Farmers' Loan & Trust Co. v. Toledo, A.A. & N.M.R. Co.

• Decision Date: 03 April 1895
• Citation: 67 F. 49
• Parties: FARMERS' LOAN & TRUST CO. et al. v. TOLEDO, A.A. & N.M. RY. CO. et al.
• Court: U.S. District Court — Northern District of Ohio

67 F. 49

FARMERS' LOAN & TRUST CO. et al. v. TOLEDO, A.A. & N.M. RY. CO. et al.

United States Circuit Court, N.D. Ohio, Western Division.

April 3, 1895

This is a consolidation of suits for the foreclosure of one general and six divisional mortgages on the railroad of the Toledo Ann Arbor & North Michigan Railway Company. A decree for sale has been entered in accordance with the prayers of the several bills, and advertisement has been begun under the sale. The cause is now brought before the court on a petition of George W. Murray, Thomas A. McIntyre, William H. Male Joseph Richardson, Edmund C. Stedman, and James B. Clews averring themselves to be a committee appointed by persons holding a majority of the $6,500,000 par value of the issued shares of the defendant railway company, to represent them in this suit. They pray to be allowed to be made parties defendant herein, and to file an answer on behalf of the railway company, contesting the validity of the general mortgage and the bonds it purports to secure. The company itself filed no answer, but allowed the decree to be entered by default.

The Toledo, Ann Arbor & North Michigan Railway Company until April, 1893, was operating a railroad extending from Toledo Ohio, through the state of Michigan, to Frankfort, on the east shore of Lake Michigan, and steam vessels upon Lake Michigan for the transportation of freight cars from Frankfort to the western shore of that lake. The railroad was the result of the consolidation of the roads of six different companies. They were as follows: (1) The road of the Toledo Ann Arbor & Grand Trunk Railway Company, extending from Toledo to Ann Arbor, 52 miles, with a branch line from Ann Arbor to Pontiac. (2) The road of the Toledo, Ann Arbor & North Michigan Railway Company, extending from Ann Arbor to St. Louis, in Michigan, a distance of 97 miles. (3) The road of the Toledo, Ann Arbor & Mt. Pleasant Railway Company, extending from St. Louis to Mt. Pleasant, 21 miles. (4) The road of the Toledo, Ann Ann Arbor & Cadillac Railway Company, extending from Mt. Pleasant to Cadillac, a distance of 61 miles. (5) The Toledo, Ann Arbor & Lake Michigan Railway Company, extending from Cadillac to Frankfort, 63 miles. (6) The road of the Frankfort & Southeastern Railway Company, which was embraced within the line operated by the Toledo, Ann Arbor & Lake Michigan Railway Company, extending from Thompsonville to Frankfort, a distance of 22 miles. There was a divisional mortgage on the Grand Trunk division of $1,260,000, on the North michigan division of $2,120,000, on the Mt. Pleasant division of $400,000, on the Cadillac division of $1,260,000, on the Lake Michigan division of $767,000, on the Frankfort & Southeastern division of $235,000, and the consolidated mortgage coverning the entire line was for $1,443,000. In April, 1893, upon the bill of a judgment .creditor, a receiver was appointed to take charge and operate the railroad of the defendant company. In September, 1893, bills were filed in this court, in the circuit court of the United States for the Eastern district of Michigan, and in the circuit court of the United States for the Western district of Michigan, to foreclose the various divisional mortgages, and also to foreclose the consolidated mortgage of the defendant company. The appearance of the defendant company was duly entered in November, 1893, in each court and case. All the foreclosure bills in each court were consolidated. In February, 1894, no answer having been filed decrees pro confesso were taken against the defendant. Nothing was done in the causes thereafter until January 1895, when a decree for foreclosure and sale under the consolidated and the divisional mortgages was entered in this court and in the circuit courts for the Eastern and Western districts of Michigan. At the time the decree was entered an application was made on behalf of the petitioners, or some of them, to be made parties, that they might file answers for the corporation, and contest the validity of the bonds issued under the consolidated mortgage, averring that they were informed by rumor that quite a number of the bonds secured by the consolidated mortgage had been diverted to the private uses of the officers of the company before the receivership. It was held by this court at that time that a mere rumor was not sufficient evidence upon which to base such an application, and further, that the petitioners, by their long delay since the decree pro confesso, had waived any right which they might have had, if exercised in due time, to prevent a sale of the property, when such a sale could be stopped by the payment into court of interest upon the outstanding bonds under the order allowing redemption contained in the decree. The default upon which foreclosure is asked in this case is a default in the payment of interest, and not in the payment of the debt. There was inserted in the decree, however, a provision that the decree for sale should not in any way be taken to prejudice the right of any interested party to appear before a decree for distribution of the proceeds of sale was made, to contest the validity of the claim of any bondholder. At the same time an order was made by the court permitting the stockholders to examine the books of the railroad company for the purpose of general investigation. Under this order, petitioners employed an expert, who has been examining the books since the entry of the decree, and the present petition was filed as a result of his investigation. It was filed the day before the advertisement was begun for the sale of the railroad to take place early in April. The petition sets out the various mortgages, and the steps heretofore taken in this cause; alleges that the actions to foreclose the mortgages were begun without the knowledge of the petitioners, avers that at the last stockholders' election, in April, 1894, proxies were secured from owners of stock represented by the petitioners for the purpose of electing George W. Quintard, Amos F. Eno, J. Edward Simmons, and Robert M. Galloway, with seven others, directors; that since the election they have called no meeting to consider the interests of the company or the stockholders, and have taken no means to file answers to the bills; that the four above-named directors thereafter became the members, and a majority of the members, of a committee, acting solely in the interest of the bondholders for the reorganization of the railway company; that they never laid before the board of directors, as such, their plan of reorganization, and that the other directors have had no opportunity to express views concerning the same; that in their statement as a committee, recommending their plan of reorganization, they have described the common stock of the defendant company as worthless, although the stock did at one time sell as high as $40 a share; that this plan was formulated on October 25, 1894, and that neither before that time nor after were any steps taken by the directors to protect the interests of the company in this litigation; that the petitioners are informed that the large amount of the consolidated bonds were diverted from the true and lawful purpose of their issue, and that many were used, as petitioners believe, as collateral security for the individual indebtedness of one or more of the former officers of the company; that the plan of reorganization by the Quintard committee treated the stock as worthless, and gave no opportunity to the stockholders to join in the plan of reorganization; that the petitioners, constituting another reorganization committee, devised a more equitable plan, in which the stockholders were given an interest in the new company, that upon the order heretofore made by this court, giving the stockholders an opportunity to examine the books, an expert accountant reports that there were net earnings over and above the operating expenses and the fixed charges for 1889 of $33,000 for 1890 $60,000, for 1891 $2,000, and 1892 $10,000, excluding the payment of the salaries of the president and vice president, and the deduction for bad debts in 1890 of $25,000,-- showing, as petitioners claim, that the common stock had some value. The petition and the amended petition then state four grounds of defense which the directors should have made for the company, and which they ask to be made parties for the purpose of setting up in an answer. The first defense proposed is that the Toledo, Ann Arbor & North Michigan Railway Company, which, since April, 1888, down to the time of the receivership, in April 1893, did business, exercised franchises, and operated a railroad as a consolidated corporation of Michigan and Ohio, never had a legal existence, because the proper steps for consolidation required by the statute of Ohio had never been taken, and therefore that the bonds purporting to be issued by such a pretended corporation, having no legal existence, must be invalid. The second defense proposed is that the defendant company had a capital of $6,500,000, and under the laws of Ohio had no authority to issue a mortgage to secure an indebtedness exceeding the amount of its capital stock; whereas the indebtedness claimed under the consolidated mortgage would increase its total indebtedness to more than $7,000,000. Third. The petitioners propose to defend against the payment of the bonds and the foreclosure of the consolidated mortgage, on the ground that the issuance of the mortgage and the bonds was never authorized by the stockholders or directors of the railway company purporting to issue the same in accordance with the laws of Ohio. Fourth. The fourth defense proposed to be made by the petitioners on behalf of the company is that on the fact of the bonds and by the terms of...