Northern Pacific Railway Company v. Boyd

The circuit court of appeals for the ninth circuit affirmed a decree subjecting the property of the Northern Pacific Railway Company to the payment of a judgment for $71,278, which Joseph H. Boyd had revived against the Coeur D'Alene Railway & Navigation Company. The record on this appeal is very lengthy and the transactions so overlap that any chronological statement would necessarily be confusing. It will conduce to clearness to refer first to those between the Coeur D'Alene and the Northern Pacific Railroad and then set out as succinctly as possible the facts connected with the foreclosure of the Northern Pacific Railroad and its purchase by the Northern Pacific Railway.

In 1886 the Coeur D'Alene Railroad & Navigation Company constructed a narrow gauge railroad from Burke, Idaho, on the Northern Pacific Railroad, to Old Mission. Spaulding, in 1887, brought suit in an Idaho court to recover $23,675 for work done and material furnished in building it. Owing to the inaccessibility of the county seat in which the territorial court was held, and the fact that the terms were generally devoted to criminal business, there was much delay in getting a hearing. At last there was a trial, lasting forty days; but the presiding judge died before making his findings and entering judgment. His successor having been of counsel for one of the parties, was disqualified, so that it was not until 1896 that Spaulding recovered judgment against the Coeur D'Alene. Boyd claimed that this judgment belonged to him; and learning that Spaulding had threatened to transfer the judgment, Boyd, in 1898, instituted a suit to establish his title. It terminated in his favor in May, 1901. When the appeal was dismissed, the judgment against the Coeur D'Alene was about to become dormant. Boyd thereupon (1903) began proceedings in Idaho to have it revived, and on October 23, 1905, obtained a judgment against the Coeur D'Alene Company for $71,278, being the original debt with accumulated interest and costs. An appeal was taken, which was dismissed, and thereupon Boyd, in September, 1906, brought in a state court this suit against the Northern Pacific Railroad and the Northern Pacific Railway Company, claiming that the railroad was liable for this debt of the Coeur D'Alene, and that the railway in turn was liable for this debt of the railroad. The case was removed to the United States circuit court for the eastern district of Washington.

The Coeur D'Alene Railway & Navigation

The Coeur D'Alene Railway & Navigation 33 miles in length. D. C. Corbin was president and controlled 5,100 shares, which constituted a majority of the stock, which had been increased to $1,000,000, and all of which was unpaid.

In 1888, while the Spaulding suit was pending, Corbin entered into a contract with the Northern Pacific Railroad in which he agreed to sell it his stock, stated to be full paid and nonassessable; to secure for it a lease of the Coeur D'Alene's property for 999 years and authority to issue $825,000 of mortgage bonds. The Northern Pacific was to pay the interest of 6 per cent on those bonds issued at the rate of $25,000 per mile on the 33 miles of road constructed, or to be constructed; and after a certain date to create and maintain a sinking fund for the redemption of the bonds at maturity; to pay for the value of material on hand, and $20,000 to cover amounts expended for surveys.

Corbin secured the adoption of resolutions authorizing the lease and the issuance of the bonds. On September 18, 1888, 5,100 shares of stock were transferred to the railroad, which entered into possession as lessee October 1, 1888, taking charge of all the matters relating to the Coeur D'Alene, including its litigation, although Corbin and the other officers did not immediately resign.

The resolution provided for the immediate issuance of $825,000 of bonds, $360,000 of which were to be retained to redeem the outstanding bonds for that amount. The agreement was silent as to what should be done with the remaining $465,000 of bonds, and the parties are at issue as to what use was, in fact, made of them. The railway insists that the records show that they were delivered by the mortgage trustee on October 29 and 30, 1888, upon the order of Corbin, president, part to him and part to another person. Boyd, however, contends that these bonds, $465,000, or their proceeds, were used to pay Corbin for the 5,100 shares of stock sold by him to the Northern Pacific Railroad, while the latter insists that the consideration for the transfer was, as stated in the contract, the railroad's guarantying the principal and interest of the bonds, and taking a lease of the property for 999 years, which provided for rental to be paid out of net earnings.

The evidence on this branch of the case is meager. On behalf of the defendant the records showed that on October 29 and 30, 1888, the bonds were turned over on the order of Corbin, president of the Coeur D'Alene Company. Corbin, who was an old man at the time of taking the testimony in 1907, stated that he received none of the bonds, but so much cash; that neither he nor his associates received any benefit from the mortgage, 'though I presume it was probably used to pay us. I know we got our money. . . . I do not think we received any bonds, unless possibly we might have received bonds with an agreement with somebody to take them off our hands and pay us the money, because I never had any bonds. . . . If they ever came into my hands at all, they just passed through my hands.'

A witness for the Northern Pacific, who had been its auditor in 1888, had no personal knowledge of the transaction, but testified that there was nothing on the books of the Northern Pacific which showed that it had ever received the $465,000 of bonds, or that it had ever paid anything for this stock. He did not think that the 33 miles of railroad cost $825,000, and supposed that the $465,000 of bonds went to Corbin and his associates. 'His rights and so on were worth something.'

In December, 1889, the railroad obtained, through Corbin, the remaining 4,900 shares of stock in the Coeur D'Alene, paying therefor $250,000. It changed the road from a narrow to a broad gauge at a cost of $150,000, and extended the line 16 1/2 miles at a cost of $750,000, and, as provided in the mortgage, issued $413,000 of additional bonds, being at the rate of $25,000 per mile. The cost of this extension, change in grade, and other betterments amounted to $910,000, or about $500,000 more than the Northern Pacific Railroad received from the sale of this last issue of $413,000.

The first twenty-one months after the lease the Coeur D'Alene's not earnings amounted to $176,000, and, as the lease provided that net earnings should be paid as rental, a dividend of 6 per cent was declared. Thereafter the earnings rapidly decreased and ultimately the books showed a loss. But the Northern Pacific Railroad, in accordance with the terms of the lease, paid the interest on the bonds until it was itself put in the hands of a receiver in 1893. He failed to pay the interest in 1895, and proceedings were instituted to foreclose the mortgages on the Coeur D'Alene Company. The property was sold under foreclosure in January, 1899, for $220,000, to the newly organized Northern Pacific Railway Company.

This left nothing for payment of Boyd's debt, and he insists that the lease and the diversion of the funds in purchase of Corbin's stock made the railroad responsible for the debts of the Coeur D'Alene, including his judgment. He further claims that the railway became liable for the payment of the same debt by virtue of new and independent proceedings now to be stated, under which the Northern Pacific Railway in 1896 acquired the property of the Northern Pacific Railroad.

On August 15, 1893, Winston and others filed in the United States court for the eastern district of Wisconsin a creditors' bill against the Northern Pacific Railroad, alleging that it was insolvent, its mortgage bonds amounting to about $140,000,000 and its floating debts to $11,000,000, and praying for the appointment of a receiver to preserve the property as an entirety, and to prevent it from being dismembered by separate sales under attachments and other liens. The company owned or controlled 54 subsidiary companies, and main and branch lines 4,700 miles in length. It also owned or was entitled to receive about 40,000,000 acres under land grants. There were six mortgages-some on one part of the property, some on another-and a general mortgage on the entire railroad lines. It also owned a large body of land which was not encumbered by liens. Interest had been paid on some of the bonds, but there had been a default in the interest on those secured by the junior mortgages.

Shortly after the filing of the creditors' bill a suit was brought in the same court by the trustees to foreclose these latter mortgages. The cases were consolidated and the receivership continued under the consolidated causes. The railroad demurred. As the road ran through several states, there were many questions of conflicting jurisdiction which were not settled until January 31, 1896, so that, except for administrative orders, no steps were taken in the litigation proper.

The representatives of the stockholders intended to resist the foreclosure, and while recognizing the superior claim of the bonds, advised that 'if properly protected, stockholders can secure equitable terms in any reorganization.' There were also representatives of the bondholders, and ultimately the two interests agreed upon a plan, the terms of which were stated by the reorganization committee which, March 16, 1896, issued a circular to 'the holders of bonds and stocks issued or guaranteed by the Northern Pacific Railroad.' This circular outlined a plan under which all of the stocks and bonds of the railroad were to be transferred to a new company (the present Northern Pacific Railway Company), which was to purchase the property of the railroad, issue new bonds, part of which were to be sold to raise money with which to discharge receivers' certificates, purchase needed equipment and make necessary betterments. The balance was to be issued in exchange for the bonds of the old company.

The plan also contemplated the issuance of preferred and common stock, part to be used in paying debts of the subsidiary companies, for which the Northern Pacific Railroad was liable, part for the expenses of the reorganization, and the balance to be issued in exchange for the outstanding stock of the Northern Pacific Railroad. Under the proposed plan the holder of $100 of preferred stock in the old company, upon paying $10 per share, was to receive $50 of preferred and $50 of common stock in the new company. For each $100 of common stock the holder was to receive one share of common in the new corporation upon paying $15 per share. The aggregate of these cash payments on stock was about $11,000,000.

The records showing the cost of the original construction were not accessible, and in some particulars the costs of the main and subsidiary lines appear to have been combined. But there is testimony tending to show that the cost of the railroad property, subject to the mortgage, was about $241,000,000. What was the value of the 40,000,000 acres of land is not stated. For several years prior to the receivership the road's net earnings had varied between $10,000,000 and $4,449,000. Its fixed charges amounted to $11,000,000,-showing an annual deficit of about $5,000,000. The bonds, unpaid interest, and receivers' certificates aggregated at date of sale $157,000,000. The unsecured debts proved before the master amounted to about $15,200,000. The reorganization contemplated an issue of new bonds for $190,000,000 at lower rates of interest, $75,000,000 of preferred stock, $80,000,000 of common stock,-a total in bonds and stock of $345,000,000.

The reorganization agreement contained a statement that the property intended to be purchased was mutually agreed to be of the value of $345,000,000, payable in the stocks and bonds as above described.

The plan of reorganization was accepted, and on April 27, 1896, the decree of foreclosure was entered and the property ordered to be sold, on a date later fixed for July 25, 1896.

On June 23, 1896, an order was entered directing the special master to give notice by publication requiring each and every creditor of the railroad to present their claims against the company or specific property before November 1st, 1896; in default of which they should be excluded from the benefit of the reference. Publication was made as directed.

On July 22, 1896, Paton and others, holding contingent and unsecured claims for $5,500,000 against the Northern Pacific R. R., filed a bill, in the same court that had jurisdiction of the creditors' bill and foreclosure suit, charging that the sale was the result of a conspiracy between bondholders and stockholders to exclude general creditors, and to award to stockholders in the old company rights in the new which were valuable and could not be legally reserved for the stockholders until first offered to and declined by the general creditors. It prayed that the decree of foreclosure should be opened; that the court would formulate a just and fair plan for distribution; and that the sale be enjoined. This was later modified so as to permit the sale to proceed, but asking an injunction to prevent the distribution of the proceeds and securities. The court held that the company was insolvent; that the assets were insufficient to pay the mortgage debts; that practical operation had demonstrated that the net earnings would not pay the fixed charges; that there was no equity in the property out of which unsecured creditors could be paid, and no reason existed why the stockholders could not go into a reorganization plan whereby they would become stockholders in the new company, if it should become the purchaser. The prayer for injunction was denied. No appeal was taken.

On July 25th the railroad property was sold at public outcry to the newly organized railway company at a price representing $61,500,000, or $86,000,000 less than the secured debts. On July 27th the sale was reported to the court, and, all parties consenting, was three days later confirmed. The railway company entered into possession, and the first year its earnings were $489,000 above fixed charges, which had been lessened under the reorganization. The second year it declared a dividend of $3,000,000 and carried $3,000,000 to surplus. Since that time the earnings have been continually large, the business profitable, and the value of the securities correspondingly great; but for a year after the sale, stock on which $10 and $15 had been paid in cash sold at prices varying from $18 to $51 for preferred and $13 and $18 for common.

In addition to the property covered by the mortgage, the Northern Pacific Railroad owned large quantities of land which was not encumbered, and in May, 1896, the Farmers' Loan & Trust Company filed its supplemental bill describing this unmortgaged property, and alleging that various intervening creditors had obtained judgments against the railroad company, some of which had been assigned to the trust company. It prayed that these lands of the railroad should be sold and the proceeds applied to the satisfaction of the unsecured claims. On the same day that this supplemental bill was filed, the railroad company and other parties to the consolidated causes answered, the court adjudged that the complainant was entitled to the decree asked for, and appointed a receiver of the property.

It was not, however, until April 27, 1899, that the sale was ordered. The property was thereupon sold to the Northern Pacific Railway for $1,623,000. The parties stipulated that the sale should be confirmed, and on the same day in September, 1899, this was done.

Out of the proceeds of this unmortgaged land a dividend of $108,000 was paid on the Coeur D'Alene bonds held by the Northern Pacific Railway. The Northern Pacific Railway had a claim against the old railroad of $86,000,000 for deficiency between the bid at foreclosure sale and the lien debts held by it. It had also purchased about $14,000,000 of other unsecured claims. On this $100,000,000 it was paid a dividend of $1,200,000, or a little over 1 per cent.

But during these years the litigation between Spaulding and the Coeur D'Alene to recover judgment for work done, between Boyd and Spaulding over the title to the judgment, and between Boyd and the Coeur D'Alene to revive the judgment, had been in progress and did not terminate until 1905, when the judgment was revived. When the appeal was dismissed, Boyd brought this bill in equity against the Northern Pacific Railroad Company and the Northern Pacific Railway Company, insisting that the railroad was liable for this debt of the Coeur D'Alene, and that the railway was in turn liable for this debt of the railroad. There was no demurrer, but both answered and much evidence was taken. A decree in favor of Boyd and against the railway was made a lien on the property purchased, subject, however, to the mortgages placed thereon. The decree was affirmed by the circuit court of appeals (170 Fed. 779, 101 C. C. A. 18, 177 Fed. 804), and both defendants appealed. In this court a brief was filed by an amicus curioe, insisting that the complainants' remedy was against stockholders of the Northern Pacific Railroad, and not against the railway company or its property.

Messrs. Charles Donnelly, Francis Lynde Stetson, and Charles W. Bunn for appellants.

[Argument of Counsel from pages 492-498 intentionally omitted]

Messrs. George Turner and R. L. Edmiston for appellee.

Mr. Samuel W. Moore as amicus curioe.

Statement by Mr. Justice Lamar:

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