Brown v. Pennsylvania Canal Co., 677.

CourtUnited States District Courts. 3th Circuit. United States District Court (Eastern District of Pennsylvania)
Citation229 F. 444
Decision Date08 February 1916
PartiesBROWN v. PENNSYLVANIA CANAL CO. et al.
Docket Number677.

229 F. 444

BROWN
v.
PENNSYLVANIA CANAL CO. et al.

No. 677.

United States District Court, E.D. Pennsylvania.

February 8, 1916


[229 F. 445]

John Cadwalader, Jr., and Thos. Raeburn White, both of Philadelphia, Pa., for plaintiff.

John Hampton Barnes, of Philadelphia, Pa., for defendant Pennsylvania Canal Co.

Francis I. Gowen, of Philadelphia, Pa., for defendant Pennsylvania R. Co.

John G. Johnson, of Philadelphia, Pa., for trustee.

DICKINSON, District Judge.

The questions raised and argued out in this case, so far as they call for discussion at the present time, are involved in the relations of the parties growing out of the transactions in which they were engaged, the proper construction of the contracts, in which they all had part, and the legal consequences of other litigation, to which they or some of them were parties.

A history of the transactions out of which this controversy has grown might well begin with the fact that the state of Pennsylvania [229 F. 446] made over to the railroad company bearing its name certain property of the state. A part of this was a railroad. Another part was a canal known to this record as the Pennsylvania Canal. The railroad and the canal throughout the length of the latter ran side by side. Later on in time the railroad managers decided to have a canal company organized. It was doubtless deemed of importance to provide against the possibility of the control of the canal passing into hostile hands. Assurance against this was secured through the ownership of its stock. This, in turn, made possible an interlocking directorate. This again, in turn, made certain the selection of friendly officers and a friendly management. This selection of the personnel of officers and managers was extended to the trustee under the mortgage hereinafter mentioned, who and those who succeeded him was always some one who stood high in the responsible executive management of the railroad; the last trustee being the present president of that road. The affairs of the canal company were managed in accordance with this plan.

The fact has already been found by another court, and the situation and relation of the parties and what was done compels the finding, that the affairs of the canal were conducted after its incorporation precisely as they would have been, had the canal management continued to be a department of the railroad, an account of the earnings and disbursements of which was separately kept. This began at the beginning and continued to the end. A canal company was accordingly chartered. The plan of the managers of the railroad, as outlined in the annual report, embraced a supply of capital to the canal company through the expedient of an issue of bonds, the payment of which was secured by a mortgage of its property. An aggregate of $3,000,000 of these bonds was issued. The intimate relations between the canal and railroad companies induced, if indeed they did not compel, the railroad company to become a party to this mortgage. This was effected through an agreement indorsed on the bonds that the railroad company would purchase any of the interest coupons which were not paid by the canal company. This gave to prospective bondholders a satisfying assurance that they would receive the interest as it fell due. Certain provisions (to be hereafter particularly discussed) were likewise made through a sinking fund for taking care of the principal of the bonds at maturity. This gave a like assurance of the payment of the principal. The payment of interest and principal being thus both provided for, the bonds were put upon the market and sold, the plaintiff's predecessor in title becoming the purchaser of some of them. It has been judicially determined in proceedings in equity (hereafter referred to at some length) that the undertaking of the railroad company was not a contract to guarantee the payment of the interest, but a contract to purchase the coupons.

It may be noted in passing that a more simple and direct means of providing a market for the bonds (which was evidently the purpose of the railroad company) would have been to have guaranteed the payment of both interest and principal. We have the opinion of the general solicitor of the railroad company (which affords the explanation [229 F. 447] of why the simpler plan was not adopted) that the railroad company was without the corporate power to make a contract of guaranty, but did have full power to enter into a contract of purchase. What has come to pass is that the canal company was unable to pay either interest or principal. The railroad company admitted and, of course, met its obligation to take up by purchase the interest coupons. The bondholders have, in consequence, been paid their interest in full. The provisions made through the covenants of the mortgage for the payment of the principal of the bonds were not met and thus far the loss has fallen upon the bondholders. All the property and assets of the canal company are gone, and have passed almost wholly into the ownership of the railroad company. This has, it is alleged, been brought about, and the affairs of the canal company have been managed and its assets manipulated, by the railroad company in such manner as to result to its gain and the loss of the bondholders.

The plaintiff has brought this proceeding for the benefit of herself and of any other bondholders who may intervene. The general purpose of the bill is to fasten upon the railroad company responsibility for the loss sustained by the bondholders. The plaintiff avers such responsibility to arise out of certain acts of the railroad company. These resulted in acts of omission and commission on the part of the canal company and of the mortgage trustee. These acts may thus be summarized:

The mortgage (as construed by the plaintiff) provided that a sum (which we will call $20,000) should be paid annually into a sinking fund pledged first to the payment of the principal of the bonds at maturity. The railroad company (as already stated) had agreed to cash the interest coupons which the canal company did not pay. The practical situation was in consequence this: If the $20,000 was paid into the sinking fund the payment of the principal of the bonds was made sure, but the railroad company would have that much more to advance in the purchase of interest coupons. If the $20,000 was diverted to the taking up of the coupons, the principal of the bonds would remain unpaid, and the railroad company would save $20,000 annually. The money was applied to the coupons, and the principal of the bonds went unpaid. The railroad company thus gained what the bondholders lost. Another provision of the mortgage was that the sinking fund moneys might be invested in the purchase of the bonds or in other securities. If these funds were invested in the bonds, and the bonds were canceled, the bondholders would lose the accumulations of 40 years or less of interest. If the bonds were held as an investment, the question would arise of whether the contract of the railroad applied to interest coupons held by the sinking fund. No trustee for bondholders could avoid seeing that the bonds should not be canceled, and that none should be purchased unless the payment of interest was assured. Bonds were not only purchased for the sinking fund, but they were also canceled. Here, again, loss resulted to the bondholders and gain to the railroad company. The plaintiff asserts that if the bonds had been held as an investment the railroad company would have been obliged to take up the coupons. However this may be, it is clear that [229 F. 448] the sinking fund should not have been invested in the bonds unless interest could be collected.

Still another feature of the situation was this: Some of the real estate of the canal company could be sold without the consent of the trustee under the mortgage. Some of it could be sold with his consent. Some could not be alienated from canal purposes. The property was sold. Much of it, as before stated, passed through such sales into the ownership of the railroad. The charter of the canal company was so changed by a special act of assembly as to give legislative consent to the abandonment and sale of all parts of the canal. The plaintiff avers that in these sale transactions the railroad company sold to itself and bought from itself, and that the prices paid were wholly inadequate. The undoubted fact is that when the bonds matured the canal company was found to be without assets sufficient in value to reach the payment of the principal of its bonds. All that it had went to the railroad company to repay the interest coupons which it had taken up, and which, under the terms of the mortgage as interpreted in the proceeding referred to, were to be first paid before the principal of the bonds.

There are other features of the transaction of which the plaintiff makes complaint. These, for the reason hereinafter stated, we pass without comment. Those referred to will suffice to present the grounds upon which the prayers for relief are based. It is unthinkable that the things which were done would have been done if the resultant loss to bondholders had been forecast. The course of events...

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12 practice notes
  • Overfield v. Pennroad Corporation, No. 8288
    • United States
    • United States Courts of Appeals. United States Court of Appeals (3rd Circuit)
    • December 28, 1944
    ...of Pennsylvania may operate, as a single course of conduct constituting a civil conspiracy. See Brown v. Pennsylvania Canal Co., D. C., 229 F. 444, 452, affirmed by this court 235 F. 669. It would follow that the periods prescribed by those statutes should not be deemed to commence to run b......
  • Edward Hines Western Pine Co. v. First Nat. Bank, No. 4638.
    • United States
    • United States Courts of Appeals. United States Court of Appeals (7th Circuit)
    • October 4, 1932
    ...the debtor of and liable for such funds to the corporations from which the funds were diverted. Brown v. Pennsylvania Canal Co. (D. C.) 229 F. 444, affirmed 235 F. 669 (C. C. A. 3); McMillan v. National Wool Warehouse & Storage Co., 28 F.(2d) 793 (C. C. A. 9); Guay v. Holland System Hull Co......
  • United States v. Klein, No. 439
    • United States
    • United States Supreme Court
    • February 28, 1938
    ...similarly situated, with provision for notice to the latter that they file their claims in the suit. Brown v. Pennsylvania Canal Co., D.C., 229 F. 444; Pennsylvania Canal Co. v. Brown, 3 Cir., 235 F. 669; Brown v. Pennsylvania R. Co., 3 Cir., 250 F. 513. It appearing that certain of the bon......
  • Overfield v. Pennroad Corporation, No. 258
    • United States
    • United States District Courts. 3th Circuit. United States District Courts. 3th Circuit. Western District of Pennsylvania
    • December 20, 1941
    ...are there found analogies of facts and circumstances helpful to the present problem. Such a case is Brown v. Pennsylvania Canal Co., D.C., 229 F. 444, 452, affirmed, 3 Cir., 235 F. 669, in which Pennsylvania Railroad was charged with having caused the diversion and application of certain mo......
  • Request a trial to view additional results
12 cases
  • Overfield v. Pennroad Corporation, No. 8288
    • United States
    • United States Courts of Appeals. United States Court of Appeals (3rd Circuit)
    • December 28, 1944
    ...of Pennsylvania may operate, as a single course of conduct constituting a civil conspiracy. See Brown v. Pennsylvania Canal Co., D. C., 229 F. 444, 452, affirmed by this court 235 F. 669. It would follow that the periods prescribed by those statutes should not be deemed to commence to run b......
  • Edward Hines Western Pine Co. v. First Nat. Bank, No. 4638.
    • United States
    • United States Courts of Appeals. United States Court of Appeals (7th Circuit)
    • October 4, 1932
    ...the debtor of and liable for such funds to the corporations from which the funds were diverted. Brown v. Pennsylvania Canal Co. (D. C.) 229 F. 444, affirmed 235 F. 669 (C. C. A. 3); McMillan v. National Wool Warehouse & Storage Co., 28 F.(2d) 793 (C. C. A. 9); Guay v. Holland System Hul......
  • United States v. Klein, No. 439
    • United States
    • United States Supreme Court
    • February 28, 1938
    ...similarly situated, with provision for notice to the latter that they file their claims in the suit. Brown v. Pennsylvania Canal Co., D.C., 229 F. 444; Pennsylvania Canal Co. v. Brown, 3 Cir., 235 F. 669; Brown v. Pennsylvania R. Co., 3 Cir., 250 F. 513. It appearing that certain of the bon......
  • Overfield v. Pennroad Corporation, No. 258
    • United States
    • United States District Courts. 3th Circuit. United States District Courts. 3th Circuit. Western District of Pennsylvania
    • December 20, 1941
    ...are there found analogies of facts and circumstances helpful to the present problem. Such a case is Brown v. Pennsylvania Canal Co., D.C., 229 F. 444, 452, affirmed, 3 Cir., 235 F. 669, in which Pennsylvania Railroad was charged with having caused the diversion and application of certain mo......
  • Request a trial to view additional results

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