FEDERAL BEPORTER. l'
CENTRAL TRUST
Co.
OF
N. Y.et al.V·. WABASlI,l:5T. L. & 1'. Ry. CO.
etal.
(Oireu£t O(J1Jll't, E, Do NiB8oUri, E. D. November 13. 1888.) An insolvent railroad corporation. the various divisions of whose road were incumbered by separate mort?;ages. and the whole by a junior general mortgage. filed; a bill praying for the appointment of rec::eivers of the whole of its property tor thll benefit of all parties concerned. ltnd receivers were appointed. Bubsequentlythetrllstees in the general mortgag-e filed a bill to foreclose. and the same was consolidated with the first bill, .and a sale took place under a de· ) .cree foreclpsing the general mortgage. subject to all the divisional .senior mortgag'es. Oertain trustees of divisional senior mortg'ages. who had been made partiesdefen'dant to the original bill. and had employed counsel to pro· tect their interests. thereupon tiled claims against' the proceeds of sale. to be reimbursed for their own services and expenses for counsel fees pending the proceedings. On a reference to a master. sa'd claims were allowed, and taxed as costs, but the claim of one trustee was disallowed'on tlie ground that. pend· fng the proceedings, it had tiled a bill in anothercollrt to foreclose the divis· fO,nal mortgage inwhicb it .was trustee. and procured the appointment of other receivers for that division, Held, on exceptions to such ruling, that it . wail erroneous; t'hat such trustee was entitled to reimbursement for services and ,expenses by it incurred jl.S a party defendant to the original bill, up te> -the tfme lts division was withdra,wn and other receivers thereof were ap· , . pointed." J. B.ure. Herd. fwrthe:r. that inasmuch as.the general mortgage bondholders had con· sllnted to the allowance of similar claims in favor of otller trustees in senior divisional mortgages, as rec()[nmended by tbe master. it had established the · rule for the taxation of costs'in the particular case. and that the court would not re-«jxaminll the question.wllether such allowances were proper. On to Master'a Report on Claim of United States Trust Company and Edward. W. and Theodore Sheldon. of November 9,1885, referred to in the opinion is as "Now; onothis day come the Central Trust Oompanyof New York, and' Oheney. by Butler, Stililnan &, Hubhard. and Phillips & Stewart. thpJ\' 8\l.Uc.itor!!./lrndJhe Met'cantile Trust OOllll>llny of New Yorll, by H. S. Greene, its solicitor,andupon motilmitis ordered that this cause ue rl·fprred to Edmund T. Allen; as special m:lster, to take .and report. with all convenient \Speed. evidl'llCe:and his conclusions·on the following questions' and matters: .. '. *,. (7) I)llid" master will also report the proLable arnonntof costs incurredinthis cause inthi8 court, and in all cOllrts entertaining ancillary juthe amonnt of reasonable ('ompen8ation to be paid to, receivers, thei.r s,l/Beltol's lind counsel, lor sprvices lIlrt'ady ren1\1 'Il Said master will also take.e\idence aud report upon st,lchother matters' ertil1enttlJthe issuei:l mllde herein as may be brought befote him·.. Itis of t'rpd that said master take such portions of the evidence on,Said questions'and .maltel'lIIlS maybe taken most c,mvenielltly in the city of:NewXork or ·.particlUarly when a number of Witnesses i?J ·. or'Il"':BY of. Louis." 'The., masteid'epOTted J uoo"U; 1887 ,as follows, the eleventh paragraph'ofsaid . uA:large amount ,ot evidelloo was produced before' met in respect of claims for services rendered in this litigation by trustees of the senior mortgages upon
1.
RAILROAJ) ,00MPANlES-BoNDS ,4Nn. MORTGAGES-FoRECJ,OSURE-COSTS.
*
(In
co. v. WABASH, ST. L.
&: P. RY.
co.
628
the property of the Wabash Railway Company; by trustees of mortgages upon ,property leased by said railway company, and forserviees rendered such:trustees by theirrespective solicitors; also in respect of claims for services by solicitors who have appeared in this cause forlessor corporations, made de· fendants in the original and cross-bills, the property of which lessor tions came into the possession of the receivers. The pUI'chasing committee contest the right of, the trustees of both classes above named, to be paid for their services. or to have their costs, as between solicitpr and client, .paid out of the fund; and contest the right: of the lessor corporations to have their costs as between solicitor ·and client, taxed against the fund. It is contended by the purchasing committee that the trustees above referred to were not necessary parties to the cross-bills of the Central ,Trust Company of New York and James Cheney, trustees, under the general mortgage, nor to their bill fOl' the foreclosure of the general mortgage, removed from thl! state court, and consolidated with the original cause, nor to the cross-bill of the Merean·tile Trust Company, trustee under the collateral trust mortgage; that the interests of all the trustees of other than the general mortgage and collateral trust were correctly stated in the original bill of complaillt of the Wabash Company, or in the amendment to its original bill, and in.,the several cross-bills above mentioned, and in the petitioll of the Central Trust Company of New York and James Cheney. removed from the state court; that no relief was sought by said. defendants and cross-complainants against the interests l'epresented by the trustees, whose claims for compensation and costs are now under consideration; that the decree entered in this cause recognized and protected all the interests represented by said trustees; that no necessity for any action on the part of said trustees in respect oUhis litigation, .and hence no occasion arose for the employment of solicitors to represent thlJm ,in the cause; that it has not been the practice of courts of chancery to make allowances to parties so related to the cause for compensation .forservicesrendered, nor to tax their costs, as between solicitor and client, to be paid out of the proceeds of a sale insufficient to satisfy junior mortgagees who sought.and secured the foreclosure of their mortgages; that in such cases the practice has · been to add the .taxable costs, particularly as between soliCItor and client, to the securities of the senior mortgagees. These contentions of the purchasing committee are well sustained by the English and .American cases. Theyseem to me, howe¥er. to overlook certain features of this litigation, which are, so far as my reading goes, exceptional, and which may well wan'ant exceptional · .treatment. Whatever it has since become, this suit was not, in its inception, s suit by ajun10r mortgagee to' foreclose his mortgage, nor by junior mortgagees to foreclose their mortgages, without interfering with or trenching upon the of prior mortgaglJes. The original bill filed by an insolvent debtor corporation prayed, among other things, 'that your honors will caUSe all the lieris upon said property, or any part thereof. and all rights, c.laims, ·and equities of all persons interested therein, to be ascertained, defined, and determined.. and that the proceeds arising from the sale of such property, (lr any part thereof, be applied under the orders and decrees of this court, according to the rights, interests, and eqUities of parties or persons interested in said fund.' This was, then, at the commencement, a proceeding for the administration of the affairs of this insolvent complainant. and might, have 'resulted in the sale of all its assets from all the many incumbrances upon it, and an application of the proceeds of such sale, · according to the rights, 'interests, and equities of parties or persons interested in said fund.' In suca cases-that is, cues of administration of an estate-it was the practice of the English court of ,chancery tl:> pay the costs of the proper and necessary parties '.inthe first instance, and before the fund .was administered. Fora v. Earl of :' Che8terjlelai 21
:624
FEDERAL REPORTER.
"Whi)e the outcome of this litigation has been the foreclosure of the two junior'mortgages, leaving unimpaired the rights and equities of senior mortgagees;, the proceeding has never ceased to be what it was at its commencement, 's suit for the administration of the estate of the Wabash Railway Company, an insolvent corporation. The receivers were appointed under the prayer of the original bill filed by the Wabash Company. A motion for their appointment under the cross-bill of the general mortgage trustees, and under the petition of those trustees removed from the state court, was denied. The original cause'.waa consolidated with the removed cause, and the two causes culminated in a final decree, which was a decree in one cause as well as in the other. The consolidated cause partook of the characteristics of each of its constituent parts, and in determining the question under discussion, the characterof the original bill should, in my judgment, be kept in mind. From the original bill the'\nsolvent condition of the com{llainant corporation was clearly apparent. It averred that large sums of money were due to a multitude of lalJorers; that the corporation was indebted to the St. Louis, Iron Mountain &, Southern Rail way Company in the sum of $1,150,091.50 for advances j that :the negotiable paper ofthe' corporation, to the amount of over two millions of dollarsi'waS outstanding, which paper was indorsed by certain parties, who held collateral trust bonds ,as security for their indorsements. The prayer Was. made that the court would make such orders as would enable the receiv. ersto be appointed' to protect the indorsers upon said promissory notes.' It averred that the complainant was indebted to a number'of other railroad cor· porations on blliances arising from exchange of business, and that, unless such indebtedness· should be:promptly paid, the' earnings of the complainant's property· would be .greatly impaired. It averred that the floating debt of the corin the aggregate to the sum of $4,784,145.01; but whether this large sum was inclusive of any or all of the amounts previously above stated, did not clearly appear. To anyone at all familiar with the history of railroad receiverships during the last twenty years, such recitals as above stated foreboded a clond of l'Alleivers' certificates. There would, in the nature of things, be no other method, ordinariI,}', of providing the means for paying off promptly labor claims, traffic balances, and other pressing preferenlial demands, and, at the same time, for keeping the property in rep,lir, paying its current operating expenses, rentals, taxes, and interest on underlying mortgages. Indeed, on the 30th day of May, 1884, the day after the recei vers were appointed, the complainant, by its petition, prayed for an order directing the receivers to protect by their obligations as receivers the promissory notes above mentioned, as they should severally mature, amounting in the aggregate to $2,300,000. The, case of Miltenbe1'!ler v. Railway 00., 106 U. :::;. 286, 1 Sup. Ct. Hep. 140dt'oId been decided at the October term, 1882. In that case Mr. Justice BLATCHFORD commented upon the want of equity in the objections of first mortgagees {who had .been 'made parties to a bill of foreclosme by a second mortgagee) to the indebtedness incurred by the receiver, under the orders of the court, because they had been lying by and seeing the court and the receiver dealihgwith the property in the Illanner complained of. and contented · themselves with merely protesting geJJerally, and disclaiming all iIIterest under the receivership..' 106 U. S. 308, 1 Sup. Ct. Rep. 159. After these commentsof Judge BLATCHFOI:D, considering the averments of the original bill, and the petition of the complainant filed immediatply after the appoilltmentof thereceivers,it does not seem to me reasonable to claim that no necessity.existed for ally: action on the part 'of trustees of senior mortgages, nor occasion for solicitors to represent them in this cause. Again, the purchasing committee are i;nconsistent in contesting these claims. On the 22d day of September, 1886, General Swayne testified before me that the purchasing committee consented to the payment out of the fund to J aIDes R. J essup, as ODe
CO. V.
WABASH, ST. L.
& P.
RY.
CO.
625
of the trustees named in the mortgage of the Great Western Railway, and as trustee namedin the mortgage to secure the consolidated sinking fund bonds of the Toledo, Wabash & Western Railroad, and as trustee named in the mortgage of the Illinois &; Southern Iowa Rail way, he having acted also as counsel for himself, and in one or more instances for his co-trustees,' the sum of three thousand dollars. By reason of this evidence of General Swayne I recommended an order making such allowance, which order was made, without objection from anyone, on the 6th day of October, 1886, and the money paid by me accordingly from funds subject to my check as commissioner. 'rhese considerations induce me to recommend the allowances to trustees and their solicitors hereinafter stated. The foregoing allowances are all that I think slrould be made, on the evidence produced before me, to trusters named in mortgagEls upon property owned by thiJ Wabash Railway Company, at the date of the receivership, and to their solicitors. Messrs. Ed ward W. and Theodore Sheldon made proof before me of services rendered as solicitors to the United Stlttes Trust Company, the trustee named in the Omaha Division mortgage. Inai!lmuch, however, as the United States 'Trust Company, on the 6th day of Janqary, 1886, secured an order for the surrender to it of the property describ",d ill its said mortgage, and has since prosecuted the foreclosnreof said .mortgage in a separate proceeding, I am of the opinion that they and the trust companysllould be remitted to th<tt proceeding for such allowances regarding their services as. they may show themselves entitled to receive, from funds lU'ising from such foreclosure. EDlIUND T. ALLEN, Special Master." Theodore Sheldon, for intervenors. John W. Noble and Wells H. Blodgett, for receivers. I
THAYER, J. 1. The master, in his report filed June 11, 1887, bases his right to .-eport upon the claims for compensation made by trustees under senior mortgages upon the eleventh paragraph of the order of November 9, 1885, and not upon the seventh paragraph. His right to investigate and report on claims of trustees in underlying mortgages under the eleventh paragraph of that order has been heretofore recognized by the court by making numerous allowances on such claims in accordance with the master's recommendation. I must accordingly overrule the point now made that the master had no authority under the order of reference to consider the claims of the United States Trust Company, and Messrs. E. W. and Theodore Sheldon, its solicitors. That question cannot be treated as now open for consideration. The master's power to report on those claims is derived from the eleventh paragraph of the order of November 9,1885. 2. The question whether trustees under senior mortgages, and their solicitors, ought to be allowed compensation out of the funds realized from the foreclosure sale under the general mortgage, is a question which the master has examined at some length in his report. His conclusion is that, inasmuch as this proceeding was originally brought by an insolvent corporation to obtain administration of its affairs, and might have resulted in a sale of all of its assets free from all incumbrances, that all of the trusteesin underlying mortgages who were made parties to the proceeding, rightfully employed counsel to guard their several interests, and are entitled to compensation out of the fund realized from the foreclosure sale. It lis unnecessary to re-examine the master's conclusion on v.36F.nO'.11-40
·626
Fli)DERALREPQRTER.
that point,' at this stage' of the case. With the consent of the purchasing committee, the court has already made numerous allowances to the trl,lstees of underlying mortgages, and to their solicitors, in accordance with the master's views. That settles the rule for the taxation of costs, so far as the present case is concerned, and it should be applied to the claim preferred by the United Stntes Trust Company, unless it differs essentially from claims in favor of other trustees that have heretofore been allowed. 3. I cannot regard the fact that the United States Trust Company began proceedings to foreclose its mortgage on the Omaha Division, and, at a certain timewithurew that division of the road from the custody of the receivers appointed in this case, as of sufficient importance to distinguish its claim from those of other trustees in underlying' mortgages whose claims have been recogni,zed. It may be assumed that the trustees in all of the underlying were entitled to compensation out of the property covered by thei:a; respective mortgages, for all of the services by them rendered, or expenses incurred, while they were parties to this suit, in guarding their respective interests in the property then- in the custody of the court. That being so, those tn:stees of underlying mortgages who did not begin foreclosure proceedings, or withdraw the property in they were concerned from the court's custody, appear to me to have no greater right to have the expenses by them inCiurred in this proceeding taxed as a part of the costs of this suit, than a trustee who did at a certain time withdraw property in which he was concerned, and begin foreclosure proceedings against it. The distinction which the master made as against the United States Trust Company appears to me to be purely arbitrary. Such allowances as have heretofore been made in favor of trustees in underlying mortgages and their solicitors, can only be. sustained on the ground that, having been made parties to a proceeding which might have resulted in a sale of all the property of the Wabash system free from all incumbrances, and having been forced to employ , counsel to guard their several interests, they areentiUed to reimbursement out of .the fund realized in this case for the trouble and expense so - incurred-. The same reasons, in,my opinion, necessitate an allowance to the United States Trust Company for all expenses by it incurred, at least · up to the date of its withdrawal. If the allowance is right in one instance, it is in the other. 4. According to the view I have taken it is unnecessary -to recommit the matter to the master. I have therefore examined the testimony be, fore the master with respect to the amount of compensation that should be allowed the United States Trust Company and its solicitors, andl conclude that an allowance of $500 to the former and $1,500 to the lat· ter will be adequate, con!:1idering the allowances that have already been made to other trustees and solicitors for similar services and expenses. The fifth paragraph of the order made herein on April 14, 1888, (over· ruling the eXception to the master's report, filed· June. 11, 1887, on the claim of the United States Trust Oompany and Messrs. E. W. and Theodore Sheldon) is rescinded, and claimants' eJt.ceptionB, filed June 29,1887 ,
FOSTER 17.-
C. & L. M. R. CO.
627
of are sU!'ltained, and an allowadce is hereby made as above $500 to the ,United Rtptes Trust Company;' al1d'$1,500 to MesEirs. E.W. and Theodore Sheldon.
FOSTER .". MAN'SFIEw,
C. & L. M. R. Co. et al. August 24,1888.)
(Oircuit Court, N. D. Ohio, E. D.
RAJT,'ROAD COMPANIES-BoNDS AND MORTGAGES-CoLLATERAL AGREEMENTS -CONSTRUCTION.
A company employed a construction company to build some of its track, agreein!!: to issue bonds therefor to a certain amount per mile of track, in Installments. as sections of the work should be completed. By a subsethe bonds were delivered in advance of the building of the track, the company a!!'reeing to take care of and pay all interest accruing before the railway berame in a condition for traffic. and the former agree<lto reimburse the latter for all Interest paid, not properly chargeable to it. out of the first earnings of the road. Held. that the construction company was only bound to pay interest on so many of the bonds as it received and used to which it was not entitled under the construction contract.
4. 6.
2. SAME-RIGHT TO FORECLOSE. The agreement of the cODstruction company to p'ay the interest is no de· fansato a bill forforeclosura of a mortgage to secure said bonds and coupons. brought by the trustees in the mortgage at the instance of a corporation to whom the bonds were negotiated. 8. SAME-DEoREE-AcTION TO SET ASIDE-LACHES. In such cllse the property was purchased at the foreclosure sale by another railway c,ompany, which held the bonds, and a bill was filed by a stockholder of the mortgagor to set aside the sale as fralldulent. The fraud was predicated on' an alleged defense to the foreclosure bill. which the directors. a majorit,v of whom were averred to be connected with,the creditor company. or· dered withdrawn. whereby a decree Pto confesso was taken. All the facts charged in the bill appeared to have been, on the face of the foreclosure pro· ceedin.L,"ll., easily accessible to complainant. if .Dot already known to him. and well-known to the officers of the corporation. No concealment of any of the transactions was and no reason shown for the delay in filing the bill. which,Was 10 years after the sale. Held that. regardless of fraud in the transaction, the. biJI showed such laches that would not relieve complainant. and a demurrer should be sustained. SAME-CORPORATIONS-STOCKHOLDERS-AcTTONS.
'A stockholder may file such a bill on behalf of the corporation, after the directors have refused to do so.
COURTS--FEDEIU.L COURTS-.JURISDTCTION-CITIZENSHIP.
A federa1 court has jurisdiction of a suit to set aside its former decree for being fr!loudnlently obtained. although by reason of present, Citizenship, ,a purely original bill between the partios could not be maintained, as such a suit is but.,a of the former controversy.
In Equity. On demurrer to bill. Bill by,OharlesFuster agai.nst the Mansfield, Coldwater & Lake Mi.ch;. igan Railroad Company and.otherB toaet aside a foreclosllre decree and Bale of the property of said company as Jralldulent. De01UlTer tained..",:,. · Dqyle &: &ott, foroomplainallt (