Pollitz v. Farmers' Loan & Trust Co.

• Decision Date: 12 December 1892
• Citation: 53 F. 210
• Parties: POLLITZ v. FARMERS' LOAN & TRUST CO. et al. SOUTHERN PAC. CO. et al. v. POLLITZ.
• Court: U.S. District Court — Southern District of New York

53 F. 210

POLLITZ v. FARMERS' LOAN & TRUST CO. et al.

SOUTHERN PAC. CO. et al. v. POLLITZ.

United States Circuit Court, S.D. New York.

December 12, 1892

W. A Underwood and Melville Egleston, for complainant and cross defendant.

James C. Carter and William D. Guthrie, for defendants and cross complainants.

COXE District Judge.

The complainant, Carl Pollitz, is the owner of 82 railroad mortgage bonds of the Oregon & California Railroad Company. All of the other bonds-- 8,523 in number-- have been surrendered and exchanged, under a reorganization agreement for new bonds of the same corporation guarantied by the Southern Pacific Company. The object of this suit is to collect the 82 bonds according to the terms of the original mortgage-- at 110 per cent. principal and interest thereon-- out of certain sinking-fund moneys in the hands of the defendant the Farmers' Loan & Trust Company, the trustee under the mortgage. Injunctions are prayed for to effectuate this object.

The defenses are: First. That the court has no jurisdiction. Second. That a judgment of the United States circuit court of Oregon which, in substance, confirmed the reorganization and provided for the surrender and payment of the complainant's bonds, is a bar to this action. Third. That all these bonds were purchased by the complainant while acting in a fiduciary capacity as a member of a bondholders' committee which advocated the reorganization. That equity will not permit him to reap profit as an individual by taking a position hostile to his duties and relations as a trustee. The cross bill prays for a decree that Pollitz be required to surrender his bonds and accept the new bonds in lieu thereof.

At the threshold of this controversy stands the Oregon decree. It is admitted that if this decree be valid and binding the bill must be dismissed. But the complainant argues that it is not binding because he was not a party, and, in any view, it was obtained by fraud, and is, therefore, a nullity. Was the complainant a necessary party to the Oregon suit?

In Shaw v. Railroad Co., 100 U.S. 605, the supreme court says:

'The trustee of a railroad mortgage represents the bondholders in all legal proceedings carried on by him affecting his trust, to which they are not actual parties, and whatever binds him, if he acts in good faith, binds them. * * * The trustee represents the mortgage, and in executing his trust may exercise his own discretion within the scope of his powers.'

In Beals v. Railroad Co., 133 U.S. 290, 10 S.Ct. 314, the court said:

'The former judgment was rendered by a court of competent jurisdiction, to which not only the railroad company that issued the bonds, but the surviving trustee under the mortgage made in the name of another company to secure the payment of those bonds, were made parties. The bondholders were thus fully represented in that suit, and bound by the decree cancelling and annulling the bonds and mortgage, unless the decree was fraudulently obtained.' See, also, Kent v. Iron Co., 144 U.S. 75, 12 S.Ct. 605; Richter v. Jerome, 123 U.S. 233, 8 S.Ct. 106; Bank v. Shedd, 121 U.S. 74, 7 S.Ct. 807; Elwell v. Fosdick, 134 U.S. 500, 10 S.Ct. 598.

These authorities are, in my judgment conclusive. If the trustee represents the bondholders in all matters relating to his trust it surely must be immaterial what is the form of the action which draws the trust into controversy. Whether plaintiff or defendant he stands sponsor for them. It cannot be possible that he represents them in a foreclosure suit and fails to represent them in an action like this where the principle involved is precisely the same. All law should be, and generally is, based upon reason. For a distinction, like the one contended for, no plausible reason can be suggested.

But it is said that the Oregon decree was obtained by fraud. The complainant, in making the charge, appears to entertain the opinion that the trustee should have bent his entire energies to the protection of the complainant's interests and his interests only. The fact that 99 per cent. of the bondholders entertained one opinion and the complainant another and that the trustee stood as the representative of all alike, seems to have been overlooked. Was it the duty of the trustee to postpone a reasonable and fair adjustment which was the almost unanimous desire of the bondholders, in order that one recalcitrant might use the weapon of delay thus placed in his hands and experiment with the courts for the purpose of obtaining better terms than the rest? If this were his duty there would be more foundation for complainant's accusation. If, however, he owed the complainant no such obligation, the course adopted by the trustee seems proper and, indeed, commendable. Various allegations in the pleadings which joined the issue in the Oregon suit are pointed out as not in accordance with the facts, and numerous acts of the parties are referred to as indicating connivance between the railroad company and the trustee for the purpose of obtaining a hurried and an inequitable decree. It is unnecessary to examine these alleged improprieties in detail because, to my mind, they are inconsequential. Even though the complainant be right regarding them they did not affect his interests injuriously. The pleadings put the court in possession of the salient points upon which the decree was founded.

The trustee by its answer stated that it had at all times refused to cancel the mortgage until all of the outstanding bonds were fully paid and...