Venner v. Farmers' Loan & Trust Co. of New York

• Decision Date: 19 November 1898
• Docket Number: 571.,570
• Citation: 90 F. 348
• Parties: VENNER v. FARMERS' LOAN & TRUST CO. OF NEW YORK. ADRIAN WATERWORKS CO. v. SAME.
• Court: U.S. Court of Appeals — Sixth Circuit

90 F. 348

VENNER v. FARMERS' LOAN & TRUST CO. OF NEW YORK.

ADRIAN WATERWORKS CO. v. SAME.

Nos. 570, 571.

United States Court of Appeals, Sixth Circuit.

November 19, 1898

This case is an appeal from a decree dismissing the intervening petition of the appellant, Charles H. Venner, filed in a mortgage foreclosure proceeding, wherein the Farmers' Loan & Trust Company was complainant, and the Adrian Waterworks Company was sole defendant. The object of the foreclosure suit was to enforce a mortgage made August 1 1888, by the waterworks company to the Farmers' Loan &amp Trust Company, as trustee, to secure an issue of 200 bonds of $1,000 each, with interest coupons maturing semiannually. There was default in payment of interest, which precipitated the payment of the principal. Venner intervened in this suit for the purpose of asserting a claim of lien against the property of the waterworks company, superior to the lien of the mortgage, being foreclosed. The averments of his petition were substantially as follows:

(1) That in 1883 the municipal council of the city of Adrian Mich., in pursuance of chapter 84 of Howell's Annotated Statutes of Michigan, passed a resolution declaring that it was expedient to have constructed works for supplying the city with water, but that it was inexpedient for the city to build such works. Thereupon, one Solon L. Wiley and his associates organized a corporation, in pursuance of the authority conferred by the statute recited above, for the purpose of supplying said city with water, called the Adrian Michigan Waterworks, hereafter called the 'Old Company.' The said company, after due organization and the acquisition of the supposed necessary site, made a mortgage upon its property to secure means to carry out its purposes by an issue of 7 per cent.bonds, aggregating 145 of $1,000 each, interest payable semiannually, with the ordinary provision for foreclosure in default of payment of either interest or principal. The trustee in this mortgage was the Boston Safe & Deposit Company. It is then averred that this old company entered into a contract with the city of Adrian to supply it with water. In the performance of this contract, bitter disputes arose between the company and the city, which resulted in a supplemental contract, made in November, 1887. It is then averred that no interest was ever paid on the bonds of said old company, and that in March, 1888, the trustee under the mortgage instituted foreclosure proceedings in the circuit court for the Eastern district of Michigan, and took possession, as mortgagee, of the property and works of the company, and continued to operate the same, and collect rentals and water dues from the city of Adrian and individual consumers until final foreclosure sale, in 1891. Petitioner then charges that neither the said old company nor the said mortgagee in possession had the means to make the extensions and improvements necessary to carry out the supplemental contract with the city, and that he was applied to, to furnish the money, and did supply the money, and procured and constructed the necessary plant, machinery, and reservoirs, 'under an arrangement with the said Boston Safe & Deposit Company,' by which the money so supplied was to be a preferential claim in the said foreclosure proceedings, and first paid out of the proceeds of sale, and by which the costs of all such additions and improvements were to be a first lien, not only upon the additions and improvements, but upon all the property of the said old company, in preference to said mortgage so being foreclosed. It is further averred that this arrangement was submitted to the said circuit court, and was approved and sanctioned by a decree of date November 6, 1890, ordering a sale of said mortgaged property, including the additions and improvements made by said Venner, and that out of the proceeds of sale the moneys so expended by said petitioner should be paid in preference to the claims of the mortgage bondholders. The cost of the said Venner plant, as fixed by said decree, was $41,217.18. In addition to this, petitioner avers that he furnished 'to the master in chancery in said suit about $20,000, with which to pay taxes and other necessary expenses, which sum was also agreed between said Boston Safe & Deposit Company and this intervener, to be also a lien prior to the said bond issue and a senior incumbrance upon said property.

The petition then proceeds as follows: '(7) Prior to the making of the said decree in the said foreclosure suit in this court, and in anticipation of the sale which would be made under it, it was determined by all parties concerned to reorganize the said mortgagor corporation, in order to refund the bonds at a lower rate of interest and to make provision to fund the interest which was unpaid, and to pay interest upon a new bond issue, which would take the place of the said former bond issue; and thereupon it was arranged by and between this intervener and all parties concerned that he should take up and carry through the said scheme of reorganization. (8) To that end, it was arranged that this intervener should act as trustee and agent for all parties concerned, and should buy in the said mortgaged property at the foreclosure sale in this court, and should convey it to a successor corporation, which should be organized under the said chapter 84 of Howell's Statutes, which successor corporation should issue two hundred twenty-year 6 per cent. bonds, to be exchanged for the old bonds, which were 7 per cent., issued by the original corporation to the extent of one hundred and forty-five, the remaining fifty-five new bonds of the successor corporation to be used to provide funds to pay the said overdue interest upon the issue by the original corporation, and to pay the interest upon the new bonds of the successor corporation until it should be in condition to pay interest out of earnings; and it was agreed that the said new bonds of the successor corporation should stand in the shoes of the old bonds of the original corporation with respect to being junior to the equitable lien of this intervener for the money representing that which was supplied by him as aforesaid to make the mortgaged property of value, and to give it running power, and to enable it to perform its duties to the public, in accordance with the intent of the statute aforesaid.'

It is then averred that 'this scheme of reorganization was substantially according to the reorganizing provisions of the General Statutes of Michigan'; that articles of incorporation were duly drawn and signed, with same capital stock as original corporation; that the subscribers to said capital 'were mere dummies,' having no intention or means to pay; and that 'nothing was ever paid or intended to be paid,' all parties regarding the new organization 'as the same as the original'; and that no new corporation could be validly organized, no new resolution having been passed by the council of Adrian, which the petition claims was an essential prerequisite to the valid organization of any new waterworks corporation, under chapter 84, How. Ann. St. Mich. This new company was organized July 24, 1888, and was called the Adrian Waterworks Company, but will hereafter, for brevity, be called the 'New Company.' It is then stated that, acting upon 'the theory that the successor corporation was the original corporation,' a new mortgage was made, the one now being foreclosed. It is stated that the only property held by the new company when it made said mortgage was a piece of land known as the 'Lawrence Land,' purchased and paid for by petitioner Venner, 'not adapted for waterworks, and distinct from the actual waterworks of the original corporation, and never used or intended to be used for waterworks.' The mortgage thus made bears date August 1, 1888, and secured the issue of $200,000 in bonds heretofore more specifically described. It is then averred that in January, 1891, petitioner, 'acting as agent and trustee for the original and successor corporations, and for both sets of mortgagees and bondholders, thus carrying out the plan of reorganization, bid in all the said waterworks plant at the foreclosure sale by the Boston Safe & Deposit Company against the original corporation,' for $127,000, and paid for same with the securities of the old company in part, and the remainder in money, and by receipting the master for the preferential sums allowed him under the decree of sale. The securities of the old company thus used, the petition says, consisted in bonds and coupons secured by the foreclosed mortgage held by him 'as trustee,' having been procured in 1888 in exchange for the bonds of the new company. Two days after receiving a conveyance from the master, petitioner avers that, 'to carry out the said plan of reorganization,' he conveyed the said property, by quitclaim deed, to the new company. He avers that 'no consideration was agreed to be paid by the successor corporation to this intervener, and no consideration was actually paid by the successor corporation to this intervener for the said property and franchises, because it was understood by all parties concerned that the said conveyance was a mere form to carry out the schemes of reorganization, and that the senior incumbrance of this intervener still remained upon the said property in the hands of the successor corporation receiving said quitclaim deed. The successor corporation took the said property and franchises conveyed to it by intervener, charged with this intervener's equitable lien and senior incumbrance; and when the said property and franchises passed under the Farmers' Loan & Trust Company's mortgage, if they did ever pass under said mortgage, they did so pass being so charged with the...