LOUISVILLE TRUST CO. V. LOUISVILLE, N.A. & C. RY. CO., 174 U. S. 674 (1899)

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U.S. Supreme Court

Louisville Trust Co. v. Louisville, N.A. & C. Ry. Co., 174 U.S. 674 (1899)

Louisville Trust Co. v. Louisville, New Albany

and Chicago Railway Company

No. 263

Argued April 24, 1699

Decided May 22, 1699

174 U.S. 674


The New Albany Railway Company, whose road was in several states, guaranteed bonds of a Kentucky railway company to a large amount. It attempted by suit to avoid this guarantee as ultra vires. Its contention was sustained by the circuit court, but that decree was reversed by the circuit court of appeals, and this Court has sustained that decision. After the decision of the circuit court of appeals, Mills, a creditor of the company, commenced suit in the circuit court of the United States. The company appeared and confessed judgment, and execution was issued and returned unsatisfied. Thereupon the creditor flied a bill praying for the

Page 174 U. S. 675

appointment of a receiver for the entire road, and that the court would administer the trust fund, and order the road sold and the proceeds from the sale divided among the different creditors according to their priority. The New Albany Company admitted the allegations of the bill and interposed no objections, whereupon a receiver was appointed. These proceedings took place on the same day. Subsequently proceedings were commenced at different times for the foreclosure of different mortgages, all of which suits were consolidated. Then the Trust Company, as holder of some of the guaranteed bonds, intervened. Then a decree. of foreclosure was entered, and a sale ordered, made and confirmed. Then the Trust Company filed another intervening petition charging that Mills' proceedings had been procured by the New Albany Company for the purpose of hindering and delaying the general or unsecured creditors in the enforcement of their debts and praying that the decree of foreclosure might be set aside, and other prayers. This was denied, and a sale was ordered. An appeal by the Trust Company to the circuit court of appeals resulted in the affirmation of the decree below. The proceedings being brought here on certiorari, it is held that, under the circumstances as presented by this record, there was error; that the charge of collusion was one compelling investigation, and that the case must be remanded to the circuit court with instructions to set aside the confirmation of sale, to inquire whether it is true, as alleged, that the foreclosure proceedings were made in pursuance of an agreement between the bondholder and stockholder to preserve the rights of both and destroy the interests of unsecured creditors, and that if it shall appear that such was the agreement between these parties, then to refuse to permit the confirmation of sale until the interests of unsecured creditors have been preserved.

The facts in this case are as follows: the Louisville, New Albany & Chicago Railway Company, hereinafter called the "New Albany Company," in 1889 and 1890 placed a guaranty upon $1,185,000 of the first mortgage bonds of a Kentucky railroad corporation. In April, 1890, the New Albany Company, guarantor, commenced a suit in the Circuit Court of the United States for the District of Kentucky against divers parties claiming to hold such bonds to have the guaranty declared void. In 1894, that court rendered a final decree, sustaining its contention and adjudging the guaranty ultra vires and void. 69 F.4d 1. From that decree the holders of the guaranty bonds appealed to the Circuit Court of Appeals for the Sixth circuit, which, in June, 1896, reversed the decree of cancellation and held the guaranty binding.

Page 174 U. S. 676

75 F.4d 3. On application of the New Albany Company, the case was then removed on certiorari to this Court, and at the time of the proceedings hereinafter referred to was still undecided. Judgment therein has since been entered sustaining the guaranty. Louisville, New Albany and Chicago Railway Company v. Louisville Trust Company, ante, 174 U. S. 552.

After the decision in the circuit court of appeals, and on August 24, 1896, one John T. Mills, Jr., commenced an action in the Circuit Court of the United States for the District of Indiana, alleging that he was a creditor of the New Albany Company to the amount of $494,911.35. That company appeared and confessed judgment, and an execution was issued and returned unsatisfied. Whereupon Mills filed his bill of complaint in the same court, based upon this unsatisfied execution and praying the appointment of a receiver. The bill set forth the property belonging to the judgment debtor, the New Albany Company, alleged that its capital stock amounted to $16,000,000, of which $7,000,000 was preferred; that its outstanding funded debt, divided into five classes, amounted to $7,700,000 in six percent bonds, and $6,100,000 in five percent bonds. The bill also alleged the existence of a floating debt amounting to nearly $1,000,000, consisting of outstanding notes and other obligations, held by the complainant and other bona fide creditors. It then set forth the guaranty of the bonds of the Kentucky railroad company, the proceedings in court by which the guaranty had been sustained, and averred that the officers of the defendant company reported a diminution of current earnings by reason of a short wheat crop and lessened traffic, and that it would be impracticable to realize from the earnings after the payment of operating expenses, taxes, and rentals a sum sufficient to pay the shortly accruing mortgage interest. The bill also alleged many matters, among others the fact that the lines of the New Albany Company were in three different states, and subject to the jurisdiction of different courts, which seemed to justify the taking possession of the property by a receiver to prevent its dismemberment or any disturbance of its continued operations as a common carrier. The prayer of the bill was:

Page 174 U. S. 677

"Inasmuch, therefore, as the complainant has no adequate remedy at law for the grievances hereinbefore stated, and can only have relief in equity, he files this bill of complaint in behalf of himself and all others in like relation to the said property, and prays that due process of law issue against the defendant, the Louisville, New Albany & Chicago Railway Company, and that it be summoned to appear in this Court, and answer this bill, but without oath, all answers under oath being hereby expressly waived under the rules to stand to and abide by such orders and decrees as the judges of this Court may from time to time enter in the premises; that, for the purpose of enforcing the rights of complainant and all other creditors of said insolvent corporation according to their due equities and priorities, and to preserve the unity of the said railway system as it has been and now is maintained and operated, and to prevent the disruption thereof by the separate attachments, executions, or levies, this Court will forthwith appoint a receiver for the entire railroad; . . . that the court will fully administer the trust fund, in which the complainant is interested as a judgment creditor, and will for such purpose marshal all the assets of said insolvent corporation and ascertain the several liens and priorities existing upon the said system of railways or any part thereof, and the amount due upon each and every of such liens, whether by mortgage or otherwise, and enforce and decree the rights, liens, and equities of each and all of the creditors of the said Louisville, New Albany & Chicago Railway Company as the same may be finally ascertained and decreed by the court upon the respective claims and interventions of several of such creditors or lienors in and to not only the said line of railroad, appurtenances, and equipment, or any part of them, but also to and upon each and every portion of the assets and property of the said insolvent corporation, and that said railroad and all the assets of such corporation shall be sold by proper decree of the court, and the proceeds divided among the different creditors according as their liens and priorities may be decreed by the court, and for such other and further relief as to the court may seem proper, and as may be necessary to

Page 174 U. S. 678

further enforce the rights and equities of the complainant and all other creditors of such corporation."

The New Albany Company appeared by its general solicitor, filed its answer, admitting the material allegations of the bill, and interposing no objections, whereupon the court made an order appointing as receiver a gentleman who was the vice-president of the company and its general manager. The order of appointment was in the ordinary form of such orders.

All of these proceedings, including the filing of the original complaint, the confession of judgment, the issue and return of the execution, the filing of the bill, and the appointment of a receiver, took place on the same day, to-wit, August 24th. Up to this time, there had been no default in any of the interest due on the several series of bonds. On November 12, 1896, the trustees in one of the mortgages (one executed May 1, 1890) filed a bill of foreclosure alleging default in the payment of interest on November 1, 1896. On the same day, the trustee in another mortgage, dated January 1, 1896, filed a similar bill, alleging default on October 1, 1896. On November 24, 1896, the court, on application of the receiver, entered an order authorizing the receiver to borrow $200,000 on receiver's certificates, payable out of the earnings, and expend the same in the construction of new bridges, the repair of freight cars and engines, and ballasting and making new alignment of track, and the equipment of engines and cars with air brakes and automatic couplers. What action was taken under this order is not disclosed in the record, although the final decree provided for payment in advance of the bonds

"of any indebtedness of said receiver which has not been or shall not be paid out of the earnings and income of the property coming into the hands of said receiver."

On the 14th day of December, 1896, the trustee in a mortgage executed September 1, 1894, commenced foreclosure, alleging default on December 1, 1896. On the 21st of December, 1896, an order of consolidation was made of these several foreclosure suits.

On the 23d of January, 1897, the petitioner, the Louisville

Page 174 U. S. 679

Trust Company, filed its petition asking generally to be admitted to appear in the suit and to take such steps and proceedings in its own behalf as it might deem necessary, which petition was sustained, and leave granted accordingly. This petition alleged the endorsement heretofore referred to of the bonds of the Kentucky railway company by the New Albany Company, that it (the petitioner) was the holder of $125,000 of those bonds, and had obtained a decree adjudging the validity of the guaranty.

On the same day, the various parties to the foreclosure suits having all appeared and filed, so far as was necessary, answers admitting the allegations of the bills, a decree was entered foreclosing the three mortgages in suit and directing a sale of the property.

On February 27, 1897, the Louisville Trust Company filed a full intervening petition, verified by affidavit, setting forth the guaranty of the Kentucky bonds, its ownership of $125,000 of them, the decree of the court of appeals and the certiorari obtained from this Court by the New Albany Company, the proceedings in the action instituted by John T. Mills, Jr., in respect to which it alleged that

"the said J. T. Mills, Jr., claimed to be a creditor to the amount of $494,911.35, but did not disclose or discover to the court in his proceedings that he was not a general creditor, but he was at the time, if a creditor at all, secured with collateral securities, the value whereof is unknown to your petitioner. And the petitioner charges that the proceedings in behalf of the said John T. Mills, Jr., were procured by the said New Albany Company for the purpose of hindering and delaying the general or unsecured creditors of the said company in the enforcement of their debts, and that, since the entry of the said order of appointment, no step has been taken in the said cause either to ascertain or to bring into court the assets which are subject to the payment of the said debts, and no proceeding has been taken to notify or to bring before the court the said general or unsecured creditors."

It then set forth the filing of the foreclosure bills, the entry of the decree of foreclosure, and alleged

"that, prior to the entry of the said decree, the

Page 174 U. S. 680

holders of the bonds secured by the mortgages to the Farmers' Loan & Trust Company and the Central Trust Company aforesaid, and the holders of the preferred and common stock of the said Louisville, New Albany & Chicago Railway Company, or a part thereof, had entered into an arrangement or agreement for the purpose of procuring the sale of the said property, its purchase by and in behalf of the parties entering into such combination and reorganization thereof, and the issue of securities to the said parties, including said stockholders, without the payment of the debts and liabilities of the said company, and for the purpose of hindering and delaying the said creditors, and with a view to prevent the collection or enforcement of such debts and liabilities, and that the said decree of sale was obtained by the said company and said complainants in order to carry out such unlawful purpose, and to prevent the general or unsecured creditors of the said company from having an opportunity to be heard in matters arising in the said cause."

It also alleged that the New Albany Company was formed by consolidation, and that one of the consolidating companies was a corporation of Illinois, and had its property in that state; that it had no power to enter into such consolidation, as had been decided by the Supreme Court of that state, and therefore that the mortgages executed by the New Albany Company, and which were being foreclosed, were not liens upon so much of its property as had belonged to the Illinois corporation, and was situated in that state. It also claimed that, under the provisions in the mortgages, there had been no such default as justified a foreclosure, and prayed as follows:

"Wherefore your petitioner prays that the decree of foreclosure and sale heretofore entered in this cause be set aside, that the pretended consolidations herein mentioned be adjudged void, and that the said mortgages before mentioned be declared to be invalid; that this cause be referred to a commissioner to ascertain and report what assets of the said New Albany Company are embraced by any liens and what are not so included, and the amounts and descriptions thereof, and that, among other things, the master be directed to ascertain

Page 174 U. S. 681

what portion of the capital stock has not been paid for and the amounts due thereon, and that the receiver herein be directed to take steps to enforce the collection of any amounts due to the said company; that due and proper advertisement be given for the proof of debts, and that said master be directed to ascertain and report the names of the creditors herein, and the amounts of debts due to them; that it be adjudged that the said master ascertain what net earnings have accrued and shall hereafter accrue from the operation of the said railway in the hands of the receiver, and that the amount thereof be adjudged and declared to be a fund to be distributed among the general and unsecured creditors of the said company, and that all such other and further proceedings be had for the sale of the assets of the said company and the distribution thereof according to law and the rights of the parties."

On the 9th of March, 1897, its petition was denied. On the 10th of March, a sale was made by the master appointed therefor, and on the same day, his report thereof was filed, and the sale confirmed. An appeal was taken by the Louisville Trust Company to the Court of Appeals of the Seventh circuit, which appeal was argued on the 16th day of November, 1897. On the 5th of February, 1898, the decree of the circuit court was affirmed. 84 F.5d 9. Whereupon application was made to this Court, and the proceedings were brought before it by certiorari.

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