In re New York State Rys.

• Decision Date: 26 September 1936
• Citation: 16 F. Supp. 717
• Parties: In re NEW YORK STATE RYS.
• Court: U.S. District Court — Northern District of New York

16 F. Supp. 717

In re NEW YORK STATE RYS.

District Court, N. D. New York.

September 26, 1936.

Willis H. Mitchell, of Syracuse, N. Y., for trustee.

Archibald L. Jackson, of New York City, for The General Finance Corporation, claimant.

Hiscock, Cowie, Bruce & Lee, of Syracuse, N. Y. (Alexander H. Cowie and Matthew R. Quinn, both of Syracuse, N. Y., of counsel), for New York Cent. R. Co., claimant.

Harris, Beach, Folger, Bacon & Keating, of Rochester, N. Y. (Keith D. Poland and Daniel M. Beach, both of Rochester, N. Y., of counsel), for Security Trust Co. of Rochester, trustee under consolidated mortgage.

Cook, Nathan, Lehman & Greenman, of New York City (Alfred A. Cook and Frederick F. Greenman, both of New York City, of counsel), for Lisman Committee of consolidated mortgage bondholders.

Sullivan & Cromwell, of New York City (Paul W. McQuillen, of New York City, of counsel), for Harris-Forbes Committee of consolidated mortgage bondholders.

White & Case, of New York City (Jesse E. Waid, of New York City, of counsel), for Bankers Trust Co., trustee under the first Rochester mortgage.

Hubbell, Taylor, Goodwin, Nixon & Hargrave, of Rochester, N. Y. (E. Willoughby Middleton, of Rochester, N. Y., of counsel), for Bankers Trust Co.

Van Schaick, Woods & Warner, of Rochester, N. Y. (Howard M. Woods, of Rochester, N. Y., of counsel), for first mortgage bondholders.

Mann, Strang, Bodine & Wright, of Rochester, N. Y. (Frank H. Parker, of Rochester, N. Y., of counsel), for Genesee Valley Trust Co., trustee under the second Rochester mortgage.

Morgan, Lewis & Bockius, of Philadelphia, Pa. (W. Heyward Myers, Jr., of Philadelphia, Pa., of counsel), for Genesee Valley Trust Co.

BRYANT, District Judge.

On July 2, 1936, the attorneys listed above met with me in conference for the purpose of devising methods to facilitate the issuance of a proposed plan for reorganization of the Rochester property of debtor. All were in agreement that certain disputed legal questions should be settled before any proposed plan is put forth. These questions relate to claims of various classes of creditors to certain funds. It was stipulated, on the record by the parties present, that these questions be submitted by briefs and reply briefs and that my decision thereon be final. The parties stipulating represent a large majority of each class of creditors. If any interested party not represented at the conference is dissatisfied with my holdings, opportunity to be heard will be given.

A few words by way of preface may prove helpful to those interested, but not wholly conversant with the situation. The New York State Railways for a number of years owned and operated street railways and some bus routes in and around the cities of Rochester, Syracuse, and Utica. Rochester is in the Western District of New York. All property other than the Rochester property is situate in the Northern District. Prior to and since receivership the operations have been accounted for through divisions known as the Rochester, Syracuse, and Utica divisions. All income and expenditures for each division have been, and now are, accounted for separately. Income and expenditures not chargeable to any particular division have been allocated on a percentage basis, which seems to be satisfactory to all.

Equity receivers were appointed in the Northern District on December 30, 1929, under a creditors' bill. Ancillary receivers under this bill were appointed in the Western District on January 23, 1930. At those times the Rochester property was covered in whole or in part by three mortgages. For convenience they will be referred to as the first mortgage, a mortgage with unpaid principal of $2,130,000, dated April 1, 1890, due April 1, 1930, which covers about 80 per cent. of the Rochester property and upon which interest and principal were defaulted April 1st, 1930; the second mortgage, a mortgage for $1,500,000, dated October 4, 1893, and due December 1, 1933, covering substantially the same property as the first and upon which default in interest was made December 1, 1929; the consolidated mortgage, a mortgage for $16,457,000, upon which interest was defaulted November 1, 1929, covering substantially all of the Rochester property, subject to the liens of the first and second mortgages. The consolidated mortgage also covers substantially all of the property, subject to certain underlying mortgages, in the Northern District.

On April 1, 1930, the consolidated mortgage trustee filed a foreclosure bill. In the Western District, the receivership was extended to this bill by order of Judge Adler made April 26, 1930.

During this period, the ancillary receivers accumulated a substantial fund from the operation of the Rochester property. It is at this point that we find two of the disputed questions presented.

(1) Does the impounding under the foreclosure date from the filing of the bill (April 1, 1930) or from the date of the order extending the receivership (April 26, 1930)?

The creditors' representatives contend for the latter date, while all mortgage representatives assert that the date of filing governs. I concur with the latter contention.

Westinghouse Electric & Mfg. Co. v. Brooklyn R. T. Co. (D.C.) 288 F. 221, 245, is directly in point. The precise question was there at issue. Judge La Combe, as special master, concluded that the period of impounding dated from the filing of the bill. His holding was confirmed by Circuit Judge Mayer. It is argued that this case should not be considered an authority because Judge Mayer in his confirmation by opinion did not mention this particular holding. Judge Mayer seems to have answered this argument when, in his opinion, he stated, "It will not be necessary to repeat at length the reasons and conclusions of the special master * * in those respects in which the court agrees with his conclusions." This holding is an affirmation of the conclusions expressed in Dow v. Memphis & L. R. R. Co., 124 U.S. 652, 8 S.Ct. 673, 31 L.Ed. 565; Chicago & Alton R. Co. v. United States & Mexican Trust Co. (C.C.A.) 225 F. 940, and Atlantic Trust Co. v. Dana (C.C.A.) 128 F. 209.

My attention has not been called to any state case where this question has been discussed. The cases cited in opposition to the above holding are ones where this point was not in issue. They cannot be considered as authorities on this question.

Aside from cases, a study of the discussion had before Judge Adler on March 29, 1930 (Steno.Minutes, pp. 16-17) makes it apparent that in reality he did extend the receivership to take effect April 1, 1930, although the formal order was not signed until the 26th.

(2) To whom does the income from December 31, 1929 (the date of the appointment of receivers under the creditors' bill), to April 1, 1930 (the date of the filing of the foreclosure bill), belong?

It is the contention of creditors, the consolidated mortgage trustee, and the various committees for bondholders under that mortgage, that it belongs to the unsecured creditors. The first and second mortgage trustees, and bondholders' committees under those mortgages, maintain that the income earned during this period belongs to the respective mortgages in the order of the priority of their liens.

It is an admitted fact that none of the mortgagees intervened in the creditors' actions or took any affirmative step to assert or protect their right to earnings until the filing of the foreclosure bill by the consolidated mortgage trustee on April 1, 1930. Until then the property was under the control of the receivers appointed in the creditors' suits. For clarity's sake, I will reiterate that we are here considering Rochester property only. I am not differentiating in the use of the words "ancillary receivers" and "equity receivers." Whenever reference is made to "equity, ancillary or creditors' receivers" it should be borne in mind the reference is to the receivers who were in possession of the Rochester property under the creditors' bill.

All agree that, in the absence of a provision in the mortgage giving the mortgagee the right to the income while the property is in the hands of a mortgagor, the mortgagee is not entitled to the income, even though the earnings are expressly pledged as security for the debt, until proper steps have been taken by the mortgagee to assert his rights. This rule is so thoroughly established by United States and New York decisions that citations seem unnecessary. It is upon this rule that the creditors and consolidated mortgage interests rely to support their theory that the mortgage interests are not entitled to earnings prior to April 1, 1930.

While approving the general rule, as stated, the underlying mortgage interests claim it has no application to the present question because possession was taken for their benefit by the equity receivers. They base this claim of right to participate, according to rank and priority, in the earnings of the equity receivership, upon the distinction— real or fallacious — between a general creditors' and judgment creditors' bill. They admit that, under the latter, mortgagees are not entitled to income earned under receivership prior to the assertion of their rights. The former, they assert, "is merely an equitable levy and execution, for the benefit of all creditors, secured and unsecured, and the question of priority is to be settled in the same manner as if execution at law had been levied, at precisely the same time, as upon judgments duly rendered." Thomas v. Cincinnati, etc., R. Co. (C.C.) 91 F. 202, 204. Differently phrased, they contend that from appointment the equity receivers operated the property for all creditors, secured and unsecured, and that the earnings, after payment of expenses, "are held for the benefit of all creditors according to their rank and priority." Pennsylvania Co. for Ins. on Lives, etc. v. Philadelphia Co. (C.C.A.) 266 F. 1, 5. In addition to the Thomas and Pennsylvania Cases, s...