Dow v. Memphis & L.R.R. Co.

• Decision Date: 01 January 1884
• Citation: 20 F. 260
• Parties: DOW and others v. MEMPHIS & L.R.R. CO., (as reorganized.)
• Court: U.S. District Court — Eastern District of Arkansas

20 F. 260

DOW and others v. MEMPHIS & L.R.R. CO., (as reorganized.)

United States Circuit Court, E.D. Arkansas.

April Term, 1884

U. M. &amp G. B. Rose, for plaintiffs.

J. C Brown, B. C. Brown, and Dillon & Swayne, for defendant.

CALDWELL J.

On the first day of May, 1877, the defendant executed its mortgage deed of that date, by which it conveyed to the trustees therein named its railroad and other property, real personal, and mixed, including its income and earnings, books of account, records, choses in action, and muniments of title. This mortgage was conditioned to secure the payment of 250 bonds, of $1,000 each, of even date with the mortgage with the interest at the rate of 10 per cent. per annum, payable semi-annually. Fifty of said bonds matured on the first day of May, 1879, and a like number annually thereafter, until all were due. On the second day of May, 1877, the defendant executed a second mortgage to the same trustees on the same property, and on 'the right or franchise to be a corporation,' which it was authorized to mortgage by a provision in its charter to secure bonds to the amount of $2,600,000, due and payable on the first day of July, 1907, and drawing interest at the rate of 4 per cent. per annum until the first day of July, 1882, and after that date at the rate of 8 per cent. per annum, payable semi-annually. The bill in this case is filed by the present trustees in the mortgages, and its prayer is that the mortgaged property may be decreed to be placed in their hands as such trustees, and that in the mean time a receiver may be appointed with the usual powers.

The case is not before the court on the motion for the appointment of a receiver. For interlocutory purposes the following allegations of the bill may be regarded as established: That the state of Arkansas held a mortgage lien on the railroad and property of the defendant, created when the property belonged to another corporation, of which the defendant is the successor, which was prior in point of time and paramount to the lien created by the mortgages set out in the plaintiff's bill; that a decree foreclosing the state mortgage was rendered by the supreme court of the state on the fourth day of March, 1882; that the defendant declined to pay the sum decreed to be due the state, and the property was about to be sold to satisfy said decree, when the plaintiffs, acting as trustees under the mortgage of May 2, 1877, were compelled to pay off said decree, amounting to $239,672.71, in order to protect the rights of the holders of the bonds secured by that mortgage, and that the plaintiffs as trustees, aforesaid, upon bill filed for that purpose, were by decree of this court subrogated to the rights of the state of Arkansas under the decree of the supreme court of the state; that the defendant paid the interest on the bonds secured by the mortgage of May 2, 1877, up to the first day of January, 1882, and has refused to pay the interest which has accrued since that time, and has refused to pay either principal or interest on the bonds secured by the mortgage of the first of May, 1877.

Since the bill in this case was filed, a decree has been rendered foreclosing the last-mentioned mortgage, under which the property will be sold at an early date, unless the decree is superseded or paid.

On the twenty-fourth day of June, 1877, and in anticipation of making a default in the payment of the interest coupons falling due July 1, 1882, the defendant confessed a judgment in this court in favor of Russell Sage, who is interested in the stock of the company for the sum of $125,921.13, and immediately thereafter, acting in collusion with said Sage, procured the appointment in the state court of its general manager as a receiver of its road, with a view of hindering and delaying the payment of the interest accruing on its bonds. The cause in which the receiver was appointed was afterwards removed to this court, which, on its own motion, discharged the receiver, upon the ground that the suit was collusive, and to hinder and delay creditors, as shown by the record. Sage v. Memphis & L.R.R. Co. 18 F. 571.

A large number of the holders of overdue interest coupons have obtained judgments at law upon them, and have filed their bills praying that the liens of these judgments may be foreclosed, and that the property of the defendant may be sold for their payment. These judgments are not appealable, and the defendant offers on reason why it does not pay them.

In the suit in this court brought by the trustees to be subrogated to the rights of the state, whose decree they paid off, the defendant set up as a defense, in its answer and by cross-bill, that the bonds of May 2, 1877, and the mortgage securing the same, were without consideration, and void for want of corporate power in the defendant to issue the same. Exceptions to the answer and a demurrer to the cross-bill were sustained, the court holding the alleged defenses were without equity, and groundless.

The defendant filed a bill against the present plaintiffs, as trustees in the mortgage of the second day of May, 1877, in the circuit court of the United States for the Southern district of New York, in which it sought to annul the bonds and mortgage of the second day of May, 1877, upon the same ground set up in the cross-bill in this court. Upon final hearing, that court dismissed the bill for want of equity, declaring the case to be 'phenomenal in the audacity of the attempt to induce a court of equity to assist a corporation in repudiating its obligations to its creditors without offering to return the property it acquired by its unauthorized contract with them. ' Memphis & L.R.R. Co. v. Dow, 19 F. 388.

The defendant has admitted in its pleadings, filed in cases in this court to which it was a party, that 'should it be decided that said bonds (of the second day of May, 1877) are valid, and that respondent is liable therefor, it admits its debts, obligations, and liabilities largely exceed the value of its property of every character. ' It has been decided that the defendant is liable on these bonds. That question is res judicata in this court, and for the purposes of this hearing the above admission must be treated as an unqualified confession by the defendant of its insolvency, and inability to pay its debts.

In its answer filed in this case the defendant says: 'Respondent itself believes that its property is not worth the amount of overdue and unpaid interest upon said coupons, the principal of the $2,600,000 of May 2, 1877, and the decree for money paid to the state of Arkansas. And it says that this load of indebtedness has been loaded upon it by the complainants themselves, and that if the defendant is in any default, such default has been caused by their action.'

The defendant, upon its own confession, is insolvent, and unable to pay its debts; and it is apparent, from the records of the court and exhibits to the bill, that it is indisposed to do so to the extent that it might. The interest coupons of its mortgage bonds are long overdue, and a large amount of them in judgment. No payment of interest on its mortgage debt has been made since January 1, 1882, and it gives forth no intimation of its purpose ever to pay the same, or any part of it. It was the plain duty of the defendant to pay off the decree in favor of the state for the protection of its mortgage bondholders whose liens were junior to that of the state. It is not to be denied that it had the credit and ability to do so. The refusal to pay off this decree was for the very purpose of extinguishing the rights and lien of its own bondholders. And this would have been the result had not the trustees, on behalf of the bondholders, advanced the funds to pay the state decree. The income and earnings, as well as all its property, are mortgaged to secure the payment of the principal and interest of its bonds. Upon these facts it is futile for the defendant to contend that a court of equity ought to decree that it is still entitled to receive and appropriate to its own use the income and earnings of its road.

The law of this state furnishes the rule for determining the rights of the mortgagees, under the mortgage, unless that rule has been changed by the contract of the parties. In this state the common-law rule on the subject of the rights of a mortgagee, after condition broken, prevails, and if the debtor fails to pay the mortgage debt at the law day, the mortgagee is entitled to the possession of the mortgaged property, and may maintain ejectment therefor, (Fitzgerald, v. Beebe, 7 Ark. 310; Gilchrist v. Patterson, 18 Ark. 575,) and, upon the facts of this case, to a receiver. Price v. Dowdy, 34 Ark. 285. This law is as much a part of the mortgage as if literally incorporated in it. In this case the remedy at law is not adequate. The mortgage embraces real, personal, and mixed property, and the appropriate remedy is in equity, when the contract rights of the mortgagee can be specifically enforced. Shepley v. Atlantic R. Co. 55 Me. 395; Hall v. Sullivan R. Co. 2 Redf.R.R.Cas. 621; First Nat. Ins. Co. v. Salisbury, 130 Mass. 303; and see Warren v. Rising Fawn Iron Co. 3 Woods, 514; North Carolina R. Co. v. Drew, Id. 713; State v. Northern Cent. R. Co. 18 Md. 193.

Ejectment will not lie for personal property, records, and choses in action. The railroad is an equity, composed of real estate and personal property. For railroad purposes its real estate would be valueless without the rolling stock and other personal property; and, on the other hand, the rolling stock and personal property would be of no utility for railroad purposes without the road-bed, track, and stations. The forms and processes of a court of law are not flexible enough...