Mackay v. Randolph Macon Coal Co.

• Decision Date: 04 May 1910
• Docket Number: 3,060.,3,059
• Citation: 178 F. 881
• Parties: MACKAY et al. v. RANDOLPH MACON COAL CO. et al. (two cases).
• Court: U.S. Court of Appeals — Eighth Circuit

178 F. 881

MACKAY et al. v. RANDOLPH MACON COAL CO. et al. (two cases).

Nos. 3,059, 3,060.

United States Court of Appeals, Eighth Circuit.

May 4, 1910

The Randolph Macon Coal Company was organized in the month of January, 1905, under the laws of Missouri. Its incorporators were owners of coal properties in that state for which they claimed to have paid $1,600,000. They entered into a so-called promoters' agreement providing for the organization of the corporation with a capital stock of $5,000,000 and an issue of $3,000,000 of bonds secured by a mortgage on all its property. By this agreement $1,800,000 of these bonds and the entire capital stock of the corporation were to be turned over to the promoters in exchange for their coal properties. The agreement was carried out. The Central Trust Company of New York was the trustee in the mortgage and the bonds were sold in the open market at the price of 90 cents on the dollar. After a career of two years the corporation was, on March 26, 1907, adjudged a bankrupt in the United States District Court for the Eastern District of Missouri. Previous to that date it had made default in the payment of interest on its bonds, and the trustee had brought suit in the Circuit Court of the United States for the Eastern District of Missouri to foreclose the mortgage. The bill asked, not only for the sale of the mortgaged property to satisfy the principal and interest of the bonds, but also for a deficiency judgment in case the proceeds of the sale should be insufficient to pay the amount due. At the foreclosure sale the entire property brought only $100,000. After proper application of this sum there was found due to the complainant the sum of $2,236,566.32, and a deficiency decree for that amount was entered. Thereafter the Central Trust Company, as trustee under the mortgage, presented this deficiency decree to the referee in bankruptcy as a claim against the estate, and the same was duly allowed. The holders of the bonds claimed that they were induced to purchase them by the gross frauds of the principal stockholders of the corporation, who were also its officers and the promoters who secured its organization. The trustee in bankruptcy, claiming that the $5,000,000 of corporate stock was issued without consideration, brought a suit in the Circuit Court of the United States for the Southern District of New York against the stockholders to recover the par value thereof as an unpaid subscription. 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.

Charles A. Boston (Lloyd L. Adams, on the brief), for appellants.

P Taylor Bryan (Harvey L. Christie, on the brief), for appellees.

Edward C. Eliot, for Trust Company.

Before HOOK and ADAMS, Circuit Judges, and AMIDON, District Judge.

AMIDON District Judge (after stating the facts as above).

To explain the question raised by the appeal it will be necessary to set forth the provisions of the bonds and mortgage. The bonds are for $1,000 each, and are payable to bearer. They contain the following provision:

'This bond * * * is entitled to all the benefits, and is subject to all the provisions, of the said mortgage as if the same were herein fully recited.' The mortgage contains a covenant binding the mortgagor to pay to the owners or holders of the bonds the principal and interest thereof in full. In case of default the trustee is authorized, upon certain terms which it is not necessary to recite, to declare the whole sum secured immediately due and payable, 'and thereupon the trustee, and the holders or owners of said bonds, shall have all the rights and privileges which it and they would respectively have upon the final maturity of the said bonds, and without prejudice or diminution of any other right or privilege secured to the trustee, or to any holder or owner of said bonds, by the said bonds, or by this mortgage. ' Article 15 of the mortgage authorizes the trustee to resort to 'any appropriate proceedings, legal or equitable, for the maintenance, foreclosure, enforcement or satisfaction of the mortgage, or of the bonds secured thereby, against or with reference to any property which is or may become security for the payment of the bonds, or subject to the trust. ' It then declares that the trustee '* * * may proceed in any other manner, whether by action at law or suit in equity, or otherwise, against the company, * * * to collect and recover for the owners and holders of the bonds secured thereby, the principal and interest thereof in full, according to their tenor.'

The mortgage also contains the following provision:

'Except as herein otherwise expressly provided, any remedy herein conferred upon the trustees, or the holder of any bond secured hereby, is not intended to be exclusive of any other remedy; but each and every such remedy shall be cumulative and in addition to every other remedy given hereunder or existing at law, in equity, or by statute.'

Article 22 of the mortgage is a carefully drawn waiver of any right of the bondholders or the trustee under the mortgage to recover against the officers or stockholders of the corporation.

It is conceded that the trustee in bankruptcy in his suit against the stockholders has no higher or better right than that possessed by the creditors whose claims have been proven and allowed against the bankrupt estate; but the learned referee and trial court were of the opinion that the trustee in the mortgage fully represented the bondholders and that the proven claim for the deficiency decree conferred upon the trustee in bankruptcy every right which he would obtain from the allowance of the claims on the bonds. The appellant bondholders on the contrary insist that they occupy a position more favorable than the trustee under the mortgage first, because of certain fraudulent representations that were made to them at the time they purchased the bonds; second, because they are not parties to the mortgage, and are, therefore, not bound in the same sense as the trustee by the waiver of the stockholders' liability contained in the twenty-second article above quoted; third, they claim that they are direct creditors of...