Equitable Trust Co. of New York v. Western Pac. Ry. Co.

• Decision Date: 17 May 1917
• Parties: EQUITABLE TRUST CO. OF NEW YORK v. WESTERN PAC. RY. CO. SAME v. DENVER & R.G.R. CO. et al.
• Court: U.S. District Court — Southern District of New York

244 F. 485

EQUITABLE TRUST CO. OF NEW YORK v. WESTERN PAC. RY. CO. SAME v. DENVER & R.G.R. CO. et al.

United States District Court, S.D. New York.

May 17, 1917

[Copyrighted Material Omitted] [Copyrighted Material Omitted]

This cause comes up upon final hearing on a dependent bill in equity, ancillary to a bill of foreclosure which was itself ancillary to an original bill in foreclosure depending upon diverse citizenship. On the 2d day of March, 1915, the plaintiff filed the original bill of foreclosure in the District Court of the United States for the Northern District of California against the Western Pacific Company for the foreclosure of a mortgage hereinafter mentioned, and on the 27th day of May, 1915, the ancillary bill of foreclosure was filed in this district for foreclosure of the same mortgage upon assets located in this district. This bill, which was filed on the same day, was to secure an adjudication upon a contract entered into between the defendant in the original bill, the Western Pacific Railway Company, the Rio Grande &amp Western Railway Company, the Denver & Rio Grande Company, and the plaintiff's predecessor in title. It was superseded by the filing of an amended and supplemental bill verified on the 4th day of January, 1917, and filed January 6, 1917, on which the hearing was had, and to which alone reference need be made.

The gist of the bill is that on June 23, 1905, the defendant Western Pacific Railway Company, a California corporation executed a mortgage dated September 1, 1903, of all its assets to the Bowling Green Trust Company, a New York corporation, of which plaintiff is the successor. At that time the Western Pacific Railway Company had only acquired a right of way for a railway in the state of California, and the mortgage was for the purpose of an issue of $50,000,000 of 5 per cent. bonds due on the 1st day of September, 1933. In the year 1905 the predecessors of the defendant the Denver & Rio Grande Railway Company (known as the New Denver Company), which were two railroads, the Rio Grande & Western Railway Company and the Denver & Rio Grande Railway Company (known as the Old Denver Company), took up the question of purchasing the rights of the Western Pacific Railway Company and issuing a sufficient number of bonds under the aforesaid mortgage to construct the railroad therein contemplated. In pursuance of such purpose, and for the purpose of better securing bonds to be issued thereunder, the Old Denver Company and the Rio Grande & Western Railway Company entered into certain contracts with the plaintiff and with the Western Pacific Railway Company known as contracts A, B, and C, the general upshot of which was that the Old Denver Company and the Rio Grande & Western Railway Company (called the Western Company) should acquire together one-half of of the $50,000,000 of the existing stock of the Western Pacific Railway Company, and $25,000,000 added stock which was to be issued. The second of these contracts, known as contract B, made certain provisions touching the payment of interest and a sinking fund upon the first mortgage bonds of the Western Pacific Railway Company, hereinafter to be set forth in detail.

Under this contract some $47,000,000 of added bonds were issued to the public generally, and the mortgage of September 1, 1903, became effective to secure the same. These bonds all carried semiannual coupons, and the same were paid in part by the earnings of the Western Pacific Railway Company itself, and the balance by the defendant until March 1, 1915, at which time the Western Pacific Railway Company defaulted, and the defendant, who had meanwhile at its organization in 1908 assumed the engagements of the Old Denver and the Western Companies, failed to supply the necessary balance of funds to redeem such coupons. Thereupon the suit in foreclosure in California, as already stated, was commenced, and on the 18th of December, 1915, the default continuing, the trustee declared the whole principal of the bonds to be due in accordance with the provisions of the mortgage. The foreclosure suit proceeded to decree of sale, and the property of the Western Pacific Railway Company was struck off to a reorganization committee consisting of bondholders for the sum of $18,000,000. No deficiency judgment was taken, but the bid was assigned to a new railroad known as the Western Pacific Railroad Company, which declined to be bound by the contracts executed as aforesaid on the 23d of June, 1905.

The bill prays that contract B, on which the obligations of the defendant Denver & Rio Grande Railroad Company are asserted to depend, be construed, and that it be declared to constitute a charge and lien upon the railroad of the defendant the New Denver Company; that the court declare the amount due thereon and declare the same to be a charge on its assets; and for other incidental relief.

At the outset an order was obtained enjoining the New Denver Company from paying over certain moneys which were within the Southern district of New York, and this was also made the basis of the equitable jurisdiction of this court. The question of the court's equitable jurisdiction, however, was not raised, as neither party desired a jury trial, and the case was heard upon the assumption that whatever relief plaintiff was entitled to, if any, should be awarded in this suit, regardless of whether strictly it had any equitable jurisdiction or not. It will serve no purpose further to detail the pleadings in the cause, but directly to proceed to a statement of the facts, which were either documentary or stipulated.

The Old Denver Company, a Colorado corporation, in 1905 operated a railroad from the city of Denver, Colo., westerly to the city of Crevasse, in Colorado, at which point it was joined by the Western Company, a Colorado and Utah corporation, which continued to Salt Lake City and Ogden, both in the state of Utah. The Old Denver Company owned all but a very few shares of stock of the Western Company, and for the purposes of this case the latter company need not be distinguished from the Old Denver Company. Indeed, in the year 1908 the New Denver Company, which is the defendant herein, was organized from the two and assumed their obligations, including specifically that arising under contract B here in question. These two roads had up to the year 1905 obtained a western outlet at Ogden and Salt Lake City by the Oregon Short Line with its terminus at Portland, and the Central Pacific with its terminus at San Francisco. In that year, however, owing to the acquisition by the Southern Pacific Railroad of the Central Pacific & Oregon Short Line, and the then existing legal incapacity of the Interstate Commerce Commission effectively to provide for the case, this outlet was abruptly cut off, and the earnings of the Denver Companies at once showed serious impairment. This made it a matter of final importance for the Denver Companies to procure a western outlet of their own, and the only feasible right of way then in existence, or indeed obtainable at all, was a substantially parallel right of way already owned by the Western Pacific Company, whose mortgage of September 1, 1903, had not yet been executed, although it had expended $3,000,000 in development. It was recognized as likely that more than the face of that mortgage, $50,000,000, would be necessary to complete the road, but in order to sell those bonds through the mediation of a bankers' syndicate, with whom negotiations had been opened, at a price of 92 1/2, it was thought necessary to give some further security than the mere mortgage itself to the bondholders, and after various negotiations, which it is unnecessary to consider, as they were subsumed in the definitive contracts, a preliminary contract was entered into on the 22d of June, 1905, for the requisite security. This contract was between the two Denver Companies and the Western Pacific Railway Company, and provided that the Denver Companies should as further security at once execute to the Pacific Company three contracts: (a) An agreement by the Rio Grande & Western Company to purchase from the Western Pacific Railway Company $25,000,000 of second mortgage bonds at 75, these being correctly thought necessary to complete the line from Salt Lake City to San Francisco; (b) the contract here in suit; (c) a traffic contract between the Missouri Pacific Railway Company and the Old Denver Company providing for the maintenance of a joint line of transportation over their lines to the benefit of which the Western Pacific Railway Company should be entitled. The Western Pacific Railway Company on its part agreed to deliver to the Old Denver Company 100,000 full-paid shares of its stock, and to the Rio Grande & Western Company 150,000 shares of its stock, constituting one-half of its existing stock, and also to increase its stock from $50,000,000 to $75,000,000, all of which was to be distributed between the two Denver Companies.

On the next day the parties as part of a single transaction executed the mortgage and the three contracts mentioned in the contract of the day before of which it will be necessary, however, further to consider only contract B. To this contract the parties were the Denver & Rio Grande Railroad Company, therein called the 'Denver Company,' and the Rio Grande & Western Company, therein called the 'western Company,' as parties of the first part, the Western Pacific Railway Company, therein called the 'Pacific Company,' party of the second part, and the Bowling Green Trust Company, the plaintiff's predecessor, therein called the 'trustee.' It was divided into six articles.

The first article defined certain terms to be used thereinunder and formal matters not necessary to mention.

The...