Louisville Nashville Railroad Company v. Schmidt

The three corporations directly or indirectly involved in this controversy are the Northern Division of the Cumberland & Ohio Railroad Company, the Louisville, Cincinnati, & Lexington Railway Company, and the Louisville & Nashville Railroad Company. In order to abbreviate we shall refer to them respectively as the Cumberland & Ohio, the Cincinnati & Lexington, and the Louisville & Nashville.

On July 2, 1879, the Cumberland & Ohio mortgaged its road to secure its certain negotiable bonds.

On July 28, 1879, the Cumberland & Ohio leased its road for thirty years to the Cincinnati & Lexington. The lease provided that if the earnings of the Cumberland & Ohio proved inadequate to pay the interest on the bonds secured by the mortgage above referred to, the lessee, the Cincinnati & Lexington, would 'supply the deficiency so far as it may be done by appropriating the net earnings, or so much as may be needed, on its own lines, which may accrue by reason of business coming to it from or over said first party's line.' The lease provided that the lessee, the Cincinnati & Lexington, should not assign the contract without the consent of the lessor, the Cumberland & Ohio. Contemporaneously with the execution of the lease, and in order to secure the carrying out of the stipulation providing for the application of certain stated earnings of the Cincinnati & Lexington to the payment of the interest on the bonds of the Cumberland & Ohio, the former corporation executed a mortgage in favor of the bondholders of the Cumberland & Ohio, hypothecating the net earnings on the Cincinnati & Lexington arising from business coming from the leased line. Although the Cumberland & Ohio did not abandon its corporate life, and preserved its formal existence, all its railroad and appurtenances as a result of the lease passed from its own to the control of the Cincinnati & Lexington.

In November, 1881, the Cincinnati & Lexington conveyed all its property to the Louisville & Nashville, and made to the latter an assignment of the lease of the property of the Cumberland & Ohio. Despite the fact that the assignment of the lease was not approved by the original lessor, the Cumberland & Ohio, as provided in the lease, the Louisville & Nashville took control of both the roads of the Cincinnati & Lexington and Cumberland & Ohio, and operated the same, reaping all the revenues of every kind arising therefrom. In 1885, default having supervened in the payment of the interest on the bonds of the Cumberland & Ohio, issued and secured as above stated, the trustee under the mortgage commenced proceedings against the Cincinnati & Lexington to enforce the mortgage on net earnings derived from business of the Cumberland & Ohio. It is not denied that at the time the action was commenced the fact of the transfer of the property of the Cincinnati & Lexington and the assignment of the lease of the Cumberland & Ohio to the Louisville & Nashville was known to the trustee. However, the Cincinnati & Lexington was the only party made defendant. The relief sought was a discovery of the amount of net earnings derived from business coming from the Cumberland & Ohio, and a decree for the amount, when ascertained, for the benefit of the mortgage bondholders. A most protracted and hotly contested lawsuit ensued. The question of earnings coming to the Cincinnati & Lexington from business over the Cumberland & Ohio was thoroughly explored by reports, expert examination of books, testimony, etc., resulting in what is denominated by counsel for the plaintiff in error in their brief as a 'wilderness of figures.' At last a final decree was entered fixing the earnings which under the contract were attributable to the mortgage creditors of the Cumberland & Ohio, at the sum of $53,565.62, which the defendant was ordered to pay into court, with interest, by a day stated. The sum not having been paid, a rule was taken on the defendant to compel performance, and in response it was answered:

'That in 1881 it sold and conveyed, for a consideration paid at the time, all its property, rights, privileges, and franchises except the mere franchise to exist, and that it distributed the proceeds of such sale among its various stockholders, and since said time it has had no property, assets, or funds of any kind with which to comply with the order of this court, and it is therefore unable to pay said sum, or any other sum, for the simple reason that it has no property or assets with which to do it.

The sale referred to in this answer being that which had been made by the Cincinnati & Lexington of all its property, including the assignment of the lease held by it from the Cumberland & Ohio to the Louisville & Nashville. In reply to a rule taken on the defendant to report the amount of net earnings which had accrued subsequent to the period embraced by the decree for $53,565.62, the defendant said:

'States and shows to this court that it has not made any net earnings, or earnings of any kind, since the date aforesaid, on business coming to it from or over the Cumberland & Ohio road, nor has it made earnings of any kind, since it does not own any railroad or property of any character whatever, and has not since the date aforesaid.' Thereupon the plaintiff sought leave by an amended and supplemental petition to make the Louisville & Nashville a party defendant to the cause. Among others the following averments were contained in the petition:

'Plaintiffs state that prior thereto the said Louisville & Nashville Railroad Company had purchased and acquired, and at the time of said conveyance held, the capital stock of the said Louisville, Cincinnati, & Lexington Railway Company, and, as such stockholder, took and appropriated, and has ever since enjoyed, the whole purchase price of the Louisville, Cincinnati, & Lexington Railway Company and all its said properties.

'Plaintiffs state that after the execution of said deed of November 1, 1881, said Louisville & Nashville Railroad Company took possession of all the property of the Louisville, Cincinnati, & Lexington Railway Company aforesaid and of the property leased, as aforesaid, to said company, including the Northern Division of the Cumberland & Ohio Railroad Company aforesaid, and began to operate, and has ever since operated, said railroads and properties, and taken and appropriated to its own use the earnings thereof.

'Plaintiffs state that at all times since November 1, 1881, said Louisville & Nashville Railroad Company, subject to and in accordance with the provisions of said lease and mortgage and by virtue thereof, has operated the said Northern Division of the Cumberland & Ohio Railroad and the said Louisville, Cincinnati, & Lexington Railway and properties, and has made all the earnings mentioned and proved in the reports of the several commissioners in this case, and ascertained and adjudged in the several judgments of this court, and finally adjudged in the opinion and judgment of the court of appeals herein, all of which said earnings were spoken of by witnesses and by the courts aforesaid in said reports and judgments respectively as the earnings of the Louisville, Cincinnati, & Lexington Railway Company.

'Plaintiffs further state that the Louisville & Nashville Railroad Company at the time of its aforesaid purchase of the railroad and properties of the Louisville, Cincinnati, & Lexington Railraod Company actually knew all the provisions of the lease, mortgages, and contracts set up in the original petition in this suit, and actually applied net earnings accruing from said operation of said properties therein referred to, in accordance with said lease, mortgages, and contracts, from the time of its said purchase until the 1st day of April, 1883, and knew at all times, including the time during which this action has been pending, that it had operated said railroad and all the other property of said Louisville, Cincinnati, & Lexington Railway Company and of the Northern Division of the Cumberland & Ohio Railroad Company, and that it had received all the earnings which were made by said properties, and understood and recognized that the earnings mentioned in the petition referred to the earnings made in the operation of the railroad and properties of the Louisville, Cincinnati, & Lexington Railway Company and the Northern Division of the Cumberland & Ohio Railroad Company, and filed the answer in this case in the name of the Louisville, Cincinnati, & Lexington Railway Company, and filed all other papers which were filed herein on behalf of the defense, and itself employed counsel in this case to make defense in the name of the Louisville, Cincinnati, & Lexington Railway Company, and introduced all the witnesses who were introduced on behalf of the defense, of this action, and has been in court defending this action, and has controlled the defense thereof continuously from the time the summons on the original petition was served in this case on Milton H. Smith, who was its president, on the ___ day of _____, 1885, and from the time the said Louisville & Nashville Railroad Company caused the answer to said petition to be filed herein on the ___ day of _____, 1886.'

The leave to file was denied on the ground that it was too late to do so after judgment. This order, refusing to allow the amendment, was affirmed by the court of appeals of the state of Kentucky. That court, however, in its opinion intimated that the amendment was not necessary if the averments of the supplemental and amended petition were true, and that under the facts the Louisville & Nashville might be proceeded against by rule to show cause. 99 Ky. 148, 35 S. W. 135, 36 S. W. 168. Following the path thus pointed out by the court of appeals, a rule in the lower court was applied for to compel the Louisville & Nashville to pay the amount of the judgment. The court considered the suggestion which had been made, in the opinion of the court of appeals, as not binding on it, and hence declined to allow the rule on the ground that the Louisville & Nashville, not having been named as a defendant in the prooceeding, could not be by rule condemned to pay the judgment. The court of appeals reversed the order of the trial court, and directed the rule to issue as prayed for. The court in effect held that as the affidavit by which the rule was supported in substance charged that the Louisville & Nashville prior to and during the entire suit had operated the roads from which the revenues accrued which were in controversy, and that that corporation had in substance volunteered in the cause to defend the same in the name of the technical defendant; had carried on the defense through its own counsel; had paid all the expenses of the litigation, the officers of the corporation which was technically a defendant being the officers of the Louisville & Nashville,-therefore the Louisville & Nashville had had under the laws of Kentucky due notice of the suit, and ample opportunity to defend, in fact had actually carried on the defense, and could hence be condemned by rule to pay the judgment. The trial court thereupon entertained and issued the rule, which was served on the Louisville & Nashville. That corporation, for answer to the rule, said, among other things:

First. 'That it is not a party to this suit. It has not been named in any pleading in the case as a party, and there is no averment made in any pleading in the case against this respondent, or that is applicable to this respondent, and no judgment or order has ever been entered in this case against this respondent, and no process has ever issued against or ever been served on this respondent.'

Second. 'There has never been a time from the institution of this suit up to this time when this respondent could, with propriety, have filed an answer setting up its defenses against the alleged claim of the plaintiff, and to require it now to pay into court upon this rule the amount stated in the rule, or any other amount, would be to deprive this respondent of its property without due process of law, contrary to the Constitution of the United States in such cases made and provided.'

The answer then pleaded a set-off to the amount of $16,524.37, which it was claimed the Louisville & Nashville should be allowed if it was held bound to pay the judgment. The conclusion of the answer was as follows: 'Wherefore, having fully responded, this respondent prays that the rule herein be discharged.' The court, having expressed in a careful opinion its view that the Louisville & Nashville could not be condemned, by rule, because it had not been a technical party to the record, nevertheless, considering itself bound by the action of the court of appeals, made the rule absolute, and entered a decree against the Louisville & Nashville Railroad, condemning it to pay the judgment, subject to the set-off which had been pleaded in the answer to the rule, and this judgment was affirmed by the court of appeals of the state of Kentucky as a delay case. By an allowance of a writ of error the cause is now here for review.

Messrs. Helm Bruce, James P. Helm, and H. W. Bruce for plaintiff in error.

Messrs. John G. Simrall, Edmund F. Trabue, Temple Bodley, John C. Doolan, Benjamin F. Washer, and James S. Pirtle for defendant in error.

Mr. Justice White, after making the foregoing statement, delivered the opinion of the court: