Sage v. Memphis & Little Rock Railroad Co. (18 F. 571)

In Chancery.

Prior to the removal of this cause from the state court a receiver had been appointed and placed in charge of the railroad property and franchises of the defendant corporation. The case came before the court upon the application of Robert K. Dow and John L. Farwell, stockholders of the defendant corporation, to be made parties, and to be allowed to file answers and cross-bills, which are tendered. Upon [p572] the argument of this motion the court requested counsel to discuss the question whether the court should not of its own motion, upon the facts appearing in the record, order the receiver to pass his accounts before the master, to the end that he may be discharged, and the court be relieved from the duty of conducting through a receiver the business of the defendant corporation. This question has accordingly been discussed by counsel for the plaintiff, but the counsel for the said Dow and Farwell declined to argue it, upon the ground that the parties represented by them were not interested therein.

The facts are as follows:

(1) This suit was originally instituted in the chancery court of Pulaski county, Arkansas, for the purpose of obtaining the appointment of a receiver to take possession of and operate the railroad and other property of the defendant; and upon presentation of a bill of complaint to that court on the twenty-fourth day of June, 1882, one E. K. Sibley was appointed such receiver and placed in possession of the property. The defendant waived notice, appeared at the hearing, and consented to the appointment.

(2) The bill alleges, as ground for the appointment of a receiver, that plaintiff had recovered judgment in the circuit court of the United States for the eastern district of Arkansas for $125,921.13. By reference to the transcript of the judgment, it appears that it was rendered by confession upon the same day the application for appointment of a receiver was made. The bill also alleges that the defendant's property consists of a railroad running through the counties of Pulaski, Lonoke, Prairie, Monroe, St. Francis, and Crittenden, together with cars, rolling stock, and other property used in the management and operation of the road. It sets out the existence or two mortgages upon the property of the defendant,—one dated May 1, 1877, to secure bonds amounting to $250,000, maturing in installments of $50,000 each, due May 1st, in the years 1879 to 1883, inclusive; and the other to secure bonds to the amount of $2,600,000, payable July 1, 1907, bearing interest after July 1, 1882, at 8 per cent. per annum, and having interest coupons attached. The bill further alleges that the aggregate amount of the bonds secured by said mortgages exceeds the salable value of the property and franchises of the defendant, or at least greatly exceeds the sum for which the same would sell under the hammer; and complainant believes that no bidder could be found at more than nominal amounts for said property, by reason of the existence of said mortgages. And a large part of the debt secured by the first mortgage being due and unpaid, it is alleged that the trustees in the mortgage could and would prevent the sale under execution of any part of said property, if plaintiff should attempt to enforce payment of his judgment by execution, and therefore to sue out an execution would be to incur useless expense; that if said property is kept together and operated, it will produce a large income, sufficient to pay operating expenses and a large surplus each year; that defendant has hitherto failed to apply its surplus income to the payment of complainant's debt, and unless prevented it will continue to so refuse, etc.

(3) Soon after his appointment the receiver filed in said chancery court an inventory of the property turned over to him by virtue of his office.

(4) October 14, 1882, John L. Farwell filed petition to be made a party defendant, alleging that he is a stockholder of defendant, owning 17½ shares of the capital stock, and presenting an answer and cross-bill alleging that the plaintiff's judgment was confessed by defendant company for no other purpose than as a preliminary step to the application to this court for a receiver, in order to hinder the prosecution of a certain suit by R. K. Dow, Watson Matthews, and Charles Moran, theretofore instituted in the circuit court of the United States to enforce a claim against the railroad for about $250,000, and to enable plaintiff and others interested with him to depreciate the market value of the bonds issued by defendant, and to depreciate the stock. It is alleged that the suit is a sham and a mere financial expedient, with no other object than to make a successful speculation in the stock and securities of the railroad company; that there is no antagonism either of feeling or interest between the plaintiff and defendant, but they have caused this suit to be brought and maintained in collusion with each other for a common purpose, etc., and numerous other allegations of like tenor and effect.

(5) November 1, 1882, the receiver reported to the chancery court that since his appointment he had received $326,049.76, and paid out $283,943.73, leaving balance on hand $42,106.03; also that the debts outstanding for labor, materials, supplies, etc., amounted to $62,000. He reports that he has expended the money received for the benefit of the property, but nothing is said about the application of any part of it to the payment of plaintiff's judgment. he submits an engineer's statement showing that an expenditure of $570,605 is necessary to put the road in repair, and he adds that $100,000 is required for rolling stock and motive power.

(6) November 10, 1882, cause removed to this court.

(7) After the removal, and on the ninth of April, 1883, the receiver filed a report in this court asking for an appropriation of $631,930 for repairs, which sum, he says, is within the actual wants of the company; and he adds: "After spending the amounts given in this statement, we will only have the tracks, bridges, and wharf-boat, rolling stock, and motive power in a safe condition to operate. You will note no provision is made for raising the roadbed east of Madison above high water, which, sooner or later, must be done to prevent the trade and traffic being stopped during the overflows of the Mississippi river and tributary streams."

(8) At the same time the receiver filed a statement showing that the earnings of the road from June 25 to December 31, 1882, were $478,425.47, and that the expenditures for the same period amounted to $456,200.92, leaving as net earnings $22,224.55; also a statement for the month of February, 1883, showing receipts $73,449.60 and expenditures $102,898.63.

(9) The last report of the receiver, filed the same day, shows:

Mr. Cockrell, for complainants.

B. C. Brown, for railroad company.

U. M. & G. B. Rose, for stockholders.