Kneeland v. Luce

• Decision Date: 09 November 1891
• Citation: 12 S.Ct. 32,35 L.Ed. 830,141 U.S. 491
• Parties: KNEELAND v. LUCE et al
• Court: U.S. Supreme Court

141 U.S. 491

12 S.Ct. 32

35 L.Ed. 830

KNEELAND v. LUCE et al.

November 9, 1891.

The Toledo, Cincinnati & St. Louis Railroad Company (hereinafter called the 'St. Louis Company') was organized about June, 1881, and was formed by the consolidation of 10 local railroad companies, which were engaged in building lines of narrow-gauge railroad in Indiana and Illinois, between Kokomo, Ind., and East St. Louis. A construction company, known as the 'Western Construction Company,' (hereinafter called the 'Construction Company,') before that, and in 1880, had entered into contracts with these local railroad companies for the construction of their roads, whereby the Construction Company was to receive for the work all the stock and bonds of the several railroad companies, and, in some cases, in addition, certain local aid which had been raised along the respective lines. The lines had been located, and the work was in progress, when, in the summer of 1881, it was concluded that it would be better to organize a continuous line of railroad; and with that view the St. Louis Company was formed by consolidation. There was a local company, called the 'Frankfort & State Line Railroad Company,' (hereinafter called the 'Frankfort Company,') which had been organized in 1874, to build a line of road from Frankfort, Ind., westward to the west line of that state. The road was located in part, and a broad-gauge railroad was built from Frankfort west for a distance of about 11 miles, in Indiana. In August, 1880, the Construction Company contracted with the Frankfort Company to build the road of the latter, as a narrow-gauge road, from Frankfort west to the west line of Indiana. The Construction Company was to receive the 11 miles of road, on which there was a mortgage, and $4,000 per mile in local aid taxes and subscriptions, which had been voted and raised, and $10,000 per mile in first-mortgage bonds, and all the stock of the railroad company, being $2,000,000, except what it should be necessary to deliver to tax-payers for local aid, for which $200,000 was reserved; the length of the line, including the 11 miles, being 67 miles. In February, 1881, the Construction Company made a contract with Barnes & Co., which was assigned to the Iowa Construction Company, for the grading of the line and some other work. The line was located early in 1881 by the engineer of the Construction Company. The work was commenced, and the grading had been done to a considerable extent, when, after the formation of the St. Louis Company, the construction company entered into a contract with the St. Louis Company to construct a line of narrow-gauge railroad running west from Frankfort, Ind., to a point on the west line of that state, for which the Construction Company was to receive the bonds and stock of the St. Louis Company. The Frankfort Company was not included in the consolidation, and the stock of that company was not exchanged for the stock of the St. Louis Company, while the stock of all the consolidated companies was so exchanged. It was not the intention to construct two lines of railroad, but the object was ultimately to consolidate the Frankfort Company with the new organization, and thus form a continuous line. This was not done then, for the reason that it was supposed that, if the consolidation should include the Frankfort Company, it would render void the local taxes voted and the local subscriptions made in aid of that company, which amounted to over $170,000. It was determined, therefore, to keep up the separate organization of the Frankfort Company, although the line of the two roads would be continuous.

The construction of the Frankfort Railroad was completed in 1881 or early in 1882, and much of the work was done on the whole line to East St. Louis; but the Construction Company was unable to sell the bonds and stock of the new line, and could not proceed further, and early in 1882 a syndicate was formed in Boston, known as the 'Delphos Trust,' which agreed to take all of the bonds and stock then unsold, and pay an amount equal to that estimated as required to complete the road. Under that arrangement all of the securities then unsold were turned over by the Construction Company to the Delphos Trust, except the stock of the Frankfort Company. At the time this arrangement was made the Construction Company was entitled to the whole of the stock of the Frankfort Company, because the Construction Company had com- pleted its contract with that company, and had at the time $1,000,000 of such stock, and soon after received the remaining $800,000 of it; and it was arranged between the Delphos Trust and the Construction Company that the president of the latter should hold the $1,800,000 of stock until all of the debts of the Construction Company due to its subcontractors were paid. Those debts not being paid, the subcontractors filed their several claims for liens, and commenced suits to foreclose those liens, prior to March 20, 1883, making the Construction Company and the St. Louis Company parties to the suits. The road was completed during 1882; but the debts due to the subcontractors were not paid, and they, having learned of the fact that the stock of the Frankfort Company was held by the president of the Construction Company to secure their claims, being about to commence proceedings to attach such stock, a written agreement was entered into on the 20th of March, 1883, by the St. Louis Company, the Construction Company, the Frankfort Company, the American Loan & Trust Company of Boston, (hereinafter called the 'Trust Company,') and certain of the subcontractors, namely, Patrick Dowling, H. S. Hopkins & Co., Cochran & Brown, the Iowa Construction Company, and Beeson & Hammond, whereby the St. Louis Company gave its notes to said creditors for the amounts of their several claims, payable in installments, the last to become due running for a year; and, to secure the payment of such notes, the stock of the Frankfort Company, being $1,800,000 in par value, held by the Construction Company, was deposited with the Trust Company, as collateral security, and it was provided that it should be sold in case of default in the payment of the notes, and that on payment of the notes the stock was to pass to the St. Louis Company. In the mean time the creditors were not to prosecute further their mechanic lien suits. Two creditors, namely, William F. Richie and Henry McPherson, did not sign the agreement or receive any notes. The reason why the St. Louis Company assumed the debts due to the subcontractors was that its officers became fearful that, by the seizure and sale of the stock of the Frankfort Company, that stock would get into hostile hands, and the St. Louis Company would thus lose 67 miles of its line of road; and they were anxious to stay the mechanic lien foreclosure suits, because they feared that if those suits were pressed a receivership of the road might become necessary.

On the 1st of August, 1883, one Braman, a citizen of Massachusetts, filed a bill in equity in the circuit court of the United States for the district of Indiana against the St. Louis Company, as a citizen of Illinois, founded on a judgment obtained by him against that company in a state court of Ohio, asking for the appointment of a receiver of the company, and for the sale of its road to satisfy his debt and the debts of other creditors of the St. Louis Company, on the ground of the insolvency of that company. The bill set forth the contents of various mortgages, which covered in the aggregate the entire property of the St. Louis Company, although there was no mortgage made by it on its line as a whole. These several mortgages were 16 in number, 9 of them being first mortgages and 7 second mortgages, the first mortgages amounting to $10,500,000 and the second mortgages to $9,250,000. The Central Trust Company of New York, a corporation of New York, was the sole trustee in all of the mortgages except one, and in that it was a trustee conjointly with Thomas A. Hendricks; and that company and Hendricks were made defendants to the bill. On the 2d of August, 1883, an order was made by the court, the St. Louis Company and the Central Trust Company appearing by solicitors, the former assenting and the latter not objecting, appointing Edward E. Dwight as receiver, to take possession of and operate the railroad from Toledo, Ohio, through Indiana and Illinois to East St. Louis, and sundry branches in Ohio. Hendricks also appeared and waived process, and stated that he did not object nor consent to the appointment of a receiver. On the 14th of November, 1883, Dwight, the receiver, filed his petition to enjoin the American Loan & Trust Company from selling the stock of the Frankfort Company. The peti- tion set forth the agreement of March 20, 1883, and stated that the indebtedness secured by the pledge of the stock was overdue, and had not been paid; that the creditors secured by the agreement had demanded of the Trust Company that the stock be sold; that the Trust Company had notified the St. Louis Company that it would, on November 21, 1883, in Boston, sell the $1,800,000 of stock at public auction for cash; that it was claimed by the holders of the bonds secured by the mortgage on the railroad extending from Kokomo to East St. Louis that that mortgage was at least an equitable lien on the road of the Frankfort Company; that that claim was disputed by certain of said creditors; that it would be ruinous to the interests of the stockholders and bondholders and creditors of the St. Louis Company and to the interests of the public if by the sale of said stock the legal title to that portion of the road between Frankfort and the state of Illinois, and possibly the right of its possession, should be sold away, and the continuity of the line be destroyed; that in that view the receiver submitted to the court whether it was not to the advantage of the holders of the mortgage bonds...