Page:Henry Osborn Taylor, A Treatise on the Law of Private Corporations (5th ed, 1905).djvu/823

 CHAP. XVII.] LEGAL RELATIONS AMONG CREDITORS. [§ 816«. which not long ago came before the Supreme Court of the United States, the parliament of the Dominion of Canada had authorized a railroad corporation, existing under its authority, Supreme Court has uttered the fol- lowing dictum upon the subject of reorganization agreements : " We must, therefore, recognize the fact, for it is a fact of common knowledge, that, whatever the legal rights of the parties may be, ordinarily fore- closures of railroad mortgages mean not the destruction of all inter- est of the mortgagor and a trans- fer to the mortgagee alone of the full title, but that such proceed- ings are carried on in the interests of all parties who have any rights in the mortgaged property, whether as mortgagee, creditor or mortgagor. We do not stop to inquire, because the question is not presented by this record, whether a court is justified in permitting a foreclosure and sale which leaves any interest in the mortgagor, to wit, the railroad com- pany and its stockholdeis, and ought not always to require an extinction of the mortgagor's interest and a full transfer to the mortgagee, representing the bondholders. As- suming that foreclosure proceedings may be carried on to some extent at least in the interests and for the benefit of both mortgagee and mort- gagor (that is, bondholder and stock- holder), we observe that no such proceedings can be rightfully car- ried to consummation which recog- nize and preserve any interest in the stockholders without also recog- nizing and preserving the interests, not merely of the mortgagee, but of every creditor of the corporation. In other words, if the bondholder wishes to foreclose and exclude in- ferior lienholders or general un- secured creditors and stockholders he may do so, but a foreclosure which attempts to preserve any interest or right of the mortgagor in the prop- erty after the sale must necessarily secure and preserve the prior rights of general creditors thereof. This is based upon the familiar rule that the stockholder's interest in the prop- erty is subordinate to the rights of creditors; first of secured and then of unsecured creditors. And any arrangement of the parties by which the subordinate rights and interests of the stockholders are attempted to be secured at the expense of the prior rights of either class of cred- itors comes within judicial denun- ciation." Louisville Trust Co. v. Louisville, N. A. &. C. R'y Co., 174 U. S. 674; but see comments upon this case by the Circuit Judge upon again confirming the sale, sub nom. Farmers' L. & T. Co. o. Louisville, N. A. & C. R'y Co.; In re Louisville Tr. Co., 103 Fed. R. 110; and in Wenger v. Chicago & E. R. Co., 114 Fed. R. 34. See, also, Paton v. Nor. Pac. R. R. Co., 85 Fed. R. 838; and Ferguson o. Ann Arbor R. R. Co., 17 N. Y. App. Div. 336. A provision in the constitution of Arkansas, that "no private corpora- tion shall issue stock or bonds ex- cept for money or property actually received, or labor done; aud all ficti- tious increase of stock or indebted- ness shall be void," does not prevent the carrying out of an agreement between mortgage bondholders of an embarrassed railroad, whereby trus- tees are to buy the mortgaged prop- erty on foreclosure, and convey it to a new company to be organized by the bondholders, which should issue 803