CAlUllY ,tI. HOUSTON & 'X. O. BY 0' 00.
'671
CAREY
tit
at.
fl. HOUSTON
& T. C. Ry. Co. tit
(Circuit Gourt,:JC. D. Texas. November 12, l89').) L FEDERAL CoUBTS-JURJSDICTION-RAILROAD FQRECLOSUR_RECEIVERS. A federal court baving jurisdiction and. possession, tbrough its receiver, of all the propljrty of a railroad company, thereby acquires jurisdiction of a subsequent suit t,o, fore,close a m.ortga,Lge on t1).e, same pro.perty,' irre,BPectl,'ve ot the citizenship decree of foreclosure and of the parties thereto, and may enter therein a sale. Morgan's L. & T. B. & S. S. CO. v. Texas Cent. By. Co., 11 Ct. Rep. 61, 13711r 1;1; 171, followed. , i, CONSENT DECREE-RAILROAD FORBOLOSURE. A decree of foreclosure and s,ale ofs railroad. entered by consent ot the creditors and the company, without fraud. in pursuance of a plan of reorganization, will not be set sside at the suit of some of the stockholders merely because the principal of one mortgage was not yet due, when it appeara that the sums due for interest thereon, for floating indebtedness, and on other mortgages, then due, were so great as to render foreclosure. inevitable, and in that case to deprive the stockholders of all their eqUity in the property; especially when complainants' not otter to do equity by paying the floating debt, and have not been diligent in opposing tbeplan of reorganization, vrin attacking the decree complained of.
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In Equity. Bill by S. W. Carey and others, stockholdersiQ the Houston & Texas Central Railway Company, against the company and various other parties, to set aside a foreclosure decree entered byoonsent in pursuance of a plan to reorganize the company, and to enjoin the carrying out of the scheme of reorganization. A motion for an injunction pendente lite was denied. 45 Fed. Rep. 438. Bill dismissed. R. H. Landale and Jeffetrson Chandler, for complainants. BuUer, Stulman Hubbard, A. H. Joltine, and Farrar, Krnttschnitt, for defendants. PARDEE, Circuit Judge. This cause was before the court in the first instance on a motion for an injunction pendente lite. The motion was denied for reasoDs given at some length. 45 Fed. Rep. 438. Both parties having taken such evidence as suited, the cause now comes on for final hearing on the proofs, which change very little the aspect of the case as presented by the pleadings. It has been most thoroughly and exhaustively argued on both sides, both orally and by brief; the discussion ranging over a wide field, covering many propositions of law and equity and of equity practice. Were it at all likely that the present decision would be taken as a finality in the case, I should be disposed to take up 8eriatim the questions as presented by counsel, and disas counsel cuss them as elaborately and, perhaps, at as great have argued the same in their printed briefs. Under the circumstances, however, I.do not deem it necessary to further incumber the record with my conclusions in the case beyond adding a little to what was said in denying the motion for a preliminary injunction. Whether the bill of COmplaint herein is an original one in the nature of a bill ofreview attacking a former decree of the court, or.is a bill of complaint in continuation of a former suit, or is an original bill to set aside a decree of foreclosure and sale and a sale thereunder, it seems to
672
FEDERAx.. REPORTER,
vol. 52.
me that, if the court was fully seised of jurisdiction in the suit in which the decree tencletred l and the proofs under the present bill do not establish collusion and fraud in the proceedings to the injury of the present cO{l1plainants, complainants' bill should fail. 1. As to jurisdiction of the court in the suit in which the decree of foreclostlre and sale attacked was rendered: On the 11th day of February. 18'85,' S. Easton and james Rintoul, citizens and residents of the state Of New York, claiming to be trustees under a certain deed of by the Houston & Texas Central Railway Company on the 1st day of July, 1866, covering the main line of tll-e Houston & Texas Railway, filed their bill-No. 183 of the docket-in the circuit court for the eastern district of Texas against the Houston & Texas Ce/i1tral Railway Company to enforce and protect the trust property, wherein they prayed for anacconnt, for an injunction, for a decree of Si!.le,Of..tlart of the trust property, and for a modified receivership. On .the same day the same complainants filed in the same court another bill again.st the Houston & Texas Central Railway Company-No. 184 ,of the docket-:-to enforce and protect a trust provided and constituted by another deed of trust dated the. 21st day of December, 1870, covering the Division of the Houston & Texas Central Railway, and all limdsandreal estate which then. constituted, cir might thereafter constitute, the' said Western DiviSion of the Houston & Texas Central Railway; and therein, on the factsallE'ged in the bill, prayed for an account, for aninjtin6tion, for a decree of sale of part of the trust property, and for a receivership. TJ;:1e records show that unrler these two bills service· was had,· the· court took jurisdiction of the trust property, and made divers orders in relation to the management and disposition {)f the same. On the 16th of February, 1885, the Southern Development Company, a body Corpo1'l1te under the laws of the state of California, and a resiQent of that state I in its own behalf and On behalf of all {)ther persons similarly situated, filed its bill of complaint-No. 185 of the docket.,.....qnthe circuit court of the United States for the eastern dis· trict of Texlls against the Houste>n & Texas Central Railway Company, therein averring, among other things, that it was a creditor of the said railway company for large sums of money advanced at various times for supplies.,labor, repairs, operating and managing expenses, proper -equipment for·use and improvement, and other necessary expenses, in amount exceeding $600,000; that the said indebtedness was contracted by the railwayeompany in consideration of its promise to pay the same out of the earnings of its railway; that the said indebtedness was in equity and good conscience a charge upon the income and property of the said railway; that there had been a diversion of the income of the milway to pay interest on the bonded debt; that by said diversion a lien resulted in favor of the complainant, which complainant was entitled to have enforced in a court of equity. Said bill also set forth many other facts, particularly the absolutely insolvent condition of the railway company, tending to show the right to the relief prayed for, which was for an accounting, the appointment of receivers to take possession of
v.
HOUSTON & T. C. RY. CO.
673
and operate the railway property, and for a decree for the payment of complainant's claims out Of the earnings of the property. To this bill the Hduston & Texas Central Railway Company appeared, and filed an answer, and thereafter, upon notice to the defendant, the court took full jurisdiction of the case, appointing receivers for all the property, real and personal, of the Houston & Texas Central Railway, and fully taking the Same into the possession of the court. Thereafter, on the 12th day of March, 1885, the Farmers' Loan & Trust Company, a corporation created by and under the laws of the state of New York, and a citizen of said state, brought its bill of complaint against the Houston & Texas Central Railway Company,-No. 188 of the docket,-therein alleging that complainant was trustee under several mortgages or deeds of trust as follows: A mortgage or deed of trust, dated June 16, 1873, covering the Waco & Northwestern Division, and also 6,000 acres of land per mile of completed road; a mortgage or deed of trust, dated October 1, 1872, covering the main line and ,the Western Division of the Houston & Texas Central Railway, and also 3,840 acres per mile of completed road; a mortgage or deed of trust, dated May 1, 1875, covering the Waco & Northwestern Division, and 6,000 acres of land per mile of completed road; a mortgage, dated May 7, 1887, to secure a series of bonds due May 1, 1887, covering all the lines of the said railway, and all its lands and land grants; a mortgage, dated April 1, 1881, covering all the lines of said railway and 10,240 acres ofland per Illile for each mile of completed road on a1l'the lines of said railway company; also all of its town lots. The bill averred the violation on the part of the railway company of many of its agreements in relation to the trust property; the default of the company in the payment of interest; the insolvency of the company; the pendency of the preceding suits; the jeopardy of the trust property; and prayed for an accounting, a writ of injunction, a decree of sale of part of 'the trust property, and for a receiver of all and singular the rights, franchises, and property of every name and nature, including the rolling stock, goods, chattels, and things in action, including all lands, real estate, tenements, hereditaments, and all property. of every sort and nature of the said defendant the Houston & Texas Central Railway Comand full authority to said railroad and carry on all the l;>usiness of said railway company under the protection of the court, with the usual powers of receivers and managers of railroads. In no one of the cases mentioned can there be any question as· to the jurisdiction of the court, so far as the citizenship of the parties is concerned. Under these suits, the court was in full, complete possession, through its receivers, of all the property of the railway company. In this state of the case, the same parties, Rintoul and Easton, trustees under the two several deeds of trust upon which suits Nos. 183 and 184 were based, then came into court January 21, 1886, and filed two other bills of complaint for the foreclosure and sale of all the railroad property covered by the said deeds of trust. To the bill for the foreclosure of the mortgage on the main line, complainants made the Housv.52F.no.8-43
674 't()D! i&
FEDERAL"REPORTER,
vol. 52. :;.
L.oaln:tt 1.hast!Company,and 1u ftwtEi upon whi<lh the' jurisdiction of dtJur'tlMut:inv6ked,as'{oIlovv!t: o.t 'j.,. . ; , I I Altd'ylifi'1l'oraUors the Farmers' LOaD & Trust Company; 'awil!rusOOes under. the: said;··mocligage or deeds,. of trust, ,hereinbefore described, will, as your bepefited by, and, .it, is to their adprayed or some part ,Y,clHf. That said covered by the as well a!! ,all the other assets, mthe hands of thiS court by the recelttlrllblty existing ion aame, and your orators thereby be! jng reqhi:re' b''l}aw·lo tlbi'J lWtion in this' court, and.to ooffiAbef.ore tbis .ord,er to;. -property in, it.s, possessio,u" ,and to obtai n its the :in ,the rp'ln.· as al! on. all. the other. gages o( bemg nowpefore the courtlD said actfotiWIl13teltibefore descbbMssNos.' 183,184, ,185, and'18B, and' oli the equit1ddckltJ()1',this court, the;8Kld!!Fartners' Loan & 'rrost Company may and; IlBOul!l· be. _de a in·this callse;irrespllctive of 'its .Jllipiand as by the ordflr of· eoul1" M\'i\, be bound by the jUdgJJ:len,t ,and roceedin ane.rein." . . . . ' : : . i ' ' . . , .' . . ' . '. I
&:residient'iof
{':Em trlil Railway COmpany· and, 0Ile·. Benjamin, A; 'J)lxas, defenditnt$,:rand.they alleged, to the Farmers 1
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"cross)ill . .. . "And beregardeJl,as a PQre cross, bill, ,as !\n original bill in the ,n,ature'8( :acrqss,biU. ,or as an orjginal. bill, there is no er,ror calli ng for the, decree, 1:lecauset,h'e court proceeded ',upon it in cormectUm with oHlllrpleadings.. 'l'he'ju'rrstliction of the circuit court did not depend upon thecilizeDsbip of tMpartiesi but on thesttbject-rriatter 'of the :':The·property was in the actlial'possessionofthat court, and :tllis drew to it thQ:right to decide upon conflicting claims to its. ultimate possession and cOJ;ltrol." .. , ' , . Citing:Minne80tai Co, v. Sf; Paul Cb", 2 WalL 609; Bankv. Calhonn, 102 U; S.256j:Ktiippendorfv. Hyde, U. S.276,48up; Ct. Rep. 27. 2. Therecord'and proofs do not show that the decree' complained of was affected ;withcblllhsion or fraud to the prejudice of the complainants. In the first place. the complainants, as stockholders,have not heen injured by the decree and sale thereunder, but rathel'bimefited. Before the decree, their interest.as stockholders was subject to manY' millions
covering the wester,n. I the ,like 'll verment Itpd the -of the of ,and sale of property cov:complete.. In . case .of Mar171,11 Sup. r.98RflCts .affecting jurisqiction sirllilar only in the. minor matter of 1pe.,.supreme ·. a discussion deciding that i,p.that case the Company cqrrectly styled a
CARE\' V.HOUSTON & T. C. BY. CO.
675
of bonded indebtedness,: beatiuK a 'high rate.ofinterest, and to the payment.ofa vast floating debt.,'l'heresult ofthe·sale and the tion thereunder is that, without increasing the amount, the interest upon. the bonded debt has boon llirgely)reduced, substituted, and the amount of theflijating ants contend that the decree complained of was a consent decree, obtained by collusion between the creditors of the company and the Southern Pacific Company, by which the defendant railroad company was precluded from making proper defenses to the suits for, foreclosure.. This contention is not borne out by the proofs. The answers of the rail-: way company were not withdrawn. Testimony in the suit was taken; in fact·. the record teemed with evidence in the natnre of admissions· by all the parties, tending to show the justice of the creditors' demands, and the fayt that the ra,Hroad company had no meritorious defenses. The vast amount of floating indebtedness was not, and could not be, The insolvency of the company I and its utter inability to pay its just debts. and maintain the property as a going concern, was adlnitted on, all hands, and could not have been truthfully denied. The sale and reorganization of the property was considered essential in the interest of aU concerned. The question of whether or: not tM principal of the, bonds secured by the first main line and western division mortgage was or had become due because of the defaults of the company, and its general 'failure to comply with its agreements,was, it is true, an issuable fact; but at the same time it was a fact of minor importance, because a sale Of the property was 11ecessa1'Y on account of the defaults of the cOmpany in the payment of interest upon its other bonds secured by gages, upon which it was undoubted the principal had become due, and because of the large admitted floating debt pressing for payment. It was of little interest to the stockholders of the Houston & Texas Dentral Railway C()mpany (who, so far as the record shows,never proposed to payariytbing) whether the principal of the firstrnain line and western division mortgages was declared due or not, when the interest thereon past due was in amount far beyond the ability of the company to meet, and for which a foreclosure was inevitable; and which, with the foreclosures'under the subsequent mortgages for principal and interest conceded to be due, would have extinguished every interest the stockholders possessed. Nor do the proofs of the case at all satisfy me that there was any collusion. '" Collusion' is an agreement between two or more persons unlawfully to defraud a person of his rights by the forms of law, or to obtain an object forbidden by law." BOllV. Law Diet. "'Collusion' is where two persons apparently in a hostile position, or having conflicting interests, by arrangement do some act in order to injure a third person, or deceive a court." Rap. & L. Law Diet. This case nowhere shows any agreement between any persons, either express or implied, to defraud anyone, to deceive any court, or that anyone has been defrauded, or any court deceived. Beyond this, the complainants have wholly failed to show that the complainants in the foreclosure suits were cognizant of any misconduct on the part of the defendant, its coun-
676
REPORTER,
voL 52.
sel, or its directors, or that they insisted upon, or were parties to, any agreement by which the interests of the defendant company or its stockholders were really aggrieved. It may be further noticed .in this case that the proofs made do not show such diligence on the part of the complainants as gives them the right to ,attack, at this time, the·decree of sale, the sale thereunder, and the organization agreement.· oonnection, what was said by Mr. Justice PATTERSON of the NewYork supreme court, in his opinion in the GernsheimCbBe,{Sup.) 7 N. Y. Supp.878, on the identical facts, is very aproposl "Manifestly, if the reconstruction were carried out in good faith, nnu the rights oftha stockholders were protected and preserved, they would have been the cutting down of interest and fixed charges; and it is not at al1 a assnmption that stockholders would have willingly acquiesced in the, reconstructIon agreement. provided it was carried out in good faith. and without any e1f,ort to destroy their interest in such stockholders; It seemsw me that it is the resUlt. and not the method, which has induced the assault upon the proceedings antedating the levying of the assessment on the sto¢kholderll. Thareco\1struction agreement was made on December20. This suit [the Gernsbeim SUit] was not brought until September. 1$$9. It is nowhere explai,\1ed in the mOVing' papers why these for .nearly two years without making any demplaintiffs onstration a!tainst the reconstructidn';agreement. or the proceedings in the United Statesoourt. which 'eventuated in the decree of foreclosure. (except as, above it is almost apparent that they were willing to take their. chances. that agreement.ancl to a.cquiesce in all the proceedings were hall.p1Jrauant to it. Il.scertained that the heavy assessment 73 per C:'l.ot' r of.which was levied upon .them to enable .' them to take stock III Lhe new corporation.... ,...· '" .' 'I. ..... . . . .It is. hardlY to the complainapts do not offer to qo equity': .pa;y into the COUl,'t l!-p,l0unt of the debt. of the defendant tobedlle, or any of the expenses of fore.o1:0s11re; nor tpat the ask, .under their bill, woqld not only be valueless.to .them and Qtbe.r stockholders, but would saddle the c,OI:npaJ;lY a vast $25,OOO,OOO,wholly due, and bearing a high rate .of interest. In my opinion, the complainants' bill should be dismisse<;l,. with costs, and a decree to that effect will be. en"
.
BALLARD
M'CLUSKEY.
677
McCLUSKEY.
(Cf,rcuU Court, B. D. New York. July 28,1899.) DBPOSITIONS-AGREEMENT FOR TAKING-AllANDONMENT.
Where, under equity rule 67, counsel have agreed that the deposition of a wit,. ness may be taken down by a typewriter in their presence. at the otllce of one of them, in the absence of the examiner. but under his construotive direction, one of the counsel cannot abandon such examination without adequate cause shown to the court on a subsequent motion to compel the production of the witness before the examiner, and, if he does abandon it without such cause, the testimony of the witness will be closed.
In Equity. Bill by Charles W. Ballard against James J. McCluskey for infringement of a patent. On motion to compel production of a witness before the examiner. Proper practice stated. W. D. Edmonds, for complainant. A. B. Carrington, for defendant. SHIPMAN, Circuit Judge. This is a motion to compel the complainant to produce Charles H. Treat, a witness, for further cross-examination. The action is a bill in equity for the infringement of a patent, and the testimony of the witness, so far as it had progressed, had been taken orally under rule 67, and had been by agreement taken down by a typewriter, at the office of one of the counsel. in the absence of the examiner, but under his constructive direction. Some differences of opinion having occurred between the counsel, the cross-examining counsel stated that the cross-examination was closed until the witness should be produced before the examiner for further examination, on the ground that the opposing counsel were" unable to agree as to the cross-examination, and defendant's counsel refuses to proceed in the absence ·of the examiner." The complainant insisted that the cross-examination should then proceed, or that the witness should sign his deposition,and his examination be considered as closed. The record does not disclose ail adequate cause for the refusal to contimie the examination. The defendant's counsel did not proceed, the deposition was signed, and the witness dismissed. Since the new rule 67 waS promulgated, the practice has been for counsel to agree that the depositions may be taken down by a typewriter, in their presence, at the office of one of them, in the absence of the examiner, but under his constructive direction. The question under this motion is as to the right of one counsel to refuse to continue the examination, and to demand the production of the witness before the examiner; in other words, to declare the agreement at an end. When counsel have entered upon the taking of a deposition under such an agreement as I have stated, the examination cannot be abandoned until the witness is produced before the examiner, without adequate cause. If counsel abandon the agreement without adequate cause which shall be satisfactory to the court, the testimony of the witness under examination will be closed. Counsel are not at liberty to enter
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