Mercantile Trust Co. v. Farmers' Loan & Trust Co.

• Decision Date: 24 May 1897
• Docket Number: 800.
• Citation: 81 F. 254
• Parties: MERCANTILE TRUST CO. v. FARMERS' LOAN & TRUST CO. et al. [1]
• Court: U.S. Court of Appeals — Eighth Circuit

81 F. 254

MERCANTILE TRUST CO. v. FARMERS' LOAN & TRUST CO. et al. ^[1]

No. 800.

United States Court of Appeals, Eighth Circuit.

May 24, 1897

Edward C. Henderson, for appellant.

John W Noble and George Zabriskie (George H. Shields was with them on the brief), for appellees.

Before SANBORN and THAYER, District Judges.

SANBORN Circuit Judge.

This is an appeal from an order denying the petition of the receivers of the St. Louis & San Francisco Railway Company for leave to renounce the leases of four railroads, which had been taken by that company before the receivership, and directing them to pay the rent reserved by these leases during the receivership from the income or the proceeds of the property of the lessee company before applying any of them to the payment of the bonds secured by its consolidated mortgage. 71 F. 601. It was upon the consolidated mortgage that the foreclosure proceedings in which these receivers were appointed was based. That mortgage was subsequent in date to the four leases, and these leases secured bonds which were issued under first mortgages upon their respective lines which were made simultaneously with the leases. The history of these transactions was this:

In 1886 and 1887 the corporations which owned these leased railroads demised them to the San Francisco Company for long terms of years, and at the same time delivered to that company a large majority of their stock, so as to give it complete control of their corporations and their property. Each of these lessors at the time it made its lease, made a mortgage upon its railroad to secure bonds which it issued, and by the terms of the lease appropriated to the bondholders a sufficient amount of the rent reserved to pay the interest on the bonds as it matured. The San Francisco Company covenanted, in each of these leases, to pay the taxes on the leased premises, to operate the leased railroad, and to pay certain rents, which it agreed should in no event be less than the interest on the first mortgage bonds of the lessor. The names of these leased lines, their length, and the amount of their outstanding first mortgage bonds, which were secured by these simultaneous leases, were as follows: Salem Branch, 54 miles, $810,000; Beaumont Branch, 61.86 miles, $744,000; Anthony Branch, 59.35 miles, $732,000; Midland Railroad, 107.20 miles, $1,608,000. The annual interest upon these bonds, and hence the minimum annual rental which the San Francisco Company agreed to pay for the use of these railroads, was $193,380, in addition to the taxes upon and the expenses of operating them. That company took possession of these railroads under these leases, and operated them until they were taken from it by the receivers in this case under the order of the court below, procured by the Mercantile Trust Company, the trustee named in the consolidated mortgage, and the appellant in this case. The consolidated mortgage was made by the San Francisco Company on June 11, 1891, to the Mercantile Trust Company, to secure an issue of $50,000,000 of bonds, $14,357,500 of which have been issued and are outstanding. It described and conveyed to the trust company, for this purpose, 989.23 miles of railroad owned by the San Francisco Company, all its leasehold estate in the four leased railroads, a large majority of the capital stock of the four lessor companies, and all the equipment and other property which pertained to what was known as the 'Frisco System' of railroads. It provided that the trustee should certify and deliver the aggregate amount of $36,074,500 of the bonds secured by it in exchange for the underlying bonds of some of the railroads of its system, among which were those secured by the first mortgage bonds of these four leased lines. In this mortgage the San Francisco Company agreed to pay the taxes upon, to maintain, repair, and renew the equipment upon, and to operate, the four leased lines. The mortgage provided that, in case of a default by the mortgagor in the performance or any of its covenants, which should continue for six months, the trustee, upon the request of the holders of the greater amount of the outstanding bonds secured by it, but not otherwise, should 'then have or be entitled to possession of all the railroads (that is, all the railroads covered by this mortgage, including both those owned and those leased by the San Francisco Company), and conduct the business of the railway company, and exercise the franchises pertaining thereto, and receive all the tolls, rents, income, and profits from said railroad and other property, and the interest upon all bonds and the dividends upon all shares of capital stock then held by the trustee under the provisions of this mortgage, and from such receipts shall pay all expenses of taking possession of said railroads and other property, and operating said railroads, and conducting said business, and the expenses of such repairs, replacements, alterations, additions, and improvements to the mortgaged property as the trustee shall deem needful, and all taxes due upon any of the mortgaged property, and all amounts due for interest or principal of any of the bonds or other obligations of the railway company secured by any mortgages or pledges prior to lien to this mortgage, and, after deducting such expenses and payments, and retaining a reasonable compensation for the services of the trustee in connection with the making of said entry, and taking possession of said railroads and other property, and operating the same, and conducting the said business, shall apply the net income to the payment of any interest previously due, or becoming due, during such possession, on bonds secured by this mortgage, in the order in which such interest shall have become due, ratably, to the person entitled to such interest, and to apply any remainder of said income to the payment of the principal of said bonds, if then due, with all interest accrued and unpaid thereon, ratably, to the owners of said principal and interest, without discrimination or preference. ' It provided that, if default should continue for six months after the trustee had made written demand of payment or performance, it should, upon the request of the holders of the greater amount of the outstanding bonds secured by the mortgage, but not otherwise, 'cause all of the railroads and other property then secured by this mortgage, including all shares of capital stock and bonds held in trust under the provisions hereof, to be sold as one property at public auction, at the city of St. Louis, in the state of Missouri,' and that said sale should be made subject to all prior mortgages, liens, and pledges set forth in the consolidated mortgage.

On December 21, 1893, the Mercantile Trust Company filed its bill in the court below to foreclose the consolidated mortgage, on the ground that the San Francisco Company had made default in the payment of taxes upon the mortgaged property. It is alleged in its bill that the railroads owned and controlled by and the four railroads leased by the San Francisco Company formed a trunk line, that this fact was one of the most important ingredients of its value, and that its severance would result in a ruinous sacrifice to every interest in the property. It prayed for the foreclosure of the mortgage, for the sale of all the mortgaged property, for the appointment of receivers to hold and operate the mortgaged railroads during the pendency of the suit. The defendant filed an answer practically admitting the allegations of the bill, and on the same day the court appointed receivers, and directed them to take possession of and operate as one property all the railroads constituting the Frisco System, including those owned and those leased by the San Francisco Company. The trust company subsequently filed a supplemental bill founded on a default of the mortgagor in the payment of the interest due in April, 1894, and that bill was ordered to be taken pro confesso as against the San Francisco Company on April 4, 1895. On December 8, 1894, pursuant to prior orders extending their time...