In re Wisconsin Cent. Ry. Co.
| Decision Date | 02 October 1946 |
| Docket Number | No. 17104.,17104. |
| Citation | 68 F. Supp. 320 |
| Parties | In re WISCONSIN CENT. RY. CO. |
| Court | U.S. District Court — District of Minnesota |
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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 the 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. (Thomas P. Helmey, of Minneapolis, Minn., of counsel), for Empire Trust Company and Henry A. Bultman, trustees of First and Refunding Mortgage.
Henry S. Mitchell, of Minneapolis, Minn. (Leonard H. Murray, of Minneapolis, Minn., of counsel), for Canadian Pacific Railway Company.
Cravath, Swaine & Moore, of New York City, and Frank A. Janes, of Minneapolis, Minn. (Frank H. Detweiler, Frank J. Pohl, and William E. Collins, all of New York City, of counsel), for Chemical Bank & Trust Company and John A. W. Richardson, Jr., as trustees under the Superior and Duluth Division and Terminal First Mortgage.
Mudge, Stern, Williams & Tucker, and Abraham Mitnovetz, all of New York City, and Bergmann Richards, of Minneapolis, Minn. (Paul Duryea Miller and John Wallis, of New York City, of counsel), for Protective Committee for holders of Superior and Duluth Division and Terminal First Mortgage Bonds.
Faegre & Benson and Everett A. Drake, of Minneapolis, Minn., for successor trustee of the Marshfield and South Eastern Division Purchase Money First Mortgage.
James E. Dorsey and Donald West, of Minneapolis, Minn., for trustees of the debtor company.
E. E. Boyner, of Minneapolis, Minn., for Minneapolis, St. Paul & Sault Ste. Marie Railway Company.
The Wisconsin Central Railway Company, the debtor, is in reorganization under the jurisdiction of this Court pursuant to Section 77 of the Bankruptcy Act, 11 U.S.C.A. § 205. The instant matter is before the Court by virtue of Order 14e, dated December 28, 1945, which propounded the following questions for hearing:
(a). Which of the mortgages of the debtor are a lien upon the equipment of the debtor at the time of such determination, and the extent and priority of such liens, whether by reason of granting clauses, after-acquired clauses, free property clauses, replacement clauses or other clauses in said mortgages, use of impounded funds, or otherwise?
(b). Which of the mortgages of the debtor are a lien upon the materials and supplies of the debtor at the time of such determination, and the extent and priority of such liens, whether by reason of the provisions of the respective mortgages, use of impounded funds, or otherwise?
(c). Which mortgages of the debtor have liens and in what priorities on the properties of the debtor which are subject to the lien of its Marshfield and South Eastern Division Purchase Money First Mortgage, subordinate to the lien of that mortgage?
(d). Which mortgages of the debtor have liens and in what priorities on the rights acquired by the debtor under the Marshfield Coordination Agreement of May 22, 1936, subordinate to the lien of the Marshfield and South Eastern Division Purchase Money First Mortgage of the debtor?
(e). The principles of law determining the amount of the earnings, if any, of the debtor or the amount of the assets of the debtor or interest therein, if any, which are available as free assets of the debtor for unsecured claims against the debtor.
At a hearing on January 21, 1946, however, all the parties agreed that the determination of question (e) should be postponed indefinitely because this Court's decision of January 18, 1946, upon certain income impounding issues1 has rendered the existence of any free assets unlikely. The issue may be brought on for hearing at a later date on notice by any interested party.
Each of the other questions will be discussed in order. It is helpful to note at this time that four mortgages exist upon the debtor railway. They are the First General Mortgage (hereinafter called the First General), dated July 13, 1899, the Marshfield and South Eastern Division Purchase Money First Mortgage (hereinafter called the Marshfield Mortgage), effective May 1, 1901, the Superior and Duluth Division and Terminal First Mortgage (hereinafter called the S. & D. Mortgage), executed May 1, 1906, and the First and Refunding Mortgage (hereinafter called the Refunding Mortgage), executed April 1, 1909.
(a). Which of the mortgages of the debtor are a lien upon the equipment of the debtor at the time of such determination, and the extent and priority of such liens, whether by reason of granting clauses, after-acquired clauses, free property clauses, replacement clauses or other clauses in said mortgages, use of impounded funds, or otherwise?
All the parties agree that the First General Mortgage Bondholders possess a prior lien upon presently existing equipment which the debtor owned when the First General Mortgage was executed on July 13, 1899, and also upon equipment which has been purchased with First General Bonds or their proceeds at any time since then. So the maximum equipment involved under this issue is that which has been purchased since July 13, 1899, with funds other than those obtained from the sale of the First General Bonds.
The First General Bondholders contend that the granting clause, the after-acquired property clause, and the replacement clause of their mortgage give them a prior lien against all of this equipment. The Refunding Bondholders contend, however, that although the Refunding Mortgage was executed after the First General, the Refunding Mortgage's granting clause, after-acquired property clause, and replacement clause entitle the Refunding Bondholders to precedence over the First General Bondholders because the free property clause of the First General negatives the equipment rights claimed under the First General after-acquired property clause. They also argue that the clause relied upon by the First General as a replacement clause does not permit the lien sought. The Refunding Bondholders contend that if the First General Bondholders do possess a lien under their after-acquired property clause, or replacement clause, the Refunding Bondholders' rights nevertheless remain prior to the First General rights upon equipment because the Refundings possessed a purchase money lien or a lien by subrogation against all the equipment paid for between April 1, 1909, the date on which the Refunding Mortgage was executed, and 1932, the date of the receivership.2 Apparently they rely upon their replacement lien to extend their prior lien to equipment purchased after 1932. The First General Bondholders dispute the Refunding's claim, but declare, in the alternative, that the First General possess a first and prior lien upon equipment which, they contend, was purchased with impounded funds which belonged to the First General Bondholders. Because the impounded funds in question begin to accumulate during the receivership and after First General intervention therein, In re Wisconsin Central Ry. Co., D.C., 64 F.Supp. 251, only the equipment purchased since that time is claimed to be subject to this First General claim. The S. & D. Bondholders also contend that they are entitled to a first lien upon all equipment purchased since the receivership with impounded funds which belonged to the S. & D. Bondholders. They claim no lien, however, under their mortgage granting clause. The Refundings dispute all claims of priority and lien based upon the use of impounded funds.
The Marshfield Bondholders have entered into a stipulation with the other parties by which the Marshfield claims are recognized.3 Consequently, they have taken no part in this argument.
All the parties appear to recognize, at least for the purposes of this proceeding, that the granting clause and the after-acquired property clause of the Refunding Mortgage create an effective lien upon all presently existing equipment which was owned when the Refunding Mortgage was executed or which has been acquired since that time. They only dispute, in the manner noted above, its priority and the existence of any other claim which would create a Refunding priority.
In view of these claims and agreements, therefore, the general question stated above resolves itself into several specific questions:
1. Does the free property clause of the First General Mortgage limit the after-acquired property clause with respect to equipment?
2. Do the facts give rise to a purchase money mortgage lien or a lien by subrogation in favor of the Refunding Bondholders?
3. Do the First General Mortgage and the Refunding Mortgage contain replacement clauses? If so, what is their effect?
4. Was any of the equipment now owned or possessed by the debtor purchased with impounded funds which belonged to the First General or S. & D. Bondholders?
Each specific question will be discussed in order.
Obviously, the problem is to interpret the provisions of the First General Mortgage and to apply the law thereto. The general granting clause of the mortgage grants "All and Singular the following described railroads, situated in the States of Wisconsin, Illinois, Minnesota, and Michigan, and also all the rolling stock, bonds, notes, shares, rights, privileges, franchises and other property now owned by the Railway Company or hereafter acquired by it or its successors, and being a part of or connected with any of said railroads, to wit: —"
Paragraphs 1 to 8 which immediately follow this general provision grant all the railroad lines which comprised the Wisconsin Central in 1899. Paragraph...
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