Pacific Railroad v. Ketchum

APPEAL from the Circuit Court of the United States for the Eastern District of Missouri.

This case presents the following facts:--

On the 10th of July, 1875, the Pacific Railroad, a Missouri corporation, mortgaged its road and other property to Henry F. Vail and James D. Fish, trustees, citizens of New York, to secure a proposed issue of bonds amounting, in the aggregate, to $4,000,000. This mortgage will hereafter be referred to as the 'third mortgage.' The bonds were to bear date as of May 1, 1875, and become payment twenty years thereafter, with interest at the rate of seven per cent, falling due semi-annually on the first days of May and November in each year. The principal object of this new issue was to take up by exchange or otherwise outstanding income and improvement bonds of the company, amounting in all to $3,500,000. The mortgage contained a clause to the effect that, if the company should fail to pay the interest on any of the bonds thereby secured, for six months after the same became due and payable, and demand made therefor, or if the principal of any of the bonds, when payable, should not be paid for six months after demand, the trustees might, on the written request of holders of bonds to the amount of $500,000, the principal or interest of which should then be in arrear and unpaid, sell the mortgaged property at public auction, in the city of St. Louis, giving notice thereof in a manner particularly specified, and execute and deliver conveyances to the purchaser, applying the proceeds of the sale to the payment of the bonds.

The property mortgaged was covered by other mortgages. One was to Uriah A. Murdock, James Punnett, and Luther C. Clark, citizens of New York; another, to Edwin D. Morgan and Joseph Seligman, also citizens of New York; another, to Rufus J. Lackland and Dwight Durkee, citizens of Missouri; another, to James Baker, a citizen of Missouri, and Jesse Seligman, a citizen of New York; and all were prior in lien to the third mortgage.

Default having been made in the payment of the interest falling due Nov. 1, 1875, on the bonds secured by the third mortgage, George E. Ketchum, a citizen of New York, claiming to be the owner and holder of many of the bonds, commenced this suit in the court below, on the 11th of November, in behalf of himself and the other bondholders, to foreclose the mortgage. To this suit the railroad company and the trustees of all the mortgages, including Vail and Fish, were made defendants, their citizenship being fully set forth in the bill. The superior right of all the prior mortgages was conceded, and it was also admitted that the full amount of their authorized issues was outstanding, but it was alleged that the interest on all except that secured by the third mortgage had been paid promptly as it matured, and that there was then no default. It was also alleged that the value of the property was greater than the amount of all the prior liens.

The bill further stated that about $2,000,000 of the income and improvement bonds had been exchanged for the bonds secured by the third mortgage, and that about $300,000 of the last-named bonds had been negotiated otherwise than by exchange, and were then outstanding. It then alleged the nonpayment of interest falling due Nov. 1, 1875, after due demand made; that there was a large amount of money due for taxes; that the company was without means to pay them and its valid obligations in full as the later became due; that its commercial paper had been protested; that it was liable to actions, suits, and proceedings on account thereof; and that there was great danger that the property covered by the mortgage might be attached or levied upon under execution or other legal process.

The bill then proceeds as follows: 'Your orator further shows unto your honors that an application has been made by your orator, on behalf of himself and other handers of bonds secured by said mortgage to the defendants Henry F. Vail and Henry D. Fish, to take proceedings to foreclose the aforesaid mortgage, and to protect the interest of your orator and such other holders; but that no such proceedings have been taken, and as your orator is informed and believes, some doubt is expressed whether, under such mortgage, they have the right to institute such proceedings, or any proceedings thereunder, by reason of the non-payment of the interest due Nov. 1, 1875, and for such reason prefer not to take such proceedings; and your orator being apprehensive that his interest and the interests of other holders of like bonds may be seriously affected by delay in the institution of proceedings to foreclose said mortgage and to obtain possession of said property, has brought this action in his own behalf, and on behalf of all others similarly situated and holding like bonds secured by said third mortgage, and has made said Vail and Fish parties defendant herein.'

The prayer was that the mortgaged property might be sold subject to the liens of the prior mortgages, and that, if necessary, an account might be taken. There was also a prayer in the usual form for the appointment of a receiver.

Process was duly issued and served on the 13th of December, 1875, on such of the defendants as were citizens of Missouri, and on the 8th of January, 1876, an order was taken for service on the non-resident defendants in the manner required by the rules of the court; but it does not appear that any such service was actually made. On the same 8th of January, one Thomas P. Akers, representing that he was a stockholder of the company, that the mortgage sued on was a fraud, and that the corporation would not resist the suit, asked that he might be permitted to come in as a defendant to protect his interests. On the 7th of February, 1876, the company filed an answer, in which it substantially confessed all the allegations of the bill, and asserted the binding character of the bonds and mortgage. The answer concluded, however, as follows: 'But it says that it is informed that a portion of said stockholders claim that they are fraudulent and void, and that the directors of this defendant were guilty of fraud in issuing the same. Therefore, this defendant asks this honorable court to permit any of the stockholders aforesaid to become a party defendant to this suit, upon a proper showing, and make such defence in the premises as they may see proper.' James Baker signed the answer as solicitor of the company, as did also the secretary of the company, and the corporate seal was affixed.

On the 16th of February, Cornelius K. Garrison and James Seligman, citizens of New York, and Thomas W. Pierce, a citizen of Massachusetts, representing themselves to be owners of $1,797.000 of the bonds secured by the third mortgage, were admitted into the suit as complainants with Ketchum, and united with him in the allegations of his bill. On the 25th of March, 1876, Peter Marie, Frank A. Otis, Robert L. Cutting, Jr., James D. W. Cutting, citizens of the State of New York, and George R. Fearing, a citizen of Rhode Island, all stockholders in the company, asked to be made co-defendants with Thomas P. Akers, with leave to defend the suit. On the 3d of April, a receiver was appointed with the usual authority, and Vail and Fish, as trustees, were authorized to exchange the bonds secured by the third mortgage for the income and improvement bonds in accordance with the terms of the mortgage, and Akers and the county of St. Louis were given leave to file a cross-bill in thirty days. No action was taken on the petition of other stockholders to be made parties. On the 25th of April, Akers and St. Louis County filed an answer and cross-bill, in which the county of St. Louis set up a lien adverse to that of the mortgage; and both defendants alleged that the mortgage was executed in fraud of the rights of creditors and stockholders, stating particularly the defences which the company had thereto.

On the 5th of June, 1876, an adjourned term of the court was held, and all the several trustees of the prior mortgages filed answers, setting up in form their respective mortgages and stating the amounts due. Each answer concluded with the statement that the answering defendant knew of no reason why the prayer of the bill should not be granted. On the next day, Vail and Fish, as trustees, filed their answer, admitting all the allegations in the bill, and concluding as follows: 'And these defendants, as trustees of the several and varied interests of the bondholders secured by said deed of trust, submit the same to the judgment of this honorable court, that the same may be duly provided for and protected, and ask that they may have such relief, including an allowance for the costs and expenses herein, as to your honorable court may seem meet.' On the same day, Akers and St. Louis County dismissed their cross-bill and withdrew their answer without prejudice to the lien claim of the county. This being done, all the several parties appeared in court by their respective solicitors, and the court having found, among other things, the amount of income and improvement bonds of the company outstanding, and that the entire amount of the bonds secured by the third mortgage had been issued, some, however, being still in the hands of the trustees to complete the contemplated exchanges; that Ketchum was the owner of ten of the bonds, Garrison of fourteen hundred, James Seligman of three hundred and forty-seven, and Pierce of fifty, and that the interest due Nov. 1, 1875, had not been paid, although demanded, it was, 'by the consent of all parties to the suit, through their solicitors of record,' adjudged and decreed 'that the said Pacific Railroad do stand absolutely barred and foreclosed of and from all equity of redemption of, in, and to said mortgaged premises, property, and franchises,' and that the mortgaged property, &c., be sold at public auction, subject to the liens of the several prior mortgages, by a master, who was named, to pay and satisfy the amounts due by the company upon the bonds, and any other indebtedness the court might order paid out of the proceeds, 'together with the costs of suit and of said sale, including the services of said trustees, and their solicitors' and attorneys' fees in and about the management of said trust, as may hereafter be ordered by the court.' Provision was also made for notice of the time and place of sale, and a conveyance to the purchaser after confirmation. The terms of sale were fixed by the decree, and if the purchase was made by or for the bondholders, all but $200,000 of the purchase-money could be paid by a surrender of bonds, provision being made for paying such of the bondholders as did not come into the purchase their pro rata share of the proceeds. Sixty days' time was given after the sale for all bondholders to come in and associate themselves with the purchasers, if the purchase should be made on account of the bondholders. Leave was also given the trustees of the mortgage to continue exchanges for the income and improvement bonds still outstanding. It was also ordered that nothing in the decree should be construed to prejudice in any manner the claim of St. Louis County, which had been set forth in its answer and cross-bill.

The property was sold under this decree to James Baker for the benefit of the bondholders. He had acted in the cause as solicitor of the company. On the 18th of September, a motion was made to confirm the sale. On the 22d of September, N. A. Cowdrey, Robert L. Cutting, Jr., Peter Marie, Frank A. Otis, Jacob Cromwell, George L. Kingsland, citizens of New York, and George R. Fearing, a citizen of Rhode Island, stockholders in the company, filed a petition in court asking that they be made defendants in the suit, that the sale might be set aside, and that they have leave to defend, alleging the fraudulent character of the mortgage, and that the directors were acting in bad faith towards the stockholders. This motion was denied, and on the 23d of October the sale was confirmed and a conveyance to Baker, the purchaser, ordered. On the 27th of January, 1877, the Pacific Railroad took this appeal.

''Mr. Matt. H. Carpenter and Mr. N. A. Cowdrey'' for the appellant.

Mr. George F. Edmunds, Mr. James O. Broadhead, and Mr. Melville C. Day, contra.

MR. CHIEF JUSTICE WAITE, after stating the facts, delivered the opinion of the court.