Reed v. Schmidt

Opinion os’ the court by JUDGE O’REAR Reversing. The Cumberland & Ohio Railroad Company (Northern Division) issued bonds in 1879 to the amount of $250,000, and executed a mortgage on its railroad and franchises, 'etc., to Joshua F. Speed, trustee, to secure their payment and interest. After the death of Speed, .appellee A. L. Schmidt was substituted, under the provisions of the mortgage, as trustee for the bondholders. The Cumberland & Ohio Railroad Company (N. D.), contemporaneously with the execution of the mortgage named, entered into a contract with the Louisville, Cincinnati & Lexington Railroad Company, by which the latter leased the properties of the former for a term of 30 years, agreeing to provide, -out of the rentals and otherwise, a sinking fund for. the payment of the mortgage debt a,nd interest. This lease and contract were .assigned by the Louisville,' Cincinnati & Lexington Railroad Company to the Louisville & Nashville Railroad Company. Default was made for several years in the payment of interest coupons by the Cumberland & Ohio Railroad Company (N. D.), and a suit was brought in the cir76 cult court of Shelby county by certain bondholders to enforce the mortgage lien. The result was a decree for the sale of the railroad property and franchises free of all liens. This sale came on to be made by the court’s commissioner on fire 12th day of March, 1900. The trustee under the provisions of the mortgage, A. L. Schmidt, had been engaged in numerous and extensive litigations for about 12 years on behalf of the bondholders against the Louisville & Nashville Railroad Company and others. It appeared at times as if the lessor road was bankrupt, and that it could pay little or nothing on its bonded indebtedness. This was so evident that the bonds depreciated in market value till they had become practically unsalable. During that time the trustee had called upon bondholders for funds to enable him to prosecute and defend the various ¡suits affecting their lien. Certain ones, .including Mrs. Jane M. Reed, Miss E. T. Reed, and those whose names appeared upon- the reorganization pool contract hereinafter named, contributed as called upon, enabling the trustee to make the contests leading up to, if not bringing about, the condition of the decretal sale on March 12, 1900. Before that time, however, both Mrs. Jane M. Reed and Miss Reed had died, and the bonds previously owned by them had been distributed to their devisees and heirs, and had been sold at executor’s sales, so that on and before March 10, 1900, appellants W. D. Reed, J. D. Reed, and S. S. Reed (who were sons of Mrs. Jane M. Reed, and brothers of Miss E. T. Reed) became the owners, each of three of those bonds, of the denomination of $1,000 each. That for which the •bondholders had been waging a wearisome fight for and ■against for many years was come to its final test. Upon its issue depended whether they would receive anything, and, if anything, what amount, to reimburse them for their — 77 — original and subsequent investments. It was understood among those who had been conducting and backing this matter that the only tangible method of protecting their interests finally was to form a purchasing syndicate of bondholders, who could and would by co-operation and conjoint effort either buy in the road at the sale, and by its. operation and resale make themselves whole on their investments, or by their bidding force another to pay for it such a price that the bondholders would receive upon their debts against the road its full value at the time of the sale. In view of the character of the property, it was not probable that any one of the bondholders could or would feel justified in alone buying the property, or that he could even become an acceptable bidder thereon. It is customary, indeed, it may be said that it- is nearly always necessary, that some such arrangement be made and allowed, or the sales of such properties at .auction would be impracticable. The parties A. L. Schmidt and others agreed to organize such a buying pool in this instance. P. Booker Reed, a brother of appellants, appears to have been one of the prime movers in this enterprise. He was a bondholder to the extent of 26% bonds. An agreement was prepared upon the following form, and industriously circulated among the bondholders for their agreement to its terms, and for their signatures : “This writing witnesseth, that whereas, the Cumberland & Ohio Railroad (Northern Division), with all its; property, rights, etc., is about to be sold under decree of the Shelby circuit court, in action of Germania Safety Vault & Trust Company, assignee, etc., against said railroad company, enforcing the lien under a mortgage made for the benefit of the holders of bonds of said road: Now, in order to protect our interests in the premises, we, the undersigned holders of the bonds of said road, do hereby consti — 78 — tute and appoint-as our agent, and as such, do hereby authorize and empower them at any sale of said railroad under aforesaid decree to bid on said railroad and property, and buy it in for us at a price not exceeding-dollars, and each of us to be bound only for our pro rata of the price, to be ascertained by our proportion of the bonds held by the undersigned; and we will also pay a like pro rata of like costs or expenses of said agent incurred in perfecting this transaction; and, as the terms of sale require a cash deposit of $2,500.00 by the purchaser, each of us agree to put into the hands of said agent twenty dollars per bond held by us, to be applied for that purpose, or so much thereof as may be necessary.” P. Booker Reed and A. L. Schmidt were the principal actors in soliciting these subscriptions. Appellants received notice through Schmidt of the plan to form the syndicate. They at once took steps to avail themselves of the privilege, and say that they applied to Schmidt to be permitted to sign the paper, and were by him told to leave their bonds with J. W. Nichols, of the Southern National Bank; that he could sign for them. Appellants accordingly left their nine bonds with Nichols, and paid to him $180 ($20 a share upon each bond), as required by the pooling agreement. Nichols then, on the following day, March 10, 1900, signed the agreement thus: “J. W. Nichols and F. N. Lewis, 12” (meaning that Nichols and Lewis represented and subscribed 12 of the bonds of the issue to form the pool). As a matter of fact, Nichols and Lewis owned but three of the bonds, the other nine being owned by appellants'. It is claimed that the paper was. signed in this manner at the instance of A. L, Schmidt, because P. Booker Reed had violently opposed appellants’ being admitted into the syndicate. That appellants authorized an adequate subscription by Nichols, iand paid the — 79 — assessment required by the pooling contract, is not denied, nor is it that Nichols intended to subscribe for them, and on their behalf, to the extent of nine bonds, in making the subscription that he did. On Sunday evening, March 11, 1900, 'P. Booker Reed learned that Nichols’ subscription represented appellants’ bonds. He at once became violently angry and indignant, and in .a most dictatorial manner required of Nichols that appellants’ subscription .should be ■revoked, or “scratched off,” under threat that he would withdraw from the syndicate, and form another. All of this was because of a family quarrel between P. Booker Reed and Ms brothers, the appellants, and entirely disconnected, it seems, from the merits of this suit. Nichols thereupon, late that Sunday evening, informed appellants that he would,- on the following morning, because of their brother’s violent hostility and threats, cancel the subscription made by him. Appellants promptly and emphatically forbade Ms doing or attempting to do anything of the kind, expressly informing him that the extent of his agency for them in the mattter was to subscribe for them to the proposition, and not to revoke a subscription which they had authorized. They followed this up with formal written notices to the same effect to P. Booker Reed and other principal promoters of ■the purchasing syndicate, including Nichols, which were delivered late Sunday night. The sale was the following day at about 11 o’clock a. m., at Shelbyville, some 25 miles from Louisville. Schmidt and the Reeds and the most numerous of the others signing the agreement resided at Louisville when the occurrence first stated had taken place. To get to Shelbyville in time for the sale it was necessary to leave Louisville about 7 o’clock in the morning. At about 7:45 o’ clock of Monday morning, March 12, 1900, Nichols, at the instance of P. Booker Reed, and in the pres — 80 — enea of appellee Schmidt, and with the concurrence of others of appellees (but not in the presence of appellants), erased the word “12” from his subscription, and wrote “3” in its stead, and received from P. Booker Reed his check covering the payment of $180, above alluded to, and which was on the next day tendered to appellants, but rejected. At the sale P. Booker Reed, as agent for the syndicate of bondholders, parties to the agreement, bought in the railroad property for $25,001. At once appellants begun steps to have themselves recognized as members of the syndicate by intervening in the foreclosure suit. The sale was approved, and the report confirmed. Appellants offered to pay into court any further assessment necessary under the pooling arrangement to finish paying for the property and expenses incident to the purchase,, etc. All of this was bitterly resisted by P. Booker Reed on behalf of the syndicate. On final hearing the circuit court dismissed appellants’ intervening petition; hence this appeal. Appellees that one has the right to select his partners, and, at any rate, that a court of equity will not compel one to enter into an unwilling copartnership with others in whom he has not confidence, and with whom his personal relations are such as to make their co-operation impossible. It is not necessary to gainsay either proposition, if it could be done. But it seems to us that the situation of .these parties is far beyond the point assumed by appellees. Have they not already embarked into a joint enterprise, in one sense in the nature- of a partnership, by which the rights of appellants have attached, and can not now be ignored or de-stroyed by the other’s ? This is true, in our opinion, whether we come to the conclusion that appellants became parties to the pooling arrangement by the act of Nichols, their seem to state their ease upon the proposition — 81 — agent, or whether it be rested upon an earlier right of possible equal dignity; that is, their rights, as members of a class of bondholders, having equal equities against the property, and against whose interest the trustee and a majority of the bondholders of the same -class had no right to discrim,inata/Ut seems to be assumed that P. Booker Reed, as one of the moving spirits of this scheme, had the legal right to control the matter of whom should be let into it; and that, if his personal dislike or hostility was sufficient cause for him, or even if without cause, he might reject any applicant from membership into- tihe -syndicate,, no matter what his equities. But this is an erroneous assumption. It undertakes to settle these property questions upon the basis of personal feeling, in stead of legal rights. These bonds for years helped to bear the burden of the common fight for the benefit of all. Their owners contributed from time to time, certainly with the clearly implied, if not expressed, understanding that they were to share, or at least be offered an opportunity to share, in the result. When the pooling agreement was signed by Nichols as agent for appellants, with the assent of Schmidt, they became members in fact. P. Booker Reed had not the right to require their names to be withdrawn, nor had Nichols the right to withdraw them. Independent of their contraot night as members of the syndicate, appellants, as holders of a- pant of these bonds, were beneficiaries of all reasonable efforts by their trustee to realize the very best results. Appellee Schmidt, known by all his associates’ to be trustee for all the bondholders under the mortgage, could not create a pool for buying in the mortgaged property at the least possible price for the exclusive benefit of a favored and chosen number of the bondholders, himself included. — 82 — All should have been afforded a fair opportunity to share on equal terms. A purposeful failure to offer, or denial of, such privilege was a fraud upon the excluded bondholders, Cook on Corp., sec. 888; Jackson v. Ludeling, 21 Wall., 616, 22 L. Ed., 492; Wetmore v. R. R., 1 McCrary, 467, B Fed., 177; Cox v. Stokes (N. Y.), 51 N. E., 320. -"Prom the enormities of the properties involved, and of the sums necessary to buy them in at decretal or foreclosure sales, the courts have favored combinations of those interested in the property as bondholders or stockholders, organized to buy in the properties, for the reason that by this means only are bidders assured, and the best inrerests of those having claims upon the property protected. Terbell v. Lee (C. C.), 40 Fed., 40; Carey v. Railway Co. (C. C.), 45 Fed., 438; Cook on Corp., s'ec. 886, .and authorities there cited. But the courts have borne in mind all the time the rights and interests of all who are so interested, and they have not allowed some to use this privilege of the law to oppress the weaker of those holding equal equities. Jenkins v. Frink, 30 Cal., 594, 89 Am. Dec., 134; Cox v. Stokes, supra. This has given rise to legislative cognizance of the subject. In this State, since 1896, a somewhat elaborate and careful plan for the reorganization of insolvent railroad companies sold out under foreclosure or insolvency proceedings has been provided by section 771, Ky. St., and its various subsections. Unless a reorganization plan is first submitted to and approved by the court decreeing the sale of the corporate properties, it is provided: “At .any such sale, or at any sale which shall be hereafter made, of any railroad or bridge under any decree of sale, the purchaser or purchasers shall be required to pay the amount of the bid in cash: provided, however, that if the property shall be purchased by or in behalf of holders of any class — 83 — 'of securities issued by the said company, the purchaser or purchasers shall be required to pay in money or securities, immediately, such amount only .as the court may deem sufficient to provide against a non-compliance wlith the bid; and the purchaser or purchasers shall thereafter be entitled, within such time as may be fixed by the court, to pay the amount of the bid by the payment of such money as may be necessary, and by the surrender of securities in proportion as such securities shall be entitled to receive the purchase money; and all holders of the same class of securities shall be entitled to have and enjoy equal rights in any such purchases with other holders of the same class.” We are of opinion that under this section, even without a previous agreement with the members of the pool, appellants, if offering within a reasonable time to bear their proportion of the expenses and assessments necessary to carry the sale into effect, were entitled to join in the purchase, and to share .the profits. Having made such offer before the confirmation of the sale, and repeated it before the property was conveyed to the corporation formed by the syndicate, appellants should have been admitted. It is suggested in the record that the property has since been sold, and passed into the hands of independent owners. If appellants had been admitted as members of the syndicate, it would necessarily have been upon terms that they abide the judgment of the authorities of the corporation organized by the membership to own and operate the property And if this corporation has in fact and in good faith sold the property and conveyed it, appellants are entitled to an accounting, after deducting what they would have been compelled to pay into the pool, on the basis charged other members, and interest thereon from the time same should have been paid, and those necessary costs and expenses in — 84 — curred in perfecting the enterprise and making the sale. The net proceeds should be then distributed upon the basis of the total number of shares of stock in the pool, including appellants’. Judgment reversed, and cause remanded for judgment and proceedings consistent with this opinion.