Winthrop v. Fellows

• Decision Date: 05 August 1915
• Citation: 230 F. 702
• Parties: WINTHROP et al. v. FELLOWS, Atty. Gen., et al.
• Court: U.S. District Court — Eastern District of Michigan

230 F. 702

WINTHROP et al. v. FELLOWS, Atty. Gen., et al.

United States District Court, E.D. Michigan, Southern Division.

August 5, 1915

Cadwalader Wickersham & Taft and Geller, Rolston & Horan, all of New York City, and Frank H. Watson, of Detroit, Mich. (George W Wickersham, Henry W. Taft, Edwin P. Grosvenor, Frederick Geller, and Edward H. Blanc, all of New York City, of counsel), for complainants.

Grant Fellows, Atty. Gen., and David H. Crowley and L. W. Carr Asst. Attys. Gen., for defendants.

Before KNAPPEN and DENISON, Circuit Judges, and SESSIONS, District Judge, sitting under section 266 of the Judicial Code (Act March 3, 1911, c. 231, 36 Stat. 1162 (Comp. St. 1913, Sec. 1243)).

PER CURIAM.

The Farmers' Loan & Trust Company is trustee under the consolidated mortgage given by the Pere Marquette Railroad Company in 1901. The individual complainants are holders of bonds secured by that mortgage and by the later refunding mortgage of 1905 (or by both of these mortgages), as well as by one or more of certain divisional mortgages antedating the consolidated mortgage. Two of the complainants are also holders of stock of the Pere Marquette Railroad Company. The bill attacks the two-cent passenger fare provision of the 1907 and 1911 amendments to the Michigan railroad statute (P.A. Mich. 1907, p. 59; P.A. mich. 1911, pp. 476-478) as confiscatory.

The present Pere Marquette Railroad Company was organized in December, 1907. At that time the statute of 1907 which is attacked was in force, and was a part of the act under which the railroad company was incorporated, and thus constituted a material part of its charter. The amendment of 1911 did not change or affect the rates of fare which the Pere Marquette was permitted to charge for the transportation of passengers. It follows that the railroad company, its stockholders, as such, and all claiming under it by right of representation are effectually estopped to question the validity of the statute here under consideration. Having sought and accepted the rights and privileges thereby granted and conferred, they must perform the duties and obligations therein imposed. Grand Rapids & Indiana Ry. Co. v. Osborn, 193 U.S. 17, 24 Sup.Ct. 310, 48 L.Ed. 598; Commissioner of Railroads v. G.R. & I. Ry. Co., 130 Mich. 248, 89 N.W. 967; Interstate Ry. Co. v. Massachusetts, 207 U.S. 79, 28 Sup.Ct. 26, 52 L.Ed. 111, 12 Ann.Cas. 555. The last word upon this subject is found in the decision of the Supreme Court in the very recent rate case of Northern Pacific R.R. Co. v. North Dakota, 236 U.S. 585, 35 Sup.Ct. 429, 59 L.Ed. 735:

'As a corporation, the owner is subject to the obligations of its charter. As the holder of special franchises, it is subject to the conditions upon which they were granted.'

Complainants have invoked the principle declared in Reagan v. Farmers' Loan & Trust Co., 154 U.S. 362, 367, 14 Sup.Ct. 1047, 38 L.Ed. 1014, Id., 154 U.S. 420, 14 Sup.Ct. 1062, 38 L.Ed. 1031, and Reagan v. Mercantile Trust Co., 154 U.S. 413, 414, 418, 420, 14 Sup.Ct. 1060, 1062, 38 L.Ed. 1028, 1030, that the trustees under a railroad mortgage, whose security extends, as here, to franchises and income, have an equitable interest in the fair earnings of the road, and are entitled to maintain suit to avoid the destruction or impairment of their security through the enforcement of confiscatory rates of fare.

We are concerned with this question only so far as it may apply to the Farmers' Loan & Trust Company as trustee under the consolidated mortgage. The trustees of the prior divisional and subsequent refunding and other mortgages have not been made parties, and, upon this record, cannot be represented by individual bondholders. It does not appear that the trustees have refused or that they are unwilling to act. The case is not within federal equity rule 38 (198 F. xxix, 115 C.C.A. xxix), for here the mortgage trustee is normally the official representative of the bondholders. The trustee under the consolidated mortgage being properly before the court, it is immaterial whether the individual holders of bonds secured by that mortgage are properly joined with the trustee as parties plaintiff.

Confining the inquiry to the rights of the consolidated mortgage bondholders: The case presented differs from the situation in the Reagan Cases in the fact that there the railroads were under no disability to attack the rate statutes under consideration and joined in the prayer for relief, while here the railroad company is estopped from complaining of the rates, and defendants object that the mortgage bondholders are asking the court to compel the railroad company to do that which it cannot lawfully do. Another difference is that the Reagan Cases involved the whole schedule of rates, passenger and freight, and so affected the entire railroad income, while here only a fraction of the income is involved.

We think, however, that in view of the frame of the bill and the facts to which we shall presently call attention it is unnecessary to consider the propositions involved in this contention; and we must not be understood as expressing or intimating any opinion thereon. It will be time enough to consider them when, if ever, the record is such as to make their decision necessary. We shall for the present assume, for the purposes only of this opinion, that upon a suitable bill and upon a suitable showing the consolidated mortgage bondholders would be entitled to complain of a passenger rate found to be in fact confiscatory.

This situation, however, is presented: The consolidated mortgage is in process of foreclosure in this court. The Farmers' Loan & Trust Company, as trustee, has elected to declare the mortgage and the bonds secured thereby presently due and payable. By so doing it has radically changed the character of its security and of its dependent rights. Before such election and declaration the mortgage trustee and bondholders were entitled to periodical payments of interest upon their bonds for upwards of 35 years to come, and thus had a direct interest in the revenue of the railroad, from which their interest would be payable. They are now entitled to the immediate payment of their bonds, and not to future installments of interest. Their mortgage has ceased to be primarily a future interest-bearing security, and has become a present investment, whose value depends entirely upon the amount of money which may be realized from a present sale of the mortgaged property. The consolidated mortgage and all prior incumbrances, with interest, amount to less than $45,000,000.

An important (and, if decided in the negative, a controlling) question presented by the motion for preliminary injunction thus is: Do the bill and the supporting affidavits show that unless the receivers are permitted, during the pendency of this suit, to put into force the statutes existing previous to the 1907 amendment, enough cannot be realized upon the foreclosure sale to pay in full the consolidated mortgage bonds after satisfying the antecedent liens, and, as incidental to the question just stated, that the putting of such higher rates in force would directly benefit the consolidated mortgage bondholders. As to these questions, we think the burden of proof rests upon complainants.

The bill is framed largely upon the theory that the railroad company is entitled to earn a fair return upon its capital devoted to its intrastate passenger business, and that the statutory rates in question are practically confiscatory of that investment. It is obvious that such consolidated mortgage bondholders, being now interested only in realizing their mortgage debt, are not concerned with the sources of the railroad's income, except so far as such income is necessary to the collection in full of the mortgage debt; in other words, the bondholders cannot get relief by merely showing that passenger rates are confiscatory. If their mortgage is collectible in spite of the alleged confiscatory rates, they are not concerned with that question. The case differs from the West Virginia Passenger Fare Case, 236 U.S. 605, 35 Sup.Ct. 437, 59 L.Ed. 745, and the North Dakota Case, 236 U.S. 585, 35 Sup.Ct. 429, 59 L.Ed. 735.

Do the bill and affidavits allege that unless the existing statutory passenger rates are enjoined pending suit the consolidated mortgage bonds cannot be collected in full? The bill alleges that the 'fair and present value of the physical properties' (exclusive of franchises and good will) of the entire Pere Marquette Railroad system is $78,545,241, and of that part of the system in actual use for railroad purposes in the state of Michigan $68,609,709, and, further, that:

The 'fair value of all the railroad properties, franchises, and assets of every description of the Pere Marquette in the state of Michigan, which are now being used for the convenience of the public, exceeds the said sum of $68,609,709, and that the fair value of the railroad properties, franchises, and assets of every description of the Pere Marquette Railroad system, which are now being used for the convenience of the public, exceeds said sum of $78,545,241.'

Defendants urge that these allegations amount to an affirmative showing that the value of the railroad properties is more than sufficient to pay off the consolidated mortgage bonds and all antecedent lien; and, if this is so, complainants obviously have no right to the relief asked. We need not and do not decide this question, for we think the bill and affidavits taken together, fail to make it sufficiently appear that without the injunction asked for the mortgaged property will not yield sufficient to meet the full payment of the consolidated mortgage bonds. While there is a showing that the entire...