Guaranty Trust Co. of New York v. North Chicago St. R. Co.

• Decision Date: 16 April 1904
• Docket Number: 1,037
• Citation: 130 F. 801
• Parties: GUARANTY TRUST CO. OF NEW YORK v. NORTH CHICAGO ST. R. CO. KOHN et al. v. NORTH CHICAGO ST. R. CO. et al.
• Court: U.S. Court of Appeals — Seventh Circuit

130 F. 801

GUARANTY TRUST CO. OF NEW YORK v. NORTH CHICAGO ST. R. CO.

KOHN et al. v. NORTH CHICAGO ST. R. CO. et al.

No. 1,037

United States Court of Appeals, Seventh Circuit.

April 16, 1904

Prior to June 1, 1899, the North Chicago Street Railroad Company and the West Chicago Street Railroad Company (herein called respectively the North Chicago Company and the West Chicago Company) operated independent systems of surface street railroads on the North and West Sides, respectively, of the city of Chicago. On June 1, 1899, each of those companies executed a lease to the Chicago Union Traction Company (herein called the Union Traction Company) demising its property and franchises to that company for the full period of the charter of the respective lessors, and all extensions or renewals thereof. By the terms of these leases the Union Traction Company agreed to pay or renew all notes, bonds, and mortgages of the lessor companies, and to pay as rental to the lessors, respectively, amounts equivalent to annual dividends of 12 per cent on the stock of the north Chicago Company, and of 6 per cent on the stock of the West Chicago Company; such payments to be made quarterly. The lease further provided that, for the purpose of securing the performance of the obligations of the lease, the Traction Company should deposit with the Illinois Trust & Savings Bank of Chicago, as trustee, such amount of cash or security as should be agreed upon by the parties, which fund should be held subject to the conditions of a tripartite agreement of even date between the three parties, by which agreement the sum of $10,000,000 in cash, or in securities of a kind and amount to be approved by the two railroad companies, was provided to be deposited; the income of the fund to be paid to the Traction Company until default in some one obligation of the lease, and upon default the income from the deposit and so much of the principal as may be necessary, to be appropriated and applied in equal and ratable payment and discharge of the debts and obligations assumed by the Traction Company. In the event that stocks of corporations should constitute part of the deposit, the trustee should vote the same in accordance with the directions of the Traction Company, and, upon request, execute a proxy to vote such stock of the North Chicago Company and 32,000 shares of the capital stock of the West Chicago Company, which shares are now held by the trustee for the purposes of the agreement. The Union Traction Company entered into possession under the leases, and, until the receiverships hereafter mentioned, operated the roads of the two lessor companies.

On April 22, 1903, the Guaranty Trust Company of New York brought three suits in the court below-- one against the North Chicago Company upon three demand notes, dated respectively, March 20, April 17, and April 20, 1903, for the amount in the aggregate of $563,000; one against the West Chicago Company upon three demand notes, one dated March 20, and two dated April 14, 1903, for the amount, in the aggregate of $270,000; and the third against the Union Traction Company upon a demand note dated March 20, 1903, for $317,000. The notes upon which the North and West Chicago Companies were sued evidenced indebtedness which by the leases the Union Traction Company had assumed to pay or renew. Judgments by confession were entered in those suits on that day. Thereafter, on the same day, the Guaranty Trust Company filed its three separate judgment creditors' bills in the court below against the three judgment debtors, respectively, containing the usual allegations of a creditors' bill, reciting the public nature of the business carried on by the company defendant therein, describing the various actual or potential controversies alleged to exist with respect to the various franchises of the several companies, and praying for the appointment of a receiver, and, in the case of the Union Traction Company, praying for administrative relief by way of operation of the railways. In each case the judgment debtor was sole defendant. Upon the same day the three companies filed their answers to the respective bills, confessing the bills, and on the same day the court below appointed receivers in each of the suits, with authority to operate the property under the order of the court. The receivers forthwith qualified and assumed possession of the property so leased to, and in the custody of, the Union Traction Company. Following the appointment of the receivers, various petitions were filed by them, setting forth in detail the various interests and rental charges to which the various defendants were subject, and reciting various controversial questions relating to the public service, public rights, and public liabilities with various corporations. No diverse parties were brought into court by these petitions, and no relief sought therein, other than the instructions of the court with respect to the administration of the property. During the receiverships the court authorized the payment of rental accruing under the various leases, and its distribution among the stockholders, respectively, of the North and West Chicago Companies, as dividends. In this way $265,722 on July 15 and October 15, 1903, were paid to the stockholders of the North Chicago Company, and $374,587.50 on May 15 and October 15, 1903, were paid to the stockholders of the West Chicago Company; these payments being made with the consent of the judgment creditor, the complainant in those bills, made with the consent of the judgment creditor, the complainant in those bills, a part of which payment was made by the receivers of the Union Traction Company by means of a loan made by them under the authority of the court.

On August 15, 1903, David A. Kohn and certain others of the appellants here, as stockholders of the North Chicago Company, filed in the state circuit court of Cook county, Ill., their bill in their own behalf, and in behalf of all other stockholders of that company, against the Union Traction Company, the North Chicago Company, the Illinois Trust Company, the individual defendants, setting forth the incorporation, charter, and capitalization of the several companies named, the holdings by complainants of stock in the North Chicago Company, the ownership of the road, and the leases hereinafter stated; that the indebtedness of the North Chicago Company at the date of the lease was $2,319,000, evidenced by notes then outstanding which the Traction Company, by the lease, assumed and agreed to pay or renew; the indebtedness of the West Chicago Company, at the date of the leases of $1,090,000, evidenced by the notes which the Traction Company had agreed to pay or renew; alleged the deposit of securities under the tripartite agreement, the execution of the notes to the Guaranty Trust Company, as stated, and the three judgments entered thereupon-- and charges that each of the three suits was begun and the judgments entered pursuant to an agreement theretofore entered into between the Guaranty Trust Company and the Union Traction Company that the proceedings should be had; that the notes upon which the judgments were entered were renewal notes executed at the request of the Union Traction Company, being indebtedness outstanding at the time the respective leases were executed, and the failure of the Traction Company to hold the railroad companies harmless therefrom; alleges the insolvency of the Union Traction Company, that it was subject to be dissolved under the laws of the state of Illinois, and that judicial proceedings had already been commenced for that purpose. The bill further alleges that since the execution of the leases the officers and directors of the North and West Chicago Companies have been designated and selected by the Union Traction Company, and that until July 23, 1903, all the directors, and officers of both railroad companies were officers or persons in the service of the Union Traction Company; that at a meeting of the directors of the North Chicago and West Chicago Companies on July 23, 1903, each of the directors-- one at a time, resigned-- the meeting being controlled by the officers of the Union Traction Company, and a new board of the companies was elected by the remaining directors, who proceeded to elect a president; that the proceedings were secret, without prior notice of the holding of the meeting to any stockholder of either company, and that no stockholder voted, except as some of the directors may have been stockholders, and to an amount not constituting a substantial minority of the shares of stock in either company; that a majority of the officers and directors so elected were not and are not stockholders in either company, but are stockholders or in the service of the Union Traction Company, and were selected by that company, prior to their election, to serve the interests of the Traction Company. The bill then charges that, at the request and direction of the officers and attorneys of the Union Traction Company, the directors of the North Chicago and West Chicago Companies adopted a resolution authorizing the execution to the Union Traction Company of a new lease and tripartite agreement, subject to the approval of the holders of a majority of the stock of the North Chicago and West Chicago Railroad Companies, at a stockholders' meeting to be called for that purpose, and that such amendatory agreement be executed and deposited in escrow, to be delivered to the Traction Company when approved by a majority of the stockholders of each of said companies, which special meeting was called for August 18, 1903. By this amended agreement the stocks on deposit with the Illinois Trust & Savings Bank of Chicago, as trustee under the tripartite...