Baker v. Central Trust Co. of New York

HOLLISTER, District Judge (after stating the facts as above). [1 ] The receiver of the Terminal and its bondholders present their case in the alternative, claiming, first, that the. contracts, being executory and specifically enforceable, and providing a fund for the payment of interest on these bonds, are, in their nature, liens upon, or confer rights in, the Wheeling’s property or its income and revenue on continued interchanged business, and, as such, are prior in interest to subsequent lienholders with notice, and should, in equity, be specifically performed by the Wheeling and its receiver. Logically such a claim would include subsequent purchasers and mortgagees, with notice, until the contracts expire by time limitation. The argument proceeds upon the ground that the contracts were made in good' faith through proper corporate action for the mutual and reciprocal advantage of the contract — 25 — ing parties and sanctioned-by law as declared in a number of important decisions. The general proposition is not disputed, and, for the purposes of this case, it may be assumed that the contracts were fair, that the Wheeling had power to make them, that corporate action precedent to their execution was regular, and the consideration for them was adequate. Nevertheless we are of opinion that they could not become a lien upon or charge against the Wheeling or its property while in the hands of its receivers or in any way supplant the rights of the holders of its general mortgage bonds with or without notice, or the purchasers of its property at a judicial sale made now or at any future lime. The mere fact that they were executory and continuing in their nature, and gave rights to the Terminal in the future earnings of the Wheeling and to the Terminal’s bondholders rights in those earnings as a fund to which they might look for the payment of their interest, does not alter the essential quality of the contracts, which involve only a personal promise by the Wheeling, for the breach of which an action for damages would lie, or for which a specific performance might be decreed, if the Wheeling were in full life and carrying on its business, if that equitable remedy gave more adequate relief than would damages at law. Such contracts do not run with the land or impose any lien upon the property. They convey no title in the railroad itself, or any interest in it, nor do they secure any particular sum of money. Express Co. v. Railroad Co., 99 U. S. 191, 200, 25 L. Ed. 319; Des Moines, etc., R. Co. v. Wabash, etc., R. Co., 135 U. S. 576, 581, 582, 10 Sup. Ct. 753, 34 L. Ed. 243. It is sought to bring them within the principles upon which Joy v. St. Louis, 138 U. S. 1, 11 Sup. Ct. 243, 34 L. Ed. 843, and Cumberland Valley R. R. Co. v. Gettysburg & Harrisburg Ry. Co., 177 Pa. 519, 35 Atl. 952, were decided; but a consideration of these cases will show that, in the former, the contract in question under which the Colorado Railroad successfully claimed the right, as against subsequent mortgagees of the Wabash and the purchaser at the judicial sale on their foreclosure, to use the Wabash tracks through Forest Park at St. Louis, was the very instrument under which the Wabash itself acquired its trackage rights through the park. The contract was held to be a link in the Wabash’s title, and specifically enforceable in favor of another railroad whose necessities in reaching the St. Louis Union Station required it to go through the park on the Wabash’s tracks. In the latter case, the railroads, parties to the agreement, were, from the standpoint of equity, all in full life, notwithstanding certain consolidations, and no rights of subsequent lienholders had intervened to prevent the same railroad from carrying out the contract made in behalf of the bondholders of one of the railroads. We know of no principle upon which these contracts may be fixed as a lien upon the Wheeling, or as a charge against its income in the hands of its receiver, or as against the subsequent general mortgage. The receiver repudiated the contracts, as was his right and duty to do if he thought, in the administration of his trust, it would be undesirable or unprofitable to adopt them. United States Trust Co. v. — 26 — Wabash Western Ry. Co., 150 U. S. 287, 299, 14 Sup. Ct. 86, 37 L. Ed. 1085; Dushane v. Beall, 161 U. S. 513, 16 Sup. Ct. 637, 40 L. Ed. 791; Central Trust Co. v. Land Co. (C. C.) 79 Fed. 19. The Terminal and its bondholders having no lien on the Wheeling or charge against its revenues, it is obvious that they cannot be heard to dispute the validity of the general mortgage and the notes securing the same or the pledge of the bonds, or any question between the note-holders and bondholders and the Wheeling. It is immaterial, therefore, on this appeal, whether or not the bonds were pledged at an illegal discount, or whether or not the notes or any of them were past due when taken up. And, of course, no question of laches on the part of the Wheeling or its stockholders can arise. [2] But the Terminal and its bondholders claim in the alternative an equity arising, as we understand their position, in this way: The Wabash and Gould and his associates caused it to be ^represented, through the statements to the Stock Exchange and circulars of the bankers, and the bonds themselves referring to the terms of the mortgage, that the contracts were specifically enforceable for the security of the interest on the bonds. This is a claim of estoppel. They charge, further, that the Wabash, in bringing about the foreclosure of the general mortgage incapacitated the Wheeling from carrying out the contracts and caused their breach. This is a tort and sounds in damages. No claim is made for damages on this account, or for false representations, but they say all of these circumstances together constitute an equity entitling the Terminal’s bondholders, as against the holders of the notes and the general mortgage bonds securing the same and their respective trustees, all having.notice, to a lien or charge upon the Wheeling’s property prior to the bond and notes. If we disregard the fact that no bondholder has been shown to have bought his bonds upon knowledge of the statement made to the stock exchange or in any of the circulars, and in reliance on the same, and assume that the bonds were so bought, it would not seem that these bondholders had a right to infer that the agreements were more than what they were said to be. It cannot be said that traffic and trackage contracts as described in the statement and circulars were such as in their nature to become charges upon the property or income of the Wheeling as against all subsequent purchasers, mortgagees and lien-holders. The strongest inference a purchaser of the bonds would be entitled to draw from what he saw in the statement, or the circulars, or both, was that, so far as legally it could be done, the three roads were tied together during the life of the bonds by traffic arrangements of advantage to the bondholders. Assuming the contracts to have been valid in all respects, we do not mean to say that, if the Wheeling continuing in full life had broken them, the Terminal and its bondholders could not have required their specific performance. But it is quite sure that no prospective bondholder could reasonably infer or had the right to infer or would infer that the Wheeling and the Wabash would survive all possible catastrophies for the 50 years of the contracts’ life, and would, during all that time, be able to carry them out. Nor could they reasonably infer that in the event of such catastrophe to the — 27 — Wheeling, its receiver would not repudiate the contracts if he thought the interests of his trust required him to do so. Nor did the bondholders have reason to believe that a pledge of a majority of the stock of the Wheeling by the Terminal would prevent the Wheeling as a separate, distinct corporation, exercising its full powers (they at least had no knowledge to the contrary, if the fact were otherwise), from authorizing a loan and executing a mortgage to secure it for the purpose of bettering the Wheeling and keeping it going. Besides, the Terminal bonds were issued before the general mortgage was made, and, whatever the relation of the Wabash to it and the notes was, no estoppel could be raised by what the Wabash did after the bondholders bought their bonds. Nor do equities arise in favor of the Terminal’s bondholders because the Wabash brought about the $8,000,000 loan and caused the execution of the general mortgage and its foreclosure. The expenditure of the money it raised for the Wheeling on its guaranty of the notes, not only made the Wheeling a vastly better property, but it undoubtedly kept the Wheeling alive. Had not the interest on that road’s underlying mortgage been paid, a foreclosure was imminent. The large floating debt was a threat to the Wheeling’s existence, and yet much of that was contracted for the benefit of the Terminal and its bondholders. The enormous expenditure for equipment by which the Terminal was relieved from the contract it could not keep, saved the Terminal, and the equipment was used in the interest of the Terminal and its bondholders. The betterments inured largely to their benefit. The Wheeling’s proposal to the Wabash for the $8,000,000 was on the express ground that the money was needed to properly carry out the provisions of the contracts, and to pay the floating debt incurred for like purposes. The expenditure of this large sum of money, by keeping the Wheeling going, kept the contracts in force for three years longer. It is true the receivership was precipitated at the procurement of the Wabash, but the Wheeling could not live under these contracts. It was insolvent, and a receiver for it was inevitable, even if the general mortgage were not in existence. We see no basis for the operation of any equity in favor of these bondholders by which the rights of the note and general mortgage bondholders may be transferred to them. The District Court was right, under the issues, in denying these bondholders relief. The prior lien obligations and the bonds of the Wheeling’s Coal Company involved in Carpenter’s suit were the debt of the Coal Company, secured by mortgage on its laud and property. The bondholders took the bonds on that understanding. They knew the Coal Company was but an adjunct and agency of the Wheeling, yet they did not look to the Wheeling for the payment of those obligations to the holders thereof, and for the payment of the- bonds to themselves, because of that relation, but expressly contracted with it for contributions to be paid by it to be applied, together with royalties paid by Hanna & Co.’s Mining Company, to the payment, first, of the prior lien obligations, and, second, to the bonds on allotment under the plan upon which the Coal Company was reorganized. It was undoubtedly expected that, — 28 — during the operation of the plan for its 10 years of life, the prior lien obligations would be paid off and something paid on the bonds, and tiren, by some new arrangement, the mortgage debt of the Coal Company, being by that much reduced, could be taken care of out of the mines of the Coal Company. In the first Carpenter et al. suit the bondholders claimed an express contract by the Wheeling to pay all of the prior lien obligations, because of its contribution agreement; but this court held on Carpenter et al.’s first appeal (218 Fed. 273, 134 C. C. A. 69) that the contribution agreement covered coal only actually transported, less the railroad’s fuel coal, and, upon that limitation, tire plan would be a fraud upon the bondholders, because the amount of coal it transported was within its own control, thereby giving it the power to destroy, as it did dfestroy, the plan under which the Coal Company had been reorganized. It was therefore decided that underlying the plan there was necessarily an implied agreement to furnish sufficient cars to transport at least the minimum the Mining Company had agreed to mine, and that the loss or damage recoverable was to be ascertained by figuring royalties on the amount actually mined in 1902 and 1903, and on 700,-000 tons annually for the succeeding eight years, plus the agreed contributions on the balance each year after deducting the amount of fuel coal bought that year for its own consumption by the Railroad Company from the Mining Company. As it turned out, that sum, on a rough figuring, was a small per cent, less than the face of the prior lien obligations; and the court below was directed to ascertain what the exact amount would be. But if the resultant had been more than the face of the prior lien obligations and interest, there would have been something to apply on these very bonds. These bondholders claim that because the Coal Company was but an adjunct or agency of the Wheeling, the bonds are the obligations «of the Wheeling itself, upon the established principle that a court of equity will disregard corporate forms when they have been used to do •injustice. That principle is not applicable here, because absolute good faith, so far as the use of corporate forms and the relation of the Railroad Company to the Coal Company and to the bondholders are concerned, dominated the dealings' between the bondholders and the Wheeling, and their entire transactions were on the basis of the Coal Company’s separate and independent corporate existence. There is no ground upon which to base a finding that these bonds are, either at law or in equity, a debt of the railroad. Not being a debt of the Wheeling, it does not appear how they can be fixed as a lien on its property or charge upon the revenues or income in the hands of its receiver. It does not appear that the amount of damages, as found on dhe first appeal, has been fixed, and the bondholders ask on this appeal a finding that the amount recoverable is a claim against the revenues derived by the receiver in the operation of the road by him, because-it is of such character as to give it preference over the general mortgage bonds, and that, if it is not of such character, the Wabash and Gould brought about the failure of the plan by causing the execution. — 29 — and operation of the traffic and trackage contracts, and the creation of the $8,000,000 debt and the execution of the mortgage to secure it, with their results, and, therefore, they arid the holders of the notes and bonds should, in the interests of these bondholders, yield their rights thereunder. Assuming that the amount of damages may still he fixed, and that such a contract is enforceable against the Wheeling in full life, it was in any event the Wheeling’s personal obligation only, and when the receiver took possession in the foreclosure proceedings, and operated the road for the benefit of the bondholders, and did not adopt it as will appear, the rights of the bondholders were limited to the recovery of damages only. But it is claimed that this court, on the first appeal, in effect held that the receiver must continue to pay contributions to the trustee of the bondholders under its express agreement. This is based on language found in the opinion (218 Fed. 2,73, 287, 134 C. C. A. 69, 83): “Since the contribution was to continue until tile prior lien obligations were paid, there can be no inequity in denying the application of the usual rule authorizing a receiver to elect not to be bound by a contract thought detrimental to his trust. The court below was right in setting aside its order discontinuing those payments.” At the time that was written, the court had not considered a modification made by the court below directing a cancellation of a former order authorizing the receiver to discontinue payments. The order, as modified, read: “That the order of this court entered on the 14th day of December, 1908, authorizing the receiver of The Wheeling & Lake Erie Railroad Company to refuse fo adopt the said contribution contract, be set aside, cancelled and held for naught; but nothing herein contained shall be construed'as a direction to the receiver to adopt the said contract that matter being reserved for further consideration, as hereinafter set forth.” The District Court never did finally expressly authorize the receiver to adopt or repudiate the contract, although in the final decree made in that case and in the case in which the other parties claimed liens on the Wheeling, the two having been consolidated, the court found, on the claims of Carpenter et al.: “Neither the said decree of April 12, 1912, as modified by said decree of September 27, 1912, nor the cause of action upon which said decree was based constitutes a preferred claim against the Wheeling Company and neither said decree nor said cause of action is entitled to any preference or priority in payment out of the property of the Wheeling Company or the receiver of said company over other general creditors of the Wheeling Company, and the said decree as so modified, but only to the extent that the same shall he affirmed on the appeal pending as aforesaid, constitutes only a general claim against the estate of the Wheeling Company, and is hereby allowed as such to be paid pro rata with other general creditors of the Wheeling Company.” This is the order from which Carpenter et al. now appeal, and necessarily decides that the receiver should not pay upon the contribution agreement as a continuing contract binding upon the property or on him, and was a direct affirmance of his conduct in refusing, as he did, to pay the contributions, although he had not been expressly author — 30 — ized to adopt or reject the contract itself. We think that, under these circumstánces, the receiver cannot be said to have adopted the contract, and what he did under the order of reservation amounted to a repudiation. He had the right to repudiate it, subject to the control of the court, if, in his opinion, it would be undesirable or unprofitable to adopt it. But, whatever, the effect of the language used in the opinion in the case of Carpenter as between these bondholders and the receiver of the Wheeling, it could not affect rights under the general mortgage. Clearly this court, by reserving tire question of priority in accordance with the reservation in the court below, did not intend to decide the question, even as against the Wheeling, or its receiver. The damages were the debt of the Wheeling' for breach of contract, and partake of no other quality. They were made up by adding tire amounts per ton the Mining Company would have paid the Coal Company and the contributions the Railroad Company would have paid the trustee of the bondholders during the life of the contract, if the minimum had been hauled. Nor can the theory upon which, in equity, claims against a railroad are sometimes allowed in preference to the payment of mortgage bonds, because they are current debts and should be paid out of the current income, prevail for the reason—if there were none other—the consideration with which the bondholders parted for the agreements with the Wheeling did not in the slightest degree contribute to the continued existence of the railroad as a going concern. The many cases on this subject will be searched in vain for any principle upon which such a claim as this is awarded the priority sought. It would be useless to cite them. The claim of these bondholders for priority arising from the alleged diversion by the Wheeling, or its receiver, of money due the Coal Company to pay taxes, and for repairs, which, under the plan of reorganization, the Mining Company agreed to pay, if otherwise maintainable, cannot be considered, because the record does not disclose any evidence of such diversion. It may be said, applicable to .the bondholders, both of the Terminal and of the Coal Company, that they have not, in these actions, asserted any claim for damages against the Wabash and Gould and his associates, in the syndicate for bringing about the situation in which they find themselves, if such action were maintainable. Hence such questions are foreign to this appeal. General equities claimed to arise as against Gould and the Wabash, growing out of their alleged conduct, including the bringing about, with knowledge, the breach of the traffic and trackage contracts by causing the execution of the general mortgage and the issuing of the notes, and the breach of the Wheeling’s contract made for the benefit of the Coal Company’s bondholders by causing the execution of the traffic and trackage contracts and the execution of the general mortgage and issuing of the bonds and notes, cannot be considered as against Gould, because, if there were no other reason, he is not a party to the suits. If such equities exist against the' Wabash, it has been hereinbefore shown that the traffic and trackage contracts were made for the benefit — 31 — of the Terminal and its bondholders, and the $8,000,000 and interest which the Wabash borrowed from the bankers to take up the notes secured by pledge of the general mortgage bonds, was spent largely for the benefit of the Terminal and its bondholders and kept the Wheeling running in their interests for three years. The Wabash’s interest in the pledge of the bonds is comparatively small after the bankers are paid. But its right to receive what there is is at least as strong as apy equity these bondholders may have. It is at least a countervailing, if not a paramount, equity. [3] Nor can Gould be said to be represented by the trustee of the general mortgage, or the trustee of the note agreement. Such trustees represent the bondholders only in matters affecting the enforcement of the security and administration of the trust property under the terms of the trust. Short on Railway Bonds and Mortgages, § 274. So far as any question involved in this case is concerned, the only powers the trustees had are such as were committed to them in the instrument creating the trust. Railway Co. v. Blair, 214 N. Y. 497, 511, 108 N. E. 840; Miller v. R. R. Co., 36 Vt. 452, 486, 487. We are unable to see how, on the case made here, bondholders, either of the Terminal or of the Coal Company, have any claim on the property of the Wheeling, and, if they have, in what respect it is superior to the rights of holders of the general mortgage bonds. From all of these considerations, it follows that the decrees of the District Court appealed from by Baker, receiver, and by Carpenter et al., should be, and they are, affirmed at the respective appellants’ costs. On Petition for Rehearing. Upon consideration of the petition for a rehearing filed by the appellants, we are of opinion that it should be, and it hereby is, denied. But we think, upon further consideration of the record, that this court was not justified in holding that the Coal Company’s bonds were not a debt of the Wheeling. The District Court, in its opinion, expressed the view that the Coal Company’s bonds constituted a general claim against the Wheeling, if it should he necessary to assert the bonds as such a claim. But that court, in its decree, spoke as follows : “Tire question of the allowance of tho claim of the cross-complainants, R R Carpenter, Franklin Leonard, Jr., and Joseph T. McCaddon, against the Wheeling Company upon the $634,500 4 per cent, mortgage bonds as a general claim against the estate of The Wheeling & Lake Erie Railroad Company, to the extent of any balance of said bonds remaining unpaid after the property covered by the mortgage securing the same shall have been exhausted, is hereby reserved.” The question so reserved, whether or not these bonds constitute a general claim against the Wheeling, was not, therefore, before this court on the present appeal of these bondholders, and no finding should have been made upon it. The direct question was not presented, and the finding is not to be considered by the District Court as in prejudice of any conclusion that court may reach upon such reserved question, after all the parties concerned have had the opportunity to be heard, and is without prejudice to the rights of the parties, should that question be presented to this court upon appeal or error, as the case may be.