Gibson v. Kansas City Refining Co.

• Decision Date: 19 April 1929
• Docket Number: No. 7953.,7953.
• Parties: GIBSON et al. v. KANSAS CITY REFINING CO. et al.
• Court: U.S. Court of Appeals — Eighth Circuit

32 F.2d 658 (1929)

GIBSON et al. v. KANSAS CITY REFINING CO. et al.

No. 7953.

Circuit Court of Appeals, Eighth Circuit.

April 19, 1929.

Frank P. Sebree, of Kansas City, Mo. (Sam B. Strother, Sam B. Sebree, and William T. Campbell, all of Kansas City, Mo., on the brief), for appellants.

Powell C. Groner, of Kansas City, Mo., for appellee Kansas City Public Service Co.

Henry Russell Platt, of Chicago, Ill., Richard J. Higgins, of Kansas City, Mo., and Silas H. Strawn, Walter H. Jacobs, Gilbert E. Porter, and Buell McKeever, all of Chicago, Ill., for appellees Continental & Commercial Trust & Savings Bank and others.

Blatchford Downing, of Kansas City, Mo., Albridge C. Smith, of New York City, and H. L. McCune and R. B. Caldwell, both of Kansas City, Mo., for appellees New York Trust Co. and others.

Before KENYON, Circuit Judge, and JOHNSON and FARIS, District Judges.

KENYON, Circuit Judge.

This is an appeal from the final decree in the foreclosure of a first mortgage given by the Kansas City Railways Company (designated herein as Railways Company), upon its street railway system in Kansas City, Mo. Said decree was entered May 16, 1925, the Railways Company being at that time in receivership. Appellants were interveners, holding certain certificates representing a beneficial interest in the stock of said Railways Company, which had come to them by virtue of a certain plan of reorganization hereinafter explained. Their intervening petition was dismissed by the trial court on the ground that they were estopped from challenging the validity of the mortgage or any of the mortgage securities.

The properties of the Railways Company were sold in 1926 under the foreclosure by a special master to the Kansas City Public Service Company, one of the appellees, which now owns and operates the same. The court entered a decree confirming the sale. Appellants appealed from that decree, as did also the trustees under the second mortgage of the Railways Company. This court affirmed the confirmatory decree New York Trust Co. v. Continental & Com. Trust & Sav. Bank, 26 F.(2d) 872, which opinion settles some of the contentions here made.

A brief statement of facts seems necessary. A number of companies, the principal one being the Metropolitan Street Railway Company, were engaged in rendering street railway and electric power and light service in Kansas City, Mo., prior to 1911, at which time they were placed in the hands of a receiver. The receivership continued for about five years under the direction of Circuit Judge Hook. A plan of reorganization was evolved, and the Kansas City Railways Company was organized, with an authorized capital stock of $100,000, divided into 1,000 shares, of $100 each. This company was to be the medium through which the reorganization was to be made effective. In 1914 it secured a new franchise from the city of Kansas City, which provided that the company should acquire the railway properties of the Metropolitan Company and its constituents pursuant to Judge Hook's plan, and also authorized the execution of a mortgage upon the property and issuance of bonds thereunder in aid of the contemplated plan of reorganization. Other provisions of the franchise are not necessary to be referred to.

The funded debt of the Metropolitan system at the time the reorganization plan was formulated amounted to $28,000,000, of which $25,000,000 was past due. The plan provided for segregation of the power and light properties into one company, and the vesting of the street railway properties in the Kansas City Railways Company. It provided for the court holding the issued stock of the Railways Company for the purpose of carrying out the plan, and directed the placing of mortgages upon the properties acquired by the Railways Company, and the issuance of bonds thereunder, some of which were to be delivered in payment for the properties, and some to be sold for cash to meet the financial requirements of the new company. It also arranged methods of participation by the various classes of security holders, and prescribed a complete procedure for the reorganization of the Metropolitan system. Some supplementary changes were made in the plan by Judge Hook whereby the stock of the Railways Company was transferred to three trustees, who were to hold the same under some kind of a trust agreement, and were to issue certificates representing beneficial interests therein to the stockholders who might become parties to the plan. Commissioners were appointed to carry out the arrangements. The beneficial certificates owned by appellants came to them out of this plan of reorganization. They could not have received the certificates, except by becoming parties to the plan.

The plan of reorganization meeting the approval of the majority of the security holders of the old companies, a final decree of foreclosure and sale was entered January 11, 1916, and the various properties under foreclosure were sold at auction and bid in as provided in the plan. The sales were confirmed by the court. On February 15, 1916, a deed conveying the street railway properties to the Railways Company was executed by the court's commissioners and receivers of the old companies. The Railways Company thus having acquired the properties, a special meeting of stockholders of said Railways Company was held on February 15, 1916, at which were represented 997 shares of stock out of the 1,000 issued. This meeting decided on the proposed mortgage, and the directors were authorized to execute and deliver the same, and also bonds for the purposes therein provided. All of the stock on deposit with the court, as provided in the franchise and by order of the court, was voted for the mortgage and bonds, as provided in the plan. A directors' meeting was held at the conclusion of the stockholders' meeting, and a resolution adopted directing the proper corporate officers to execute said mortgage, likewise the bonds thereunder, as specified, and the mortgage and its terms were approved. The mortgage was executed and recorded. It was approved by the city, by its city counselor, and was approved also by Judge Hook. The preambles to the mortgage contain the following:

"Whereas, the company is authorized and empowered to borrow money and contract debts and issue and dispose of its obligations for money so borrowed and to acquire property and issue its obligations therefor, and by proper and every necessary corporate action, including the unanimous vote of stockholders and directors, at meetings properly convened and held, has duly resolved to issue its first mortgage gold bonds as herein provided, and to execute, acknowledge and deliver this indenture to secure the payment thereof;"

"And whereas, all things necessary have been done to make said bonds, when issued by the company and authenticated by the corporate trustee, the valid, binding and legal obligations of the company and this indenture a valid mortgage lien to secure the payment thereof."

The bonds provided for in the plan were duly issued and delivered, and additional bonds were issued at various times, all being authorized by corporate action. It should be stated that the mortgage, bonds and notes issued by the Railways Company were prior to issuance authorized by the Public Service Commissions of the states of Missouri and Kansas, and that the plan of reorganization had been approved by the Public Service Commission of Missouri prior to its execution.

At a meeting of the stockholders of the Railways Company early in 1916 and before the bonds were issued a resolution was adopted increasing the authorized capital stock to $30,000,000, but the record thereof was not filed with the secretary of state until November, 1917. The Railways Company operated the properties forming the new system for several years after February, 1916. Interest was regularly paid on the bonds. In 1919 financial difficulties arose. Certain first mortgage bonds fell due and were not paid. The company was unable to pay its general taxes for 1919, and the protective committee, which had been formed, raised and paid some $450,000 for that purpose. There were defaults in the payment of the interest upon the mortgage debt, and in September, 1920, a bill of complaint was filed by the Kansas City Refining Company, a general creditor, asking an equity receivership, and alleging that the Railways Company had outstanding over $27,000,000 of first mortgage bonds, and over $5,000,000 of second mortgage bonds; that it had defaulted in two semiannual installments of interest upon said bonds; that it had $1,000,000 of gold notes secured by pledged bonds due and unpaid; that the lines had been operating at a loss; that there were outstanding current obligations of over $5,000,000, and unsatisfied judgments of $800,000.

The court appointed first a temporary receiver, and then permanent receivers. October 21, 1920, the trustee under the first mortgage, with leave of court, filed an intervening petition and bill to foreclose said mortgage. Certain creditors of the Railways Company holding judgments for personal injury and property damages, called in the proceedings "tort claimants," intervened and raised the question of the validity of the mortgage and bonds under the Missouri Constitution and statutes. The state of Missouri also intervened and filed pleadings to the same effect. These matters were adjusted and the state withdrew from the case.

Appellants' intervening petition attacking the validity of the mortgage and bonds was filed March 6, 1924. The case was tried in 1924, and on December 30, 1924, the court announced its decision. It filed two memorandum opinions. Its final decree upheld the validity of the first mortgage and the first mortgage securities and the various junior lien securities. With reference to the claim of appellants, it said in one of its memorandum opinions:

"The stockholders attack the validity of this entire issue (except...