Mississippi Valley Trust Co. v. Washington Northern R. Co.

• Decision Date: 27 March 1914
• Docket Number: 9.
• Citation: 212 F. 776
• Court: U.S. District Court — Western District of Washington
• Parties: MISSISSIPPI VALLEY TRUST CO. et al. v. WASHINGTON NORTHERN R. CO. et al.

212 F. 776

MISSISSIPPI VALLEY TRUST CO. et al. v. WASHINGTON NORTHERN R. CO. et al.

No. 9.

United States District Court, W.D. Washington, Southern Division.

March 27, 1914

Snow &amp McCamant, of Portland, Or., and Huffer & Hayden, of Tacoma Wash., for complainants, rely on the following authorities Bronson v. La Crosse R.R. Co., 2 Wall. 283, 310, 17 L.Ed. 725; Jerome v. McCarter, 94 U.S. 734, 736, 24 L.Ed. 136; Central Bank v. Hazard (C.C.) 30 F. 484 486; Pratt v. Nixon, 91 Ala. 192, 8 So. 751; Horton v. Davis, 26 N.Y. 495; Freeman v. Auld, 44 N.Y. 50; Johnson v. Thompson, 129 Mass. 398, 400; 34 Cyc. 758; Gillespie v. Torrance, 25 N.Y. 306, 311, 82 Am.Dec. 355; Force v. AgeHerald Co., 136 Ala. 271, 33 So. 866, 868; Allis v. Jones (C.C.) 45 F. 148, 150; Old Dominion Co. v. Lewisohn, 210 U.S. 206, 28 Sup.Ct. 634, 52 L.Ed. 1025; Williams Co. v. Kinsey Co. (D.C.) 205 F. 375, 376; 34 Cyc. 719, 720; section 3443, Rem. & Bal. Code; 2 Randolph on Commercial Paper, Sec. 986; New York Security Co. v. Equitable Co. (C.C.) 77 F. 64; Dooley v. Virginia Co., 7 Fed.Cas.page 913, No. 3999; In re Burton (D.C.) 29 F. 637, 638, 640; White v. Fisher, 62 Ill. 258, 259, 261; Gordon v. Wansey, 21 Cal. 77, 79; Schinkel v. Hanewinkel, 19 La.Ann. 260; Thompson's Adm'r v. George, 86 Ky. 311, 5 S.W. 760; Eastman v. Plumer, 32 N.H. 238; Wallace v. Bank, 1 Ala. 565, 570; Winans v. Wilkie, 41 Mich. 264, 1 N.W. 1049; Brosseau v. Lowry, 209 Ill. 405, 70 N.E. 901, 904; Lawson v. McKenzie, 44 Iowa, 663; Swem v. Newell, 19 Colo. 397, 35 P. 734, 735; Kneeland v. Miles (Tex. Civ. App.) 24 S.W. 1113, 1115; First Nat'l Bank v. Maxfield, 83 Me. 576, 22 A. 479, 480; First Nat'l Bank v. Harris, 7 Wash. 139, 142-144, 34 P. 466; 4 Am. & Eng. Enc. of Law (2d Ed.) p. 310; 2 Randolph on Commercial Paper, Sec. 289; Storey on Promissory Notes, Sec. 120; Muller v. Pondir, 55 N.Y. 325, 14 Am.Rep. 259; O'Mulcahy v. Holley, 28 Minn. 31, 8 N.W. 906; Central Trust Co. v. First Nat'l Bank, 101 U.S. 68, 25 L.Ed. 876-878; Thompson-Houston Elec. Co. v. Capitol Electric Co. (C.C.) 56 F. 849; Spinning v. Sullivan, 48 Mich. 5, 11 N.W. 758; Galusha v. Sherman, 105 Wis. 263, 81 N.W. 495, 47 L.R.A. 417; Osgood's Adm'rs v. Artt (C.C.) 17 F. 575.

Kerr & Crawford, of Seattle, Wash., for defendant Crawford, rely upon the following authorities: Section 848, vol. 3, Cook on Corporations; Drury v. Cross, 7 Wall. 299, 19 L.Ed. 40.

CUSHMAN District Judge.

Complainants interpose a motion to strike out certain paragraphs of the amended answer of the defendant William W. Crawford. For a proper understanding of the matter, a brief outline of the complaint and answer is necessary.

Complainants ask the foreclosure of two mortgages, executed January 4, 1910--one upon the property of the Washington Northern Railroad Company, hereinafter referred to as the 'railroad company,' and the other upon the property of the Oregon-Washington Timber Company-- both given to the Mississippi Valley Trust Company, the first of which is now held by it and the second by it and its cotrustee, Union Trust Company, one of the plaintiffs herein.

The railroad company's mortgage was given to secure bonds to the amount of $1,000,000, all of which have been issued. The Oregon-Washington Timber Company's mortgage was given to secure $600,000, in bonds. All of the railroad company's bonds were purchased by the Oregon-Washington Timber Company, and $600,000 worth of these bonds were surrendered to the Mississippi Valley Trust Company, as part of the security for the payment of the $600,000 of the Oregon-Washington Timber Company's bonds. The Oregon-Washington Timber Company's mortgage provides that, upon the payment of any of its bonds, a like amount, par value, of the railroad company's bonds, so conveyed to the trust company, should be also canceled and returned to the railroad company, or delivered to it uncanceled, at the option of the railroad company. The $600,000 of the Oregon-Washington Timber Company's bonds were sold. On the same date (June 4, 1910), the Oregon-Washington Timber Company executed a second mortgage to the same trustee to secure a bond issue of $400,000, sold by it to the railroad company, and also transferred to the railroad company, to secure the payment of the $400,000, a like amount of the railroad company's bonds, which latter bonds are held by the trustee. The second mortgage, in like manner, provides for the surrender of the railroad company's bonds, upon payment of those of the Oregon-Washington Timber Company. The railroad company and the two defendant timber companies, on March 1, 1912, gave a further mortgage to the defendant Crawford, as trustee, by which the railroad company assigned to him the said $400,000 second mortgage bonds of the Oregon-Washington Timber Company and the $1,000,000 of the railroad company's bonds, the latter to be delivered upon their release under the prior mortgages. By an agreement between the railroad company and the Oregon-Washington Timber Company, the proceeds of the second mortgage bonds of the Oregon-Washington Timber Company, secured by the $400,000 of the railroad company's bonds, were to be used in building additional railroad lines, but were pledged to the trustee, Crawford, who, it is charged, had notice of the terms of this agreement. Thirty thousand dollars, only, of the Oregon-Washington Timber Company's bonds have been paid. Upon which, $30,000 of the railroad company's bonds were released and delivered to the mortgagee, Crawford, uncanceled.

The complainants ask, upon the decree, a determination whether the $430,000 railroad company's bonds claimed by Crawford are equal in dignity, or postponed to the $570,000, held as security by complainants.

The defendant Crawford, trustee, answers that a proposition made June 4, 1910, by the Oregon-Washington Timber Company was accepted by the railroad company, the material parts of which proposition were:

'We understand that you are proposing to make certain extensions to your railroad (formerly owned by the Cape Horn Railroad Company), the result of which will be to increase our facilities for marketing the timber from our lands, in Skamania county, Washington, and that you have authorized an issue of one million dollars ($1,000,000) par value first mortgage six per cent. gold bonds, dated the 4th day of June, 1910, due on the first day of May, 1928, and secured by a first mortgage on your railroad property.

'We propose to buy from you the entire issue of one million dollars ($1,000,000) par value of said bonds and pay you therefor four hundred thousand dollars ($400,000) par value of our bonds as hereinafter described, and the sum of five hundred and forty thousand dollars in money, said money to be used for the following purposes:

'$125,000 to be used for the payment of the present floating indebtedness of the Cape Horn Railroad Company.

'$215,000 to be used for extensions, betterments and equipment to your railroad property.

'As a further consideration for the sale to us of said one million dollars ($1,000,000) of your bonds, and without any new or further consideration, we agree to sell and deliver to you four hundred thousand dollars ($400,000) par value six per cent. gold bonds issued by us, dated the 4th day of June, 1910, due serially $30,000 par value every six months, beginning May 1st, 1922, the last $40,000 thereof maturing May 1st, 1928, and secured by second mortgage on our lands and timber in Skamania county, Washington, and

secured also by $400,000 par value of the $1,000,000 par value of bonds now proposed to be purchased by us from you; said $400,000 par value of our bonds so sold to you; however, or the proceeds of the sale thereof, to be used by you only for future extensions, betterments or equipment to your railroad, after the expenditure of the said sum of $540,000 above mentioned.

'The $1,000,000 par value of your bonds hereby proposed to be purchased by us are all to be executed and delivered by you to the trustee in the mortgage securing the same, and to be by said trustee duly authenticated, and $600,000 par value thereof to be deposited with the Mississippi Valley Trust Company of St. Louis, Missouri, to be by it held in trust as security under the terms of a certain first mortgage dated June 4, 1910, executed by us to said Mississippi Valley Trust Company to secure an issue of $600,000 par value of 6% gold bonds issued by us, and the remaining $400,000 par value of your bonds hereby proposed to be purchased are to be deposited with the said Mississippi Valley Trust Company to be by it held in trust as security under the terms of a certain second mortgage dated June 4th, 1910, executed by us to said trust company to secure an issue of four hundred thousand dollars ($400,000) par value second mortgage 6% gold bonds issued by us, which latter $400,000 par value second mortgage bonds are the bonds hereinabove agreed to be sold and delivered to you.

'The said sum of $540,000 to be deposited as needed for the purposes mentioned above to your credit at said Mississippi Valley Trust Company and to be paid out in checks signed by you and countersigned by said trust company for said purposes.'

It is averred: That the $600,000 timber company bonds mentioned were sold to a syndicate, together with $999,300 par value of the corporate stock of the railroad company, for $540,000. That the members of the syndicate and trust company knew, at the time of the purchase, of the purposes to which, by the agreement, the money raised was to be applied. That a large portion of these bonds are still held by the members of this syndicate. That, instead of the money being expended as agreed, the proceeds of the sale of the bonds were spent, in part as follows:

'$175,000 for the payment

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