Quincy Company v. Humphreys

Bill by the Wabash, Missouri & Pacific Railway Company against the Central Trust Company and others for the appointment of receivers for complainant's property. Solon Humphreys and Thomas E. Tutt, having been appointed accordingly, and having operated the road for some time, intervening petitions were filed against them and the Wabash Company by the Quincy, Missouri & Pacific Railroad Company and Theodore Gilman and Charles H. Bull, as trustees of the mortgage bondholder thereof, claiming certain rentals due on a lease of the latter company's line to the Wabash Company. The petition was denied by a referee, and his report was confirmed by the court. 34 Fed. Rep. 259. Petitioners appeal. Affirmed.

[Syllabus from pages 82-84 intentionally omitted]

STATEMENT BY MR. CHIEF JUSTICE FULLER.

The Quincy, Missouri & Pacific Railroad Company of Missouri owned in 1879 about 77 miles of road extending west ward from West Quincy towards the Missouri river; had issued mortgage bonds to the amount of $2,000,000; and owed, in addition to the principal of said bonds, a large amount of overdue interest accrued thereon. By an indenture made August 21, 1879, the railroad of this company was leased to the Wabash Railway Company for a period of 99 years, with the option to the lessee to renew the same perpetually. By the terms of this contract a majority of the common stock of the Quincy Company was to be transferred to the Wabash Company, so as to give the latter control of the former, and a majority of directors in its board was to be elected in the interest of the Wabash Company. The Wabash Company was to supply $125,000 to the Quincy Company to enable it to complete the construction of its road to Milan, to a connection with the line of the Burlington & Southwestern Railroad, and was itself authorized to extend the road from Milan to its contemplated terminus at Brownville, on the Nebraska state line. A new mortgage was to be made, covering all the property of the Quincy Company, and securing bonds at the rate of $9,000 per mile, which was to be used in retiring the bonds then outstanding, and providing for future construction. Preferred stock of the Quincy Company was also to be issued and used in connection with the new bonds to liquidate its outstanding indebtedness, then estimated to be about $600,000.

The Wabash Company agreed to set aside certain percentages of the gross earnings derived from the operation of the Quincy Company's road, and to apply these percentages-First, to the payment of interest on the new bonds; and, second, of dividends on the stock. The company guarantied to pay interest on the bonds in the event that the said percentage of gross earnings should be insufficient for that purpose; to maintain and operate the railroad of the Quincy Company, keeping the same in good condition and repair for the full term of the lease; and to pay all taxes.

It was further provided that, if the principal of the bonds secured by the mortgage should become due in consequence of default in the payment of interest, the Quincy Company should have the option to forfeit the lease, and re-enter without process of law.

Under date of October 1, 1879, a mortgage was made by the Quincy Company to Humphreys and Browning as trustees, whereby all its property, including leases and leasehold interests, was conveyed to the trustees to secure the payment of bonds to be issued at the rate of $9,000 per mile, and the mortgage provided that a default of six months in the payment of interest might be availed of by the bondholders as a cause for declaring all the bonds forth with due.

November 10, 1879, the Wabash Company was consolidated with other railroad companies, the consolidation forming the Wabash, St. Louis & Pacific Railway Company. This company received possession of the railway of the Quincy Company on July 1, 1880, and by the 1st of July, 1881, had extended the road from Milan to Trenton, a distance of about 31 miles.

On the 27th of May, 1884, the Wabash, St. Louis & Pacific Railway Company filed its bill in equity in the circuit court of the United States for the eastern district of Missouri, stating that it was insolvent; that it had accumulated a floating debt for its maintenance of $4,784,145; that it was about to make default in interest payments; that such default would be ruinous to all parties interested in its maintenance and its revenues; and that the interest of all the creditors and bondholders would be thereby imperiled.

The bill made various persons and corporations parties defendant having interests in the lines of the Wabash Company as lessors, mortgagors, or trustees under deeds of trust covering the lines or portions thereof, including the Central Trust Company and Cheney, trustees in a general mortgage, the trustee in a collateral trust mortgage, the Quincy Company, and others; and prayed the court to appoint successors to trustees deceased, or to make such other order with respect thereto as would cause the respective trusts to be properly represented in the matters of the litigation; and to require the defendants to set up their several interests, so that the same might be fully represented.

The bill alleged that by their terms nearly all, if not quite all, the mortgages and trust deeds, whether executed by complainant or other companies on any portions of the line prior to the time when complainant acquired the same, not only embraced the roads and tangible property of the companies executing the instruments, but also the revenues and incomes to be derived from the use of the parts of the roads so mortgaged; that the bondholders had always insisted upon their right to look to the revenues of the sections of the road upon which their mortgages rested as a means of paying and discharging their bonds; that all, or nearly all, of the mortgages embraced all rolling stock to be thereafter acquired by the companies executing the mortgages; but, as the lines of the original companies had been absorbed into complainant's system, the rolling stock on the entire system had become so intermingled as to be incapable of division according to the ownership of the several lines of road or according to the several mortgages; and that any attempt to control or dispose of portions of such rolling stock by courts not having jurisdiction of the whole and not competent to deal with the entire property as a unit would produce great confusion and uncertainty, and result in great loss to all persons interested in the rolling stock or in complainant's property or securities.

The bill further averred that the complainant's directors and officers had thoroughly considered and already resorted to all proper means for obtaining the funds by which to pay the floating indebtedness of the company and meet the accruing interest falling due at the beginning of the month of June then next, and continuing to mature by installments at very short intervals, but had wholly failed to provide the means with which to discharge the floating indebtedness and meet the interest; and the company was powerless to accomplish such purpose, and was practically insolvent, and it was certain that a default would occur in June, and complainant be also without means of meeting the floating indebtedness.

It was further stated that complainant's interest in the road and the interests of all its creditors and bondholders were greatly imperiled by the existing prospect of the disruption of the road on the happening of the default; and that, if the lines of railroad were broken up, and the fragments thereof placed in the hands of various receivers, and the rolling stock, materials, and supplies seized and scattered abroad, the result would produce irreparable injury and damage, not merely to complainant, but to all persons having any interest in the road and the secrurities thereof. Complainant, therefore, 'to prevent the breaking up of said lines of road, and the scattering abroad of its assets,' and 'in order to the preservation of the interests of large numbers of persons, stockholders, and creditors unknown to orator, and in order to the protection of the interests of all concerned, and to prevent a great multiplicity of suits,' prayed the court to appoint one or more receivers, 'and empower and direct such receiver or receivers to take possession of said entire property, and to preserve, operate, and manage and control the same, collect all indebtedness due or to become due to orator, and otherwise to discharge all the duties ordinarily imposed by courts of equity on the receivers of railroad property by such courts appointed; that on a final hearing of said cause your honors will, under this bill, or under such amendments as may be made thereto, or such supplemental bills as shall be filed herein, or such cross bills as parties in interest may also file, decree the sale of said entire property, whether such decree shall judicially foreclose said general mortgage or any of the other mortgages aforesaid, or whether such decree shall dispose of said property as a trust fund on general equitable principles; that your honors will cause all the liens upon said property, or any part thereof, and all rights, claims, and equities of all persons interested therein to be ascertained, defined, and determined, and that the proceeds arising from the sale of such property, or any part thereof, be applied under the orders and decrees of this court, according to the rights, interests, and equities of parties or persons interested in said fund;' that all persons and all corporations having possession of compainant's property, or any part of it, be directed to surrender the same to such receiver or receivers as might be appointed, or to hold such property or portions of property under such receiver or receivers, if the latter shall elect to pursue such course; and that such order may be made 'as will insure the protection of the interests of orator and its creditors, giving an opportunity to all the defendants not served with notice to be heard hereafter; and orator avers that no injury can arise to any creditor or person in interest from the appointment of the said receivers with or without notice, as such receivers' possession will inure to the benefit of all the persons concerned.'

Upon the filing of the bill an order was thereupon made on the same day appointing Solon Humphreys and Thomas E. Tutt receivers of the railroads and property of the company; and it was ordered 'that the said receivers, out of the income that shall come into their hands from the operation of said railroad or otherwise, proceed to pay all balances due to other railroads or transportation companies, or balances growing out of the exchange of traffic accruing during six months prior hereto; that said receivers also in like manner pay all rental accrued, or which may hereafter accue, upon all leased lines of said complainant, and for the use of all terminals or track facilities, and all such rentals or installments as may fall due from said complainant for the use of any portion of road or roads or terminal facilities of any other company or companies, and also for all rentals due or to become due upon rolling stock heretofore sold to complainant and partially paid for; that said receivers also pay in like manner, out of any incomes or other available revenues which may come into their hands, all just claims and accounts for labor, supplies, professional services, salaries of officers and employes that had been earned or have matured within six months before the making of this order; * * * that such receivers keep such accounts as may be necessary to show the source from which all such income and revenues shall be derived with reference to the interest of all parties herein and the axpenditures by them made.'

The receivers qualified on May 29, 1884, and took possession of all lines of railroad which at that date were held or operated by the Wabash Company. On June 9, 1884, the trustees in the general mortgage appeared and filed their cross bill, in which they prayed for the foreclosure of their mortgage, and for the sale of the property, and also asked for the appointment of receivers; but the court refused to make such appointment. These trustees afterwards filed an amended cross bill, and at a still later date an original bill in one of the state courts of Missouri, which was removed to the United States court, and consolidated with the original suit. These bills contained prayers for the foreclosure of the mortgage and the appointment of receivers.

June 26, 1884, the receivers petitioned the court for advice, stating that from the incoming rents and profits of the property they were unable to pay on the 1st day of June, 1884, the interest falling due on certain classes of bonds and dividends on certain specified stock. And they further stated, in respect of 28 other classes of bonds enumerated in the petition, that the earnings of the lines upon which these bonds were secured had until this been sufficient to meet the operating expenses, cost of maintenance, and interest payments; but in respect to 10 other classes of bonds, of which the bonds of the Quincy Company constituted one, 'that the earnings of none of the lines or divisions last above described have at any time since their acquisition been sufficient to pay their operating expenses, the cost of their maintenance, and interest on the several series of bonds, and other obligations above described, and secured upon each of them, respectively, by mortgage or deeds of trust.'

The petition was referred to a master, who reported thereon June 28, 1884, and recommended the entry of an order directing the receivers, 'from the incoming rents and profits of said property, after meeting such other obligations as they have been directed to discharge by the former orders of this court, pay from whatever balance may remain in their hands the interest, as the same shall from time to time mature, upon the following bonds or other obligations secured by mortgage on the several lines or divisions' enumerated, whose earnings had been sufficient to pay the interest. The order further provided 'that the receivers herein, until otherwise directed, keep the accounts of all the earnings and incomes from, as well as the accounts of all the operating expenses, cost of maintenance, and taxes upon, the following lines or divisions of said property separately, to wit,' and here follow the lines which had not earned interest, including the Quincy Company; 'and that said receivers make quarterly reports thereof, showing not only the income and expenses of each of the lines aforesaid, but also the methods by which the incomes and expenses of said lines were respectively ascertained;' and this report was confirmed.

On September 20, 1884, the receivers filed a petition for instructions as to interest due on bonds of the Havana division; and on October 15, 1884, the court stated, upon the matter being again brought up, that money that belonged to the underlying mortgages would not be taken to pay interest on nonearning branches.

December 16, 1884, the Quincy Company filed an intervening petition, in which it set forth that interest on its bonds was in default, and 'that it has no means, property, or moneys, aside from what is covered by said mortgage, and that it is without any means of paying said overdue and defaulted interest;' that it believed that, if default in the payment of interest should continue, the bondholders would require the sale of the mortgaged property under the terms of the mortgage; that it had applied to the president of the Wabash Company and others of its officers for information, but had been unable to obtain any of an intention on the part of the company, or any one for it, to make such payment; and it prayed that the company or defendants, or some one of them, should pay the interest on the bonds in default July 1, 1884, or that such interest be paid out of the funds of the Wabash Company in the charge or under the control of the court or the receivers, or that the court order that the lease between the petitioner and the Wabash Company be transferred to the St. Joseph & Quincy Railroad Company, which latter company would pay the interest coupons in arrears, and would either pay or give security to pay the interest coupons about to mature January 1, 1885, and would assume any and all liabilities resting upon the Wabash Company, or to which it was subject by reason of the existence of or under said lease. This petition was answered by the receivers and the Central Trust Company and Cheney, trustee, and April 16, 1885, it was ordered that whenever within 60 days from that date the St. Joseph & Quincy Railroad Company should pay to the trustees on the first mortgage an amount equal to the coupons on the first mortgage of the Quincy Company due July 1, 1884, and January 1, 1885, in payment of said coupons, and should assume by proper agreement in writing the liabilities and obligations to be performed by the lessee under said lease, then said lease should become assigned and vested in the St. Joseph Company, freed from any liens or rights of the Wabash Company or the trustees under the general mortgage.

On January 8, 1885, the receivers reported the incomes and earnings from, as well as the operating expenses, cost of maintenance, and taxes of, the Quincy Company from May 29 to September 30, 1884, showing a deficit of $1,416.78; and on the 2d of March, 1885, made a similar report, showing a deficit of $9,021.82 from October 1 to December 31, 1884; and on May 15, 1885, a report showing a total deficit up to February 28, 1885, for 9 Months, of $20,251.09. On March 20, 1885, the receivers filed a petition setting forth in detail the earnings and operating expenses of all the branch and leased lines of the Wabash Company from May 29 to November 30, 1884, and prayed orders with respect to the future operation of the lines, and concerning the payment of the respective rentals which the Wabash Company had agreed to pay. Upon this petition the court made an order, April 16, 1885, which was entitled: 'In the matter of the application of the receivers for the cancellation of certain leases.' By this order the court directed (1) 'that subdivisional accounts must be paid separately.' (2) 'Where any subdivision earns a surplus over expenses, the rental or subdivisional interest will be paid to the extent of the surplus, and only to the extent of the surplus.' (3) 'Where a subdivision earns no surplus, simply pays operating expenses, no rent or subdivisional interest will be paid. If the lessor or the subdivisional mortgagee desires possession or foreclosure, he may proceed at once to assert his rights. While the court will continue to operate such subdivision until some application be made, yet the right of a lessor or mortgagee whose rent or interest is unpaid to insist upon possession or foreclosure will be promptly recognized.' (4) 'Where a subdivision not only earns no surplus, but fails to pay operating expenses, as in the St. Joseph & St. Louis branch, the operation of the subdivision will be continued, but the extent of that operation will be reduced with an unsparing though a discriminating band, that is, if a subdivision does not earn operating expenses, and receivers are running two trains a day, then lop one of them off; if they are running one train a day, and still it does not pay, then run one train in two days. While the court will endeavor to keep that subdivision in operation, it will make the burden of it to the consolidated corporation, and to all the other interests put into that consolidated corporation, a minimum.'

These directions were given in an opinion which was ordered to stand as the order of the court in respect to the matters therein referred to. 23 Fed. Rep. 863. July 15, 1885, Gilman and Bull, trustees under the mortgage of the Quincy Company, petitioned for the possession of its property. The petition was granted by the court, and the receivers were ordered to surrender and transfer said property to the trustees on or before August 1, 1885, which was done.

On July 1, 1884, an installment of interest on the bonds of the Quincy Company, for $36,120, became due, and was not paid. On January 1, 1885, another like installment became due, and was not paid. On July 1, 1885, another like installment became due, and was not paid. The rent due for the month of July amounted to $6,020, and was not paid. The foregoing installments aggregated $114,380. The taxes on the railroad of the Quincy Company for the year 1884 amounted to $16,000, and were not paid by the Wabash Company or the receivers, but by the trustees for the Quincy Company, who also made repairs upon said railroad at an expense of $15,000.

December 8, 1885, the trustees, Gilman and Bull, filed a petition, in which application the Quincy Company united June 12, 1886, by a separate petition. These petitions prayed that the court would order the recivers to pay the Quincy Company or the trustees, for the bondholders, the sum of $114,380 for interest, $16,000 for taxes, and $15,000 for necessary repairs, 'being the rental due on account of the said lease of the property' of the company; and that the court would decree that said sums 'are liens superior and paramount to all mortgages on all the property of the said Wabash, St. Louis & Pacific Railway Company.' The prayer of the trustee's petition was confined to the sum of $114,380.

January 6, 1886, a decree was entered foreclosing the mortgages upon the property of the Wabash Company known as the 'general mortgage' and the 'collateral trust mortgage.' The court found due upon the general mortgage the principal sum of $17,000,000, and for interest, $2,132,753.40, up to December 1, 1885; and upon the collateral trust mortgage the principal sum of $10,000,000, and $1,109,268.80 interest. In default of payment of these sums, the court directed the sale of the mortgaged property, excluding, however, the property of the Quincy Company. The court decreed that the sale and conveyance of the mortgaged property should not have the effect of discharging any part of said property from the payment of claims that had been or might be charged against the same or the receivers by the court making the decree, or any other circuit court exercising ancillary jurisdiction, or by any other court to which any of the parties to said decree had been remitted, and that the property should be subject to be retaken, and, if necessary, resold, if the sums so charged or to be charged against it or said receivers should not be paid within a reasonable time after being required by order of court. The mortgaged property was thereupon sold, but no surplus realized.

The net earnings of the Wabash system from the time the receivers took possession to the time when they surrendered the road of the Quincy Company was $1,012,857.39, which was $3,304,633.61 less than the amount of preferred debt existing when the receivers took possession. The petitions of the trustees, Gilman and Bull, and of the Quincy Company were referred to a master, who reported against the claims therein set forth. Exceptions were argued before the circuit court and overruled, the report confirmed, and the petitions dismissed, whereupon the petitioners brought the case by appeal to this court. The opinions of BREWER, Circuit Judge, and THAYER, District Judge, will be found reported in 34 Fed. Rep. 259.

D. H. Chamberlain, for appellant.

Everett W. Pattison, ''Edwd. W. Sheldon and James Thomson'', filed briefs on behalf of appellant by leave.

''Thos. H. Hubbard and Wells H. Blodgett'', for appellees.

Mr. Chief Justice FULLER, after stating the facts in the foregoing language, delivered the opinion of the court.