Crawford v. Washington Northern R. Co.

• Decision Date: 08 May 1916
• Docket Number: 2723.
• Citation: 233 F. 961
• Parties: CRAWFORD v. WASHINGTON NORTHERN R. CO. et al.
• Court: U.S. Court of Appeals — Ninth Circuit

233 F. 961

CRAWFORD v. WASHINGTON NORTHERN R. CO. et al.

No. 2723.

United States Court of Appeals, Ninth Circuit.

May 8, 1916

On June 4, 1910, the Oregon-Washington Timber Company, hereinafter called the Timber Company, placed two mortgages on 10,800 acres of timber lands which it owned in Skamania county Wash., a first mortgage of $600,000, and a second mortgage of $400,000. The Mississippi Valley Trust Company was the trustee of both mortgages. Thereafter the Union Trust Company of Detroit became, with that company, a cotrustee of the first mortgage. The Washington Northern Railroad Company hereinafter called the Railroad Company, owned a logging road running to the timber lands owned by the Timber Company. Both companies were owned and controlled by substantially the same stockholders. On June 4, 1910, the Railroad Company executed a mortgage in the sum of $1,000,000 to the Mississippi Valley Trust Company. The debts secured by all three mortgages were evidenced by bonds of $1,000 each, and the mortgages made by both the Timber Company and the Railroad Company were given to secure the same debt, and there was a provision in the mortgages of the Timber Company that payment of one of the bonds of that company should have the effect to pay one of the bonds of the Railroad Company, which latter bond might be canceled or surrendered uncanceled to the Railroad Company at its option. On June 4th the Timber Company proposed to the Railroad Company to purchase all of that company's bonds and to pay therefor $400,000 of the Timber Company's second mortgage bonds and $540,000 in money, the money to be used for the following purposes: $150,000 for the retirement of a first mortgage then outstanding on the Railroad Company's property, $125,000 to pay the present floating indebtedness of a company of which the Railroad Company was the successor, $215,000 for extensions and betterments and equipment to the railroad property, and $50,000 to be loaned to the Timber Company on its note; and it further proposed to pledge to the Railroad Company $400,000 of the bonds so to be purchased as security for the payment of the $400,000 second mortgage bonds of the Timber Company. The proposition was accepted, and the contract was entered into. The stockholders of both the Railroad and Timber Companies were at that time substantially the same. Thereafter the parties in control of those two companies organized the Blazier Timber Company which acquired some additional timber lands, and on March 1 1912, that company executed a mortgage to Crawford, trustee, to secure nominally $425,000, the actual consideration being $300,000, in which mortgage the Railroad Company and the Timber Company joined, thereby giving to Crawford a first lien on the property of the Blazier Company and a second lien on the property of the Timber Company, and, as found by the court below, a second lien on the property of the Railroad Company.

In the following year the Trust Companies brought a suit to foreclose both the first mortgage of the Railroad Company and the first mortgage of the Timber Company, and Crawford, trustee, filed a cross-bill to foreclose his mortgage and answering the bill of complaint interposed two affirmative defenses, which, on motion of the Trust Company, were ordered to be struck out. The first portion so struck out is in substance the following: That $175,000 of the cash paid by the Timber Company was not devoted to the purposes specified in the contract, but was used to acquire additional timber lands for the Timber Company, and $100,000 was paid out for logging equipment and camps of that company, and that this diversion of funds was made under the direction of a syndicate which acquired $600,000 of the first mortgage bonds, and $300,000 of the bonds represented by the trustees in the suit; that both the members of the syndicate and the Trust Company knew at the time of the purchase of the purposes to which, by the agreement between the parties, the $540,000 cash was to be applied; that a large portion of said bonds are still held by the members of the syndicate; that the Railroad Company was without power under its charter to issue bonds for the purchase of lands for the Timber Company, or for the building of camps and procuring of logging equipment for that company, and that the money so expended for those purposes was paid out by the Trust Company on the direction of the syndicate, the present holders of the $570,000 first mortgage bonds of the Timber Company, represented by the complainants in the suit, and that the syndicate are the holders of more than $300,000 of said $570,000 first mortgage bonds; that the complainants are estopped from sharing in the proceeds of the sale of the bonds of the Railroad Company, or the property of the Railroad Company, to the extent of said sum of $275,000, which was at their instance diverted from the proceeds of the sale of the first mortgage bonds of the Timber Company, and that none of the complainants ought in equity to be permitted to share in the proceeds of the sale of the bonds of the Railroad Company, or the sale of the property of the Railroad Company.

The second portion of the answer which was so struck out is in substance the following: In February, 1911, the Blazier Timber Company was incorporated. Thereafter the two timber companies and the Railroad Company authorized the execution by those three companies of two series of notes; series A to consist of $100,000 joint collateral trust notes, and series B to consist of $150,000 joint collateral notes. The notes were secured by indenture of the three companies to the Mississippi Valley Trust Company, to which trustee the Blazier Timber Company conveyed all its property, and the Railroad Company assigned the $400,000 second mortgage bonds of the Timber Company and $400,000 of its own first mortgage bonds, deposited as collateral security for those of the Timber Company. That the proceeds of series A notes were used as authorized, but that series B notes were delivered to the syndicate for the purchase of the Railroad Company's stock sold to the syndicate with the first mortgage bonds of the Timber Company. That the stock was not sold to the companies, or either of them, but to Blazier individually. That $150,000, the amount of these notes, has been paid to the members of the syndicate by the Railroad Company and the Timber Company, thereby diverting unlawfully the funds of the timber companies.

The appellant set forth these transactions as a payment upon and as an offset against the $570,000 of bonds on which the suit was brought, and...