Lane v. Equitable Trust Co. of New York

• Decision Date: 24 November 1919
• Docket Number: 5381.
• Citation: 262 F. 918
• Parties: LANE v. EQUITABLE TRUST CO. OF NEW YORK. [1]
• Court: U.S. Court of Appeals — Eighth Circuit

262 F. 918

LANE v. EQUITABLE TRUST CO. OF NEW YORK. ^[1]

No. 5381.

United States Court of Appeals, Eighth Circuit.

November 24, 1919

Wells H. Blodgett and Clifford B. Allen, both of St. Louis, Mo for appellant.

Theodore Rassieur, of St. Louis, Mo. (George Welwood Murray and Lawrence Greer, both of New York City, of counsel, and Murray, Prentice & Howland and Pierce & Greer, all of New York City, and Jourdan, Rassieur & Pierce, of St. Louis, Mo on the brief), for appellee.

Daniel N. Kirby, of St. Louis, Mo. (Nagel & Kirby, of St. Louis Mo., on the brief), for Wabash Ry. Co., by leave of Court.

Before STONE, Circuit Judge, and MUNGER and YOUMANS, District Judges.

YOUMANS District Judge.

On January 30, 1914, a decree of foreclosure upon a deed of trust was entered in the case of Equitable Trust Company of New York v. Wabash R.R. Co. and James B. Forgan. The property of the railroad company covered by the deed of trust was ordered sold, and sale of the property was accordingly made. The amount realized from the sale was not sufficient to pay the indebtedness secured by the deed of trust. On March 8 1918, the Equitable Trust Company filed a motion under equity rule 10 (198 F. xxi, 115 C.C.A. xxi) for a deficiency judgment against the railroad company. The appellant, an unsecured creditor of the railroad company, on behalf of himself and other unsecured creditors, resisted the motion.

The pleading filed by appellant is summarized in the brief filed by his counsel, as follows:

'(a) That it was true, as alleged in said petition, that the amount realized from the sale of said mortgaged property was not sufficient to pay the amount due as principal and interest of said bonds.

'(b) That the matters set forth and alleged in the foreclosure bill of the Equitable Trust Company were not sufficient to entitle said trust company to a personal judgment against said Wabash Railroad Company for any deficiency.

'(c) That said foreclosure decree was entered January 30, 1914, and that a sale thereunder was had July 22, 1915; that at the instance of said trust company the receivers under said foreclosure bill were discharged on the 18th day of September, 1916, and that by the consent and procurement of said trust company all the unmortgaged property and assets of the Wabash Railroad Company were taken over and transferred by said receivers to the new Wabash Railway Company, and that no steps were taken by said Equitable Trust Company to procure a deficiency judgment until after proceedings had been instituted by general creditors for an accounting and recovery of the trust funds wrongfully diverted as aforesaid at the instance of said trust company, and that said trust company was in equity now estopped from having and recovering a deficiency judgment for any sum whatever.

'(d) That under the plan of the bondholders and stockholders of said Wabash Railroad Company for the foreclosure of said mortgage and a sale of the mortgaged property under a foreclosure decree, and the purchase thereof by a committee representing said stockholders and bondholders (as shown by the record, folio 289), all claims and demands of the holders of said bonds and of said Equitable Trust Company as trustee against said Wabash Company on account of said bonds were fully satisfied and discharged.'

The issue presented by the motion and answer was submitted upon the following stipulation:

'It is hereby stipulated and agreed between the parties hereto as follows:

'(1) That the paper hereto attached, marked 'Exhibit A,' and entitled 'Wabash Railroad Company, Plan and Agreement of Reorganization,' dated April 28, 1915, is a true and correct copy of said plan and agreement of reorganization, and is made a part of the record in this proceeding with the same force and effect as the original copy of said plan and agreement of reorganization.

'(2) That the paper hereto attached, marked 'Exhibit B,' and entitled 'The Wabash Railroad Company Joint Reorganization Committee,' dated January 26, 1916, is a true and correct copy of the final report of said joint reorganization committee, made to the board of directors of the Wabash Railway Company, and is made a part of the record in this cause with the same force and effect as the original copy of said final report.

'(3) That the paper hereto attached and marked 'Exhibit C' and entitled 'Method 5' is a correct computation, made by Thomas J. Tobin, of interest on the principal of the first refunding and extensions mortgage bonds, and on the accumulated interest as provided in paragraph 10 of the foreclosure decree by the method as stated upon said exhibit. Said exhibit is hereby made a part of the record in this cause.

'(4) It is agreed that the court may refer to and use in this proceeding bound volumes I and II of the printed record of the various proceedings in the Wabash receivership cases, entitled 'Record of Wabash R.R. Co. Receivership.'

'It is further agreed that all or any part of the orders, petitions, decrees, or other documents set forth in said printed volumes, and referred to in this proceeding by either party hereto by appropriate references, may be considered and used by either party making reference to the same as a part of the record in this cause.'

I. The first ground urged by counsel for appellant is that equity rule 10 does not authorize the entry of a deficiency judgment in favor of a trustee to whom the defendant is not indebted. In support of this contention reliance is placed upon the case of Mackay v. Randolph-Macon Coal Co., 178 F. 881, 102 C.C.A. 115, decided by this court. In that case a deficiency judgment had been taken by a trustee for bondholders under a deed of trust. The defendant corporation had been adjudged a bankrupt, and the remainder of its estate was being administered in the bankruptcy court in the Eastern district of Missouri. With the intention of having the trustee in bankruptcy bring suit in the state of New York against the stockholders of the bankrupt for unpaid subscriptions to stock, the trustee for the bondholders presented his deficiency judgment for allowance in bankruptcy. In the statement of facts Judge Amidon, speaking for the court, said:

'The only claim proven in bankruptcy is the deficiency decree, and the trustee in bankruptcy would, of course, have no higher right than the holder of that claim. Being apprehensive that the trustee under the mortgage might not be a 'creditor' of the corporation who would be entitled to maintain the suit against stockholders for their unpaid subscriptions, holders of the bonds secured by the mortgage made due proof of the same before the referee, and asked that they be allowed as claims against the estate. The referee, being of the opinion that the bonds had been merged in the deficiency judgment, disallowed the claims, and his ruling was affirmed on appeal to the District Court. The bondholders seek a review of that action by the present appeal.'

The only question before the court was whether each separate bond was merged in the deficiency judgment, so as to prevent a separate allowance in bankruptcy on the bond. On that point the court said (178 F. 884, 102 C.C.A. 118):

'It is manifest that the appeal turns mainly upon the question whether the cause of action arising out of the bonds was merged in the deficiency decree. Both merger and res adjudicata lie in the same field. They are not, however, identical. A point may become res adjudicata as to one cause of action in a suit upon an entirely independent cause of action between the same parties, if it has been there directly litigated. Merger, on the contrary, cannot result unless the causes of action in the two suits are identical.'

The court said also:

'As between the parties to the foreclosure suit, the deficiency decree is, of course, conclusive of every fact necessary to support the decree. It forecloses inquiry as to whether the court had authority to enter a deficiency judgment. Hatcher v. Hendrie, etc., Supply Co., 133 F. 267, 272, 68 C.C.A. 19. But the suit against the stockholders is not between the parties to the foreclosure action. It is pending in the state of New York. By the decisions of the highest court of that state it is doubtful whether a judgment against a corporation is more than prima facie evidence of the creditor's debt in a suit against stockholders. Cook on Corporations, Secs. 209 and 224. If that should be the holding of the court in the action of the trustee in bankruptcy against the stockholders of this corporation, the defense would be open to them that the trustee under the mortgage had no right whatever except to enforce the security, and was in no sense a creditor of the corporation. The peculiar language of the covenant in the mortgage, to say the least, gives color to such a defense.

'The principle of merger has its foundation mainly in the maxim 'Nemo debet bis vexari pro una et eadem causa.' That maxim has no application to the facts of this case. No one could possibly be vexed by costs or litigation through the allowance of the bondholders' claims. No costs could accrue, and it was not necessary to summon any person to the hearing of the claims. Another reason that has guided courts in barring a second action for the same cause is that the judgment already entered affords to the plaintiff all the judicial aid that could be obtained from a second judgment. In the present case there is good reason for saying that the allowance of the bondholders' claims would furnish the trustee in bankruptcy a much better basis than the deficiency decree for his suit against the stockholders. The claims could have been allowed without the possibility of injury to others. The referee had full power, both by his...