New York Trust Co. v. Michigan Traction Co.

• Decision Date: 02 February 1912
• Citation: New York Trust Co. v. Michigan Traction Co., 193 F. 175 (W.D. Mich. 1912)
• Parties: NEW YORK TRUST CO. v. MICHIGAN TRACTION CO. et al.
• Court: U.S. District Court — Western District of Michigan

193 F. 175

NEW YORK TRUST CO. v. MICHIGAN TRACTION CO. et al.

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

February 2, 1912

Kleinhans & Knappen, for complainant.

Sanford W. Ladd(Joseph G. Hamblen, Jr., of counsel), for defendants.

SESSIONSDistrict Judge.

The facts in this case have been stipulated and are not in controversy.The defendantMichigan Traction Company formerly owned and operated an electric railway in and between the cities of Kalamazoo and Battle Creek, in this state.On January 1, 1901, the Michigan Traction Company duly executed acknowledged, and delivered to the Investment Trust Company of Philadelphia, as trustee, a first mortgage to secure an issue of bonds of the par or face value of $700,000, dated January 1, 1901, and payable on or before January 1, 1921 with interest from date until paid at the rate of 5 per cent per annum, payable semiannually.This mortgage covered all the property of every kind and description then owned or thereafter acquired by the Michigan Traction Company including physical properties, franchises, and the tolls, earnings, income, revenues, rents, issues, and profits derived from its railway.The mortgage contained the usual conditions and provisions, among which were the right of the mortgagor to the full use, possession, and enjoyment of the mortgaged property until default in some of the conditions of the mortgage, and the right of the trustee and mortgagee, upon default in any of the conditions of the mortgage, to declare the whole indebtedness due, and to foreclose and, in its discretion, to take possession of and operate the railway, and collect and receive all tolls and revenues derived therefrom, and apply the same in the payment of operating expenses and upon the mortgage, and in payment of the bonds and the interest thereon.

It was further provided in and by the mortgage that the Traction Company would from time to time during the existence of the trust make, execute, acknowledge, and deliver such further instruments and conveyances as might be necessary to further secure the rights and remedies of the holders of the bonds.Pursuant to this provision, on February 8, 1901, the defendantTraction Company executed and delivered to the Investment Trust Company a further and supplemental indenture or agreement out of which this controversy has arisen.The supplemental indenture added two paragraphs to the original mortgage, as follows:

'Fifteenth.That the said railway company shall and will in each year, beginning two years after the date of the bonds secured by said deed of trust or mortgage, set aside and pay unto the said trustee not less than 5 per centum of the gross earnings of said company in each year, as a sinking fund for the redemption of said bonds.The moneys paid into the sinking fund shall be invested by the said trustee from time to time, together with all income and increase thereof, and held and retained as a trust fund for the redemption of the said bonds at maturity: Provided always, however, that the trustee shall have the right, in its discretion, to invest said sinking fund in first mortgage, interest-bearing securities, and it may also use the said fund from time to time in the purchase of the said bonds at any price not exceeding par and a premium of 10 per centum upon the par value thereof.

'Sixteenth.If the said railway company shall fail to set aside and pay unto the said trustee not less than 5 per centum of the gross earnings of said company in any year, beginning two years from the date of said bonds, as a sinking fund for the redemption thereof, such failure shall be deemed a default in the requirement of the said deed of trust or mortgage; and if such default shall continue for the space of 30 days after due and proper notice or demand, then and in such case the trustee, for the time being, may, and upon the written request of the holders of a majority in amount of said bonds then outstanding shall, declare the whole amount of the principal and interest of each of said bonds, together with all accrued and unpaid interest thereon, due and payable forthwith, and thereupon, upon like request, it shall be lawful for the trustee to proceed in the manner specified in the fifth paragraph of said deed of trust or mortgage to exercise the remedies, or any of them, authorized by said paragraph, in the case of default, subject, however, to all the provisos therein contained, to the same extent and with the same effect as if said remedies and provisos were herein fully set forth.'

On July 25, 1901, the Michigan Traction Company, for the purpose of confirming and ratifying the indenture of February 8, 1901, executed and delivered another instrument of the same tenure and effect.The complainant is the successor of the Investment Trust Company as trustee in said mortgage and has been such trustee since March 15, 1904.

Shortly before April 25, 1906, the defendantMichigan United Railways Company was organized for the purpose of acquiring the properties and franchises of the defendantMichigan Traction Company, and also of the Jackson & Battle Creek Traction Company and the Lansing & Suburban Traction Company.On May 2, 1906, the defendantMichigan Traction Company conveyed to the defendantMichigan United Railways Company all of its property and franchises, and at about the same time the Michigan United Railways Company purchased and took possession of the properties and franchises of the Jackson & Battle Creek Traction Company and the Lansing & Suburban Traction Company, and has, since the purchase thereof, operated all of said properties as one system.The receipts from the railway line formerly belonging to the Michigan Traction Company have been mingled with, and have not been kept separate from, the receipts derived from the other properties of the Michigan United Railways Company.The latter company has at all times been in the full possession of its properties, and complainant has not taken nor demanded possession thereof.

At the close of each of the years 1905, 1906, 1907, and 1908, complainant demanded of the defendants a statement of the gross earnings of the Michigan Traction Company properties during such year, and demanded the payment of 5 per cent. of such gross earnings in accordance with the provisions of article 15 of the mortgage above quoted.Neither of the defendants has complied with such demands, and neither of them has paid to the complainant 5 per cent. of such gross earnings or any part thereof.

Prior to the sale of the property on May 2, 1906, the Michigan Traction Company, and after such sale the Michigan United Railways Company, expended in betterments and extensions of the railway line all the earnings of that part of the line over and above operating expenses and fixed charges, and in addition thereto the Michigan United Railways Company expended in betterments and extensions the sum of $305,000 derived from the sale of bonds.The amount so expended for betterments and extensions of the property, exclusive of said sum of $305,000, exceeded 5 per cent. of the gross earnings of the property, and has enhanced the value of complainant's security.The expenditures so made were necessary to keep the road and the equipment in proper condition as required by its franchises.

Complainant's bill is filed to obtain a decree requiring defendants to come to an accounting as to the gross earnings of that part of the property formerly belonging to the Michigan Traction Company and covered by the mortgage, requiring them to pay to complainant 5 per cent. thereof to provide a sinking fund for the redemption of the bonds in accordance with the terms of article 15 of the mortgage, declaring and establishing an equitable lien...