Palmer v. Bankers Trust Co.

• Decision Date: 05 May 1926
• Docket Number: 7085.,No. 7084,7084
• Citation: 12 F.2d 747
• Parties: PALMER v. BANKERS' TRUST CO. et al. (two cases).
• Court: U.S. Court of Appeals — Eighth Circuit

12 F.2d 747 (1926)

PALMER v. BANKERS' TRUST CO. et al. (two cases).

Nos. 7084, 7085.

Circuit Court of Appeals, Eighth Circuit.

May 5, 1926.

Louis B. Wehle, of New York City (Mason A. Lewis and James B. Grant, both of Denver, Colo., on the brief), for appellant.

Henry McAllister, Jr., of Denver, Colo., for appellee Denver & Rio Grande Western R. Co.

Roberts Walker, of New York City (William V. Hodges, of Denver, Colo., Joseph M. Hartfield, of New York City, and James Grafton Rogers, of Denver, Colo., on the brief), for appellee Bankers' Trust Co.

Cravath, Henderson & De Gersdorff, Murray, Aldrich & Roberts, John F. Bowie, and Donald C. Swatland, all of New York City, for appellees Swatland and Hibberd.

Before STONE, KENYON, and BOOTH, Circuit Judges.

BOOTH, Circuit Judge.

Review is sought by these two appeals, respectively, of two orders which denied two petitions of appellant for intervention in the suit entitled "Bankers' Trust Company, as Trustee, Plaintiff, v. Denver & Rio Grande Railroad Company and Denver & Rio Grande Western Railroad Company, in equity, No. 7381, Consolidated Cause." There is also a motion to dismiss the appeals, on the ground that the orders were not appealable. The consolidated suit represents another chapter in the long history of the complicated litigation involving the Denver & Rio Grande Railroad Company and its subsidiary and affiliated companies. The history can be found in Equitable Trust Co. v. Western P. R. Co. (D. C.) 231 F. 478; Id., 231 F. 571, 145 C. C. A. 457; Id., 233 F. 335; Id. (D. C.) 236 F. 814; Id. (D. C.) 244 F. 485; Id., 250 F. 327, 162 C. C. A. 397; Denver & Rio Grande R. Co. v. Equitable Trust Co., 246 U. S. 672, 38 S. Ct. 423, 62 L. Ed. 932; Equitable Trust Co. v. Denver & R. G. R. Co. (D. C.) 269 F. 987; Levy v. Equitable Trust Co. (C. C. A.) 271 F. 49; Beers v. Equitable Trust Co. (C. C. A.) 286 F. 878, 883, and 886.

A rehearsal of a few facts from that history is necessary to a proper understanding of the present appeals:

On or about August 1, 1908, the Denver & Rio Grande Railroad Company (hereafter called the old Denver Company), made, executed, and delivered to the Bankers' Trust Company of New York, as trustee, its first and refunding mortgage (hereafter called refunding mortgage) to secure an authorized issue of bonds, not to exceed in the aggregate the principal sum of $150,000,000, of which bonds approximately $42,000,000 of principal amount were issued. The mortgage covered in general the railways, franchises, property rights, and income of the railroad company. August 1, 1921, the old Denver Company defaulted in the payment of an installment of the sinking fund provided for in the refunding mortgage and due on that date, and also defaulted in the payment of interest due under the mortgage on the same date. It further defaulted in the payment of interest due February 1, 1922. On July 21, 1922, the trustee filed its bill in the court below, and on August 21, 1922, its supplemental bill, to foreclose the mortgage.

Among the property owned by the old Denver Company at the time of the execution of the refunding mortgage were 100,000 shares of stock in the Utah Fuel Company. Whether this stock was covered by the refunding mortgage is a question which has caused trouble and litigation, but which does not require answer in this case. The salient facts in regard to the stock are as follows:

In 1901, the Rio Grande Western Railway Company, one of the predecessors of the old Denver Company, bought the stock of the Utah Fuel Company, paying for it in bonds under its first consolidated mortgage (hereafter called consolidated mortgage) in the principal amount of $6,000,000. The stock was pledged with the Guaranty Trust Company of New York, trustee under said consolidated mortgage. The equity in this stock thereafter became the property of the old Denver Company, and in December, 1917, was attached by the Equitable Trust Company in a suit brought by it in the Supreme Court of the state of New York upon a judgment theretofore obtained against the old Denver Company in the United States District Court for the Southern District of New York in the sum of upwards of $36,000,000. June 20, 1918, this equity was sold on execution under judgment of the state court for $4,000,000 to William Salomon & Co., who assigned and transferred it to the Western Pacific Railroad Corporation February 14, 1919. It was claimed by the Bankers' Trust Company, trustee under the refunding mortgage, that the equity in this stock was covered by that mortgage, subject, of course, to the consolidated mortgage. The Western Pacific Railroad Corporation thereafter filed a bill in the United States District Court for the Southern District of New York, in the nature of a bill to quiet title to the stock, making the Bankers' Trust Company and others defendants in the suit. Issue was joined, and the suit brought to trial, but before decree the proceedings were suspended by stipulation, subject to being revived upon 10 days' notice. This was the situation when the present foreclosure suit was commenced.

On or about May 1, 1912, the old Denver Company made, executed, and delivered to the New York Trust Company, as trustee, its so-called adjustment mortgage, to secure an issue of bonds not to exceed in the aggregate the principal sum of $25,000,000, of which $10,000,000 were issued. This mortgage covered in general the same property that was covered by the refunding mortgage. The railroad company defaulted in the payment of interest on the adjustment mortgage June 30, 1921, December 31, 1921, and June 30, 1922. On July 7, 1922, the trustee filed its bill to foreclose the mortgage.

These two foreclosure suits were consolidated by order of court July 21, 1922. A receiver was appointed, who took possession the same day. He found in possession the Denver & Rio Grande Western Railroad Company (hereafter called the new Denver Company), a corporation which had been formed for taking possession of and operating the railways after the sale thereof which had been made in the creditor's bill suit on November 20, 1920. See Levy v. Equitable Trust Co. of N. Y. (C. C. A.) 271 F. 49, 54. The new Denver Company had taken possession August 1, 1921. The new Denver Company was in possession, not only of the railways, but also of other property necessary to the operation of the railways, but not covered by the refunding mortgage or the adjustment mortgage. The receiver appointed in the present suit, however, took possession of this property also, pursuant to an agreement with the new Denver Company to make adjustment therefor later.

On November 20, 1922, the special master who had been appointed in the case made his report on the receiver's budget for improvements and betterments. The report showed that the road would need for betterments and additions during the succeeding three years $22,000,000; that the service of the road was from 15 to 25 per cent. short of adequacy on the main line, and worse on branch lines; that $7,000,000 should be made available within 60 days, and $3,000,000 more before the end of 1923; and this in addition to prospective earnings which might be applicable for the same purposes. $5,000,000 of equipment trust certificates and $5,000,000 of receiver's certificates were recommended. New equipment was needed, especially in the way of additional power, also new shop equipment, ballasting, restoration of bridges. A receiver's report was attached to the report of the special master, showing, among other things, that the annual interest on the underlying bonds was $3,279,740. The receiver's estimate for additions and betterments needed was $21,129,644.

On December 2, 1922, the court approved the report of the special master and ordered the issuance of $5,000,000 receiver's equipment trust certificates. A subsequent order fixed the amount at $4,500,000. The court further ordered the issuance of $5,000,000, receiver's certificates. At this time the refunding bonds, which were in foreclosure, were being quoted on the market at from 45¾ to 49. It may be here stated that in January, 1924, the court authorized a further issue of receiver's certificates in the principal amount of $1,500,000, with which to raise money to pay interest on the underlying bonds.

A plan of reorganization had been under discussion for several years. On June 15, 1923, a proposed plan, approved by three committees of bondholders, was published. It provided briefly as follows: That the property covered by the refunding and adjustment mortgages in foreclosure should be sold, and be acquired by a new company (it was later found feasible to make use of the new Denver Company); that the new company should issue to the refunding bondholders and the adjustment bondholders, in exchange for their bonds, general mortgage bonds secured by mortgage on the properties of the new company, and also preferred stock; that the exchange should be on the basis of $725 general mortgage bonds and $400 par value preferred stock for each $1,000 refunding or adjustment bonds. It was estimated that the amount of general mortgage bonds necessary would be $29,808,000 and the amount of preferred stock would be $16,445,600.

The plan further provided that the new company should issue $150,000,000 of refunding and improvement bonds, to be secured by a mortgage covering all of the railroad properties and equipment of the new company, prior in lien to the general mortgage, but subject to the underlying mortgages. All of these refunding and improvement bonds (except about $3,000,000, which were to be issued immediately to provide the new company with additional working capital) were to be reserved and issued solely to refund the underlying bonds, or for additions and betterments on the property.

The plan further provided that the Western Pacific Railroad Corporation, which owned the stock of the new Denver Company, should turn over to the new...