Paton v. Northern Pac. R. Co.

• Decision Date: 22 July 1896
• Citation: 85 F. 838
• Parties: PATON et al. v. NORTHERN PAC. R. CO. et al.
• Court: U.S. District Court — Eastern District of Wisconsin

85 F. 838

PATON et al. v. NORTHERN PAC. R. CO. et al.

United States Circuit Court, E.D. Wisconsin.

July 22, 1896

The bill alleges that such foreclosure decree was passed by consent, pursuant to a conspiracy, plan, and agreement published March 16, 1896, by which the trustee and bondholders under the various mortgages conspired with the railroad company and its stockholders to exclude general creditors from participation in the assets of the insolvent Northern Pacific Railroad Company, and to award to stockholders of the company, in proportion to their former holdings, new rights and privileges, which the bill charges should belong to the general creditors of the road, and that such general creditors were excluded from participation in the plan of reorganization. It was charged that such plan and agreement was a fraud and wrong upon general creditors because it gave to stockholders, upon the payment of specified sums of moneys, the right to participate in the reorganization, which was a valuable right, and one which could not legally be reserved for the stockholders until it should first be offered to and declined by general creditors and that it also was a combination to prevent the general creditors from bidding at the sale under the decree, thereby preventing competition between stockholders and secured creditors. The bill prayed that such plan and agreement of reorganization might be declared to be in fraud of the rights of the general creditors, and that all persons may be enjoined from pursuing such plan or from any purchase of the railroad thereunder; that the decree might be opened and the general creditors adjudged to be entitled to all rights given to stockholders by such a plan and agreement; that the court would formulate and provide a just and fair plan for distribution of the securities of any new corporation which might be formed under such plan and agreement, and which might purchase the railway; that the proposed sale under the decree should be enjoined; and that the defendants who constituted the reorganization committee should be enjoined from issuing to stockholders of the railroad company any securities of the new company until they should have been first offered to and declined by general creditors. The Northern Pacific Railroad Company demurred specially to the bill, upon the ground that the complainants are not judgment creditors; that the alleged guaranty of the bonds of the Seattle, Lake Shore & Eastern Railway Company was without consideration and void. Others of the defendants demurred generally to the bill. A motion for injunction pursuant to the prayer of the bill came on for hearing, at which time there was presented for the reorganization committee an affidavit controverting many material charges in the bill. At the hearing of the motion, the application for an injunction restraining a sale under the decree was abandoned by the complainants' counsel, and the motion limited to an order restraining the reorganization committee from delivering to stockholders of the Northern Pacific Railroad Company any stock of the new company to which they might become entitled under the provisions of the plan of reorganization.

Peckham & Stark, for complainant.

Silas W. Pettit, for N. P. R. Co.

W. N. Cromwell, for Adams.

J. G. Flanders, for the Loan & Trust Co.

Stetson & Morawetz, for Morgan.

JENKINS Circuit Judge (orally).

It is proper to look at the situation of this road, and the relative position of the parties with respect to their securities and claims, before proceeding to remark upon the legal aspect which the case presents.

The proceedings in behalf of the trust company to foreclose certain mortgages upon the road were commenced in the year 1893, since which time this road and its property have been under the management and in the possession of the receivers of the court. At the time of the publication of the plan of reorganization, the property of the road stood substantially, if not accurately, in this position: There was a first mortgage of $41,879,000; there were the underlying mortgages upon the Missouri Division of $1,815,500; and upon the Pend D'Oreille Division of $357,000,-- making $44,051,500 in amount of mortgage liens superior to the mortgages sought to be foreclosed. The principal and interest to the date of the decree of the second mortgage was $23,033,738.80; of the third mortgage, $13,606,212.70; of the consolidated mortgage, $71,643,703.63. There were also outstanding receivers' certificates amounting to $5,000,000, which were liens upon this road prior to either of these mortgages for such amount as might remain after the application of collaterals. Without reference to the receiver's certificates, there was a debt upon this railroad superior to any claim of the preferred or common stock, and superior to any claim of general creditors, of $152,335,155.13. The fixed charges amounted to $10,905,690. The net income under the receivership for the year 1894-95 (a fair year) was $6,015,846.62, leaving a deficit to meet the fixed charges of nearly $5,000,000. So that it may well be said, as was said and is asserted over and over again in the record of the foreclosure proceedings, that this railroad company was insolvent.

The plan of reorganization proposed that, upon the purchase of this road upon the sale,-- if the syndicate should become the purchaser,-- there should be issued $130,000,000 of 4 per cent. 100-year gold bonds, secured by first mortgage; $60,000,000 of 3 per cent. 100-year gold bonds, secured by a second mortgage; $75,000,000 of preferred stock, and $80,000,000 of common stock; and by the plan, after payment of some small amount of cash, the holders of the first mortgage bonds assenting to the arrangement should have $1,350 in new bonds for each $1,000 of old bonds, and that amount, undoubtedly, in view of and because of the reduction in the rate of interest. The holders of the second mortgage bonds should take 118 1/2 per cent. in 4 per cent. bonds for the old bonds and accumulated interest, and 50 per cent. in preferred stock. The holders of the third mortgage bonds should take 118 1/2 per cent. in 3 per cent. bonds in lieu of the old bonds and accumulated interest, and 50 per cent. in preferred stock. The consols should receive 66 1/2 per cent. in the 3 per cent. bonds, and 62 1/2 per cent. in preferred stock. Provision was also made for the retirement of the bonds held by the Northwest Equipment Company, and of those pledged for collateral trust notes and for dividend certificates issued under certain resolutions of the old board of directors with reference to a supposed surplus or dividend belonging to preferred stockholders. The preferred stock of the old company should receive 50 per cent. in new preferred stock, and 50 per cent. in common stock, in consideration of the holders of it paying $10 per share. Holders of the common stock should receive 100 per cent. in new common stock upon paying $15 per share. The estimate of the plan was that, by the abatement of interest, the amount of fixed charges, now $10,905,690 annually, would be reduced to $6,052,600 annually. The property up to this time, at the best, could be relied upon to realize not to exceed $7,800,000 a year.

It is no doubt true, as ruled in Railroad Co. v. Howard, 7 Wall. 392, that the disposition of the property of a corporation among its stockholders, without providing for the...