Farmers' Loan & Trust Co. v. Kansas City, W. & N.W.R. Co.

• Decision Date: 21 November 1892
• Court: U.S. District Court — District of Kansas
• Parties: FARMERS' LOAN & TRUST CO. v. KANSAS CITY, W. & N.W.R. CO. et al.

53 F. 182

FARMERS' LOAN & TRUST CO. v. KANSAS CITY, W. & N.W.R. CO. et al.

United States Circuit Court, D. Kansas.

November 21, 1892

Turner McClure & Rolston and Rossington, Smith & Dallas, for complainant.

Wheeler H. Peckham, for intervener.

M Summerfield, for defendant and receiver.

CALDWELL Circuit Judge.

On the 2d day of January, 1888, the Kansas City, Wyandotte &amp Northwestern Railroad Company executed a mortgage on its railroad and appurtenant property to the Farmers' Loan &amp Trust Company, of New York, as trustee, to secure the payment of a series of bonds issued by the railroad company, amounting to $3,750,000. On the 21st day of March, 1890, the trustee named in the mortgage filed in this court its bill to foreclose the mortgage. The bill, among other things, alleged that the company was insolvent, and had made default in the payment of the interest coupons, and that the plaintiff had been requested by the holders of the requisite amount of bonds to bring suit to foreclose the mortgage. The bill prayed for the appointment of a receiver. When the motion for receiver was brought on for hearing it appeared that the road had been recently constructed, was probably not then fully completed and equipped, and that the company owed some debts for work done, and for labor, materials, machinery, and supplies furnished, in the construction, extension, equipment, and operation of the road and its branches. These debts, it appeared, were contracted after the execution of the mortgage, and most of them accrued or matured not many months before the filing of the bill. They were contracted to create or conserve the mortgaged property, and were extremely meritorious. The bill alleged, in terms, 'that the defendants are financially embarrassed, and that they owe a large amount of floating and unsecured debts for labor, material, and supplies, which they are unable to pay:' and 'that certain of the creditors of the said defendants, to whom they are indebted for labor and material employed and used in the construction of said roads, are threatening to, and your orator believes will, file liens thereon upon the property of said defendants, and to cause attachments to be issued and levied upon the same, which, if done, will embarrass the operation of said roads, diminish their earnings and income, and impair the value of the property conveyed by said mortgage to your orator, and endanger the security thereunder to the holders of said bonds.'

It was apparent that these creditors, by proceeding under the local law, in the state courts, could secure and collect all or a portion of their debts. It appeared that some of these creditors were entitled to liens on the property, or parts of it, and all of them had the right to subject the income and earnings of the road to the payment of their debts by a proper proceeding for that purpose; for, while the mortgage may in terms give a lien upon the income and earnings of the road, it is well settled that, until the mortgagee takes possession, or a receiver is appointed, the income and earnings belong to the company, and any judgment creditor may subject the same to the payment of his judgment. Bridge Co. v. Heidelbach, 94 U.S. 798; Fosdick v. Schall, 99 U.S. 235, 253; Dow v. Railroad Co., 124 U.S. 652, 8 S.Ct. 673; Sage v. Railroad Co., 125 U.S. 361, 8 S.Ct. 887. Under the circumstances of the case, it was obvious that it would be extremely unjust and inequitable for the court to deprive these creditors, whose labor and materials had contributed to the creation and preservation of the mortgaged property, of their right to establish their liens and collect their debts without making some just provision for the ultimate payment of the same. The court therefore required as a condition of the appointment of a receiver that the plaintiff should consent upon the record that these debts should be declared to be a prior lien on the mortgaged property, and paid out of the proceeds of the foreclosure sale, if not sooner paid out of the earnings of the road. Profiting by its experience in previous cases, the court declined to act upon the assent of counsel appearing for the plaintiff, until the plaintiff had been advised of the condition which the court proposed to impose, and expressly instructed its counsel to assent thereto. After being advised of its terms, the plaintiff instructed its counsel to assent to the condition, and the court thereupon appointed a receiver, the order of appointment containing the following conditions:

'The foregoing order appointing a receiver in this cause is made upon this express condition: That the said plaintiff, as trustee and mortgagee representing the mortgage bondholders whose bonds are secured by the said mortgage, consents and agrees that the debts due from the railroad company for ticket and freight balances, and for work, labor, materials, machinery, fixtures, and supplies of every kind and character, done, performed or furnished in the construction, extension, repair, equipment, or operation of said road and its branches in the state of Kansas, and liabilities incurred by said company in the transportation of freight and passengers, including damage to person and property, which have accrued since the execution of the mortgage set out in the bill of complaint, being the 2d day of January, 1888, together with all debts and liabilities which the said receiver may incur in operating said road, including claims for injury to person and property, shall constitute a lien on said railroad and all property appurtenant thereto superior and paramount to the lien of the mortgage set out in the bill, and said railroad shall not be released or discharged from said lien until said debts and liabilities are paid. The receiver is authorized and directed to pay all such debts and liabilities out of the earnings of the road or out of any funds in his hands applicable to that purpose, and, if not sooner discharged, then the same shall be paid out of the proceeds of the sale of the road.'

Among the well-settled rules applicable to the appointment of a receiver in a suit for the foreclosure of a mortgage on a railroad are the following:

1. That the appointment of such a receiver is not a matter of right, but rests in the sound discretion of the court, and is a power to be exercised sparingly, and with great caution. Railroad Co. v. Howard, 131 U.S.Append. lxxxi; Fosdick v. Schall, 99 U.S. 235, 253; Sage v. Railroad Co., 125 U.S. 361, 367, 8 S.Ct. 887.

2. That the court appointing a receiver may impose such conditions as appear to be just and equitable, and the party asking for and accepting the appointment of a receiver on the conditions imposed will be bound thereby. In Fosdick v. Schall, supra, Chief Justice Waite, speaking for the court, said:

'The mortgagee has his strict rights, which he may enforce in the ordinary way. If he asks no favors, he need grant none. But if he calls upon a court of chancery to put forth its extraordinary powers, and grant him purely equitable relief, he may, with propriety, be required to submit to the operation of a rule which always applies in such cases, and do equity in order to get equity. The appointment of a receiver is not a matter of strict right. Such an application always calls for the exercise of judicial discretion, and the chancellor should so mold his order that, while favoring one, injustice is not done to another.

And see Trust Co. v. Souther, 107 U.S. 591, 2 S.Ct. 295.

3. The trustee in a railroad mortgage represents the bondholders in all legal proceedings carried on by it to enforce the trust. The bondholders claiming under the mortgage have no interest in the security except that which the trustee holds and represents, and, if the trustee acts in good faith, whatever binds it in any legal proceedings it begins and carries on to enforce the trust, to which they are not actual parties, binds them. Kerrison v. Stewart, 93 U.S. 155; Corcoran v. Canal Co., 94 U.S. 741, 745; Shaw v. Railroad Co., 100 U.S. 605, 611; Richter v. Jerome, 123 U.S. 233, 8 S.Ct. 106. In the case last cited the court say: 'Whatever forecloses the trustee, in the absence of fraud or bad faith, forecloses them. This is the undoubted rule. ' And where the trustee in good faith assents to terms imposed by the court as a condition for appointing a receiver, the bondholders are bound by such assent as fully and absolutely as if it had been given by them in person. In Kneeland v. Luce, 141 U.S. 491, 509, 12 S.Ct. 32, the trustees consented that receiver's certificates might be issued, and made a prior lien on the mortgaged property. Afterwards the bondholders denied the right of the trustees to give such consent, and contested the validity of the receiver's certificates and the priority of lien given them, and the supreme court said: 'The consent of the trustees to the issue of the certificates bound every bondholder. There is nothing to show that the trustees acted corruptly or fraudulently. ' And see, to the same effect, Kent v. Iron Co., 144 U.S. 75, 12 S.Ct. 650. In the case of Elwell v. Fosdick, 134 U.S. 500, 512, 10 S.Ct. 598, the trustees executed a release of errors, and their authority to do so being questioned by the bondholders, the supreme court said: 'The trustee represented the bondholders, not only in the proceeding which resulted in the entry of the decree so that the bondholders were not necessary parties, but he also bound them by his release of errors.'

Some time after the appointment of the receiver, August, Wolff, claiming to be the holder of some of the stock and mortgage bonds of the company, filed a petition asking to be made a defendant in the suit, and the prayer of his petition was granted by the district judge.

Wolff...