Kansas City Southern Railway Company v. Guardian Trust Company

• Decision Date: 21 February 1916
• Docket Number: No. 85,85
• Citation: 36 S.Ct. 334,240 U.S. 166,60 L.Ed. 579
• Parties: KANSAS CITY SOUTHERN RAILWAY COMPANY, Appt., v. GUARDIAN TRUST COMPANY, Central Improvement Company, Cambria Steel Company, and Kansas City Suburban Belt Railroad Company
• Court: U.S. Supreme Court

240 U.S. 166

36 S.Ct. 334

60 L.Ed. 579

KANSAS CITY SOUTHERN RAILWAY COMPANY, Appt.,

v GUARDIAN TRUST COMPANY, Central Improvement Company, Cambria Steel Company, and Kansas City Suburban Belt Railroad Company.

No. 85.

Argued December 13, 14, and 15, 1915.

Decided February 21, 1916.

Messrs. Samuel W. Moore and Samuel Untermyer for appellant.

[Argument of Counsel from pages 168-170 intentionally omitted] Messrs. Frederick W. Lehmann, George H. English, Jr., Edward P. Gates, and Walter C. Clephane for the Guardian Trust Company.

[Argument of Counsel from pages 170-172 intentionally omitted] Mr. Harry S. Mecartney and Newell H. Clapp for intervening stockholders of the Guardian Trust Company.

Mr. Justice Holmes delivered the opinion of the court:

This is an appeal from a decree in which the circuit court of appeals decided that the Guardian Trust Company, as an unsecured creditor of the Kansas City Suburban Belt Railroad Company, was entitled to charge the appellant for the Belt Company's debt, because the reorganization scheme, adopted upon a foreclosure of a mortgage of the Belt Company's property and a purchase by the appellant, left the unsecured creditors inadequately provided for, while it made a considerable provision for the stockholders in the Belt Road. 120 C. C. A. 121, 201 Fed. 811, 127 C. C. A. 184, 210 Fed. 696. See Northern P. R. Co. v. Boyd, 228 U. S. 482, 57 L. ed. 931, 33 Sup. Ct. Rep. 554.

The facts are less complicated than the proceedings that have grown out of them. The Kansas City, Pittsburg, & Gulf Railroad extended From Kansas City to Port Arthur on the Gulf of Mexico. It used terminals at Kansas City belonging to the Belt company above mentioned, and companies in its control, and at Port Arthur belonging to a Dock Company. All three were mortgaged, and after a default on the bonds of the Gulf Company in 1899, a plan was made to bring the road and terminals into one hand. The Gulf Company's mortgage was to be foreclosed and a new company formed, which was to exchange its own securities for the stock and bonds of the Gulf, Dock, and Belt Companies, making a new mortgage to raise the necessary funds. The Gulf Company's mortgage was foreclosed, the appellant company was formed, issued its new securities, and in March and April, 1900, became the owner of the Gulf road and of most of the stocks and bonds of the old companies, including the Belt Company. In September, 1900, a suit was begun to foreclose the Belt mortgage, and on December 31, 1901, it was sold for the amount of its mortgage to the appellant. The court of appeals thought it plain that the foreclosure was part of the original plan; and as it also thought that the mortgaged property was worth enough above the mortgage to pay the unsecured creditors, it held that the stockholders, when receiving pay for their stock, were receiving it in substance as the proceeds of a transaction that removed all property of the Belt Company from its unsecured creditors' reach. The appellant was the principal holder of the Belt Company stock, as well as the purchaser of its property with notice of the outstanding debts, and therefore was decreed to pay the Trust Company's claim.

The proceedings began with a creditors' bill by the Cambria Steel Company against the Belt Company and the Guardian Trust Company to prevent the latter from selling securities held by it for an alleged debt of the Belt Company, the bill denying the debt. The court of appeals thought that this suit was really a suit of the appellant. The Cambria Steel Company has disappeared and the proceedings have been carried on by the Belt Company, the instrument of the appellant, and later by the appellant, intervening in the suit, and all charging that the Trust Company was indebted to the Belt. The Trust Company, on the other hand, asserted its rights and prayed judgment for its debt in its answer to the Belt, although it failed to insert a similar prayer in its answer to appellant. The ground of the appellant's intervention was that the Belt mortgage covered after-acquired property, so that it was entitled to the securities in the Trust Company's hands unless the Trust Company could make good its claim. On the other hand, the decree foreclosing the Belt mortgage expressly left open the right of the Trust Company to contend that the appellant was bound to pay the Belt Company's unsecured debts.

The appellant attacks the conclusion of the circuit court of appeals upon several grounds. In the first place it contends that the Trust Company is bound by the plan because it was a party to it, exchanged its own Belt Company stock in pursuance of it, was a depositary under it, and used all its influence to induce other stockholders and bondholders to come in. It asserts that the plans contained an express covenant not to hold the new company liable for the debts of the old one. It also asserts that the property was not worth more than the mortgage. We will consider these and some subordinate matters in turn.

The plan presented elaborate estimates of the funds required. One item was: 'For present stock [of the Kansas City Suburban Belt Railroad Company] one quarter of a share of new preferred stock and three quarters of a share of new common stock of the company as reorganized for each share of the present stock of those who may deposit thereunder.' The Trust Company exchanged its stock and it is said that by its retention of this benefit it has precluded itself from claiming its debt. But the plan also stated at the outset as one of the results to be attained, 'The payment of the floating debt and the existing Car Trust obligations,' and at a later point it allowed for payment of floating debts, $475,000, to come from proceeds of the sale of first mortgage bonds and preferred stock and payment of $10 per share by participating stockholders. It is true that the estimate turned out to be much too small, but the plan did not on its face give notice of an intent to prefer the Belt stockholders to its creditors, and therefore the Trust Company, by assenting to it and exchanging stock under...