Sidell v. Missouri Pac. Ry. Co.

• Decision Date: 23 February 1897
• Parties: SIDELL v. MISSOURI PAC. RY. CO. et al.
• Court: U.S. Court of Appeals — Second Circuit

78 F. 724

SIDELL v. MISSOURI PAC. RY. CO. et al.

United States Court of Appeals, Second Circuit.

February 23, 1897

Charles D. Ingersoll and Albert Stickney, for appellant.

Winslow S.Pierce, Rush Taggart, and David D. Duncan, for appellees.

Before WALLACE, LACOMBE, and SHIPMAN, Circuit Judges.

WALLACE Circuit Judge.

This is an appeal from a decree dismissing the bill of complaint. The action was a creditors' suit founded on a judgment recovered in April, 1894, for the sum of $31,925, by the complainant against the Leroy & Caney Valley Railroad Company, and an unsatisfied execution thereon, to reach assets in the hands of the Missouri Pacific Railroad Company alleged to constitute a trust fund for the benefit of the creditors of the Leroy & Caney Valley Railroad Company. The theory of the bill is that the Missouri Pacific Company being the principal stockholder and in full control of the Leroy Company, took from the latter, without any new consideration, and with the intention of hindering, delaying and defrauding its creditors, and especially the complainant, a long lease of its entire property, leaving the company entirely insolvent; that the property was a trust fund for the payment of the debts of the Leroy Company, and the value thereof was largely in excess of the amount of the complainants' judgment; that the Missouri Pacific Company is, therefore, liable in equity to account for the value of the fund; and that, as the complainant is the only creditor of the Leroy Company whose debt remains unpaid, the Missouri Pacific Company should be compelled to pay his judgment in full.

It appears by the proofs that the Leroy Company, a corporation organized under the laws of the state of Kansas, entered into a contract dated October 7, 1885, with the Missouri Pacific Company, also a corporation of that state, and also with one Loss, by which Loss agreed to build a railroad for the Leroy Company between certain designated places in the state of Kansas, and was to be paid therefor by the delivery to him of the first mortgage bonds to be issued by the Leroy Company and secured by a trust deed conveying all its property; and by which the Missouri Pacific Company was to guaranty the payment of the principal and interest of the bonds, and was to acquire the larger part of the stock of the Leroy Company. The complainant's claim grew out of this contract by mesne assignments from Loss. The railroad was built, the mortgage bonds were created, the Missouri Pacific Company guarantied them, and the bonds were applied as contemplated by the contract. The mortgage securing the bonds guarantied by the Missouri Pacific Company covered not only all the physical property and the franchises of the Leroy Company, but also 'all the rents, issues, profits, tolls, or other income' thereof. March 3, 1887, the Leroy Company executed to the Missouri Pacific Company a lease of its railroad, together with all its other property, for the term of 40 years, at a rental of $500 per mile of road annually. The lease provided that the Missouri Pacific Company should pay all taxes on the property, and make all the replacements and repairs. The lease contained the following clause:

'It is agreed that, whereas, the party of the second part has guarantied the payment of interest on certain of the first mortgage bonds of the party of the first part, * * * the party of the second part has the right, instead of paying the rental herein stipulated to be paid directly to the party of the first part, to apply the same to the payment of the coupons on the bonds of the party of the first part as the same become due, and thereby exonerate itself from all liability to pay rent; this right in favor of the party of the second part being one of the considerations on which said guaranty was made.'

The rent under the lease was payable semiannually, and at the same time when the semiannual interest upon the bonds would fall due. At the time this lease was executed the Missouri Pacific Company owned and held a majority of the capital stock of the Leroy Company. It voted upon this stock at a corporate meeting of the Leroy Company called to authorize the lease, and by its vote elected the directors who were instructed to cause it to be executed. It took possession of the railroad and all the other leased property under the lease, and has since remained in possession and continued to operate the same.

The proofs justify the inference that the Leroy Company was organized for the purpose of building the railroad as a branch line or feeder to become a part of the system of the Missouri Pacific Company, and that the latter was from the inception of the enterprise a virtual principal. The proofs also show that at the time of the lease the property was not of a rental value equal to the accruing interest upon the outstanding first mortgage bonds. The railroad was doubtless projected and built in the interests of the Missouri Pacific Company with the view of occupying and developing new territory, and in the expectation that at some future time its value as a tributary of the main system would equal or exceed its cost. No evidence was introduced on behalf of the complainant respecting the value of the lease property beyond that supplied by the lease itself. According to the testimony for the defendant, the railroad has been operated by it at a large annual loss, amounting altogether to more than $400,000.

The legal principles applicable to this state of facts are familiar. In a qualified sense, the property of an insolvent corporation is a trust fund for the payment of its creditors. Creditors do not have a specific lien upon the assets any more than they do upon the property of an insolvent individual. If, instead of appropriating them to the payment of its debts, it makes a disposition of them in fraud of creditors, the creditors can reach them, and by proper proceedings acquire a lien upon...