Seaboard Terminals Corp. v. Western Maryland Ry. Co., 4525.

• Decision Date: 08 January 1940
• Docket Number: No. 4525.,4525.
• Citation: 108 F.2d 911
• Parties: SEABOARD TERMINALS CORPORATION v. WESTERN MARYLAND RY. CO. et al. (MARYLAND TERMINALS CORPORATION, Intervenor).
• Court: U.S. Court of Appeals — Fourth Circuit

108 F.2d 911 (1940)

SEABOARD TERMINALS CORPORATION v. WESTERN MARYLAND RY. CO. et al. (MARYLAND TERMINALS CORPORATION, Intervenor).

No. 4525.

Circuit Court of Appeals, Fourth Circuit.

January 8, 1940.

James Thomas, of Baltimore, Md., for appellant.

Hilary W. Gans, of Baltimore, Md. (Eugene S. Williams and William C. Purnell, both of Baltimore, Md., on the brief), for appellees.

Before PARKER and SOPER, Circuit Judges, and DOBIE, District Judge.

DOBIE, District Judge.

This case began in the United States District Court for Maryland with a creditor's petition for the reorganization of the Seaboard Terminals Corporation under Chapter X of the Bankruptcy Act, 11 U.S.C.A. § 501 et seq. Upon the answer of the debtor corporation and exhibits, the District Court, on March 10, 1939, approved the petition and appointed a temporary trustee. Thereafter, the Western Maryland Railway Company and the Voluntary Relief Department of Western Maryland Railway Company filed their answer as creditors, denying allegations of the petition as to the debtor's ownership of certain property, and asked that the petition be dismissed as not being filed in good faith in that it was unreasonable to expect that a plan of reorganization could be effected. Also, before the first hearing, the Court permitted the Maryland Terminals Corporation (a wholly owned subsidiary of Western Maryland Railway Company) to file an intervening petition in which it asserted its ownership of the property in question, its lease thereof to the debtor, the debtor's default under the lease, and petitioner's desire to exercise its right to reenter and take possession of the property. The trustee, then in possession of the property, filed an answer to the intervening petition denying the right of Maryland Terminals Corporation to terminate the lease.

On April 27, 1939, at the conclusion of its hearings, the District Court dismissed the petition for reorganization of the debtor as not filed in good faith within the meaning of Section 146 (3) of Chapter X of the Bankruptcy Act, 11 U.S.C.A. § 546(3), and rescinded its order of March 10, 1939, approving the petition. By a prior decree the Court had modified this same order, upon a finding that the debtor occupied the property as a lessee and was in default under its lease, to permit the Maryland Terminals Corporation to exercise its rights under said lease without injunction from the Court. From both of these decrees, the Seaboard Terminals Corporation, debtor, appeals.

The disposition of this case in the lower court necessarily turned upon the legal effect given to transactions between the appellant and its principal creditors, Western Maryland Railway Company and subsidiaries, concerning the real estate and improvements upon which appellant was conducting its business at Curtis Creek, Maryland. Consequently, this appellate court, in determining the assignments of error, must consider also the prior dealings and circumstances which throw light on the debtor's condition and which aid in the interpretation of the transactions as to which issue is raised.

During the years 1924 to 1933, the appellant and a subsidiary had engaged in the business of buying gasoline and other petroleum products and selling or marketing the same at wholesale to jobbers and retailers of such products. During a number of years the business was highly profitable, but in 1928 Seaboard Terminals had begun to convey and sell small parcels of its approximately seventy-nine acre tract. Because of an alleged conspiracy existing between producers of gasoline and other petroleum products, the source of supply for these materials became cut off with disastrous financial losses to the appellant. As a result of the situation thus created, in May of 1932 appellant borrowed from the Baltimore Trust Company the sum of $350,000 and, to secure the loan, executed a first mortgage upon its property. Appellant also executed a second mortgage for $33,274.87 to Oil Well Supply Company as security for the payment of the purchase price of certain machinery and plant equipment. Both mortgages matured by their terms on May 2, 1933. At the beginning of the year 1933, appellant's property, subject to these mortgages, consisted of approximately fifty (50.45) acres of land with improvements thereon, including a number of steel storage tanks, a system of pipes and loading platforms, and pipe lines to the pier. After the date of these mortgages, appellant's property was devoted almost exclusively to the storage of gasoline and other petroleum products for other distributors on a gallonage rental charge.

During the first months of 1933, appellant was still in a straitened financial condition and needed ready money with which to meet its pressing situations. In February of that year, the Western Maryland Railway Company submitted an offer to purchase all of appellant's property and equipment at Curtis Creek for $540,000. Since Western Maryland would have to assume the mortgages and various other debts, Seaboard Terminals was to receive only $23,000 to $28,000 in cash. Appellant refused this offer, and it was then withdrawn. Thereafter, appellant asked Western Maryland to lend it $70,000, but appellee was unwilling to accept as security therefor a third mortgage. Negotiations between the president of Seaboard Terminals and the Western Maryland Railway resulted in an agreement dated April 18, 1933, which provided for the sale to Western Maryland, or its nominee, of all appellant's property and improvements, subject to the existing mortgages, for approximately $70,000. The agreement provided also for a lease of this property back to the appellant for a term of five years upon an annual rental equivalent to six per cent of the purchase price plus the amount of taxes, insurance premiums and pier rental. It further provided that appellant should have the option to repurchase the property at the expiration of the term for the same amount plus unpaid rental and the expenditures of Western Maryland on the premises. This agreement was subject to certain conditions, among which were provisions that appellant should obtain extensions of the two mortgages for not less than two years, and that appellant's president should agree not to operate any other gasoline or terminal business within three years from the termination or expiration of the lease, in the event that appellant did not exercise its option.

After the execution of this instrument, appellant obtained an extension of time for the repayment of the principal of both mortgages until May 2, 1935; but the mortgagees required Western Maryland to guarantee payment of both principal and interest on these mortgages. The final outcome was that the agreement was apparently confirmed by the execution of two instruments on May 3, 1933: first, a deed to the Maryland Trust Company, as nominee of Western Maryland, conveying appellant's property; second, a lease from Maryland Trust to appellant of said property, but excluding a part referred to as the "wharf log". Other conditions of the agreement were embodied in these instruments, and Western Maryland supplied the purchase price, $70,079, to the appellant. On June 10, 1933, Western Maryland caused the Maryland Trust to convey this property, subject to the mortgages and lease, to Maryland Terminals Corporation, a wholly owned subsidiary of the appellee and intervening petitioner in this proceeding.

Under this lease, appellant was to pay the interest on the mortgages and was to prevent any default upon their maturity. But in the fall of 1934, appellant's president told Western Maryland that Seaboard Terminals would not be able to pay the mortgages and asked Western Maryland to buy and extend them. The second mortgage was then purchased by the Voluntary Relief Department of Western Maryland, and later the first mortgage was purchased by Western Maryland. Both mortgages were assigned to other companies, but Western Maryland has always appeared to be in control of them; so, by agreement dated May 2, 1935, the mortgages were extended to May 2, 1938. About this same time, the lease and option were extended to July 31, 1946. The mortgages were not paid in 1938, and foreclosure proceedings on the second mortgage were commenced during January, 1939, in the state court. Seaboard Terminals responded by filing an application for injunction and construction of instruments, and then the creditor's petition was filed in the federal District Court.

Such was the situation between the debtor and its principal creditors when reorganization proceedings were instituted in the federal court. Upon this factual background, we can undertake examination of appellant's contentions and assignments of error on the part of the District Court. The second principal claim raises a question of jurisdiction and will be considered first. Did the Court exceed its jurisdiction in determining the ownership of the property and in modifying its injunction upon the intervening petition of Maryland Terminals Corporation? Appellant contends that the District Court erred in this decree in that the final determination of title to property in...