McIlhenny v. Binz

• Decision Date: 29 March 1890
• Citation: 13 S.W. 655
• Court: Texas Supreme Court
• Parties: McILHENNY <I>et al.</I> <I>v.</I> BINZ <I>et al.</I>

13 S.W. 655

McILHENNY et al.v.

BINZ et al.

Supreme Court of Texas.

March 29, 1890.

Appeal from district court, Harris county.

Wheeler H. Peckham, Baker, Botts & Baker, and Gresham & Jones, for the Union Trust Company of New York. Wm. H.

Crank, for the Dickson Manufacturing Company. F. Rohde, Hutcheson, Carrington & Sears, for S. K. McIlhenny and the Houston, East & West Texas Railway Company. Houston Bros., for appellees Johnson & Hansen. McLemore & Campbell and Jones & Garnett, for appellees Jacob Binz and others. John G. Tod, for appellees Milby & Dow. O. T. Holt and Gustave Cook, for appellees Dozier and others.

GAINES, J.

This suit was originally instituted by the Houston, East & West Texas Railroad Company and Mary Louise Bremond, Edward L. Bremond, Harriet Tempson, John A. Dozier and his wife, Mary Pauline Dozier, Kate Bremond, Walter E. Lufkin and his wife, Henrietta C. Lufkin, and Julia Bremond, a minor, against T. W. House and other creditors of the company. The petition alleges that the company was incorporated by an act of the legislature of Texas approved March 11, 1875; that Paul Bremond had died shortly before the institution of the suit, being the owner of the whole of the stock; and that the co-plaintiffs of the corporation, except John A. Dozier and Walter E. Lufkin, were his devisees, legatees, and heirs at law. The petition also averred that the corporation was largely indebted both to secured and unsecured creditors, and that it was unable to meet its obligations. It was further alleged that certain unsecured creditors had prosecuted their demands to judgment, and had caused executions to issue thereon, and to be levied upon the rolling stock of the company, and that such rolling stock was under mortgage to secure the outstanding bonds of the company, and was necessary to enable it to operate its road, and to perform its duties to the state and the people. The prayer was for the appointment of a receiver to take charge of the assets of the corporation, and that, upon final hearing, its franchises and property be sold as an entirety, and that the proceeds of the sale be distributed among its creditors according to their respective rights, equities, and priorities, and the balance among the stockholders. At the time of the filing of the petition, neither an executor of the will of Paul Bremond, deceased, nor an administrator of his estate, had been appointed. The subsequent history of the suit is fully detailed in the brief of the appellant the Union Trust Company, and from that brief we make up the following summary of the proceedings:

The petition having been filed on the 7th of July, 1885, on the next day the court made an order appointing a receiver, and directing that "all debts of said railway company for work and labor performed by its employes and laborers, and for supplies and materials furnished for equipping, operating, repairing, or improving the road, and all obligations incurred in the transportation of passengers and freights, or of injuries to persons or property, which have accrued within six months last past, shall be paid out of the earnings of the road as may be hereafter ordered." A special master in chancery was appointed in the same order, with the powers usually incident to that position. Soon after this original bill was filed, the defendants Jacob Hornberger, Johnson & Hansen, Jacob Binz, and T. J. Todd filed their answers to said original bill, setting up the company's indebtedness to them, all of which, their pleadings show, accrued after the date of the first mortgage, and most of it after the date of the second mortgage, and claiming what they call an "equitable lien" on the company's property to secure their debts. These answers will be seen on pages 14 to 46 of the transcript. Afterwards, and before the Union Trust Company of New York became a party to the suit by answer and cross-bill, most of the creditors of said railway company intervened in said suit, and their debts were referred to the special master, who, very uniformly, reported most of the claims as entitled to priority of payment. On the 2d day of December, 1887, the Union Trust Company, as trustee in the two mortgages intended to secure the bonds of the company, obtained leave of the court to make itself a party to the suit, and on the 5th day of March, 1888, filed its answer to the original bill, and also filed a cross-bill seeking to foreclose the mortgages. To this cross-bill the railroad company filed an answer attacking the validity of the mortgages. On the 26th of April, 1889, S. D. McIlhenny, as administrator of the estate of Paul Bremond, and the railway company, filed a joint answer to the Union Trust Company's cross-bill, which, among other things, denied that the mortgages were issued in the manner authorized by law. On October 7, 1889, the children and heirs of Paul Bremond, who were co-plaintiffs with said railway company in the original petition filed in this cause, and therein claimed that their father owned the entire capital stock of said company, and the same had descended and passed to them as his devisees, legatees, and heirs at law, filed their amended petition attacking said mortgages, and denying that said railway company was ever organized, claimed that their father falsely and fraudulently assumed to have organized the company under said act, and then spent in the construction of said road the community fund of himself and his deceased wife, and claimed one-half of said road through their deceased mother. They prayed for partition, and, in the event that relief could not be had, that the road be sold, and that one-half of the proceeds be paid to them. To this a demurrer was sustained. On the 23d of April, 1889, the special master made a report of all claims against the company which had been presented, including those of the Union Trust Company. At the fall term, 1889, of the court, the cause came on for trial, and by consent was submitted to the court without a jury as to all the issues presented, except the pleas of non est factum to the mortgages. The issues made by their pleas were tried before a jury, who returned a verdict in favor of the Union Trust Company. The court thereupon rendered a decree ordering a sale of the property of the company, including its franchises, as an entirety, and ranking certain of its debts into three classes, denominated, respectively, as, "statutory claims," "operating expenses," and "construction claims," and directing that from the proceeds of the sale their claims, so classified, should be first paid, that then the mortgage bonds should be next paid, and that the balance should be distributed among the general creditors. Such are the salient features of the decree. The details and other particulars need not be stated in this connection. From the judgment the railroad company, S. D. McIlhenny, administrator, and the trust company have appealed. The heirs of Mary Bremond and Melby & Dow, intervening creditors, have filed cross-assignments of error, which are properly presented in briefs on file.

The appellant the Houston, East & West Texas Railway Company complains that the court erred in decreeing a foreclosure of the first mortgage, and in decreeing a sale of the properties of the railway company to pay the bonds secured by that mortgage. It is insisted that so much of the decree is erroneous "because, by the terms of said mortgage, it is provided that such foreclosure and sale can only be decreed `in case default shall be made in the principal sum or sums by virtue of the said bonds, or any of them, or any part thereof, at maturity,' and no part of said bonds mature or become payable until the 1st day of May, A. D. (1898) eighteen hundred and ninety-eight." The contention seems to be that, since the mortgage was not subject to foreclosure for default in the payment of the interest on the bonds only, and since the principal was not due, the property of the corporation should have been sold subject to the mortgage. It may be that, according to the terms of the mortgage, the trustee was not entitled, as an original proceeding, to have a foreclosure and sale. But the cross-action of the Union Trust Company is not to be treated as such a proceeding. The railroad company first filed its bill alleging its inability to pay its debts, and to operate its road, and prayed that it might be sold, and its proceeds distributed among its creditors according to their respective priorities. Upon the propriety of such suit we are not called upon to pass. The only assignment, in any of the numerous briefs on file, which presents that question, has been expressly abandoned. But we are unwilling to leave the subject without remark, lest it should be inferred that the appointment of the receiver of the property of the corporation upon its own petition merits the approval of this court. The case of Wabash, etc., Ry. Co. v. Central Trust Co., 22 Fed. Rep. 272, in a circuit court of the United States, is the only precedent we have found for this practice. On the other hand, there are authorities which hold that a receiver should not be appointed to take charge of the assets of a corporation upon its own original proceeding. Kimball v. Goodburn, 32 Mich. 10; Hugh v. McGrae, Chase, 467. A natural person, because of his inability to meet the demands of his creditors, has no right to place his property under the control of a court of equity for the purpose, merely, of preventing its sacrifice by its sale under execution. We see no reason why, as a general rule, a corporation does not stand upon the same footing. If a railroad corporation become insolvent, and a receivership be necessary for the preservation of its property and the distribution of its assets among its creditors, it would seem that the directors, as trustees for the stockholders and creditors, would be the proper parties to institute the suit. But, if the appointment of the receiver...