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Vol. IV.]

MEYER v. Johnston.

(No. 3.

We have been furnished, by the industry of counsel for complainants below, with imperfect manuscript reports of the cases of Southerland, Trustee, &c. v. The Lake Superior Ship Canal Railroad f Iron Co. (before Judge Longyear, United States District Judge for the Eastern District of Michigan, presiding in the circuit court at Detroit), and Hyde v. The Sodus Point, fc. R. R. Co. (before a judge of the supreme court of New York, at Brooklyn). In each of these cases the court seems to have authorized its receiver to raise money by certificates of indebtedness, which should constitute a first lien on the property, and to complete therewith the company's unfinished work. In what manner, in the former case, the court obtained jurisdiction of the cause, by whom, for what purpose, and how it was brought before the court, we are not informed. It only appears, by a copy of Judge Longyear's order, of June, 1872, that " the receiver, Knox, was appointed .... under the first mortgage,” and that after notice to the parties, and counsel for them had been heard, “it being made to appear to the court that it is for the best interest of all concerned in said ship canal and said property, real and personal, that said canal should be finished and made ready for use as speedily as practicable, and that it is necessary and expedient that said receiver should issue certificates of indebtedness for the purpose of said speedy construction ;” therefore he was authorized by the court to issue such certificates, payable July 1st, 1873, and bearing interest at the rate of ten per cent. a year, to the amount of $500,000, which should constitute a first lien on said canal and property, and have priority of payment over any debt previously created, and to execute and deliver a mortgage trust deed thereof, and of the franchises and rights of the company, to a trustee, to secure payment of said certificates accordingly. It was further provided that, in case these should not be paid at maturity, the receiver should, upon application to the court and on its order, deliver over all the property and effects embraced by said deed to the trustee, to be by him sold to pay said certificates. The receiver was also authorized to sell said certificates, at a discount not exceeding twenty-five per cent., or to borrow money by hypothecation of them. The court, by this conveyance to a trustee, put the property even out of its own control, and appears to have disposed of it, as if invested itself with a sort of seigneurial title that enabled it to supersede existing rights of others therein, and to have exercised legislative power in authorizing the borrowing of money without regard to usury laws.

The only other information which our manuscript of this case contains is, that the first series of these certificates of indebtedness not having been paid, the trustees under the receiver's mortgage trust deed applied to the court, in 1874, for leave to sell, to enable him to pay them ; that a contest was thereupon inaugurated with other parties interested, and that the judge declined to grant the leave applied for, until the supreme court of the United States should decide a case pending in it, which seemed to him to involve some of the questions on which his decision would depend. Not having a full report of this case, we do not comment on it further, except to say that, as presented to us, we do not recognize in it any principle which would justify a chancellor of this state in assuming the authority (seemingly absolute) which Judge Longyear exercised in that case ; and [No. 3.

Vol. IV.]

MEYER v. Johnston.

we do not perceive in the result of it any reason for desiring that a court of equity should be clothed with such authority.

In Hyde v. The Sodus Point Railroad Co. et al., a judgment creditor, to an amount between $500 and $600, filed his complaint in the nature of a bill, in December, 1873, against that company and the Union Trust Company, on behalf of himself and such other creditors as should join in the proceedings. He set forth that an execution on his judgment had been returned unsatisfied ; that the property of the Railroad Company was of great value; that it was subject to a first mortgage trust deed executed to the Union Trust Company as trustee, to secure the payment of bonds to the amount of $700,000, which had been issued ; that the trustee had not taken possession of the property, as it lawfully might have done; that, by reason of disputes among the officers and managers of the company, its property was being wasted, and seized for taxes and various other claims, real or alleged ; that bankruptcy proceedings against it were threatened ; and that there was great danger, unless the court should take charge of the railroad, that its operations would cease and the property be wasted, and the claims of plaintiff and other bona fide creditors be lost; wherefore, plaintiff prayed that a receiver be appointed ; that the company and its officers be enjoined from interfering ; that the property, profits, and earnings of the railroad company, properly applicable to payment of plaintiff and other creditors with liens, be so applied, and that the property should be sold as the court should direct; to which last prayer no response was made, or perhaps desired. With the complaint, and in the same cause, were filed affidavits (sworn to before plaintiff's complaint was filed) of several persons, holders and agents of the holders of first mortgage bonds, to the amount of $649,000 of the $700,000 issued ; in which affidavits affiants say, “ their bonds constitute the first existing lien on the property of the company; that the interest on them is in arrears and unpaid ; that proceedings for a foreclosure have been postponed in the hope that some arrangement might be made which would prevent the sacrifice usually incident to such proceedings, and preserve the rights of the subsequent lienors; that in September, 1873, the Union Trust Company suspended payment, and shortly afterwards a receiver of its effects was appointed, whereby a further difficulty existed in the way of a foreclosure ; that they are advised that the appointment of a receiver would not prejudice the right of the trustee to commence proceedings hereafter to a foreclosure; and that they believe it would be a benefit to all the creditors of the R. R. Co. to have a receiver appointed for the purposes mentioned in plaintiff's complaint." Thereupon, it seems (though our manuscript does not contain the order), Sylvanus J. Macy, one of the holders of first mortgage bonds, was appointed receiver. On the 15th of January, 1874, he made a very lucid report of the condition of the property, specifying the bridges and other parts of the road that were wretchedly out of order, and insisting on the importance of making repairs, and of constructing, at one terminus, wharves, piers, and other fixtures to facilitate transfers of cargo to and from vessels, and at the other terminus, connections with other railroads ; in order to do which work, and other things, he asked for authority to issue certificates of indebtedness to the amount of $125,000, which should constitute a first lien on the property of the company. This au

Vol. IV.]

MEYER v. Johnston.

(No. 4.

thority was granted on the 16th day of January, 1874, and on the 20th was confirmed, after consideration by the court of an affidavit (of which we have no copy) by the President of the Union Trust Company, and argument by Mr. Peckham, in opposition.

It is obvious that the holders of the first mortgage bonds, in their own right, or as agents, representing nearly all of them, got up this case in conjunction with Hyde, a judgment creditor, as plaintiff. And, since no one opposed the motion, except (apparently) the Union Trust Company (trustee in the mortgage deed made for their benefit), and no appeal was taken, it is probable that the opposition was pro forma rather than real. At any rate, it was obvious to all parties that it would be beneficial to all to have the work completed even on those terms. And, if the holders of the first mortgage bonds were willing that the certificates should create a lien prior to their own, it seemed pretty certain that the other creditors would not consider that they had any cause for opposing them.

We cannot regard this unreported amicable suit as an authority of weight concerning the jurisdiction of a court of equity to take upon itself the completion of unfinished enterprises, and the raising of money for the purpose, by charging the property with liens that shall override other and older ones, against the consent of the persons entitled to them.

Another case to which our attention has been called on this point is that of the Alabama and Chattanooga Railroad. Dilapidated, mismanaged, in litigation in several distinct courts, subject to independent managers, deriving authority from different sources, charged with a first mortgage debt of more than $5,000,000, with interest to a large amount unpaid, which debt the entire property, upon a sale thereof, would not fetch money enough to pay, and daily diminishing in value, while its other large debts were daily growing larger, the trustees under the first mortgage deed filed their bill in the circuit court of the United States, at Mobile, against the company and the trustees in the second mortgage deed, and several other defendants, and prayed that the court would take jurisdiction of, settle, and determine the various matters of dispute and the rights of all persons concerned, and sell the property, or dispose of the same for their benefit, according to their respective rights therein, and, in the mean time, take charge of, preserve, repair, and operate the railroad, with its appurtenances, by receivers, whom it was asked to appoint, “ with full power to borrow money, and to render effectual the orders and directions of the court, .... [and] to cause the property and effects of said corporation to be properly .... protected, improved, and administered .... and to be put in such condition, as to title and possession, as well as in every other respect, that the said railway, and the property incident thereto, may not be sacrificed,” &c. This bill, with its exhibits and many affidavits in support of it, before being filed, was presented to Mr. Justice Bradley, of the supreme court of the United States, on the 26th day of May, 1872, and application made for an injunction and the appointment of receivers, according to the prayer of the bill. But he ordered that the application be heard before the circuit court of the United States, sitting in equity at Mobile (of which he was circuit justice), on the 20th of June following, and “ that a copy of the bill and affidavits, and notice of the VOL. IV.

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[No. 4.

Vol. IV.)

MEYER v. Johnston.

hearing aforesaid, be served on the defendants at least ten days before the hearing."

“On the 20th of June, 1872, the motion for receivers and for injunction was duly submitted to said circuit court .... in open court, and held for order and decree in vacation.” But, urgent as the case was, not until the 26th of August — and not then until “ the parties interested ” consented, after an amendment of the bill bearing date August 23d, 1872, withdrawing all offensive imputations, was made — did Mr. Justice Bradley make the order so much relied on in this cause, and which has attracted so much attention from the legal profession. The order recites that the “ railroad and connecting works and other property .... are rapidly deteriorating in value, and being wasted, scattered, and destroyed, whereby the security of the first mortgage bond holders, and the interest of all other persons concerned in said property, are subject to great hazard and danger of entire sacrifice.” And then the order proceeds as follows: “ And whereas, in the present condition of said property, it is impossible, without great sacrifice, to dispose of the same in any manner; and whereas, it has been proposed and agreed by the parties interested, that all further opposition to the proceedings in bankruptcy against said company .... shall be withdrawn, and that the said proceedings shall be affirmed ; and that all other proceedings for the appointment of receivers in the several state and district courts shall be discontinued, so that the proceedings in this suit shall have full effect and operation, without undue embarrassment, and that a receiver or receivers shall be appointed in this cause to take charge of said property, and put the same into proper condition for its preservation and disposition, for the mutual benefit of all parties interested therein ;” therefore, receivers are appointed and “ authorized to put said railroad and other property in repair, and to complete any incompleted portions thereof, and to procure rolling stock, machinery, and other necessary things for operating the same to the best advantage, so as to prevent the said property from deteriorating, and to save and preserve the same for the benefit and interest of the said first mortgage bond holders, and all others having an interest therein. It is further ordered that all moneys which may be raised by said receivers by loan, or which may be advanced by them for the purposes aforesaid, not exceeding the sum of $1,200,000, shall be a first lien, prior to all others, on the said railroad and other property, and to be paid, before the first mortgage bonds, out of the proceeds of said property." See Stanton v. A. & C. R. R. Co. 2 Woods, 506.

It is argued for complainants below (appellees) that the consent spoken of was only to the appointment of receivers, and not to their borrowing of money by giving such liens. This was not, it seems to us, the understanding of Justice Bradley. For in going on, after making the appointment of the receivers, by virtue of the agreement, to specify their duties, it is not to be supposed that he either did not know, or did not regard what was the understanding and agreement of the parties in that respect. And when we note what were the duties they were expected to perform, it is perceived at once that, in order to discharge them, the receivers must have a large amount of money. Under this idea, when he proceeds, in the next paragraph, to speak of the liens to be created, Justice Bradley does not Vol. IV.]

(No. 4.

MEYER v. Johnston.

expressly authorize the receivers to raise money, but, assuming that they would, of course, have that to do, he says : “ All moneys which may be raised by said receivers by loan, or which may be advanced by them,” .... “not exceeding,” &c., “ shall be a first lien," &c. The language seems to imply that, having once said that the appointment was made by agreement of “the parties interested,” the learned justice did not think it important to repeat this in the several successive paragraphs in which he spoke of what the receivers were to do. Besides, the prayer of the bill was for receivers “ with full power to borrow money,” to have the property improved, &c. And the parties, consenting to their appointment, must be understood as consenting to their being appointed “ with full power to borrow money,” according to the application, which, obviously, could not be done for an insolvent corporation, except by creating liens on its property that should have precedence of the first mortgage. But however this may be, Justice Bradley took care not to allow any lien to the certificates of indebtedness, which were to be issued by the receivers, payable ten years afterwards, “ until (as the order says the same shall be countersigned by a majority of the trustees for the first mortgage bond holders ; without which countersigning, they shall not be entitled to the priority and lien aforesaid.” This countersigning would itself secure such priority, even if the lien of the first mortgage bond holders should have to be displaced to that extent in favor of subsequent mortgagees, according to the case of Pierce v. Emery, 32 N. H. 521.

We have examined and analyzed these cases thus particularly, because the proposition involved in the discussion is of immense importance, and they are understood as establishing it. It will be seen that in all of them first mortgagees were the actors, and that in the one last considered, express consent was given by " the parties interested," or, if not, that it was exacted of the trustees of the first mortgagees; wherefore, this case cannot be relied on as affording support to the proposition. Let us now return to the examination of it upon principle.

We presume it may be considered as settled that a railroad company, which has executed a first mortgage of its railroad, constructed and to be constructed, and thereby raised a large amount of money to aid in the building of it, cannot afterwards give a security to another, even to one who is engaged to build an unfinished part, that shall have precedence of the older one. In Dunham v. Railway Company, supra, this question was presented (very favorably, on behalf of a contractor) to the supreme court of the United States. “Authorities are cited,” says Justice Clifford, " which seem to favor the supposed distinction, and the argument in support of it was enforced at the bar with great power of illustration ; but, suffice it to say that, in the view of this court, the argument is not sound, and we think the weight of judicial determination is greatly the other way." And in Galveston Railroad Co. v. Cowdrey et al. 11 Wall. 480, the same court, by Bradley, J., says : “ On the part of Robert Pulsford, it is objected that the decree does not give him a priority on that portion of the road which was laid with his iron. He contends that he is entitled to this, first, because, when the mortgages of complainants were executed, it was not in existence and could not have been conveyed thereby, and can only be embraced therein on the principle of equitable estoppel, which

ipad we think that, in the the bar with inction

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