Central Improvement Co. v. Cambria Steel Co.

• Decision Date: 22 October 1912
• Docket Number: 3,489,3,490.
• Citation: 201 F. 811
• Parties: CENTRAL IMPROVEMENT CO. et al. v. CAMBRIA STEEL CO. et al. GUARDIAN TRUST CO. v. SAME.
• Court: U.S. Court of Appeals — Eighth Circuit

201 F. 811

CENTRAL IMPROVEMENT CO. et al. v. CAMBRIA STEEL CO. et al.

GUARDIAN TRUST CO. v. SAME.

Nos. 3,489, 3,490.

United States Court of Appeals, Eighth Circuit.

October 22, 1912

[Copyrighted Material Omitted]

George H. English, Jr., and Edward P. Gates, both of Kansas City Mo. (D. J. Haff and E. C. Meservey, both of Kansas City, Mo on the brief), for appellants.

Frank Hagerman, of Kansas City, Mo., for Cambria Steel Co.

Samuel Untermyer, of New York City, and Samuel W. Moore, of Kansas City, Mo., for Kansas City Southern Ry. Co.

Newel H. Clapp, of St. Paul, Minn., and Enoch J. Price, of Chicago, Ill., for Shedd and others.

Before SANBORN, Circuit Judge, and MARSHALL and WM. H. MUNGER, District Judges.

WM. H MUNGER, District Judge.

While the parties to these controversies are numerous, the questions involved upon the appeal require consideration only of acts of the following named companies, to wit: The Cambria Steel Company, which, for convenience, will herein be designated 'Cambria Company'; Kansas City, Pittsburg & Gulf Railroad Company, herein called 'Gulf Company'; Port Arthur Channel & Dock Company, herein called the 'Dock Company'; Kansas City Suburban Belt Railroad Company, herein called the 'Belt Company'; Kansas City Southern Railway Company, herein called the 'Southern Company'; Guardian Trust Company, herein called the 'Trust Company'; the Provident Life & Trust Company, herein called 'Provident Company.'

The Gulf Company was a railroad extending from Kansas City to Port Arthur on the Gulf of Mexico; the Dock Company was a local company having terminal facilities at Port Arthur; the Belt Company was a belt line railroad having terminal facilities at Kansas City, Mo. Each of these companies had outstanding bonds secured by mortgages upon its properties. The Cambria Company was a judgment creditor of the Belt Company. The Trust Company owned a large amount of the stock and bonds of both the Gulf Company and the Belt Company and was also a creditor of the Belt Company. The Gulf Company, having defaulted in the payment of interest upon its mortgage, a suit for foreclosure was instituted, and a committee of bondholders was selected to originate and propose a reorganization plan. This committee proposed a plan of reorganization by which the properties of the Gulf Company, the Dock Company, and the Belt Company should be acquired and organized into or operated as a single new company. This committee formulated a plan of reorganization, by the terms of which it was proposed that a new company be organized to acquire the properties of the three mentioned companies. Their plan was published and submitted to the bond and stockholders of each of the companies, the committee declaring that it had formulated and adopted said plan as the basis of the reorganization of the railroad system, having for its ultimate purpose the unification of the main line and terminals into one ownership and under one management; that such object was sought to be accomplished by having the Gulf Company, when reorganized, acquire the capital stock of the other two companies, namely, the Dock Company and the Belt Company, and, having thus acquired the control and possession, to thereafter adjust the bonded indebtedness standing against the properties of the Belt Company and Dock Company by retiring the existing bonds, and issuing therefor new bonds, the basis of the plan being that the property of the existing Gulf Company should be sold in the foreclosure proceeding, purchased by the committee, and a successor company organized, to which the property so purchased should be conveyed, together with the stock and bonds of the Dock Company and the Belt Company. should be deposited with the committee, in exchange for bonds and stock of the new company to be organized, then those properties to be acquired. By that plan it was said the following results would be obtained: The new company to be organized would own the property of the Gulf Company and also the bonds and capital stock of the Belt and Dock Companies, and thereby all three properties would be under one corporate ownership, management, and control. Said stock and bonds so purchased of the Belt and Dock Companies to be pledged under the mortgage to be given by the company to be organized for the payment of: (1) Floating debts and existing car trust obligations: (2) adequate provision for working capital for future acquirements. It was also stated that it was contemplated that said reorganized or new company should issue $30,000,000 50-year 3 per cent. gold bonds, $18,000,000 of the bonds to be used for the conversion of the bonds of the Gulf Company, $1,330,000 for the conversion of the old or existing bonds of the Belt Company, $817,500 new bonds for the old or existing bonds of the Dock Company, $3,000,000 of the new bonds to be sold for the necessary cash requirements of the new company, $3,802,500 to be reserved for the future requirements of the new company, $3,050,000 of new bonds to be used in acquiring existing outstanding bonds of some other companies that were subsidiary companies of the Belt Company.

It was proposed in the plan that the holders of securities of the Gulf Company were to receive for their bonds 75 per cent. in new bonds and 50 per cent. in new preferred stock; the stockholders of the Gulf Company, upon paying $10 per share, were to receive one share of new common stock for each share of the old stock.

The bondholders of the Belt Company, for their old bonds, were to receive 133 per cent. of new bonds and 25 per cent. in new preferred stock; the stockholders of the Belt Company were to receive for each share one-quarter of a share of new preferred stock and three-quarters of a share of new common stock.

The bondholders of the Dock Company were to receive for their old bonds 50 per cent. in new bonds, 50 per cent. in new preferred stock, and 50 per cent. in new common stock; the stockholders of the Dock Company, for each share of their stock, were to receive three-quarters of one share of new common stock.

The stock and securities of the respective companies were largely deposited according to the committee's plan. A decree was entered in the foreclosure against the Gulf Company on February 5, 1900, sale had and the property thereunder acquired by the Southern Company on March 19, 1900, the date on which it was organized and incorporated.

The Southern Company issued a new mortgage and bonds, also its stock, according to the terms of the reorganization plan, and such bonds and stock were exchanged for the bonds and stock of the old companies, the holders of which had deposited their bonds and stock in accordance with the proposed plan. The Trust Company accepted the plan and deposited its stock and bonds which it held of the Belt Company and received in new bonds and stock its proportionate amount under the reorganization agreement.

Although the Southern Company had acquired practically all of the bonds and stock of the Belt Company in exchange for its new bonds and stock, in accordance with the reorganization plan and agreement, and acquired possession and control of the property of the Belt Company, the Provident Company, trustee in the Belt mortgage, filed its bill of foreclosure and asked for the appointment of receivers. The master's finding in this regard was as follows:

'On September 6, 1900, nearly six months after the incorporation of the Southern Company, the receivers were appointed for the Belt Company, at the instance of the Southern, and through the Provident Company, as trustee, which filed the foreclosure bill; the foreclosure decree being made on November 6, 1901, and the sale on December 31, 1901, to the Southern Company.'

The Trust Company was a party to that foreclosure suit, and before the decree was entered asked leave to file an amended supplemental answer, stating in effect that the reorganization plan had been promulgated in the interests of creditors of the Belt Company as well as bondholders and stockholders, and that it had been intended to pay the Trust Company's debt, the reorganization committee having often promised to pay it until about the time of the institution of the foreclosure suit, and that the purpose of such suit was to vest in the Southern Company title to all the Belt Company property, free from the payment of that company's floating debt, which was a fraudulent purpose. It asked that the Southern Company be made a party to the cause, etc. The court denied the leave to file such answer, but provided, however, as a condition of the denial, that complainant (Provident Company) should, within five days thereafter, file a stipulation that the decree should be without prejudice to the claim of the Trust Company. The last paragraph of the foreclosure decree was as follows:

'This decree is entered on the express condition to which the complainant has assented, that it shall be without prejudice to and shall not bar the right of the Guardian Trust Company, or its receiver, to plead and insist in any litigation now pending or hereafter brought, that the Kansas City Southern Railway Company by virtue of the manner in which it was organized, or for any other reason, is legally or equitably liable for and bound to pay the unsecured debts of the Kansas City Suburban Belt Railroad Company, either in full or to pay them to the extent of the value of any property heretofore acquired by it from the Kansas City Suburban Belt Railroad Company, or that may hereafter be acquired by it from said company by virtue of these foreclosure proceedings, and without prejudice to the right of said Guardian Trust Company or its receiver, to plead and insist, in any pending litigation or litigation hereafter brought,

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