United States Trust Co. of New York v. Chicago Terminal Transfer R. Co.

• Citation: 188 F. 292
• Decision Date: 11 April 1911
• Docket Number: 1,693.
• Parties: UNITED STATES TRUST CO. OF NEW YORK et al. v. CHICAGO TERMINAL TRANSFER R. CO. et al. BRAINARD et al. v. SAME.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

188 F. 292

UNITED STATES TRUST CO. OF NEW YORK et al. v. CHICAGO TERMINAL TRANSFER R. CO. et al.

BRAINARD et al. v. SAME.

No. 1,693.

United States Court of Appeals, Seventh Circuit.

April 11, 1911

[Copyrighted Material Omitted]

Charles S. Holt and George Welwood Murray, for appellants.

Herbert R. Preston, William J. Calhoun, and James M. Sheean, for appellees.

Before GROSSCUP, BAKER, and SEAMAN, Circuit Judges.

BAKER Circuit Judge.

Two appeals are presented in the one record.

I. The first predicates error on the court's refusal to allow appellants as owners and representatives of common stock in the Terminal Company to intervene after foreclosure decree in the suit of the Trust Company, mortgagee, against the Terminal Company, mortgagor, the Baltimore & Ohio Railroad Company, lessee of part of the mortgaged premises, and others.

Default in paying interest on the $15,140,000 of bonds occurred in January, 1905; suit was begun in February, 1906; a receiver was appointed in April, 1906; and the foreclosure decree was entered in February, 1907. The decree provided that the purchaser should have six months in which to elect whether or not he would adopt the Baltimore & Ohio and other leases.

In March, 1907, the Baltimore & Ohio filed its petition for leave to redeem as lessee and to be subrogated to the rights of complainant. The stockholders had knowledge of this petition, appeared in court by counsel, and (though stating orally that the lease was fraudulent and had greatly damaged the Terminal Company) agreed to the entry of an order on April 16, 1907, that the Baltimore & Ohio Company might redeem by the payment of the amount theretofore decreed, with subsequently accruing interest, and that upon such payment the company should become entitled to all the legal and equitable rights of the bondholders. The order, however contained the following proviso:

'This order is expressly made without prejudice to the rights of the Chicago Terminal Transfer Railroad Company, or the receiver of said company, or any stockholder of said company hereafter permitted by the court so to do, to contest the validity or effect of the lease of April 1, 1903, between the Chicago Terminal Transfer Railroad Company and the Baltimore & Ohio and Chicago Railroad Company and the Baltimore & Ohio Railroad Company, as fully and freely in all respects as if this order had not been made. Nor shall the entry of this order be held at any time or in any proceedings hereafter, as determining the validity or effect of said lease, and is expressly made without prejudice to the right of the company or the receiver of the company or the stockholders of the company to litigate all questions raised by the answer of the Chicago Terminal Transfer Railroad Company. The entry of this order shall not be held as a determination by the court as to whether said amount of money so to be paid by the said Railroad Company shall be payment or as a redemption. But no decree hereafter entered in adjudicating any controversy between the Chicago Terminal Transfer Railroad Company, its receiver or stockholders, and the Baltimore & Ohio and Chicago Railroad Company and the Baltimore & Ohio Railroad Company shall affect or impair the subrogation under this order of the said railroad companies or the one making payment hereunder to the rights of the bondholders of the Chicago Terminal Transfer Railroad Company or their or its right to collect the amount of the decree heretofore entered in this cause with interest thereon, in the same manner and with the same rights as the original bondholders would have had.'

On May 16, 1907, the Baltimore & Ohio filed a petition that the foreclosure decree be amended so that the sale should be subject to their lease instead of giving the purchaser a six months right of election.

On June 24, 1907, representatives of the stockholders' protective committee filed a petition for leave to intervene for the purpose of setting forth the fraud in connection with the Baltimore & Ohio lease. This petition is not copied in the record, but is referred to in the present petition as being of the nature just stated. It was never called up for action. The excuse is given that negotiations were pending between the Baltimore & Ohio and the committee for the purchase of the stock controlled by the committee. But reference to the exhibit attached to the present petition shows that the negotiations (which were later consummated) related only to the purchase of preferred stock.

Claiming that the Baltimore & Ohio's purchase of their preferred stock was only a 'partial settlement' and that the situation required or justified an abandonment of their first petition, the stockholders filed a second petition on February 3, 1909. The court entered an order on April 17, 1909, denying them leave to intervene. This petition set forth a conspiracy, alleged to have originated with Harriman and associates, to ruin the Terminal Company. The charge was that the conspirators obtained control of the management of the Terminal and Baltimore & Ohio Companies, and with great profit and advantage to themselves, caused the Terminal Company to make the lease in question to the Baltimore & Ohio at a shockingly inadequate rental; that the conspirators intended that the insolvency of the Terminal Company should result; that the Terminal Company had consequently suffered not only loss of rental but all the damages that flowed from the default and foreclosure. One paragraph from this second petition will illustrate its scope and object:

'That the Baltimore & Ohio, being party to said fraud and conspiracy immediately and directly resulting in the default on the bonds and in the foreclosure suit, which bonds are now owned by the Baltimore & Ohio, is by reason of such fraud and conspiracy not entitled to further prosecute said foreclosure proceedings in a court of equity until it has purged itself of said fraud and conspiracy and accounted and paid to the Terminal Company the damages which have been suffered by the Terminal Company as the result of said fraud and conspiracy; that this honorable court, however, should retain jurisdiction of the subject-matter, ascertain the damages suffered by the Terminal Company, direct the payment thereof to the Terminal Company or its receiver, and permit the Terminal Company or its receiver to pay the Baltimore & Ohio the overdue interest on the bonds and reinstate the bonds and mortgage to their original position, as the result of which the Terminal Company will be again solvent, able to conduct its public functions and duties and to promptly meet the interest thereafter accruing upon its mortgage debt.'

On October 27, 1909, the Baltimore & Ohio filed a motion for leave to withdraw its petition of May 16, 1907, to modify the decree, and for directions to the master to sell under the decree as it stood. This motion was granted the next day.

On October 6, 1909, the stockholders had moved for leave to file another intervening petition. The hearing of this motion was set for November 9, 1909. What the form of the proposed petition was does not appear from the record. After the Baltimore & Ohio's action of October 27, 1909, the petition was tendered in its present form, and leave to intervene was denied on January 5, 1910, by the order now on review. Outside of averments of the change in attitude of the Baltimore & Ohio on October 27, 1909, this petition, on comparison with the second, is found to be the same in substance and effect. It counts on the same fraud and conspiracy and likewise seeks to vacate the foreclosure decree, cancel the lease, wipe out the default by means of an accounting of damages, and restore the status which the Terminal Company prior to the conspiracy had enjoyed as a going concern. It admits that the stockholders were aware of the fraudulent transactions therein set forth ever since the beginning of the foreclosure proceedings in February, 1906.

Applications for leave to intervene are of two kinds. In one the applicant has other means of redress open to him, and it is within the court's discretion to refuse to incumber the main case with collateral inquiries. In the other the applicant's claim of right is such that he can never obtain relief unless it be granted him on intervention in the pending cause. In this latter class the right...