Toledo, St. L. & K.C.R. Co. v. Continental Trust Co.

• Decision Date: 05 July 1899
• Docket Number: 640,641,673.
• Citation: 95 F. 497
• Parties: TOLEDO, ST. L. & K. C. R. CO. et al. v. CONTINENTAL TRUST CO. et al. HAMLIN et al. v. SAME. ROSE v. SAME.
• Court: U.S. Court of Appeals — Sixth Circuit

95 F. 497

TOLEDO, ST. L. & K. C. R. CO. et al. v. CONTINENTAL TRUST CO. et al.

HAMLIN et al. v. SAME.

ROSE v. SAME.

Nos. 640, 641, 673.

United States Court of Appeals, Sixth Circuit.

July 5, 1899

[Copyrighted Material Omitted]

The appeal in the principal case, styled as above, is an appeal by the railroad company, and various intervening creditors of that company, from a decree foreclosing a first mortgage made by said railroad company to secure an issue of its bonds aggregating $9,000,000, and directing a sale of all of its property and franchises, and dismissing various intervening petitions filed by unsecured creditors of said mortgagor railroad company attacking the validity of its mortgage bonds upon various grounds, and from a decree upon the cross bill of Charles Hamlin and others, giving to holders of preferred stock issued by said railroad company a preference over the common stock in the surplus of the property of said railroad company, after the payment of all of the debts of the company. The appeal of Charles Hamlin and others is from so much of the decree of sale as charged the property of the railroad company with a lien for all debts of the company which might at any time be established to the extent that the holders of such preferred shares might use the same in paying any bid made by them as purchasers at the foreclosure sale of said property. The appeal of Dana A. Rose is from a decree striking an intervening petition filed by him from the files.

The Toledo, St. Louis & Kansas City Railroad Company is a consolidated corporation of Ohio, Indiana, and Illinois. Its road extends from Toledo, in Ohio, to East St. Louis, in Illinois, and is 450 miles in length. This consolidated company was organized June 18, 1886, by a consolidation of three constituent companies, corporations, respectively, of the states of Ohio, Indiana, and Illinois. In May, 1893 Stout and Purdy, citizens of New York, and judgment creditors of the said consolidated company, filed a creditors' bill in the circuit court of the United States for the Western division of the Northern district of Ohio against said railroad company, in behalf of themselves and other creditors. Like bills were filed at the same time in Indiana and Illinois. Under these bills, the same receiver was appointed in each jurisdiction, and the entire line of railway was thereafter operated under the direction of the circuit court for the Northern district of Ohio, that being the court of original and primary jurisdiction. Other creditors were, by publication under order of the court, invited to come in under that bill, and to file their claims before the master, and many of them did so; among them being a committee representing the holders of first mortgage bonds as a class. At the time of the filing of this creditors' bill, there had been no such default in payments of interest upon the mortgage debt as would authorize foreclosure. Such default did subsequently occur, and thereupon the trustees under the first and only mortgage filed a bill in the same circuit court for the foreclosure of that mortgage. These trustees were the Continental Trust Company, a corporation of the state of New York, and John M. Butler, a citizen of the state of Indiana. The defendants under this foreclosure bill were the railroad company, the receiver appointed under the creditors bill of Stout and Purdy, and certain judgment creditors of the railroad company. This bill was filed by leave of the court, and the receiver under the creditors' bill was made receiver under the foreclosure bill. At the same time an order was made consolidating the creditors' suit with this foreclosure proceeding, and directing that the consolidated cause should take the title of the foreclosure proceeding, and that the receivership under the creditors' bill should be extended to the said foreclosure suit. Answers were filed to this foreclosure suit by the railroad company, and by the judgment creditors made parties defendant thereto. The answer of the railroad company declined to admit that it was a validity consolidated company, though it had acted as such; declined to admit the validity of the mortgage or of the bonds secured thereunder; denied default in interest as well as insolvency; and declined to admit the averments of the bill as to the bona fide character of the owners of the mortgage bonds. Some of the judgment creditors made defendants denied the legality of the consolidation under which the mortgagor company became a corporation; denied the power of the company to make a mortgage or issue bonds; and denied that the present holders of said bonds were bona fide holders for value; and asserted the priority of their judgments over the bonds. In the foreclosure suit certain creditors of the railroad company were permitted to intervene by petition for the purpose of attacking the validity of the bonds of the railroad company. This they did, by averring that all of the bonds had been sold by the company at less than 75 cents on the dollar, in contravention of section 3290, Rev. St. Ohio. and also that they had been purchased by directors at less than par, and were therefore void, under section 3313, Id. Hamlin and others, representing a majority of the preferred stock of the company, were also admitted as defendants to the foreclosure suit, and allowed to answer and file a cross bill. The history of the admission of these preferred stockholders as defendants, over the objection of the complainants in the foreclosure suit, is fully stated in the opinion of this court, reported as Hamlin v. Trust Co., 47 U.S.App. 422, 24 C.C.A. 271, and 78 F. 664. The answer of the Hamlins, as representatives of the class of preferred stockholders, denied the validity of the bonds, upon the ground that they had been fraudulently paid out to one S. H. Kneeland, the holder of the entire common stock of the company, upon a contract with him under which he was obligated to convert the original narrow-gauge railroad into a first-class standard-gauge railroad, with full equipment of engines and rolling stock, and pay off all liens prior to the mortgage, in consideration of the bonds and common stock of the consolidated company. It was averred that Kneeland had not performed his contract in respect to the reconstruction and re-equipment of the railroad, and had not paid off some $700,000 of liens which he was bound to discharge, but that through fraud he had procured the issuance to him of the entire issue of bonds, aggregating $9,000,000, and of the entire common stock of $11,250,000, and $1,000,000 in preferred stock, and that the value of things done in the performance of his contract did not exceed $5,000,000, and that he had therefore received the bonds for about one-third of their par value, in violation of the laws of Ohio, Indiana, and Illinois. It was also averred that the bonds had been taken by their present holders subject to all defenses, and with full knowledge and notice of the facts which made them invalid. By Hamlin's cross bill, it was sought to have an account taken with Kneeland, and the amount received for the bonds ascertained, and the holders of such bonds limited to a recovery of the value received by the company. A lien second only to the valid bonds was asserted in behalf of the said preferred shares of stock. The lien claimed in behalf of the preferred stockholders arises under the terms set forth in the certificates issued to holders of such stock, which were in the form following:

'Toledo, St. Louis & Kansas City Railroad Company.

'No. . . . . Preferred Capital Stock. 10 Shares.

'This is to certify that James M. Quigley or bearer is entitled to ten shares, of one hundred dollars each, of the preferred nonvoting capital stock of the Toledo, St. Louis & Kansas City Railroad Company. This constitutes a lien upon the property and net earnings of the company next after the company's existing first mortgage. It does not entitle the holder to vote thereon. After the first day of January, 1888, it is entitled to and carries interest at the rate of 4 per cent. per annum, payable semiannually, represented by interest coupons attached to this certificate. Such interest is only payable out of the net earnings of the company after the payment of interest upon its existing first mortgage bonds, and the cost of maintenance and operation. A statement showing the business of the company for the half of its fiscal year next preceding shall be exhibited at the office of the company in New York, to the holder of this certificate, at the maturity of each interest coupon, and the net earnings applicable to such interest shall be reckoned for such period. Such interest is not to accumulate as a charge, and the coupons representing unearned interest must be surrendered and canceled on the payment, in whole or in part, of a subsequently maturing coupon. At any time after the first day of January, 1888, this certificate may be converted into the common capital stock of the company. If not converted then, to become a preferred 4 per cent. noncumulative stock. The company will create no mortgage of its main line other than its first mortgage, nor of any part thereof, except expressly subject to the prior lien of this certificate, without the consent of the holders of at least two-thirds of this stock present at a meeting, of which reasonable personal notice must be given to each registered stockholder, and by publication for at least three successive weeks in two leading daily papers, newspapers published in the cities of New York and Boston. One-third of the entire issue of this stock, present in person or by proxy, shall constitute a quorum. nor will the company increase the issue of these certificates of stock without

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