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

• Decision Date: 11 November 1920
• Docket Number: 6782.
• Parties: EQUITABLE TRUST CO. OF NEW YORK v. DENVER & R.G.R. CO. [1]
• Court: U.S. District Court — District of Colorado

269 F. 987

EQUITABLE TRUST CO. OF NEW YORK v. DENVER & R.G.R. CO. ^[1]

No. 6782.

United States District Court, D. Colorado.

November 11, 1920

George Welwood Murray, of New York City, William V. Hodges, of Denver, Colo., and F. W. M. Cutcheon, of New York City, for plaintiff.

Arthur M. Wickwire, of New York City, and John L. Webster, of Omaha Neb., for petitioners.

Before SANBORN, Circuit Judge, and LEWIS, District Judge.

PER CURIAM.

Mr Jefferson M. Levy and others, stockholders and members of a committee for stockholders of the Denver & Rio Grande Railroad Company, the judgment debtor herein, present a petition for leave to intervene in this suit, to become parties thereto, and for an adjournment of the sale of the property of the railroad company, which is set by the decree herein for November 20, 1920, to enable these petitioners to present and litigate in this suit or elsewhere their claim for an avoidance and injunction against the enforcement of the judgment of the United States District Court for the Southern District of New York, in favor of the Trust Company and against the Denver & Rio Grande Railroad Company, on its guaranty of the payment of the $50,000,000 mortgage bonds of the Western Pacific Railroad Company, rendered on June 14 1917 (244 F. 485), and affirmed on appeal by the United States Circuit Court of Appeals of the Second Circuit on January 3, 1918 (250 F. 327, 162 C.C.A. 397). Reference is made to the statements and opinions in the cases just cited for the origin and history of the liability of the Denver Company on which that judgment rests, and of the litigation concerning it prior to 1918. These stockholders seek to avoid that judgment in order to secure a foundation on which to base a suit to set aside the judgment of this court upon the New York judgment in favor of the Trust Company and against the Denver Company for $36,515,038.18, which was rendered by this court on January 7, 1918. And they seek to avoid the latter judgment for the purpose of setting aside the decree in this suit for the sale of the property of the Denver Company and the application of its proceeds to the payment of the amount still remaining unpaid on the latter judgment which was found and adjudged by the decree herein to have been $36,192,655.78 on September 25, 1920. These judgments and this decree are adjudications of these courts in litigated, carefully considered cases to the effect that the Denver Company was and is justly indebted to the Trust Company in the amounts above stated, that as against the Denver Company and its stockholders it was entitled to payment on June 14, 1917. It has already been delayed in obtaining this payment and this application is made more than three years since that date. The judgments which have been referred to may not be lightly regarded, and this delay ought not to be prolonged, unless these stockholders have shown that there is reasonable cause to believe that they are entitled to and will be able to secure an avoidance of the New York judgment and consequently of those founded upon it.

The parties to the New York judgment were the same as the parties to this suit. They were the Trust Company as trustee for the bondholders, and the Denver Company which guaranteed the payment of the bonds. The basic right or cause of action was the same, the liability of the Denver Company on its guaranty of the $50,000,000 of mortgage bonds in each of these cases. A judgment for or against a corporation is as conclusive against its stockholders as against itself, because a corporation is formed and empowered to sue and be sued for its stockholders and it represents them in the litigation in which it is engaged. Since, where two actions are brought between two parties upon the same cause of action, the first judgment, in the absence of fraud in the conduct of the action on which it is founded, estops the defendant from maintaining, not only every defense that it made in that action, but also every defense that it might have made, the New York judgment estops the Denver Company and the petitioners, its stockholders, from maintaining in this suit, in the absence of fraud in the conduct of the suit which resulted in that judgment, not only every defense that it made, but also every defense that it or its stockholders might have made in that action. The right of a stockholder to avoid a judgment against his corporation is derived from it, rises no higher than the right of that corporation, and may be worked out only in the latter's right. So it is that these stockholders are estopped from maintaining any defense to the New York judgment, or any ground for its avoidance, and from intervening for that purpose on the ground that the guaranty was unfair, unreasonable, obtained by undue influence, interlocking directors, or pernicious collusion, until they first clearly show that there was fraud or pernicious collusion by the Trust Company or the bondholders it represents in the conduct of the action which resulted in that judgment. Forbes v. Memphis, E.P. & P.R. Co., 9 Fed.Cas. 408, 418, Case No. 4,926; Farmers' Loan & Trust Co. v. Kansas City, W. & N.R. Co. (C.C.) 53 F. 182, 186.

Another indispensable condition of the right to avoid a judgment or decree of a court for fraud is diligence in discovering it and in presenting the proof of it to the proper tribunal and asking relief from it. The alleged fraud on which these stockholders rely to avoid this New York judgment is the fraudulent failure of the Denver Company to interpose certain alleged defenses to the cause of action upon the guaranty upon which that judgment is founded. A long time has elapsed since the New York judgment was rendered on June 14, 1917, and it was not until within three months of this day that these stockholders made any complaint of the conduct of the defense of that action or gave any warning of any defect in that judgment. Conscious of their delay, they aver in their petition that they did not discover the alleged facts they now present until within these three months. They fail, however, to allege why they did not discover them, from what source they did discover them, why they did not discover them earlier, and they fail to plead any facts in this regard which persuade that they could not as easily have discovered and presented them to the New York court within three months of that judgment in 1917 as they could after the 1st of September, 1920. The excuse they plead for the failure to make the discovery and present the alleged grounds for the avoidance of the New York judgment does not appeal with persuasive force to the conscience of a chancellor.

The appropriate time and place for these petitioners to have assailed that judgment on the grounds they now urge was in the court that entered it, by motion or petition to set it aside and to permit the stockholders to defend against the cause of action there stated, or by a bill in equity in that court to avoid the judgment and enjoin its enforcement. The guaranty upon which that judgment is founded was assumed by the Denver Company in the year 1908. On May 17, 1917 (244 F. 485), in a suit to which the Equitable Trust Company, as trustee for the bondholders, was the plaintiff, and the Denver Company was the defendant and in which it answered and strenuously contended for various reasons that it was not liable on the guaranty, the United States District Court for the Southern District of New York, in an elaborate opinion which was published to the world, adjudged that it was so liable. 244 F. 506. A judgment was rendered on June 14, 1917, in favor of the Trust Company and against the Denver Company for $38,270,343.17 in that suit. An appeal was taken therefrom, briefs and arguments of eminent counsel were submitted to the Court of Appeals of the Second Circuit, and in an elaborate opinion, which was also published, it affirmed that judgment on January 3, 1918. 250 F. 327, 162 C.C.A. 397. The Denver Company petitioned the Supreme Court for a writ of certiorari to reverse that decision, and that petition was denied on April 15, 1918. 246 U.S. 672, 38 Sup.Ct. 423, 62 L.Ed. 932. Under a writ of execution on the judgment in this New York court property of the Denver Company was seized, and on October 4, 1917, was sold for $3,032,400, and the proceeds applied to the payment of the judgment.

On December 17, 1917, the Trust Company commenced an action upon that judgment against the Denver Company in the Supreme Court of the state of New York and on March 13, 1918, a judgment was rendered in that court in favor of the Trust Company and against the Denver Company for $36,908,529.14. Property of the Denver Company in New York was sold under writs of execution upon that judgment in June, 1918, and on May 26 1920, and the proceeds of those sales were applied to the payment of that judgment. On August 23, 1917, the Trust Company, as trustee for the bondholders, brought an action in this court against the Denver Company upon the judgment against it in the United States District Court in New York, and on January 7, 1918, recovered a judgment against the Denver Company for $36,515,038.16. An execution was issued on that judgment and returned unsatisfied. On January 17, 1918, this suit in equity was instituted against the Denver Company to secure the application of all the remainder of its property to the payment of its debt. The Trust Company, as trustee for the bondholders, intervened and set up the New York judgment and its claims thereunder, a receiver was immediately appointed and is now in possession of the property of the Denver Company subject to the mortgages and liens upon it. Later the Trust Company was substituted for the original plaintiff and the decree in this suit was rendered...