Baker v. Central Trust Co. of New York

• Decision Date: 12 May 1916
• Docket Number: 2764.,2732
• Citation: 235 F. 17
• Parties: BAKER v. CENTRAL TRUST CO. OF NEW YORK et al. CARPENTER et al. v. SAME.
• Court: U.S. Court of Appeals — Sixth Circuit

235 F. 17

BAKER v. CENTRAL TRUST CO. OF NEW YORK et al.

CARPENTER et al. v. SAME.

Nos. 2732, 2764.

United States Court of Appeals, Sixth Circuit.

May 12, 1916

On Petition for Rehearing, July 7, 1916.

In Case No. 2732:

Louis Marshall, of New York City, for appellant.

H. A Kelley, of Cleveland, Ohio, for appellee Central Trust Co. of New York.

F. H Ginn and J. G. Fogg, both of Cleveland, Ohio, for appellee Wheeling & Lake Erie R.R. Co.

W. R Begg, of New York City, for appellee New York Trust Co. In Case No. 2764:

D. A Holmes, of New York City, for appellants.

W. R. Begg, of New York City, A. L. Smith, of Toledo, Ohio, and J. G. Fogg, of Cleveland, Ohio, for appellees.

See, also, 218 F. 273, 134 C.C.A. 69.

Pursuant to a plan to obtain for the Wabash Railroad Company (herein called 'Wabash'), a line from Toledo, its eastern terminus, to, and an entrance into, and facilities in and about, Pittsburgh, by utilizing the line of the Wheeling & Lake Erie Railroad Company (herein called 'Wheeling'), from Toledo, and by acquiring and constructing terminals at Pittsburgh, and a connection thence westwardly to the Wheeling, George J. Gould, a director of the Wabash, and Joseph Ramsey, Jr., its president, caused (February 1, 1901) a syndicate to be formed, with a subscribed capital of $20,000,000, for the acquirement and construction of terminal and belt facilities at Pittsburgh, and the purchase of equipment for their proper operation when completed. Of the subscribers, five were directors of the Wabash. The syndicate having acquired a majority of the stock of the Wheeling, elected in May, 1901, as directors, members of the Wabash directory and others under its control, and proceeded to acquire several railroad and coal properties at or about Pittsburgh, including the West Side Belt, and to construct the Pittsburgh, Carnegie & Western Railroad to a connection with the Wheeling.

The syndicate, thus in control of the Pittsburgh properties and the Wheeling, brought about a contract (May 10, 1902) by which, in consideration of the great outlay of the Pittsburgh, Carnegie & Western for the terminals, and as an inducement to it to construct its road, the Wheeling and the Wabash agreed that for 20 years, in fixing schedules and percentages on interchanged traffic, that road would be given an arbitrary of 100 miles as against its actual 60 miles and an arbitrary of 10 cents per ton for traffic originating on its line. Certain trackage rights were given including the operation by each of the parties of its through trains over the tracks of the others.

To provide more money for the enterprise, to permit the syndicate to realize on their investment, and to vest the practical ownership and actual control of the Terminal properties and the Wheeling in the Wabash, a plan was devised by which the Pittsburgh properties were, May 7, 1904, consolidated under the name The Wabash-Pittsburgh Terminal Railway Company (herein called 'Terminal'); the Terminal stock was transferred to the Wabash, which paid $6,000,000 in cash for $6,600,000 of the Terminal's first mortgage bonds secured by mortgage May 10, 1904, to Mercantile (afterwards Bankers') Trust Company, of New York; the syndicate received $13,400,000 first mortgage bonds and an entire issue of $20,000,000 in second mortgage bonds ($2,000,000 for expenses), secured by mortgage to Equitable Trust Company of New York, and $10,000,000 of the Wabash stock. Under the plan a supplemental contract was agreed upon, but executed later (October 10, 1904), by which the first contract was extended to 1954, the date of maturity of the Terminal's bonds, and a requirement was added that the Wheeling and the Wabash pay an additional sum on interchanged traffic equal, when taken with the Terminal's net earnings, to the interest on the Terminal's bonds to the extent, if necessary, of 25 per cent. of each of those two roads' revenue from traffic interchanged with the Terminal.

The mortgages contained a specific pledge of 'contracts, trackage agreements, or operating arrangements, covenants and agreements, terms, or parts of terms, including all the rights of the Railway Company under a certain Traffic and Trackage Contract dated October 10, 1902, and executed by The Wabash Railroad Company, The Wheeling & Lake Erie Railroad Company and the Pittsburgh, Carnegie & Western Railroad Company (of which lastnamed company the Railway Company, party hereto of the first part is the successor), and under a certain contract bearing even date herewith supplemental to said Traffic and Trackage Contract (a counterpart originals of which original and supplemental contracts have been deposited with the trustee hereunder) * * *,' and of the shares constituting a majority of the Wheeling stock.

The Terminal, with the exception of 1,000 coal cars, held under lease by the West Side Belt, had practically no equipment. The Wheeling had considerable, though inadequate, equipment for the purposes of its own traffic, but in 1902 and 1903 apparently took care of its own traffic reasonably well. Operations of the combined roads began in July, 1904, but interchange of traffic not until at or about the time of the execution of the supplemental contract (October 10, 1904). Then began a diversion of a large part of the Wheeling's equipment to the hauling of traffic from the Terminal, to the detriment of the Wheeling and the shippers along its line. Early in March, 1905, the Terminal contracted with manufacturers for 62 locomotives, and 2,000 coal cars, 1,000 of which were delivered prior to August, 1905, and 1,000 not long afterwards. All the Terminal first mortgage bonds which could be issued had been disposed of, and it had no way of paying for this equipment. Money must be had, both to provide equipment to carry the traffic from the Terminal, and to make betterments and improvements on the Wheeling to enable it to properly handle its own and the Terminal's heavy coal trains, as well as other traffic, and to pay the Wheeling's floating debt of some $2,000,000 and a large sum coming due on its then outstanding mortgage bonds.

The Wabash, in the effort to save the enterprise, and the millions it had already invested in it, caused a plan to be adopted by which these obligations of the Wheeling could be paid, the betterments made, and the equipment contracted for by the Terminal paid for and utilized. It took the Wheeling's $8,000,000 3-year (due August 1, 1908) gold notes at 95 per cent., and, having guaranteed their payment, sold them to bankers at New York at the same price, who sold them to the public in the usual course of business. These were secured by $12,000,000 of bonds issued under the general mortgage of the Wheeling to the Central Trust Company of New York, as trustee, dated August 1, 1905. On the same day, the Wheeling entered into a trust agreement (called note agreement) with the New York Trust Company, by which it vested that company, the Terminal agreeing thereto, with the title of the equipment, and pledged with the trustee the $12,000,000 of bonds secured by the general mortgage, to secure the holders of the $8,000,000 in notes. The equipment was leased by the trustee to the Wheeling at a nominal price. The Wabash handled the proceeds of the notes ($7,600,000 and some accrued interest) and paid to Blair & Co. and Read & Co., bankers of New York, some $2,200,000, including accrued interest, advanced by them to pay the equipment manufacturers contracted with by the Terminal, about $2,000,000 to pay the Wheeling's unsecured floating debt, large sums for interest on the Wheeling's underlying bonds, as well as some interest on the general mortgage bonds, and expenditures chargeable to capital account made in current operations, and about $3,425,000 to the Wheeling for betterments and improvements. There is no reason to doubt that all the money was spent on or for the Wheeling.

The interchange gave the Wheeling large increased tonnage. Its own equipment, the equipment acquired on the Terminal's contract, the equipment certain shippers on its own lines provided to assist in hauling their freight, and equipment leased to it at a fair rental by the Wabash in 1907, were used for the primary purpose of carrying the traffic interchanged with the Terminal at a great loss to the Wheeling and to the diminution of the revenues it would have received from shippers on its own line, as well as to the destruction of its plan of reorganization of its Coal Company (the Wheeling & Lake Erie Coal Company).

The Wheeling's own burdens, the burdens put upon it for the benefit of the Wabash, the Terminal, and the Terminal's bondholders, including large sums paid and due on interchanged business under the traffic contracts, the loss of its own business, by reason of the diversion of its equipment, together with the business depression of 1907, and the approaching maturity (August 1, 1908) of the gold notes, required legal proceedings for the appointment of a receiver. These were had by procurement of the Wabash, June 8, 1908, and B. A. Worthington was appointed receiver the next day. A few days before (May 29th), at the suit of the Wabash, receivers were appointed for the Terminal.

Default by the Wheeling in the payment of its gold notes due August 1, 1908, and its inability to pay interest on general mortgage bonds due August 1st, being certain, the Wabash, to protect its guaranty, arranged with Blair & Co. and Kuhn Loeb & Co., bankers in New York, by agreement (July 31, 1908), to purchase the notes for it from their holders, who were notified by the bankers, by public advertisement, to present the same for payment at the office of Blair & Co. On August 1st $7,083,000 of the notes, and later in the year the remaining $917,000, were...