United States Trust Company of New York v. Wabash W. Railway Company

[Syllabus from pages 287-289 intentionally omitted]

Statement by Mr. Justice BROWN:

These were cross appeals from a final decree entered September 25, 1889, overruling the exceptions of the appellant the United States Trust Company to a master's report, overruling in part the exceptions of the appellant the Wabash Western Railway Company to the same report, and adjudging that the trust company, as trustee under the mortgage of what is known as the 'Omaha Division of the Wabash, St. Louis & Pacific Railway,' recover from the Wabash Western Railway Company the sum of $13,708.33, with interest thereon from January 6, 1886, amounting in all to $16,765.51, as rental for that division during the period in which it was operated by the receivers of the Wabash Company.

At the time the petition in this case was filed, the Wabash, St. Louis & Pacific Railway Company, a corporation formed by the consolidation of a large number of railway companies, extending from Detroit and Toledo, in the east, to Omaha and Kansas City, in the west, with a total mileage of 3,600 miles, of which railway the St. Louis, Kansas City & Northern Railway was a branch, was in process of winding up and reorganizing under two bills, namely: (1) A bill filed May 27, 1884, by the Wabash, St. Louis & Pacific Railway Company itself, wherein it set forth its own insolvency, its inability to meet various pressing debts, including interest due June 1, 1884, on its general mortgage and certain other of its bonds, the consequent danger of a breaking up of its system of railroads, and the irreparable damage that might result from it disruption, and praying for the appointment of receivers to take possession of, preserve, and operate its lines of railroad for the benefit of its creditors, according to their respective legal and equitable rights. To this bill the Central Trust Company of New York and James Cheney, trustees under the Wabash general mortgage, the United States Trust Company of New York, trustee of the Omaha Division mortgage, as well as the trustees in all the underlying and divisional mortgages on the various lines of the Wabash system, were made defendants. (2) A cross bill filed June 9, 1884, by the trustees of the Wabash Company, under its general mortgage, for the foreclosure of that mortgage and appointment of receivers of the mortgages premises.

The petition in this case was filed April 23, 1886, and the case referred to a master upon a stipulations as to the facts, of which the following is a summary: On February 10, 1879, the Council Bluffs & St. Louis Railway Company, an Iowa corporation, the owner of a projected railway 65 miles in length, from Council Bluffs, Iowa, in a southeasterly easterly direction, to a point on the state line between Iowa and Missouri, leased its road to the St. Louis, Kansas City & Northern Railway Company, the owner of another railway extending from that point on the state line about 78 miles to Pattonsburg, Mo., for the term of 91 years. These roads formed a line from Pattonsburg, Mo., to Council Bluffs, Iowa, and are known in this litigation as the 'Omaha Division of the Wabash System.' On the 15th day of February, 1879, the said St. Louis, Kansas City & Northern Railway Company, for the purpose of raising funds necessary to complete and equip the Omaha Division, issued and sold $2,350,000 in bonds, or at the rate of $16,000 for each mile, and, to secure the payment thereof, mortgaged its interest and estate in the whole of such division, being an estate in fee in that portion of the line situated in Missouri and its leasehold estate in that part located in Iowa, to the United States Trust Company.

In November, 1879, the St. Louis, Kansas City & Northern Railway Company, of Missouri, was consolidated with the Wabash Railway Company, under the corporate name of the Wabash, St. Louis & Pacific Railway Company. By the terms of such consolidation the new corporation assumed all the obligations of both the constituent companies. Immediately upon such consolidation, the Wabash, St. Louis & Pacific Railway Company entered upon the sole use of the premises demised by said lease, and upon June 1, 1880, issued $17,000,000 of what were known as its 'general mortgage bonds,' secured by a mortgage to the Central Trust Company of New York and James Cheney, as trustees. This mortgage covered all its railway, leasehold, and other property. By a later mortgage, dated May 1, 1883, to the Mercantile Trust Company of New York, 11,089 shares of stock of the Council Bluffs & St. Louis Railway Company were pledged with a large amount of other property of secure $10,000,000 of what were called the 'collateral trust bonds' of the Wabash Company.

From 1879 to May 27, 1884, the Omaha Division was successfully and profitably operated, and the terms of the lease were complied with. Upon presentation to the court of the first bill above stated, filed by the Wabash Company, alleging its own insolvency, and on May 27, 1884, an order was entered appointing Solon Humphreys and Thomas E. Tutt receivers of all the property of the said Wabash Company. This order appointing the receivers directed them to take possession of, operate, and preserve all of said lines of railroad, and from their earnings pay their operating expenses; the balance due to other railroad and transportation companies growing out of the interchange of traffic during the preceding six months; all rentals accrued, or which should thereafter accrue, on all leased lines for the use of terminals or track facilities; and for all rentals due or to become due upon rolling stock therefore purchased by the company and partially paid for; likewise, all just claims and accounts for labor, supplies, professional services, salaries of officers, and employes that has been earned or matured during the preceding six months. The receivers were also directed by the order to keep such accounts as might be necessary to show the sources from which all such incomes and revenues were derived, with reference to the interest of all parties to the suit and the expenditures made by them.

On June 26, 1884, within one month after their appointment, the receivers made a report and petition to the court, in which they stated to the best of their information and belief that each and all of certain lines of railroad constituting the consolidated Wabash, St. Louis & Pacific Railway Company had 'at all times during the five years last past, or ever since their construction, earned more than encough to pay their operating expenses, the cost of maintenance, and interest upon the several series of bonds' that were secured upon them by their mortgages or deeds of trust, and prayed the court to instruct them as to what they should do with respect to the payment of interest, as the same from time to time matured, on the mortgage bonds on the several lines and divisions of the road as they existed at and before the date of the consolidation. On June 28th, two days after the filing of this petition, the court ordered the receivers, from the incoming rents and profits of the property, after meeting such other obligations as they had been directed to discharge by former orders, to pay from whatever balance might remain in their hands the interest maturing upon the bonds or other mortgage obligations on the several lines or divisions of the Wabash Company before its consolidation. Under this order the rental for the use of the Omaha Division falling due on October 1, 1884, and amounting to $82,250, was paid by the receivers. Rentals and interest on other lines accruing for the same and various subsequent periods, and aggregating $2,175,062, were paid under the same order.

The record shows that, at the time the receivers were appointed, the labor and supply claims and other preferential indebtedness of the Wabash Company, which the receivers were, by their order of appointment, directed to pay, amounted to $4,378,233.49. It also appeared that the net earnings of all the lines operated by the receivers were never sufficient to discharge the preferential debts.

On March 20, 1885, the receivers made another application to the court, in which they set forth in detail the earnings and expenses of the various lines of the system up to November 30, 1884, and prayed the court for instruction with respect to the future operation by them of the several branch lines that had failed to earn their operating expenses. Notice was given to the solicitor of the trustee of the Omaha Division that this petition would be called up on the 14th of April. In the application it was stated that the expenses of operating the Council Bluffs & St. Louis Railway-that is, the Omaha Division-had exceeded its earnings by $5,288.64, not including any charge for rental, and, including such charge, there was a deficit of $87,538.64. On April 16th, the court made an order upon this petition to the effect that subdivisional accounts should be kept separately; that 'where a subdivision earns no surplus, simply pays operating expenses, no rent or subdivisional interest will be paid. If the lessor or 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.'

The semiannual installment of interest or rent of the Omaha Division falling due April 1, 1885, being unpaid, a bill for the foreclosure of the mortgage upon that division was filed by the intervener in the circuit court of Pottawatomie county, Iowa. The Wabash receivers were made defendants to the bill. This suit was removed to the circuit court of the United States for the southern district of Iowa. Another default occurring October 1, 1885, the intervener filed a second petition, and requested the transfer of the division to a receiver.

On December 2, 1885, the United States Trust Company filed another petition, in which it recited the defaults which had occurred in the payment of interest on the bonds secured on the Omaha Division, and prayed that the receivers of the Wabash system, Humphreys and Tutt, be ordered to surrender to the receivers, appointed or to be appointed in the foreclosure suits of the Omaha Division, all its property.

On January 6, 1886, the matter was called to the attention of the court, and the court thereupon entered an order directing the receivers, Humphreys and Tutt, to surrender within 30 days the Omaha Division to the United States Trust Company, or to any person or receiver appointed at their instance by the circuit court for the southern district of Iowa, or by the state courts. There was a further clause in the order which authorized Humphreys and Tutt to retain possession of the Omaha Division for an additional 30 days, if the Wabash, St. Louis & Pacific Railway Company, or any one on its behalf, would pay to the United States Trust Company $13,708.33, which sum was equal to the interest for one month on the Omaha bonds. That amount was paid by the receivers, and there is no controversy here concerning it.

On March 3, 1886, Thomas McKissick was appointed receiver of the Omaha Division, and on March 6th the division was surrendered to him by Humphreys and Tutt. On April 23d the petition in this case was filed by the intervener for the rental which accrued from October 1, 1884, to February 6, 1886, amounting to $222,075.77.

On the same day the order of surrender was made, namely, January 6, 1886, a decree of foreclosure and sale under the Wabash general and collateral mortgages was entered. This sale specially reserved all rights under the Omaha Division and other leases and mortgages, and adjudged that the receivers' surrender of any leased branch terminated the lease as of the date of the surrender. The sale of the road having been made and confirmed, the receivers were directed to transfer all the property to the Wabash Western Railway Company, a new corporation organized to take the property, the latter company agreeing to pay all claims and demands 'growing out of the operation by said receivers of the railway property lately in their charge, which have been or may be adjudged to be superior in equity to the mortgages foreclosed by said decree.' The transfer of the entire property was thereupon made to that company, and it has since assumed the defense of the intervener's claim.

The master to whom the petition of the trust company for rent was referred made two reports. By the first report, the trust company was allowed a rental of $77,237.06, being a sum equal to the interest on the bonds from October 1, 1884, the date of the last payment, to April 16, 1885, the date on which the court ordered that no rent or subdivisional interest would be paid on lines that did not earn a surplus.

To this report the receivers filed exceptions, which were sustained by the court, and the case referred back to the master, with instructions to report-First, whether the Omaha Division has been retained by the receivers at the instance or for the benefit of the mortgagees under the Wabash general mortgage, after the United States Trust Company had demanded possession thereof; and, second, to ascertain and report what would be a reasonable rental for the line for the time it was so withheld. In his second report the master reviewed at some length the record in the case, and concluded that the value of the use and occupation of the property during the time it was withheld from the intervener was the pro rata amount of the rental provided for in the lease, namely, $13,708.33 per month; that the intervener had received the rental for 30 days of the period of detention, and was entitled to receive pay for two months more, or the sum of $27,416.66.

To this report both parties, the receivers and the trust company, excepted, and, these exceptions having been filed, the court, on September 25, 1889, entered a decree that the exceptions should be sustained in so far as the report found that the intervener was entitled to recover two months' rent of the mortgage property at the rate of $13,708.33 per month; but, in so far as the report found that the intervener was entitled to recover one month's rent, it was confirmed, and a final decree was entered for $13,708.33, and interest from January 6, 1886, making an aggregate amount of $16,765.51.

From that decree both parties appealed to this court.

Theo. Sheldon and E. W. Sheldon, for the United States Trust co.

[Argument of Counsel from pages 295-299 intentionally omitted]

Wells W. Blodgett, Thos. H. Hubbard, and F. W. Lehmann, for Wabash W. ry. co.

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