Central Improvement Co. v. Cambria Steel Co.

Decision Date02 December 1913
Docket Number3,489,3,490.
Citation210 F. 696
CourtU.S. Court of Appeals — Eighth Circuit

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

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

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

Newell H. Clapp, of St. Paul, Minn., and Enoch J. Price and Harry S. Mecartney, both of Chicago, Ill., for appellees Edward A. Shedd, and others.

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


The paramount issue in these cases is: Did the Southern Company become liable to pay the unsecured debt of the Belt Company to the Trust Company by participating in the execution of a scheme whereby it acquired the title to the property of the Belt Company, deprived its creditor, the Trust Company, of recourse thereto by execution to collect its claim and yet reserved to itself and other stockholders of the Belt Company an equity in its property and a benefit therefrom more valuable than the amount of the Trust Company's claim? After exhaustive arguments and briefs and a review of the master's report on which this case came to this court, the conclusion was reached that this question should be answered in the affirmative. This question had been at issue between the Trust Company and the Southern Company in this suit and in actions at law in the state courts for many years. The prosecution of those actions had been repeatedly enjoined and delayed by orders of the court below, and those orders had been as often reversed by this court. While the pleadings of the parties squarely presented the issue, while this issue had been litigated strenuously in this suit, the Trust Company had not in any of its pleadings made a specific prayer for a decree for the payment of its claim by the Southern Company, nor for the seizure or sale to pay it of the property of the Belt Company which the Southern Company had taken. The question had been suggested by three of the stockholders of the Trust Company whether or not, in view of the long delay, this court could or should direct an entry of a decree for such relief in these cases rather than to leave that relief to be granted upon trials of the cases in the state court, and, as this question had not been argued, counsel for all the parties were permitted to be heard upon it. That hearing developed into a reargument of all the salient issues in the cases, and at the close of that hearing they were taken under advisement by the court. It is the purpose now to state the conclusions at which we have arrived after another consideration of the issues presented.

The history of this litigation, the issues, and many of the facts found by the master are set forth in our former opinion. Central Improvement Co. v. Cambria Steel Co., 201 F. 811, 120 C.C.A. 121.

1. From all the facts pertinent to the issue which are set forth in many printed pages of his report, the master deduced this decisive conclusion:

'That the Southern Company is not liable in any way for the floating indebtedness of the Belt Company.'

To this conclusion the Trust Company excepted on the ground that, in view of other conclusions which the master reached adverse to it, it was unnecessary for him to determine that issue. A consideration after argument of all the facts relating to this issue which the master found in his report convinced this court that the conclusion lawfully deducible from them was that the Southern Company was liable to pay to the Trust Company the debt which the Belt Company owed it. Counsel for the Southern Company now insist that this court was without power to consider or correct this conclusion of the master which the court below followed, and that the Trust Company must suffer the loss of this amount because its counsel did not state in its exception that the conclusion was wrong on the merits of the issue. They invoke the conceded general rule that where no exception is taken to the master's report it will be deemed to be true, and where exceptions to parts of it are taken the parts to which no exception is taken will stand as correct and will not be open to review in an appellate court. Burns v. Rosenstein, 135 U.S. 449, 10 Sup.Ct. 817, 34 L.Ed. 193; Provident Life & Trust Co. v. Railway Co., 177 F. 854, 859, 101 C. C. A. 68. But this rule, like most rules of law or practice, is not without its exceptions. In Sheffield, etc., Ry. Co. v. Gordon, 151 U.S. 285, 291, 14 Sup.Ct. 343, 344 (38 L.Ed. 164), the Supreme Court, while holding the exceptions in that case insufficient to present the questions argued, said:

'It is true that, if the report of the master is clearly erroneous in any particular, it is within the discretion of the court to correct the error; but we see no occasion for exercising such discretion in this case.'

In 2 Daniell's Chancery Pleading & Practice, at page 1314, it is said that it is entirely discretionary with the court to grant an opportunity to except to a report after it has been absolutely confirmed.

Counsel also claim that by the Trust Company's exception they were induced to forego a review of the finding of the master that the Belt Company was indebted to the Trust Company, and that thereby an equitable estoppel from reviewing the issue of the liability of the Southern Company was created. But suits in chancery are tried and reviewed in view of the fact that a court of equity has and frequently exercises the power where justice may thereby be done, to grant to litigants the right remedy although they have sought the wrong one. Clark v. Clark, 62 N.H. 267, 272; Hardin v. Boyd, 113 U.S. 756, 5 Sup.Ct. 771, 28 L.Ed. 1141; Wiggins Ferry Co. v. Ohio & Mississippi Ry. Co., 142 U.S. 396, 414, 415, 416, 12 Sup.Ct. 188, 35 L.Ed. 1055; Bradford v. Bank, 13 How. 57, 69, 70, 14 L.Ed. 49; Walden v. Bodley, 14 Pet. 156, 164, 10 L.Ed. 398; Moran v. Hagerman, 64 F. 499, 503, 504, 12 C.C.A. 239.

As an appeal in equity in the federal courts results in a trial de novo, the appellate court is not, in our opinion, so powerless that it is compelled to affirm an unjust decree; nor is the appellant so conclusively estopped that it may not attack such a decree by the fact that it gave a wrong reason for its exception to the erroneous conclusion of the master it assails.

Moreover, the conclusion here challenged was a mere deduction from the facts disclosed in the master's report, and, where it appears on the face of the report that the master has drawn an erroneous conclusion from the facts he found, the absence of an exception does not disable the court from correcting the error and entering a just final decree. 2 Daniell's Chancery Pleading & Practice, *p. 1310; 17 Encyc. of Pleading & Practice, 1048; Celluloid Mfg. Co. v. Cellonite Mfg. Co. (C.C.) 40 F. 476, 477; Burke v. Davis, 81 F. 907, 910, 26 C.C.A. 675, 678; Haymond v. Murphy, 65 W.Va. 616, 64 S.E. 855, 857; Hayes v. Hammond, 162 Ill. 133, 44 N.E. 422, 423; Hurd v. Goodrich, 59 Ill. 450, 456; Von Tobel v. Ostrander, 158 Ill. 499, 42 N.E. 152, 153. The contention that the Trust Company was estopped from seeking a correction of this error and that this court was powerless to correct it does not seem to be well founded, and this court is unwilling to affirm what it deems an unjust decree on account of the defect in the exception.

2. It is conceded that by the transaction described in the former opinion of this court and deemed by it violative of the rights of the Trust Company, a creditor of the Belt Company, if that transaction be valid, was deprived of legal recourse to the property of the Belt Company to obtain payment of that company's debt to the Trust Company of about $360,000. At that time the Southern Company, by an exchange of its stock and bonds for the stock and bonds of the Belt Company, and by a formal foreclosure by itself, as holder of about 89 per cent. of its bonds, by means of its representative, the Provident Company, trustee for the bondholders, against and with the consent of itself as the holder of about 97 per cent. of its stock, and by a foreclosure sale of the property of the Belt Company to itself obtained the title to the Belt Company's property to itself, the bondholders of the Belt Company secured about $1,330,000 par value of the bonds and $250,000 of the preferred stock of the Southern Company, aggregating at their par value $1,580,000 for their $1,000,000 par value of bonds of the Belt Company, and the stockholders of the Belt Company secured for their $4,750,000 par value of the stock of that company about $1,187,500 par value of the preferred stock and about $3,562,500 par value of the common stock, in all about $4,750,000 par value of the stock of the Southern Company.

The following propositions of law are deemed incontestable:

'A reorganization of an insolvent railroad company, by which both its mortgage bondholders and its stockholders, in exchange for their bonds and stocks, are given an interest in the new company, which purchases the property of the old company at a foreclosure sale made pursuant to such plan of reorganization and by the consent of the old company and its stockholders, is fraudulent in law as to unsecured creditors of the old company whose claims are left unpaid, and renders the new company liable for the claims of such creditors, at least to the extent of the value of the interest in the new company secured by the stockholders of the old company.

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