable. The defendant had been forced to postpone payment of audited vouchers for several large amounts of material and supplies. The road was being operated at a deficit. Less than two months before the bill was filed, the Board of Trade of one of the cities served by the railroad had represented to the Attorney General of the state that the railroad company was insolvent, charging serious inefficiency in the operating and maintenance departments, and requesting that the Attorney General 'move for an adequate remedy and that without delay. ' The Michigan Railroad Commission had refused defendant's application for the issue of further securities with which to meet its pressing needs.

The principal proceeding is a creditors' suit for a receivership over the property of the defendant railroad company, the administration of its railroad system, the marshaling of its assets, and the ascertainment and enforcement of the rights and equities of creditors in the railroad and other property of the defendant. The bill was filed April 3, 1912. This appeal is from an order authorizing the issue of receivers' certificates and from an order denying appellant's application to vacate the original order. In substance sufficient for present purposes the case is this The bill set out in greater detail all or nearly all the facts we have in substance stated; also that defendant's officers estimated that to meet the payments due April 1, 1912, defendant would require at least $800,000 above cash on hand March 30, 1912, and above the estimated amount of earnings and income subsequent to that date; that defendant had no resources with which to meet such payments and no reasonable hope of final assistance to enable it to do so; that default in all or nearly all such payments was inevitable, and that there was danger of suits and levies on account of the indebtedness for material and supplies; that defendant was in danger, by reason of its financial condition, of forfeiting important trackage and leasehold rights and interchange of business with other roads; that there was also danger of irreparable loss to defendant and to its creditors and stockholders through default in payment of equipment obligations, which would authorize the seizure of equipment necessary to defendant's railroad operations, also from default in bond interest, and danger of mortgage foreclosure, as well as from default in payment of state taxes, involving large penalties; that the interests of not only defendant, but of the public as well, demanded the preservation of the railroad property and business, under the authority of a court of equity.

The defendant answered, admitting the general allegations of the bill, and joining in the prayer for receivership, the operation thereunder of the railroad's business, the marshaling of assets, and for ultimate sale of the entire property and assets of defendant. Upon the coming in of the answer, and on April 5th receivers were appointed with the broad powers of administration, management, and operation usual in railroad receiverships. Later an ex parte order was made authorizing the issue of receivers' certificates in the amount of $605,000, to pay taxes due the state of Michigan. The propriety of this order is not challenged.

The receivers filed their petition, asserting the necessity of expending 'for the general betterment of the system' $775,000 in the purchase of new equipment, and $925,000 in acquiring new rails, engine houses, coal plants, yards, and depots; stating that during the 12 months ending April 30th then next there must be paid $1,800,000 principal on maturing equipment obligations secured by first liens on a large amount of equipment absolutely necessary to the continuance of the road's operations; that it would not be possible out of the earnings of the system to make the proposed expenditures and to meet such payments on principal of equipment obligations, and yet meet the payments of interest on underlying bonds; that the several divisions on which the underlying bonds are liens had been operated as one system for over 10 years, and that a dismemberment thereof, such as might follow a default on any of the underlying bonds, would be against the best interests of the public, as well as disastrous to a large body of bona fide security holders.

It was recommended that receivers' certificates be issued in the amount of $3,500,000, to meet the two classes of disbursements above stated, the certificates to be made a lien on all the property of the railroad company within the states of Michigan, Ohio, and Indiana, subordinate to the divisional securities and to the mortgages on the Indiana and Canadian properties, but paramount to all the other mortgages, including that of appellant; the certificates to be a first lien for $775,000 upon the new equipment to be bought, as well as a first lien for $650,000 on certain equipment, the final principal payment on which was included in the $1,800,000.

It was recommended that the interest on the underlying mortgages including that of appellant (but excluding the mortgages junior thereto), as well as interest on equipment obligations (which for the year would amount to about $212,000) be paid out of earnings. It was stated that the earnings, as carefully estimated, would be ample to pay the interest on the underlying bonds, as well as taxes, rentals, and interest on equipment obligations and on receivers' certificates. It appears that at a hearing, evidently more or less informal, had a few days earlier, an estimate of the income for the coming year was presented, which, on the basis of adding 5 per cent. to the...