Farmers' Loan & Trust Co. v. Meridian Waterworks Co.

• Decision Date: 28 April 1905
• Docket Number: 42.
• Citation: Farmers' Loan & Trust Co. v. Meridian Waterworks Co., 139 F. 661 (S.D. Miss. 1905)
• Parties: FARMERS' LOAN & TRUST CO. v. MERIDIAN WATERWORKS CO. et al.
• Court: U.S. District Court — Southern District of Mississippi

139 F. 661

FARMERS' LOAN & TRUST CO. v. MERIDIAN WATERWORKS CO. et al.

No. 42.

United States Circuit Court, S.D. Mississippi, Eastern Division.

April 28, 1905

Brown &amp Spurlock, for complainant.

Miller & Baskin, S. A. Witherspoon, and Ethridge & McBeath, for defendants.

NILESDistrict Judge.

This is a suit in equity, brought by the complainant, as trustee under several mortgages executed by the Meridian Waterworks Company and the city of Meridian for the purpose of preserving for the benefit of the bondholders represented by it the property included in the mortgages, and to have the complainant's rights therein declared as against both of the defendants.It is alleged, among other things not necessary to be stated: That on the 20th day of July, 1886 the city of Meridian contracted with W. S. Kuhn, his associates and assigns, for the erection and maintenance of a system of waterworks for the purpose of supplying to the said city and its inhabitants water for domestic and public uses.The bill and contract exhibited therewith describe the works as originally designed, and which have since, under the directions of the city, acting in accordance with the provisions of the contract, been largely increased.After said contract was duly executed, it was assigned to the Meridian Waterworks Company, which, in accordance with its terms, erected the works and had ever since operated and maintained the same, and was still in possession thereof, but with no right to continue their operation, as had been decreed in a suit brought against it by the city of Meridian wherein the contract aforesaid was annulled, and as a result of which the defendant city was claiming that its co-defendant had no longer the right to use its streets to maintain said works, or to collect from it the hydrant rentals which said city had agreed to pay for and during the whole period of said contract.That said contract granted to said Kuhn, his associates, successors, and assigns the right to construct said works, and to use the streets and public places of the city to maintain and operate the same for a term of 25 years from the date when completed and accepted.That on November 1, 1886, the Meridian Waterworks Company, in order to secure the necessary funds to build said works executed and issued bonds to the amount of $150,000, and secured the payment of the same by a conveyance to the complainant of said works and all franchises, rights, and contracts incident thereto; and on July 1, 1892, it executed and issued bonds in the additional amount of $100,000 to pay for the extensions of its mains and pipe lines, as directed by the defendant city, and secured this loan by a mortgage of the same date, again conveying the same property rights, and franchises to the complainant.That in September 1898, the city began a suit in the chancery court of Lauderdale county, Miss., against the Meridian Waterworks Company, alleging that the water then being supplied its inhabitants was not pure and wholesome and suitable for drinking purposes, and that the pressure afforded for fire protection was not such as the contract required.This bill, it is alleged, was not answered until November, 18900, and no steps were taken for the purpose of bringing it to a hearing until February, 1902.In the meantime the defendant city had directed the laying of a large amount of additional mains, and by its legislative boards had authorized the dismissal of the suit previously brought against it; and the Meridian Waterworks Company for the purpose of securing the necessary funds to make these extensions, and to pay for other improvements, had borrowed the additional sum of $100,000, secured by a mortgage executed to the complainant on November 1, 1899, and in which provision was also made for renewing and extending the lien of the two issues of bonds secured by the mortgages executed in 1886 and 1892.That at the time this mortgage was executed neither the complainant nor the bondholders represented by it knew of the pending of the said suit in the state court, and would not have agreed to renew or extend the prior issues of the bonds if they had had such knowledge.That after the Meridian Waterworks Company had completed all of the extensions ordered by the city, and had, with the city's knowledge and consent, added other extensive improvements to its plant, costing nearly the sum of $140,000, the city, through its counsel, began the active preparation of its suit for a hearing, and it was heard with the result that the contract was annulled by a decree of the chancellor, which decree was, on appeal to the Supreme Court of the state of Mississippi, affirmed.That the defendant city was claiming since the rendition of said decree that the Meridian Waterworks Company had no longer any claim upon it for hydrant rentals, or any right to use and occupy its streets for the purpose of maintaining its plant, under the contract which had previously assigned to the complainant as security for the sums borrowed as aforesaid.That the defendant the Meridian Waterworks Company, under the several mortgages executed to the complainant, had agreed to keep the property conveyed as security free from liens and incumbrances of all kinds, and to so manage it as not to impair its value as security for the debts described in the several mortgages; but that it had, by the decree aforesaid, been deprived of its power and right to manage said property, or to collect and apply its income from any source, or to maintain the same; and that, if it was deprived of the possession of this property, it would be utterly destroyed and rendered valueless as security for the outstanding bonds.That said mortgagee company had no other property, and was by said decree rendered insolvent, and unable to pay its outstanding bonds, or to preserve the property by which they were secured.The relief sought as against said defendant was that a receiver be appointed to take possession of said property, and to operate and maintain the same for the benefit of the bondholders, and, as an incident to said proceeding, that the rights of the plaintiff as against the defendant city be declared.

To this the mayor and boards of councilmen and aldermen of the city of Meridian have demurred, and assigned in substance the following defenses: (1)The bill fails to show that any legal or equitable rights of the plaintiff have been violated, or threatened to be violated.(2) That the plaintiff has no legal or equitable right or title authorizing it to maintain the bill.(3) That the decree of the state court is valid, and no reasons are assigned for declaring the same void, and that the plaintiff is bound and concluded thereby.(4) That the bonds issued under the mortgages executed in 1886 and 1892 have been exchanged for the bonds issued under the mortgage executed in 1899, and were therefore extinguished, so that the plaintiff had no rights in said property except as conveyed to it under the mortgage last named.(5) That the right of the plaintiff to collect hydrant rents due from the city is a legal action, and will not accrue at all unless necessary to pay interest upon the outstanding bonds, which is not now in default; and that the plaintiff, having no greater rights than the waterworks company in said contract, and the same having been annulled, no suit, either legal or equitable, can be maintained to collect said rents.

After the Meridian Waterworks Company had conveyed its property and the franchises incident thereto the plaintiff to secure the bonds issued under its several mortgages, the water company had only an equity in these properties, and the right to continue in possession of the same, subject to the terms and limitations stated in the deeds of conveyance.At the same time, and under the same conveyances, the plaintiff held the legal title for the benefit of the bondholders, with the right to take possession of the property whenever it became either necessary to sell it or to preserve it from waste and loss.The mortgagor company having no other property besides that conveyed, the trustee had in fact a greater interest in the preservation of the property than in its sale.If the mortgagor had voluntarily abandoned its right of possession, and left the property to go to waste, or if its existence as a corporation had been terminated at the suit of the state, so that it could not have performed its duties in caring for the property under its mortgage, in either event the right of the trustee to take possession would have accrued.The result would not be different where it was disabled in the performance of these duties by any other character of decree; and when it is necessary to preserve the property the trustee may ask the appointment of a receiver to prevent the subject-matter of his mortgage from being impaired and wasted, without waiting until there has been a default, either in the payment of the principal or of interest on the indebtedness secured.Brassey v. New York N.E.R. Co. (C.C.)19 F. 663-669.

It is alleged in the bill of complaint that a decree of the chancery court of Lauderdale county, Miss., in a suit brought by the city of Meridian against the Meridian Waterworks Company, and affirmed by the Supreme Court of the state of Mississippi, had adjudged that the waterworks company has no longer any interest in the contract under which the waterworks were constructed and being maintained.The practical effect of this decree was to destroy the water company's right to possess and operate the plant which it had conveyed to the plaintiff.It had no power thereafter to collect and use the income of the company from any source to pay the taxes annually assessed against the property, to continue its value as a going concern,...