American Loan & Trust Co. v. Toledo, C. & S. Ry. Co.

• Decision Date: 06 December 1886
• Citation: 29 F. 416
• Parties: AMERICAN LOAN & TRUST CO. v. TOLEDO, C. & S. RY. CO. and others.
• Court: U.S. District Court — Northern District of Ohio

29 F. 416

AMERICAN LOAN & TRUST CO. v. TOLEDO, C. & S. RY. CO. and others.

United States Circuit Court, N.D. Ohio.

December 6, 1886

The defendant Brown, being largely interested in a railroad then undergoing foreclosure in this court, entered into negotiations in New York with the American Finance Company J. B. Mason, and F. G. Jillson for the purpose of raising the money to re-establish the enterprise. These negotiations resulted in a contract between Brown and the American Finance Company whereby the latter undertook, for certain considerations, to raise the necessary funds to relieve the property, reorganize it under a new company which should operate the road already built, connect it with another road near to it, secure certain terminal facilities, and extend it to the Ohio river. The scheme comprehended the issuance of stock and bonds at so much of each per mile, a mortgage to secure the bonds, etc. Mason and Jillson agreed to lend the money immediately required to relieve the property from the pending suit to foreclose. This transaction, by what is called a tripartite agreement between Brown, the American Finance Company, and Mason and Jillson, took the form of a loan by the latter to Brown upon his notes, secured by the deposit as collateral, of his securities in the old company to be substituted however by the securities in the new company when organized. In this way over $300,000 was realized in cash, and the parties proceeded to carry out the scheme of reorganization. Brown went into control of the new enterprise, as it was contemplated he should, but subsequently the parties disagreed, and a struggle commenced for a control of the directory. Injunction suits were instituted, and Brown maintained his control, the bill charges, by fraudulent practices. This struggle depended upon a disputed right on each side to vote the collateral stock. Subsequently this bill was filed by the trustee in the mortgage, and asked the appointment of a receiver, and an injunction against negotiating any further bonds. It charges Brown and his associates with fraudulently obtaining control if the election for directors, with fraudulent traffic mismanagement in the interest of rival companies, with neglect to secure the terminal facilities and to extend the road, with misappropriation of the earnings, with making default in the payment of the interest coupons, and that he is wholly insolvent and unreliable. The answers of Brown and the company deny all these charges, set up counter-allegations of bad faith, and rely upon the contracts accompanying the mortgage to show that there has been under them no default in the payment of interest, and cannot be until his notes become due to Mason and Jillson. Numerous affidavits on both sides are filed relating to the management of the road and the conduct of the parties under these contracts. The case was heard before WELKER and HAMMOND, JJ., on a motion to appoint a receiver.

S. A Bowman and R. A. Harrison, for plaintiff.

Doyle & Scott and Burke, Ingersoll & Sanders, for defendants.

HAMMOND J.

The impressions made at the argument that this case does not present a state of facts justifying the appointment of a receiver have not been removed by a more careful consideration of the subject upon the elaborate printed briefs which have been filed. Undoubtedly there are cases where a court of equity may take hold of mortgaged property before default in the condition of the mortgage and protect the security against impending danger from fraudulent management, but this is not one of them. It would be intolerable to extend that principle so as to transfer to a court of equity every controversy over the management of mortgaged property, or to convert those courts into the supervisors of the control of every corporation where property is pledged to secure its mortgage debts. Take one feature of this case, dependent on the question whether it be wise to construct that extension of the railroad which was in contemplation of the parties to this mortgage and the other contracts connected with it, as a simple example. That involves a matter of discretion in the judicious management of the property which properly belongs to the directors in charge of the company, and it is not the function of a court of equity to direct the exercise of that discretion upon any judgment of the court that the extension should or should not be made. The court, as to that, may be no wiser than the directors, and the complainants no wiser than either. If loss occurs to the mortgagees from unwise action in that regard, it is one of the inevitable results of the mismanagement of property by its owners, and the remedy is not, certainly, to be found in usurpations of control by the court, through a receiver or otherwise.

But it is said the management is influenced improperly by the persuasive manipulations of a rival enterprise. This is a suspicion of bad faith that may be well or ill founded, but we do not see why a court of equity should, even if it be true, assume to determine either that the extension should or should not be made through the process of appointing a receiver and undertaking the control of the property. This is an extension of the uses of courts beyond any reasonable limits, and a dangerous application of their power. Under that doctrine the whole business of building railroads might be readily committed to the courts of equity, and in the end, perhaps, be more disastrously managed. But if it be conceded that a court of equity should interfere for relief in such cases, it seems to us that the proper remedy would be by a bill either to rescind the contract for the fraudulent breach of it, or else to compel its specific performance, if that were possible. This bill as originally constructed did not pray for any such relief or make any other appeal to the equitable...