Morris v. East Side Ry. Co.

• Decision Date: 24 June 1899
• Citation: 95 F. 13
• Parties: MORRIS et al. v. EAST SIDE RY. CO. et al. MAXWELL v. SAME.
• Court: U.S. District Court — District of Oregon

95 F. 13

MORRIS et al. v. EAST SIDE RY. CO. et al.

MAXWELL v. SAME.

United States Circuit Court, D. Oregon.

June 24, 1899

Ralph E. Moody, for Morris & Whitehead.

Wirt Minor, for A. L. Maxwell, trustee.

W. A Cleland, for East Side Ry. Co.

Milton W. Smith and W. S. Goodfellow, for German Savings & Loan Soc.

A. H Tanner, for Charles F. Albee.

Thomas N. Strong, for Washburn & Moen Mfg. Co.

BELLINGER District Judge.

The East Side Railway Company is a corporation organized and controlled by James and G. A. Steel. Prior to September 1892, the Steels had borrowed money of the German Savings & Loan Society upon the security of bonds of the railway company, and in that month their indebtedness to the loan society was increased by an additional loan to $83,000, for which they pledged 125 bonds of the railway company, of the par value of $1,000. This was one-half of the bonds that the railway company was authorized to issue. These bonds were secured by a mortgage to the Security Savings & Trust Company, as trustee. Thereafter, in February, 1893, the directors of the railway company authorized the issue of 300 bonds, of $1,000 each, secured as aforesaid, to take the place of the issue already authorized. Of the bonds so authorized 156 were issued to the Steels, and pledged by them to secure the existing debt to the loan society, for which a new note was executed, bearing date April 1, 1893, and the remaining bonds, 144 in number, were pledged to the loan society for a further loan of $80,000, for which the Steels gave a second note, dated April 1, 1893. The bonds pledged to secure the $83,000 note are described therein as numbered from 145 to 300, inclusive, while those pledged in the $80,000 are described as numbered from 1 to 144, inclusive. It is contended for the Steels and the railway company that the $80,000 is the debt of the company, and not of the Steels, who were required to give their individual note for the loan upon the advice of the attorney of the loan society that the railway company could not borrow money on its own bonds in this way, and that the understanding at the time was that bonds numbered from 145 to 300, inclusive, were pledged for the $80,000 debt by the railway company, or in its behalf, and that these were otherwise unissued treasury bonds of the company. On the other hand, it is contended that the two notes for $83,000 and $80,000, respectively, are in effect for one debt of the aggregate sum of $163,000, to secure which debt the entire issue of the bonds of the company are pledged, without distinction as to ownership or issue, but upon the assumption that said bonds were, and that they in fact were, the property of James and G. A. Steel; that all the bonds authorized by the company had been issued to the said Steels, and were their property at the time the loan was negotiated. In November, 1893, the railway company executed a second mortgage to the Northwest General Electric Company to secure $37,639.95 then due that company, and further advances to an additional amount not exceeding $25,000, and, further, to secure the sum of $29,289 due from the railway company to the Commercial National Bank. This suit was begun by the electric company in December, 1893, to foreclose this second mortgage, and Joseph Simon was appointed receiver of the railway company's property. In the meantime the bonds pledged to secure the Steel notes were sold at auction, in San Francisco, in pursuance of notice duly given, and were purchased by Morris & Whitehead, bankers, parties herein. After their purchase, A. L. Maxwell was substituted as trustee in the first mortgage for the Security Savings & Trust Company, and in that capacity brings his bill of complaint, in the nature of a cross bill herein, against the East Side Railway Company, to foreclose the said first mortgage.

The principal question that arises in the case involves the validity of this sale of bonds made in San Francisco,-- the contention of the Steels and of the railway company being that the sale to Morris & Whitehead is a mere pretense designed for the purpose of enabling the German Savings & Loan Society to foreclose for the face value of the bonds, instead of the amount due upon the notes, for which the bonds were pledged; and, furthermore, that the hypothecation of the unissued bonds, 156 to 300, inclusive, was unauthorized, the company being without authority to make such hypothecation; that the debt for which these bonds were hypothecated was that of the company, and not of the Steels, and, if such bonds were lawfully hypothecated, still their sale in the mode employed was unauthorized and void. The answer made to this is that the sale to Morris & Whitehead is bona fide; that the German Savings & Loan Society has no interest in the sale, but that it is immaterial as to this, for the...