Equitable Trust Co. of New York v. Denver & R.G.R. Co.

• Decision Date: 03 January 1918
• Docket Number: 99.
• Citation: 250 F. 327
• Parties: EQUITABLE TRUST CO. OF NEW YORK v. DENVER & R.G.R. CO. SAME v. WESTERN PAC. RY. CO.
• Court: U.S. Court of Appeals — Second Circuit

250 F. 327

EQUITABLE TRUST CO. OF NEW YORK v. DENVER & R.G.R. CO.

SAME v. WESTERN PAC. RY. CO.

No. 99.

United States Court of Appeals, Second Circuit.

January 3, 1918

Chadbourne & Shores, of New York City (John G. Milburn and A. J. Shores both of New York City, and Henry McAllister, Jr., of Denver Colo., of counsel), for appellant.

Murray Prentice & Howland, of New York City (George Welwood Murray and F. W. M. Cutcheon, both of New York City, John F. Bowie of San Francisco, Cal., and Ralph M. Arkush and William Roberts, both of New York City, of counsel), for appellee.

For opinion below, see 244 F. 485.

Appeal from a decree in equity entered in the above-entitled 'ancillary dependent' action in the District Court for the Southern District of New York.

The trial of this case in the court below consisted in submitting to the District Judge several volumes of documents and some written stipulations as to facts. No oral testimony was taken, and, in the sense of what words were spoken or written or when certain acts took place, the record presents no conflict of evidence. The differences between the parties are wholly as to the proper inferences to be drawn from the documents aforesaid.

The following nomenclature has been pursued throughout the litigation and will be adopted by this court:

The Equitable Trust Company is a corporation of New York and the trustee acting under a certain indenture of mortgage made by the Western Pacific Railway Company to secure an issue of its first mortgage bonds to the amount (par) of $50,000,000. The trust company will be referred to as the 'trustee,' and the mortgage as the 'Pacific mortgage.'

There was a Denver & Rio Grande Railroad Company incorporated under the laws of Colorado in 1886, which will be referred to as the 'old Denver Company'; while the present defendant-appellant of the same name was incorporated in 1908 under the laws of Colorado and Utah and will be spoken of as the 'new Denver Company.' This last corporation was and is a consolidation of the old Denver Company and the Rio Grande Western Railway Company which was organized in 1889 under the laws of Colorado and Utah, and will be referred to as the 'Western Company.' From a time anterior to any of the matters raised in this litigation the old Denver owned and operated a railway from points in or not far from Denver to (or nearly to) the Utah boundary, while the Western Company owned a railway from (or substantially from) the terminus of the old Denver to Ogden. These two connecting or continuous lines of rail were operated as one system under the control and direction both as to traffic and finance of the old Denver Company.

The Western Pacific Railway Company is a corporation under the laws of California, chartered in 1903, and at that time (or thereabouts) authorized to construct and operate a railway from Ogden to San Francisco. It will be spoken of hereinafter as the 'Pacific Company,' and was the maker of the first mortgage aforesaid.

It is so clear that no reference will hereafter be made to the evidence proving that the Pacific Company was intended to be and was the creature of the Old Denver and its successor the New Denver, and that the purpose of its creation was to afford to the Denver Company (whether new or old) an outlet or through line to the Pacific Coast in order that the Denver Companies might be independent of the other and pre-existing lines of railway between Utah and the Pacific Coast upon which transportation companies it had previously been necessary to depend for obtaining and retaining through freight.

The method of this control (existing from the day of the Pacific Company's incorporation until after the beginning of this suit) need not be specified. It is enough to state that the Pacific Company could take no corporate action except through men who held their places by the legally exercised authority of the men (often the same) who controlled the Denver Companies (new or old according to time of action).

In 1905 the Pacific Company (thus controlled) was a railroad mostly on paper, and desired to build its line by the usual method of raising money on the mortgage of that which was to be built.

To effect this it was necessary to find bankers who could and would (at a price) sell the mortgage bonds to the public. Such bankers were found, with whom was executed a document by the Pacific Company only, wherein and whereby that company promised that, if they would act as a syndicate for the purchase and distribution of the bonds, the Old Denver and Western Companies would enter into certain agreements calculated to increase the attractiveness and security thereof. This document has been referred to throughout the record as the 'bankers' agreement. ' This was followed by a formal ('preliminary') contract between the Old Denver and the Western as parties of the first part and the Pacific Company as party of the second part, whereby the first parties substantially agreed to do what the Pacific Company had (with the bankers) agreed would be done.

When the interest of September 1, 1914, was about to be paid, the New Denver authorized a public statement (by resolution of its directors) that if it was 'to continue its support of (Pacific Company) some plan of readjustment of that company's finances and the relation of the (New Denver) thereto must be devised. ' No such readjustment was made, and the Pacific Company having failed to earn enough money over taxes and operating expenses to pay interest due March 1, 1915, the New Denver provided no funds and default ensued. Thereupon and on March 2, 1915, the above-entitled 'original suit' of foreclosure was instituted in the District Court for the Northern District of California. Subsequently ancillary aid was requested in the Southern District of New York, and on May 27, 1915, this 'ancillary dependent' action was brought in the court below.

The prosecution hereof was enjoined by the District Court for the Northern District of California, until such injunction was reversed by the Circuit Court of Appeals for the Ninth Circuit. In re Equitable Trust Co., 231 F. 571, 145 C.C.A. 457. The trustee thereupon proceeded to a decree of foreclosure against the Pacific Company, sold the road, and on October 11, 1916, the District Court in California fixed the amount produced by the sale applicable to the payment of the principal of the bonds represented by the trustee herein.

Shortly thereafter this ancillary dependent bill was amended so as to set forth fully the cause of action now before this court. The case was tried as one in equity (Learned Hand, D.J.) and a decree entered, the mandatory portion of which is as follows:

'Ordered, adjudged, and decreed as follows: That the complainant, the Equitable Trust Company of New York, as trustee, recover from the defendant the Denver & Rio Grande Railroad Company the sum of $38,270,343.17, with interest thereon at the rate of 6 per cent. per annum from the date of this decree; that the defendant, its officers and agents, pay said sum to the complainant; and that the complainant have execution therefor pursuant to the rules and practice of this court.'

From that decree this appeal was taken.

The provisions of the several documents hereinabove referred to may be summarily stated or described as follows, so far as they seem to us relevant in this litigation: It is by these provisions of said documents that the decree above set forth must be justified.

Contract B recites that all the parties thereto 'have knowledge of each and all of the provisions of the said first mortgage of the Pacific Company and entered into this agreement in contemplation thereof. ' It also recites that the 'Pacific Company covenants that this agreement shall be in all respects subject to its said first mortgage and to pledge its interest under this agreement under, and to make the benefits to be derived therefrom a part of the security provided by said mortgage, and by so doing it will be enabled' to sell its bonds more advantageously than could be done 'if this agreement were not so subordinated and pledged.'

It may be noted without further quotation from evidence that in and by the first mortgage such pledge was obtained, so that the trustee became fully entitled to assert in its own name whatever claim or demand contract B created as against any party to that contract, and that the trustee's right so to assert and enforce the true meaning of contract B has not been denied in this litigation.

Contract B in the main may be described as intended to make Pacific Company entirely subordinate to and a feeder of the Old Denver and Western in respect of traffic acquisition and arrangements. But article 2 of the contract contains the following specific joint and several covenants on the part of the Old Denver and Western Companies, viz. (section 4):

'To purchase semiannually, beginning with the date hereof except as otherwise expressly stated, and to pay therefor, dollar for dollar in cash at the dates and in the manner hereinafter provided, promissory notes of the Pacific Company bearing interest at the rate of 5% per annum and payable on demand, to the amount of face value, by which the gross earnings and income of the Pacific Company during the preceding fiscal half year shall be insufficient to meet the sum of the following:

'(1) (Operating expenses.)

'(2) (Taxes and assessments.)

'(3) From and after the first day of September, 1908, or the earlier acquisition and completion of the Pacific Company's main line of railroad from San Francisco to Salt Lake City, all interest falling due during the then current calendar half year upon the Pacific Company's (mortgage bonds).

'(4) (Sinking fund.)

'(5) (Any

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