Shaw v. Bill

APPEAL from the Circuit Court of the United States for the District of Indiana.

In 1849, the New Albany and Salem Railroad Company was incorporated under the laws of Indiana, with power to construct a railroad from New Albany, on the Ohio River, to Michigan City, on Lake Michigan. To enable the company to raise the necessary means to complete and equip the road, it issued at different times a large amount of bonds, secured by mortgages upon its property. There were five issues of bonds, varying in amount from $500,000 to over $2,000,000, and carrying interest from seven to ten per cent per annum, payable semiannually. Each issue was secured by a separate mortgage. he first mortgage was executed in February, 1851; the second, in February, 1852; the third, in November, 1853; the fourth, in February, 1855; and the fifth, in December, 1856. They were all made to Douw Williamson, as trustee for the bondholders, the complainant, Charles E. Bill, being named as substitute or successor, in whom the estate and the powers of the trustee were to vest in case of the death, incapacity, or resignation of Williamson.

The several bonds as they matured, and the interest stipulated, not being paid, the trustee, in August, 1857, filed a bill in the Circuit Court of the United States for the District of Indiana, for the foreclosure of the several mortgages. The corporation was served with process of subpoena, appeared to the suit and demurred to the bill. It does not appear from the record what disposition was made of the demurrer, but it is to be inferred from the subsequent proceedings that it was abandoned. At any rate, in December of the following year (1858), a decree was entered in the case by consent of parties,-one not foreclosing the mortgages as prayed in the bill, but declaring the rights and interests of the bondholders and stockholders under the several mortgages,-in accordance with what was termed a basis of adjustment and settlement, proposed to them by the president and directors of the company. The practical effect of the decree was to extinguish all the liens upon the property of the company, except such as were created by the first and second mortgages; to provide for a reorganization of the company, and to convert the subsequent bonds into common stock of the reorganized company.

Before this decree was rendered, the bondholders, waiving their priority, had consented to an interlocutory decree, entered in June, 1858, authorizing the trustee to borrow $200,000 to pay certain unsecured debts, and to hold possession of the mortgaged property until this loan should be repaid with interest. The decree of December, 1858, provided for the prior payment of this sum, and also of a mortgage of another company for $175,000, which had been previously assumed.

Nearly ten years afterwards, in August, 1868, the bondholders secured by the first and second mortgages, or at least a large portion of them, demanded that the trustee should take proceedings to foreclose those mortgages. The trustee, acting upon the assumption that the original suit, brought in the Circuit Court for that purpose in 1857, was ended by the decree of December, 1858, commenced suit for the foreclosure desired, in a court of the State of Indiana. That suit proceeded to a final decree, under which the property was sold in May, 1869. The purchasers organized themselves under the law of Indiana into a new company, called the Louisville, New Albany, and Chicago Railway Company, which held possession of the property until it was transferred to a receiver, upon the application of the appellant, John S. Shaw. This appellant held a bond of the fourth-mortgage issue, and some stock of the company issued for bonds surrendered under the decree of December, 1858. Upon his petition, purporting to be filed on the foot of that decree, and alleging various irregularities and fraudulent practices on the part of the trustee and the first and second mortgage creditors, a receiver of the property of the company was appointed. His position was that the railroad property was placed under the exclusive wardship of the Circuit Court of the United States, by virtue of the two decrees of June and December, 1858, and that, consequently, the foreclosure proceedings in the State court were irregular and void. Ultimately, and after protracted litigation, this view of the appellant was sustained by the Circuit Court. It is unnecessary to detail the various steps taken by the parties upon the petition of Shaw. It is sufficient to mention that they led Charles E. Bill, the successor of the original trustee, to apply for leave to file a supplemental bill for the foreclosure of the mortgages remaining in force, and that his application was granted. It is upon the subsequent proceedings, resulting in a final decree of foreclosure, from which Shaw and others appealed, that the questions arise for determination here.

Mr. Samuel A. Huff for the appellants.

1. The decree against the Louisville, New Albany, and Chicago Railroad Company is erroneous, because it appears that the company was defaulted at the instance of counsel who had theretofore appeared specially for the company, and process of subpoena upon the supplemental bill was not taken out against the company before such default, nor at any time thereafter.

2. The supplemental bill upon which the final decree is founded shows upon its face that the complainant trustee, and those in whose behalf he prosecuted it, are not entitled to the relief therein prayed, nor to any relief whatever. It does not even aver that a demand of payment of the bonds was made when they were payable.

3. In the final decree, the provisions of the several mortgages touching the property covered by them respectively are wholly disregarded by the court in this, to wit,--

a. The mortgage of 1851 and that of 1852, being the first and second of the series, in express terms limit their respective operation as to the future-acquired property of the company to such as may be purchased with the bonds thereby secured, or with the money obtained therefor.

b. The mortgages of 1853 and 1855, being the third and the fourth of the series, pledged, as security for the payment of the bonds by them respectively secured, the property that might be purchased with such bonds, or with money obtained therefor.

Whereas, by the final decree of the Circuit Court, the mortgages of 1851 and 1852 are held to cover all the property of the company, whether acquired by purchase with the bonds secured by the subsequent mortgages, or with money obtained for such latter bonds, or otherwise.

4. The parties in whose sole behalf the decree was passed, having, before the filing of the supplemental bill upon which it rests, surrendered the bonds secured by the mortgages foreclosed in their behalf, in such form as to forfeit their standing in court, should therefore have been denied any relief.

Mr. Henry Crawford, contra.

MR. JUSTICE FIELD, after stating the case, delivered the opinion of the court.