Levy v. Equitable Trust Co. of New York

• Decision Date: 28 February 1921
• Docket Number: 5763.
• Citation: 271 F. 49
• Parties: LEVY et al. v. EQUITABLE TRUST CO. OF NEW YORK et al.
• Court: U.S. Court of Appeals — Eighth Circuit

271 F. 49

LEVY et al. v. EQUITABLE TRUST CO. OF NEW YORK et al.

No. 5763.

United States Court of Appeals, Eighth Circuit.

February 28, 1921

John Lee Webster, of Omaha, Neb. (Arthur M. Wickwire, Louis Marshall, and Daniel W. Blumenthal, all of New York City, on the brief), for appellants.

George Welwood Murray and John F. Bowie, both of New York City (Franklin W. M. Cutcheon and William Roberts, both of New York City, on the brief), for appellee Equitable Trust Co. of New York.

Before HOOK, Circuit Judge, and COTTERAL and JOHNSON, District Judges.

HOOK Circuit Judge.

This is an appeal by some individual stockholders of the Denver & Rio Grande Railroad Company and a protective committee of like stockholders from an order of the United States District Court for the District of Colorado denying them leave to intervene in the suit of the Equitable Trust Company of New York pending in that court. A decree had been entered in the suit for the sale of the equity of the Denver Company in its railroad properties and the sale was about to be made. The decree was based on a money judgment in the court below for $36,515,038.68, obtained January 7, 1918, by the Trust Company against the Denver Company, which in turn was upon a prior judgment in the United States District Court for the Southern District of New York, upon which a credit had been applied by the sale of property.

The object of the intervention sought by the petitioning stockholders was the postponement of the sale in Colorado to enable them to investigate and develop a defense against the New York judgment and a fraudulent omission to assert it there. As the court in New York had jurisdiction of the parties and of the subject-matter of the litigation, and the judgment against the Denver Company had become final, and judgment on that judgment had also been rendered in Colorado it was incumbent on the petitioning stockholders to show that they acted seasonably in view of the circumstances, that their corporation had a good defense to the demand of the Trust Company, and that through fraud the defense was not presented in New York.

Upon a hearing of the petition and proofs the court below held that the petitioners either knew or should have known, long before the New York judgment was rendered, of the transactions upon which it was founded and of the defenses that might be urged and that their inactivity amounted to such neglect or laches as precluded them from asserting, at this time, a defense not made by their corporation, the defendant in the cause. Passing this objection, the court below further held that the petitioners failed to show the probable existence of a sufficient defense that might have been, but was not, set up in the New York case, or fraud on the part of counsel who had charge for the Denver Company in that court. The petition to intervene was therefore denied. A sale of the railroad properties of the Denver Company not previously sold under proceedings in other courts was then had but, pending this appeal from the denial of the intervention action on the motion for confirmation of the sale was deferred by the court below.

The present case is the culmination of events that began in 1905 and is the direct outgrowth of various judicial proceedings first in the Ninth Circuit, then in the Second Circuit, and finally in the United States District Court for Colorado, from which the appeal to this court comes. In both the Ninth and the Second Circuits they reached the Circuit Courts of Appeals. An unsuccessful effort was also made to obtain a review by the Supreme Court of the judgment in the Second Circuit. What has occurred makes a long history, but only so much of it will be set forth here as is needful to disclose the situation when the stockholders asked to intervene in Colorado on November 1, 1920. It appears in greater detail in 231 F. 478; 145 C.C.A. 457, 231 F. 571; 233 F. 335; 236 F. 814; 244 F. 485; 162 C.C.A. 397, 250 F. 327; 246 U.S. 672, 38 Sup.Ct. 423, 62 L.Ed. 932.

Prior to 1905 the Western Pacific Railway Company, a corporation organized under the laws of California, had acquired a right of way from Salt Lake City to San Francisco and had constructed a small amount of track. The Denver & Rio Grande Railroad Company, a Colorado corporation, and the Rio Grande Western Railway Company, a corporation of Colorado and Utah (then practically, but not legally, a single company, with a single system of railroads), greatly desired the completion of the Western Pacific, so that they would have an outlet to the Pacific Coast. Reasons for this are recited in the above-reported cases, and are also referred to in the opinion of the Supreme Court in United States v. Union Pacific R. Co., 226 U.S. 61, 33 Sup.Ct. 53, 57 L.Ed. 124. Briefly, as stated, they were to avoid being bottled up by the combinations, effected and threatened, of other large transcontinental systems to the north and south of them, and competing with them and their Eastern connections for the same through traffic. The building of the railroad from Salt Lake City, where it connected with the Rio Grande Western, to San Francisco, required a large amount of money, and that in turn required the issue and sale of Western Pacific securities that would appeal to the purchasing public; and so it was arranged that the Denver and the Rio Grande Companies should back the Western Pacific project with their own credit.

The transaction took the following form: The Western Pacific completed the issue, previously authorized, of $50,000,000 of its first mortgage 5 per cent. bonds due September 1, 1933. On June 23, 1905, it executed to a trust company, as trustee for the bondholders, its first mortgage on its railroad then and thereafter constructed. On the same day it executed, with others, three contracts, known as A, B, and C. In this case we are mainly concerned with contract B, in which the Denver & Rio Grande and the Rio Grande Western were parties of the first part, the Western Pacific the party of the second part, and the trust company, as trustee, the party of the third part. It may be observed here that this contract was included in the mortgage of the Western Pacific to the trust company as a pledged or mortgaged item along with the railroad properties; also that the mortgage and the three contracts, A, B, and C, were parts of one and the same comprehensive transaction. In 1908 the Denver & Rio Grande and the Rio Grande Western were consolidated in the name of the former under the laws of Colorado and Utah; the consolidated company expressly assuming the obligations of its constituents under contract B. For convenience the constituent and consolidated companies will be generally referred to as the 'Denver,' except where necessary to distinguish them. The trust company, as trustee in the mortgage of the Western Pacific and third party in contract B, was succeeded in title and trust by the Equitable Trust Company of New York, a party to the cause here, and they will be referred to as the 'Trust Company.'

To return to contract B: Reduced to its lowest terms, material on this appeal, the contract provided: (a) That the Denver should have certain defined traffic and trackage rights in respect of the railroads of the Western Pacific; (b) that the Denver should generally keep the Western Pacific going financially, and, specifically, should pay to the Trust Company for the bondholders all interest on the Western Pacific first mortgage bonds, not actually paid by the Western Pacific, until all the bonds were fully paid principal and interest; (c) that the contract should run with the railroads of the Denver and the Western Pacific into whosesoever hands they might come, and that its provisions and the performance of them should be deemed a part of the consideration of any contract, of whatever form or nature, and of any transaction by which any person or corporation might acquire or attempt to acquire the railroads or either of them; (d) that if, upon default in any of the terms of the Western Pacific mortgage a right of foreclosure should accrue to the Trust Company, it might terminate the contract, and all provisions giving the Denver the right to the use and possession of the railroad of the Western Pacific, excepting provisions that the Denver should pay interest on the bonds as above.

The Denver paid interest on the Western Pacific bonds until, finding that its own solvency was seriously threatened, it defaulted in the semiannual installment due March 1, 1915. Its failure to pay at that time was according to a prior declaration that it would pay no more. March 2, 1915, the Trust Company brought suit in the Northern district of California to foreclose the mortgage. Receivers were appointed, and they took possession of the Western Pacific Railroad. While the suit was pending, further default was made as to the interest due September 1, 1915, and on December 18, 1915, the Trust Company declared the principal of the bonds due. On May 26, 1915, the Trust Company filed an ancillary bill in the Southern district of New York and the court there appointed as receivers of the Western Pacific property in its jurisdiction the same persons who had been appointed in California. On the following day, May 27, 1915, the Trust Company filed in the court in New York a suit against both the Denver and the Western Pacific, setting up the mortgage and contract B, and asking for a construction of the latter in respect of the obligations of the Denver under its terms, the determination of the amount due on the Western Pacific bonds after the foreclosure in California, a receiver of the Denver, and the subjection of its property to its ascertained liability under the contract.

On February 21, 1916, the court...