State Trust Co. v. Kansas City, P. & G.R. Co.

• Decision Date: 15 April 1901
• Docket Number: 2,331.
• Parties: STATE TRUST CO. v. KANSAS CITY, P. & G.R. CO. et al.
• Court: U.S. District Court — Western District of Missouri

110 F. 10

STATE TRUST CO. v. KANSAS CITY, P. & G.R. CO. et al.

No. 2,331.

United States Circuit Court, W.D. Missouri, Western Division.

April 15, 1901

Lathrop Morrow and Fox Moore, for Kansas City Southern Ry. Co.

Trimble & Braley and John A. Eaton, for Guardian Trust Co.

In 1899 suit was instituted in this court in the above-entitled cause to foreclose mortgages given by the Kansas City, Pittsburg &amp Gulf Railroad Company, executed to the complainant as trustee, securing bonds of the company to the extent of about $23,000,000. Receivers were appointed by the court, and the property placed in their hands pending the foreclosure proceedings. On February 5, 1900, a final decree was rendered in the foreclosure proceeding, under which all the property and assets of every kind and description belonging to the Kansas City, Pittsburg & Gulf Railroad Company, upon certain terms and conditions therein mentioned, was decreed to be sold on the 19th day of March, 1900, at which sale the Kansas City Southern Railway Company, a corporation organized for such purpose, became the purchaser; and, having complied with the terms and conditions of such sale, the sale was duly confirmed by order of court on March 20, 1900. Thereupon a deed was duly executed to the purchaser by the receivers; and the railroad and all the property of the Kansas City Pittsburg & Gulf Railroad Company covered by said mortgages was turned over and delivered to the Kansas City Southern Railway Company, and it took immediate possession thereof and, pursuant to the provisions of the scheme of reorganization, issued and put upon the market and negotiated its bonds, creating a first and second mortgage lien upon the railroad property. The Guardian Trust Company, a Missouri corporation, was a party defendant to said foreclosure suit and was one of the trustees for the bondholders of the Kansas City, Pittsburg & Gulf Railroad Company. The provisions of the decree of foreclosure and confirmation aforesaid, in so far as they are pertinent to this controversy, will sufficiently appear in the following opinion of the court. After said foreclosure and sale of said property as aforesaid, said Guardian Trust Company instituted suit in the state circuit court of Jackson County, Mo., against the said Kansas City, Pittsburg & Gulf Railroad Company and the Kansas City Southern Railway Company, claiming to be the owner and holder of certain obligations of the Kansas City, Pittsburg & Gulf Railroad Company, which it alleges are preferential claims, prior in equity and right to that of the mortgagees under the mortgages foreclosed in the principal suit. The petition in the state court charges, inter alia, that the proceedings had in said foreclosure suit in this court were collusive and fraudulent, in that the stockholders and bondholders of the Kansas City, Pittsburg & Gulf Railroad Company associated themselves together for the purpose of reorganizing the property of that company by means of said foreclosure sale in order to fraudulently cut out the claims of unsecured creditors, while preserving to the bondholders and stockholders their full interest in the property; that the foreclosure proceedings aforesaid in this court, and the appointment of the receivers therein, were in furtherance of said scheme, and the decree of foreclosure was in execution thereof. While not asking to disturb the decree of this court, the petition asked to have its claim established against the property in the hands of the Kansas City Southern Railway Company, and declared to be prior in right to the said mortgages, and for execution against the property so purchased by the Kansas City Southern Railway Company. The Kansas City Southern Railway Company, in response to the summons issued upon said suit in the state court, appeared at the return day thereof, and filed its petition for the removal of the cause into the United States circuit court for this district, on the ground of a separable controversy, and because the controversy involved a federal question. The state court sustained the application for removal. The plaintiff filed a motion in this court to remand the cause to the state court; and pending this motion the Kansas City Southern Railway Company has filed a bill in the nature of a supplemental bill in the principal foreclosure suit of the State Trust Company against the Kansas City, Pittsburg & Gulf Railroad Company et al., reciting said foreclosure proceedings, the appointment of receivers, the decree of foreclosure, sale and confirmation of the property, and the substance of the suit aforesaid instituted in the state court, praying for an injunction from this court enjoining the Guardian Trust Company from the further prosecution of said suit in the state court.

PHILIPS District Judge (orally).

This cause has been submitted to the court on two questions: First, on the motion of the plaintiff to remand the cause to the state court; and, second, in case said motion be sustained, as to the right of the Kansas City Southern Railway Company, on a bill in the nature of a supplemental bill in the original foreclosure proceeding, to enjoin the Guardian Trust Company from the further prosecution of the suit in the state court.

Without entering into a discussion of the first question, it is sufficient for the court to say that as the suit instituted in the state court by the Guardian Trust Company against the Kansas City, Pittsburg & Gulf Railroad Company and the Kansas City Southern Railway Company is an independent suit at law, and both the defendants are Missouri corporations, the right of the defendant the Kansas City Southern Railway Company to remove the whole cause into this court cannot be sustained. The controversy is not separable as to the defendants. An examination of the more recent decisions of the supreme court of the United States is against the right of such removal. The motion to remand, therefore, will be sustained.

The remaining question, then, is whether the Kansas City Southern Railway Company has a right, by a supplemental bill filed in the original foreclosure proceedings in this court, to enjoin the suit instituted by the Guardian Trust Company in the state court. This question is answered by a review of the adjudicated cases and the provisions of the decree of foreclosure and confirmation of sale in the receivership case. In Sharon v. Terry (C.C.) 36 F. 337, Mr. Justice Field, on the circuit, delivered an instructive opinion on the question of the right of the court which first obtains jurisdiction of the subject-matter and the parties in a proceeding in equity to retain jurisdiction to the end, to the exclusion of any other court. He said:

'This court, having the power to hear and determine the subject-matter in controversy, and having first obtained possession of the controversy, is fully at liberty to retain it until it shall have disposed of it. The general rule is that, as between courts of concurrent and co-ordinate jurisdiction, the court that first obtains possession of the controversy must be allowed to dispose of it without interference from the co-ordinate court. * * * Where a party is within the jurisdiction of this court, so that on a bill properly filed here this court has jurisdiction of his person, although the subject-matter of the suit may be situated elsewhere, it may, by the ordinary process of injunction and attachment for contempt, compel him to desist from commencing a suit at law, either in this state or any foreign jurisdiction, and, of course, from prosecuting one commenced after the bringing of the suit in this court.'

Proceeding then to a discussion of the applicability of section 720 of the United States Revised Statutes, which provides that the writ of injunction shall not be granted by any court of the United States to stay proceedings in any court of the state, except in cases where such injunction may be authorized by law relating to proceedings in bankruptcy, he observed that:

'Notwithstanding the very general terms of the prohibition, with the single exception mentioned, it has been settled that it does not apply where the federal court has first obtained jurisdiction, or where, the state court having first obtained jurisdiction, the case has been removed to the federal court. In such cases the federal court may restrain all proceedings in a state court which would have the effect of defeating or impairing its jurisdiction. It extends only to cases in which the jurisdiction of the state court has first attached. With its proceedings, then, no federal court can interfere by injunction.'

In Fisk v. Railroad Co., 10 Blatchf. 520, Fed. Cas. No. 4,830, the circuit court of the United States for the Southern district of New York issued an injunction restraining that corporation from taking any steps in the state court to procure its own dissolution, and the effect of the statute in question was considered. Judge Blatchford, in deciding the case, said:

'The provision of section 5 of the act of March 2, 1793 (1 Stat. 334), that a writ of injunction shall not be granted to stay proceedings in any court of a state, has never been held to have, and cannot properly be construed to have, any application except to proceedings commenced in a court of a state before the proceedings are commenced in the federal court. Otherwise, after suit brought in a federal court, a party defendant could, by resorting to a suit in a state court, defeat in many ways the effective jurisdiction of person and subject-matter. Moreover, the provision of the act of 1793 must be construed in connection with the provision of section 14 of the act of September 24, 1789 (1 Stat. 81), that the federal courts shall have power to issue all writs which may be necessary

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