Morgan's Company v. Texas Cent Railway Company

The Texas Company answered, admitting in general the allegations of the bill, but submitting to the court that the bill was destitute of equity. The Metropolitan Trust Company filed its answer August 17, 1885, admitting the allegations in respect to the mortgage executed to it as trustee on October 1, 1884, and that it refused to certify bonds thereunder until the completion of the recording of the mortgage. The Farmers' Loan & Trust Company answered, September 24, 1885, and denied, on information and belief, the allegations of the bill in respect to the advances by the Houston Company to the Texas Company, and also that the indebtedness stated in the bill was a first lien upon the income or property of the Texas Company, and averred that, if any advances were made, they were payments which, in equity, should be imputed to complainant; that the Houston Company and the complainant are the owners of the Texas Company and of its property, holding the same as a mere appendage to the Houston road, and the mortgages executed by the Texas Company were in fact mortgages procured to be made by the parties controlling the complainant and the Houston Company, and, in various averments, recited the facts and circumstances attending the formation of the Morgan Company, its ownership of the Houston Company, and the creation of the Texas Company, and of the Southern Development Company, upon whose application receivers had been appointed for the Houston Company in the suit referred to in complainant's bill. It alleged that the complainant in that suit and in this represented practically and substantially the same interests, the two complainant corporations being owned and controlled by the same persons, and that all the proceedings and acts of the defendant, the Texas Company, from its organization are, in fact and law, those of the complainant, and to be equitably imputed to the complainant. And it denied that the Texas Company had used its earnings for making payment of coupons upon its first mortgage bonds, and which the holders were not entitled to receive, and asserted that the bill, as framed, was open to demurrer, for reasons given. Subsequently, the Farmers' Loan & Trust Company, upon leave duly granted, filed its cross-bill in the cause against complainant and its co-defendants. This set up the mortgages, and averred that the mortgagor had failed to pay the interest on all the bonds secured by the mortgages respectively, which became due and payable May 1, 1885, and all interest since that date; that payment of such

interest had been duly demanded; that said default had continued 60 days after such demand, and thereupon the principal of all the bonds was and had become immediately due and payable; that the lien of the deed of trust to the Metropolitan Company was subsequent and subsidiary to the lien of the trust-deeds or mortgages made to complainant; and that, if the claim of the Morgan Company, as set forth in its bill, was a lien at all on the property, it was subject and inferior to the liens of the mortgages to complainant. The bill alleged the insolvency of the Texas Company, and the insufficiency of its net earnings to pay the floating debt, and discharge the interest on the mortgage bonds, and concluded with the usual prayers for the appointment of a receiver, an injunction, and an account of the bonds, and the amounts due the holders, and for a decree that the amounts so found due shall constitute a first lien on the property; that the railway company pay into court the amount found due, together with costs; and that, in default of such payment, the property and franchises of the railway company be sold; and for judgment for any deficiency. The fourteenth paragraph of this crossbill averred that the Texas Company had made default upon the first deed of trust held by it, by failing to pay the interest on the bonds which became due and payable on the 1st day of May, 1885; that payment of such interest had been duly demanded, 'and said default had continued sixty days after such demand;' and that 'thereupon the principal of the said bonds secured by said last-mentioned mortgage or deed of trust is and has become immediately due and payable, and the same and all said interest so in arrears as aforesaid remains still due and unpaid.' Paragraph 15 made the same averments as to the second mortgage held by the cross-complainant. The Texas Company, in its answer, admitted the allegations of the bill of the Farmers' Loan & Trust Company as to the execution of the mortgages, and admitted the fourteenth paragraph of the bill to be true, except that it set up, by way of explanation, that its roads and property were placed in the hands of receivers on May 14, 1885, on the bill filed by the Morgan Company. It admitted the allegation in the fifteenth paragraph to be true, as stated. The Morgan Company, in its answer, reiterated all the averments in its original and amended bills, and claimed that it had a lien upon the property of the Texas Company, and that, in any foreclosure proceedings, it was entitled to be paid out of the proceeds of sale by preference over the mortgage creditors. It admitted that the matters set forth in the fourteenth and fifteenth paragraphs of the cross-bill were true. The Metropolitan Company admitted the allegations of the cross-bill respecting the mortgage executed to it, as trustee, by the railway company, in October, 1884, and alleged that no bonds had, to its knowledge or belief, been issued secured by the lien of the said mortgage.

Replications were filed and proofs were taken.

Evidence was given of the issuing of the bonds under the two mortgages to the Farmers' Loan & Trust Company, and of a request to that company for the institution of proceedings to foreclose the trust-deeds, but not on behalf of the holders of 75 per cent. of the bonds of either issue. The three trust-deeds or mortgages referred to in the original bill, the 16 notes, amounting to $761,992.04, and the certificates of the Texas Company, were also put in evidence, and a statement from the books of the Texas Company, as follows: "TEXAS CENTRAL RAILWAY COMPANY.

"Statement of Gross Earnings, Expenses of Operation, and Charges against Income

Intrest Total charge

Gross Operating Taxes. on bonded against in- Deficit.

earning. expences. debt. come.

To Dec. 31, 1830 $102,733.76 $75,360 $79.67 $54,250.00 $129,689.92    $26,916.16

"  "   "   1831 247,707 02 115,426 83 3,603 24 140,875 00259,905 07

"  "   "   1882. 205,887 32 157,896 73 9,626 79 218,680 00386,203  52

"  "   "   1883. 290,262 45 248,310 73 13,440 32 237,930 00499,681   05

" Sept.30 1884. 210,312 78 177,302 88 14,337 40 237,930 00429,570 2 8

Total $1,056,943 33 $774,279 42 $41,087 42 $889,665 00$1,705,049 8 4

Interest other than on bonded debt......70,098 858,106 51

Total deficit......$718,205 36

70,098 85

---

$648,106 51

The Morgan Company called as a witness E. W. Cave, treasurer for the receivers, and treasurer for the Texas Company in 1880, 1881, 1882, 1883, and 1884, and also of the Houston Company, and produced the resolution of the directors of the Houston Company of December 1, 1884, pledging the notes and certificates to the Morgan Company, and the receipt of the latter therefor. Mr. Cave testified that the notes were given by the Texas Company to the Houston Company in settlement of the indebtedness of the former to the latter, which arose from cash advances and payments made by the Houston Company for the benefit of the Texas Company; that the account between the Houston Company and the Texas Company was adjusted and closed about the last of October, 1884; that there was no year during the five years mentioned when the Texas Company earned enough to pay its operating expenses and fixed charges. including taxes; that the funds advanced were used in paying the operating expenses of the Texas Company for material and supplies, for maintenance, and such things as had to be done to improve or keep the property up, and some portion of it may have been applied to the maintenance of its security by the payment of interest on its bonds; that some of the money necessarily went for that, because whatever money was used by the company out of its own gross earnings from its general business, for the payment of interest, left a deficit in its operating expenses and maintenance, which had to be covered by advances; that the officers of the Houston Company had of the Texas Company were practically the same; that no salary was paid to the officers of the Texas Company, which was organized in the interest of the Houston Company; that the Houston Company owned about two-fifths of the Texas Company's stock, and the Morgan Company the other three-fifths; that the directors of the two companies were mainly the same, and the Morgan Company owned a majority of the stock of the Houston Company; that the bonds that were issued under the mortgage to the Farmers' Loan & Trust Company were negotiated by the president of the Houston Company; that the Texas Company was practically a part of the Houston Company, and the latter company collected its revenues and accounts; that the money was disbursed from the moneys that were collected, and only as the deficit arose and increased were the advances made by the Houston Company; that the road was operated practically as a division of the Houston Company; that the officers of the Houston Company acted as officers of the Texas Company; that the revenues came in and went into accounts, and then those accounts went on to the books of the Texas Company where matters were not kept direct; that the earnings went into the books of the Houston Company, and, when the Texas Company got into debt, the executive officers of the Houston Company advanced the money; that they were authorized to advance it, and the debts of the Texas Company were paid; that the Houston Company collected all the earnings of the Texas Company, and when the latter was short it received help; that that was the way this balance of nearly $762,000 arose, it being the balance of running account beginning from the time the road commenced to be operated as a road; that, when the settlement was made upo which these notes were issued, the account was brought down to date, interest calculated by the auditor of the Houston Company, understood and acknowledged, and a balance of interest struck, and the balance found to be as stated, about $762,000; that interest was computed on both sides; that there was a continual running account; that, when the Texas Company had funds and balances, it paid the interest on the bonds, and did not have to call on the Houston Company for funds, and whenever it did not have funds, as in the matter of interest or as in other matters, whatever balance was needed was supplied, but the Texas Company's coupons were paid by Cisco & Son, upon separate account, that firm being the fiscal agent of both roads. The following are questions to and answers of the witness: 'Question. The accruing funds, the income of the Central Company, was there any special use of its own funds, of its own earnings, towards paying running expenses rather than interest, or towards paying interest rather than running expenses, or was that all a matter or running account? Answer. It was all in one account, so far as the account of the Houston & Texas Central Railway Company was concerned, and whether the advances were made for one purpose or another they were charged so much cash; but the Texas Central Railway Company, of course, took cognizance of what it was used for. Q. So that whenever it was behindhand on its current indebtedness, and needed money, the Houston & Texas Central Railway Company paid it, and when it came to pay interest, and did not have funds, the Houston & Texas Central Railway Company paid it? A. The Houston & Texas Central Railway Company let it have the money.'

On the 12th of April, 1887, the circuit court entered its decree. The decree finds the execution and delivery to the Farmers' Loan & Trust Company of the two mortgages of September 15, 1879, and May 16, 1881, and of the mortgage of the 1st day of October, 1884, to the Metropolitan Trust Company; that the liens and claims of the Metropolitan Company and the beneficiaries under its trust are in all respects subsequent, subsidiary, and junior to the rights and equities of the Farmers' Company and its beneficiaries, both of the mortgages to the Farmers' Company being prior liens to the mortgage to the Metropolitan Company, the first as to the property therein described, and the second as to the entire property of the defendant, the Texas Company; that the Morgan Company has an equitable lien upon all the property of the Texas Company to the amount of $761,992.04, with interest from November 1, 1884, said lien, however, being junior and subordinate in all respects to the liens under the mortgage deeds of trust to the Farmers' Company; that in each of the mortgages it is provided that in case the Texas Company (defendant) shall fail to pay any of the interest on any of the bonds due under the mortgage at any time when the same may become due and payable, and said default shall continue 60 days after said demand, then and thereupon the principal of all of the said bonds shall become immediately due and payable; that the Texas Company was on May 1, 1885, and still is, insolvent, and unable to meet or payits obligations, including the coupons issued on its bonds secured by the said mortgages to the Farmers' Company, and maturing upon that date, and that it wholly failed to pay the same, and made default in the payment of all the coupons upon said bonds, and has not paid any of the said coupons which fell due November 1, 1885, or May 1, 1886, nor any coupons which matured since that date; that payment of said interest has been duly demanded, and said default has continued 60 days after such demand; and that the principal of all the bonds under both mortgages is and has become immediately due and payable. It finds the amount of principal and interest due on both sets of bonds, and that by reason of the default of the Texas Company to pay the interest and any of it, and by reason of other matters and things hereinabove alleged, the conditions of the mortgages and of each of them held by the Farmers' Company have been broken, and the said mortgages, and deeds of trust, and both of them, have become absolute, and the trustee is entitled to a decree for the sale of all the mortgaged property to satisfy the principal and interest of the said bonds; and the decree then orders, adjudges, and decrees that the principal sums have become due and payable, and that unless the defendant, the Texas Company, shall within 10 days pay into court the sum found due, with interest, and an amount sufficient to defray the costs, the equity of redemption of said defendant, and of all the parties to the suit, and of all the holders of bonds or other claims secured by the mortgage to the Metropolitan Company in or to the mortgaged property, shall be barred and foreclosed, and the mortgaged premises and property shall be sold to the highest bidder for cash, as provided. It further orders, among other things, that in case the amount of the bid shall be more than sufficient to pay the sums and amounts found and adjudged to the Farmers' Company, the overplus shall be applied to the payment of the sums decreed to be due to the Morgan Company; and provides for deficiency decrees in favor of the Farmers' Company and the Morgan Company.

From this decree separate appeals were prosecuted by the Morgan Company and the Texas Company. On behalf of the Morgan Company it is insisted that the court erred in adjudging that its claim was not in equity a lien and charge upon the property of the Texas Company, prior and superior in right to the lien of the mortgages of the Farmers' Company, and justly entitled to be paid out of the proceeds of the sale of the property in preference to the mortgage bonds, and in granting leave to the Farmers' Company to file the bill of complaint for the foreclosure of the mortgages, and rendering a decree thereon; and that, if it had jurisdiction to entertain the bill of the Farmers' Company, then it erred in proceeding to a decree for foreclosure and sale to pay the principal of the bonds upon a default in the payment of interest, without averring and proving that the bill had been filed for that purpose by the request of the holders of 75 per cent. in amount of the outstanding bonds. On behalf of the Texas Company, errors are assigned to the action of the court in entertaining the bill of the Farmers' Company, and rendering the decree of foreclosure and sale thereon, and also in adjudging the principal sums of the bonds to be due and payable, and indecreeing foreclosure and sale without proof of a request to the trustee, by the holders of 75 per cent. in amount of the bonds, to foreclose.

J. Hubley Ashton, for Morgan's L. & T. R. & S. S.C.o.

[Argument of Counsel from pages 185-189 intentionally omitted]

''Chas. H. Tweed'', for Texas Cent. Ry. Co.

Herbert B. Turner, for Farmers' Loan & Trust Co.

Mr. Chief Justice FULLER, after stating the facts as above, delivered the opinion of the court.