In re Wisconsin Cent. Ry. Co.

• Decision Date: 14 September 1945
• Docket Number: No. 17104.,17104.
• Citation: 63 F. Supp. 151
• Parties: In re WISCONSIN CENT. RY. CO.
• Court: U.S. District Court — District of Minnesota

63 F. Supp. 151

In re WISCONSIN CENT. RY. CO.

No. 17104.

District Court, D. Minnesota, Fourth Division.

September 14, 1945.

George W. Morgan, of St. Paul, Minn., and M'Cready Sykes, of New York City (Morgan, Chase, Headley & Hoshour, of St. Paul, Minn., and Stewart & Shearer, of New York City, of counsel), for Trustees under the First General Mortgage.

W. Lloyd Kitchel, of New York City (Cadwalader, Wickersham & Taft, of New York City, of counsel), for Protective Committee for First General Mortgage bonds.

Olin, Clark & Murphy, of New York City, and Stinchfield, Mackall, Crounse & Moore, of Minneapolis, Minn., for Empire Trust Co. and Henry A. Bultman, Trustees of the Refunding Mortgage.

Snyder, Gale, Hoke, Richards & Janes, of Minneapolis, Minn., and Cravath, Swaine & Moore, of New York City, for Chemical Bank & Trust Co. and John A. W. Richardson, Jr., as Trustees under the Superior and Duluth Division and Terminal First Mortgage.

James L. Hetland and E. E. Boyner, both of Minneapolis, Minn., for Minneapolis, St. Paul & Sault Ste. Marie R. Co.

James E. Dorsey and Donald West, and Dorsey, Colman, Barker, Scott & Barber, all of Minneapolis, Minn., for Trustees of the debtor company.

NORDBYE, District Judge.

There have been presented the following matters for determination arising out of the objections to claims filed in the above proceeding:

1. Whether interest may be allowed upon the overdue interest coupons attached to the debtor's First General Mortgage bonds and the Superior and Duluth Division and Terminal First Mortgage bonds which are now outstanding in the hands of the public.

2. Whether and to what extent the Superior and Duluth Division and Terminal First Mortgage bonds of the debtor are entitled to interest after May 1, 1936, the due date of said bonds, at a rate greater than four per cent.

3. Whether the $1,047,000 principal amount of First General Mortgage bonds now held by the Trustees of said mortgage, and the $1,000 principal amount of such bonds held by the debtor, are entitled to participate in the assets of the debtor.

These matters will be considered in the order indicated above.

I. The respective mortgages which secure the bonds referred to expressly

provide that interest shall be paid upon defaulted coupons. The contracts involved herein were made and are performable in New York. The parties recognize, therefore, that the law as enunciated by the courts of that State on this question must govern. It is conceded that, under the New York law, compound interest may only be collected, generally speaking, upon the basis of a promise made after the interest upon the principal has accrued. State of Connecticut v. Jackson, 1814, 1 Johns.Ch. 13, 7 Am.Dec. 471; Young v. Hill, 67 N.Y. 162, 23 Am.Rep. 99; Newburger-Morris Co. v. Talcott, 1916, 219 N.Y. 505, 114 N.E. 846. An agreement, therefore, to pay compound interest made when the debt is created is void and unenforceable even if the promise to pay is an expressed one. See, Young v. Hill, supra; State of Connecticut v. Jackson, supra; Newburger-Morris Co. v. Talcott, supra. Cf. Quackenbush v. Leonard, 1841, 9 Paige 334.

The bondholders herein, however, are not seeking compound interest, and earnestly contend that the New York courts do not deny the enforcement of promises to pay interest on interest. Interest on interest is the interest paid upon interest due upon the original principal sum. Compound interest is the interest paid when the unpaid interest due upon the principal is added to the principal and the resulting sum is the basis for the next payment upon which the ensuing interest is computed. The latter method of figuring interest results in interest on interest on interest ad infinitum. See, 33 Corpus Juris, Interest, § 2, p. 179. But while this distinction might be made as between compound interest and interest on interest, the situation now before the Court does not present a factual basis for contending that there is a great difference in the burden which rests on the debtor as between interest on interest and compound interest. Computations indicate that, if the coupons on a $1,000 bond which pays four per cent interest were in default since 1940, the amount of interest now due the bondholder, if compound interest were paid upon the defaulted bond, would be only $1.83 greater in amount than if only interest on interest were paid during that time. The burden, therefore, which rests upon the Debtor is one of quantity rather than of character.

An analysis of the New York cases which have dealt with the policy of that State with reference to the right of a creditor to collect interest on interest becomes necessary. At the outset, it may be recognized that there is some apparent uncertainty in the law of that State on this question. The courts of that State have used two terms interchangeably — "interest on interest" and "compound interest" — without expressly distinguishing between their meaning and the different factual situations to which they apply. The confusion is somewhat accentuated because the Federal courts which have been confronted with the task of construing the effect of these State decisions are in conflict. Compare American Brake Shoe & Foundry Co. v. Interborough Rapid Transit Co., D.C.N.Y. 1935, 11 F.Supp. 418, and In re Columbus S. & H. R. Co., 6 Cir., 1901, 109 F. 177, with American Brake Shoe & Foundry Co. v. Interborough Rapid Transit Co., D.C.N. Y.1939, 26 F.Supp. 954, and Transbel Investment Co. v. Roth, D.C.N.Y.1940, 36 F.Supp. 396.

The two New York decisions which are most frequently referred to in considering this problem are Young v. Hill, supra, and Williamsburgh Savings Bank v. Town of Solon, 1893, 136 N.Y. 465, 32 N.E. 1058, 1062. A careful reading of the latter case seems to require the conclusion that interest on interest cases are governed by the same rules which govern compound interest cases. In the Williamsburgh case, as in the instant situation, the bondholders contended that they were entitled to interest upon the overdue interest coupons attached to the bonds and still in the hands of the bondholders. No doubt exists as to the fact that that case was a true interest on interest case. The court refused to grant interest on the coupons, holding that such interest would be "compound interest, which we have held not to be recoverable, except upon some new and independent agreement, made upon sufficient consideration. Young v. Hill * * *." In other words, the New York Court of Appeals held that interest on the coupons was just as much compound interest as was the interest in Young v. Hill, a true compound interest case, and that the compound interest rule applied in Young v. Hill must be applied to the interest on interest situation unless certain exceptions, not present there, or here, existed. The court expressly characterized the interest on the coupons as "compound interest * * * not * * * recoverable."

Moreover, an analysis of the fact situations in other New York cases indicates that no attempt is made to distinguish between interest on interest and compound interest. Both types are referred to without discrimination in the same opinions and sometimes in the same paragraph. They tend to support the rule announced in the Williamsburgh case. For instance, in Toll v. Hiller, 1844, 11 Paige 228, a true interest on interest situation appears to have been involved. There, the court made this pronouncement of the "special reasons of policy" which would not countenance the collection of interest on interest, stating (11 Paige at page 231):

"It may be proper to say, however, that as the interest was, by the condition of the bond and mortgage, to be paid annually, it would be perfectly equitable to receive interest on interest from the time it was payable; although for special reason of policy, courts will not allow interest upon interest, unless there is a special agreement to pay interest thereon after the original interest has become due and payable."

In Ritter v. Phillips, 1873, 53 N.Y. 586, the debtor was paying an extra one per cent interest on the mortgage principal because he was unable to pay the mortgage when it had fallen due. He contended that this additional one per cent interest agreement was void because it was like paying interest on interest. The court said that the situation was "like an executed agreement to pay interest upon interest accrued. This is compound interest. An agreement to pay interest on interest thereafter to accrue, will not be enforced. But after it has been paid, it cannot be recovered back." The facts, the language, and the computations and result show clearly that the New York court did not require a true compound interest situation as a condition to the application of compound interest rules. In Boardman v. Lake Shore & M. S. R. Co., 1881, 84 N.Y. 157, 186-190, the plaintiff was seeking interest on dividends past due. The court referred to the interest as "compound interest" and applied the compound interest rules, denying recovery. Plaintiff there apparently did not seek interest on interest due on the dividends. The court only said he sought interest on the dividends. The facts show a true interest on interest situation to which the court applied the rule followed in compound interest cases. Reference may also be made to Buffalo Loan Trust & Safe Deposit Co. v. Median G. & L. Co., 1896, 12 App.Div. 199, 42 N.Y.S. 781, and Klein v. East River Elect. Co., 1901, 33 Misc. 596, 67 N.Y.S. 922. These cases were decided by the New York Supreme Court and were true interest on interest cases. The compound interest rule was applied, the court relying expressly upon Williamsburgh Savings Bank v. Town of Solon, supra. Although these cases were decided by the New York Supreme Court, they should not be ignored in ascertaining the rule in that State. West v. American Tel. & Tel. Co., 1940, 311 U.S. 223, 61 S.Ct. 179, 85 L.Ed. 139, 123 A.L. R. 956. While ...