Lowenthal v. Georgia Coast & P.R. Co.

• Decision Date: 12 July 1916
• Citation: 233 F. 1010
• Parties: LOWENTHAL v. GEORGIA COAST & P.R. CO.
• Court: U.S. District Court — Southern District of Georgia

233 F. 1010

LOWENTHAL v. GEORGIA COAST & P.R. CO.

United States District Court, S.D. Georgia.

July 12, 1916

C Henry & R. S. Cohen, of Augusta, Ga., and Max Isaac, of Brunswick, Ga., for plaintiff.

Adams &amp Adams and Hitch & Denmark, all of Savannah, Ga., for defendant.

SPEER District Judge.

The Georgia Coast & Piedmont Railroad Company is a corporation of this state. Its railway line extends from the port of Brunswick into the interior of the state. The mortgage was made to secure bonds in the amount of about $1,600,000, the proceeds of which were designed for the construction of the defendant's railway lines, depots, etc. About 100 miles of the road have been constructed, and are in actual operation. Lowenthal holds and owns bonds in the amount of $6,000. The interest thereon, maturing in October of the last year, and in April of this, is in default. The plaintiff has made a demand in writing upon the trustee, the Columbia Trust Company, of New York, requiring it to take immediate action to foreclose the mortgage or deed of trust, to secure the bonds and the interest thereon. The default of the October interest has lasted for more than three months. The railway corporation is alleged to be insolvent, and the bill seeks the appointment of a receiver for the purpose of foreclosing the equity of the bondholders in the property.

'Where a railroad corporation is unable to pay its currently accruing interest, it is actually, as well as technically insolvent, and its property inadequate security for its mortgage debt, and it may be put in the hands of a receiver.' 94 F. 276, 36 C.C.A. 242, Central Trust Co. of New York v. Chattanooga R. & C.R. Co. et al. (Owen et al. v. Jones).

The trustee, notwithstanding this demand, has refused to take the action requested. This bill was presented to the court, Judge Speer presiding, when actually in session at Savannah, in the Eastern Division of the Southern District. Its consideration in limine was continued by the court until the next week when the court would be in session in Augusta. At that time, and on the day assigned, a rule nisi was ordered, directing the defendants to show cause at Macon in the Western Division of the district, why the relief sought should not be granted. This rule was duly served, and came on for hearing on the day when it had been assigned. The respondents filed no answer, but relied upon a motion to dismiss the bill. Since then, a highly important amendment was filed, and the defendant has also filed its answer to the rule to show cause. The motion to dismiss is based on the following grounds:

First. That one-third of the persons holding bonds outstanding, secured by the mortgage, had not called upon the trustee to take action to foreclose the same.

Second. That the bill does not show an offer on the part of the plaintiff to indemnify the trustee to its reasonable satisfaction, when the demand for foreclosure was made.

Third. That the trustee was not made a party defendant, although under the allegations of the bill, it is an indispensable party.

Fourth. That the requisite jurisdictional amount, exclusive of interest and costs, is not involved.

In Toler v. East Tennessee, Virginia & Georgia Railway Company (C.C.) 67 F. 168, Judge Lurton, afterwards Associate Justice, rendering the opinion, declared that:

'If there is any proposition well settled in the courts of the United States, it is that limitations contained in a mortgage, restricting the right of foreclosure, must be strictly construed.'

There may be some departure from this rule among the state courts, but in the national courts it is uniform.

The learned circuit judge makes this significant statement:

'If the provisions of the mortgage concerning foreclosure were subject to the construction that they are exclusive of all right to resort to a court of equity, then the mortgage, itself, would be invalid, as intended to oust the jurisdiction of the courts, which, by a uniform current of authority, cannot be done.'

See, also, Guarantee Trust & Safe Deposit Company v. Green Cove Springs & M.R. company, 139 U.S. 143, 11 Sup.Ct. 514, 35 L.Ed. 116. In that case, and on its last page, Mr. Justice Brown for the court observes:

'We think that such limitations upon the power of the trustee to take legal proceedings to enforce payment of the amount secured, should be strictly construed. ' 'In this case, the condition only relates to the taking possession of the property under the deed of trust, * * * and we think it should not be held to apply to foreclosure proceedings begun in a court of competent jurisdiction to obtain a judicial sale of the property.'

Justice Brown, for the unanimous court, continues:

'It is true there is a subsequent provision in the deed of trust, to the effect that neither the whole nor any part of the premises mortgaged shall be sold, under proceedings either at law or equity, for the recovery of the principal or interest of the bonds, it being the intention and agreement of the parties that the mode of sale provided by the mortgage shall be exclusive of all others. This clause, however, is open to the objection by attempting to proceed against a remedy in the ordinary course of judicial proceedings, and oust the jurisdiction of the courts, which, as is settled by the uniform current of authority cannot be done.'

The learned justice here cites many authorities.

In that case it appeared in the answer that the mortgage or deed of trust required that 60 per cent. in value of the outstanding bondholders should request the trustee in writing to initiate proceedings, and that no such request was alleged in the bill. The circuit court dismissed the bill, and its decree was, by the Supreme Court, reversed. The conditions in the case before the court are very similar.

In Farmers' Loan & Trust Company v. Northern Pacific Railroad (C.C.) 66 F. 174, the rule that, in general, courts can deal with bondholders only through their trustee, is declared to have its exceptions. It is merely a rule of convenience to facilitate the conduct of the suit. It proceeds upon the assumption that the cestui que trust can be fully and freely represented and protected in his rights by the trustee or his representative. A rule of convenience must, however, give way when rights are involved. If it appears that the trustee refuses or neglects to act, or stands in a hostile position, or has assumed a position prejudicial to the interest of the cestui que trust, the rule is put aside and the cestui que trust admitted to represent his right, because in such case the trustee has not or cannot fully and faithfully represent them. See, also, Jones on Corporate Bonds, 338.

The averments of the bill point out that the trustee has both refused and neglected to perform its duty, and such averments, for the purpose of this action to dismiss as in case of a demurrer, must be taken as...