Source: https://supreme.justia.com/cases/federal/us/137/171/
Timestamp: 2019-04-19 11:12:43+00:00

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Justia › US Law › US Case Law › US Supreme Court › Volume 137 › Morgan's L. & T. R. Co. v. Tex. Cent. Ry. Co.
Morgan's Louisiana & Texas Railroad & Steamship Co.
When a mortgage provides that the principal shall become due for the purposes of foreclosure upon a default in interest continuing for sixty days, the trustees in the mortgage may proceed for the collection of the whole amount of principal and interest by bill in equity, without a formal declaration of the maturity of such principal.
If a mortgage contains a power of sale by advertisement at public auction for cash upon the request of the holder or holders of seventy-five percent in the amount of the bonds secured thereby, that remedy is cumulative, and the restriction does not operate upon the right to foreclose by bill in equity, especially when in a separate clause it is provided that nothing in the mortgage contained shall be held or construed to prevent or interfere with the foreclosure of the instrument by any court of competent jurisdiction.
The mere fact that money loaned to a railroad corporation was expended in payment of interest on its first mortgage bonds or of operating expenses does not entitle the lender to preference over the first mortgage bonds by way of subrogation, or on the ground of superior equities.
Although advances may have enabled a railroad company to maintain itself as a going concern, that fact alone does not give such advances priority over first mortgage bonds upon the theory that the interests of the public and of the bondholders were subserved by such advances.
A bill filed by a defendant, on leave, in order to a complete decree upon the whole matter in dispute, is properly styled a cross-bill, and where on the bill of the original complainant possession of property has been taken by a circuit court of the United States, the jurisdiction of the court in passing upon such a cross-bill in the disposition of the property does not depend upon the citizenship of the parties.
"and that, unless said railway be administered in such a manner as to maintain it with unimpaired efficiency during this period of depression, its assets will be sacrificed without any adequate benefit to any of its creditors;"
interests of both companies that that interdependence should be maintained; that the Houston Company owns over one-third of the capital stock of the Texas Company, and the Houston Company is also obligated for the indebtedness of $761,992.04, pledged by it to complainant, and it is of vital importance to both of said roads that the management of the two should be under one common head. Complainant prayed for the appointment of one or more receivers of the property of the defendant, and for a decree for the payment and satisfaction of its claims out of the rents, revenues, issues, and profits coming to the receivers. Copies of the deeds of trust from the Texas Central Railway Company to the Farmers' Loan and Trust Company of September 15, 1879, and of May 16, 1881, and of that to the Metropolitan Trust Company of October 1, 1884, were attached to the bill.
latter have respectively received, and to have their claims satisfied out of the property of the railway company or out of the proceeds of any sale thereof. The bill prayed, among other things, for a decree of lien by reason of the certificates, an accounting, a sale of the property if necessary, and the payment of the amounts decreed to be due the complainant, out of the proceeds, in preference to any amounts due on the mortgage bonds, etc.
The Texas Company answered, admitting in general the allegations of the bill but submitting to the court that the bill was destitute of equity.
proceedings and acts of the defendant, the Texas Company, from its organization are, in fact and law, those of the complainant, and to be equitably imputed to the complainant. And it denied that the Texas Company had used its earnings for making payment of coupons upon its first mortgage bonds, and which the holders were not entitled to receive, and asserted that the bill, as framed, was open to demurrer, for reasons given.
"thereupon the principal of the said bonds secured by said last-mentioned mortgage or deed of trust is and has become immediately due and payable, and the same and all said interest so in arrears as aforesaid remains still due and unpaid."
Paragraph 15 made the same averments as to the second mortgage held by the cross-complainant.
The Texas Company, in its answer, admitted the allegations of the bill of the Farmers' Loan and Trust Company as to the execution of the mortgages, and admitted the fourteenth paragraph of the bill to be true, except that it set up, by way of explanation, that its roads and property were placed in the hands of receivers on May 14, 1885, on the bill filed by the Morgan Company. It admitted the allegation in the fifteenth paragraph to be true, as stated.
The Morgan Company, in its answer, reiterated all the averments in its original and amended bills and claimed that it had a lien upon the property of the Texas Company and that, in any foreclosure proceedings, it was entitled to be paid out of the proceeds of sale by preference over the mortgage creditors. It admitted that the matters set forth in the fourteenth and fifteenth paragraphs of the cross-bill were true.
The Metropolitan Company admitted the allegations of the cross-bill respecting the mortgage executed to it, as trustee, by the railway company, in October, 1884, and alleged that no bonds had, to its knowledge or belief, been issued secured by the lien of the said mortgage.
Replications were filed and proofs were taken.
"Q. The accruing funds, the income of the Central Company, was there any special use of its own funds, of its own earnings, toward paying running expenses, rather than interest, or toward paying interest, rather than running expenses, or was that all a matter or running account?"
"A. It was all in one account, so far as the account of the Houston and Texas Central Railway Company was concerned, and whether the advances were made for one purpose or another they were charged so much cash; but the Texas Central Railway Company, of course, took cognizance of what it was used for."
"Q. So that whenever it was behindhand on its current indebtedness, and needed money, the Houston and Texas Central Railway Company paid it, and when it came to pay interest, and did not have funds, the Houston and Texas Central Railway Company paid it?"
"A. The Houston and Texas Central Railway Company let it have the money."
become due and payable, and that unless the defendant, the Texas Company, shall within ten days pay into court the sum found due, with interest, and an amount sufficient to defray the costs, the equity of redemption of said defendant, and of all the parties to the suit, and of all the holders of bonds or other claims secured by the mortgage to the Metropolitan Company in or to the mortgaged property, shall be barred and foreclosed, and the mortgaged premises and property shall be sold to the highest bidder for cash, as provided. It further orders, among other things, that in case the amount of the bid shall be more than sufficient to pay the sums and amounts found and adjudged to the Farmers' Company, the overplus shall be applied to the payment of the sums decreed to be due to the Morgan Company, and provides for deficiency decrees in favor of the Farmers' Company and the Morgan Company.
From this decree separate appeals were prosecuted by the Morgan Company and the Texas Company. On behalf of the Morgan Company, it is insisted that the court erred in adjudging that its claim was not in equity a lien and charge upon the property of the Texas Company, prior and superior in right to the lien of the mortgages of the Farmers' Company, and justly entitled to be paid out of the proceeds of the sale of the property in preference to the mortgage bonds, and in granting leave to the Farmers' Company to file the bill of complaint for the foreclosure of the mortgages, and rendering a decree thereon, and that, if it had jurisdiction to entertain the bill of the Farmers' Company, then it erred in proceeding to a decree for foreclosure and sale to pay the principal of the bonds upon a default in the payment of interest, without averring and proving that the bill had been filed for that purpose by the request of the holders of seventy-five percent in amount of the outstanding bonds. On behalf of the Texas Company, errors are assigned to the action of the court in entertaining the bill of the Farmers' Company, and rendering the decree of foreclosure and sale thereon, and also in adjudging the principal sums of the bonds to be due and payable, and in decreeing foreclosure and sale without proof of a request to the trustee, by the holders of seventy-five percent in amount of the bonds, to foreclose.
MR. CHIEF JUSTICE FULLER, after stating the facts as above, delivered the opinion of the Court.
holders of seventy-five percent in amount of the bonds so in default which may be at any time outstanding under this deed of trust, it shall be the duty of the said Farmers' Loan and Trust Company of the City of New York, by its president or agent duly appointed in its behalf, to foreclose this mortgage or deed of trust, and sell the property herein and hereby conveyed at the City of Houston, Texas at public auction, to the highest bidder for cash, after having given at least sixty days' notice of the time, place, and terms of sale by advertisement in at least two daily newspapers published in the City of Houston, and two daily newspapers published in the City of New York,"
"It is hereby further agreed that nothing herein contained shall be held or construed to prevent or interfere with the foreclosure of this instrument, the appointment of a receiver, or any other act or proceeding appropriate in such cases, by any court of competent jurisdiction."
There was nothing in the mortgages which took away the inherent right of resort to the courts, and this clause did not impart what existed without it, but its insertion, evidently out of abundant caution, made it perfectly clear that the provisions relied on by appellants did not apply to foreclosure by bill in equity, but to the cumulative remedy specified. It is easy to see why taking possession and selling without the intervention of the court should be guarded against, and the trustee not be required or allowed to proceed in that summary manner except on the request of a certain percentage of the holders of the bonds. Such proceedings might result in injury which could not be predicated of those regularly taken in a court of equity. Arbitrary procedure by the trustee was not deemed desirable in view of the interests of both mortgagor and the bondholders as a class, while each would find the protection to which it might be entitled at the hands of the court. Mercantile Trust Co. v. Missouri, Kansas & Texas Railway, 36 F. 221.
"of the first importance to ascertain whether the decree of foreclosure and sale, in the present case, found due and required to be paid, as the condition of exercising the right to redeem, a larger sum than was then due."
upon the alleged default, which had been found insufficient. And it was further held that under the same article which provided for a foreclosure on the written request of the holders of the majority of the outstanding bonds, even if the principal sum of the mortgage deed had been rightfully declared due and the required notice given, nevertheless the foundation for proceeding to foreclose would fail without proof that the bill had been filed for that purpose upon such written request.
In the case at bar, the proof of the presentation and default upon the coupons was full, and was not disputed. The mortgages specifically provided that upon such default's continuing for sixty days after demand, the principal of all the bonds should become immediately due and payable. The Texas Company and the Morgan Company both admitted that the principal had become due and payable. The instruments did not require a written request for a declaration by the trustee that the principal was due, or such a declaration and notification to the defaulting company, in order to make the principal mature. That was a consequence of a default continuing sixty days after demand. Nor was there any restriction upon the power to proceed by bill in equity, but on the contrary any intention to impose such a restriction was disavowed.
mortgage bonds, although the holders of the coupons were only entitled to receive payment thereof after the Texas Company had paid the amounts advanced and paid as aforesaid, and that the Morgan Company was entitled to stand in the place and stead of said mortgage creditors for the amounts received. In other words, the contention seemed to be that the Houston Company should be awarded priority of lien because it advanced the amount in question to be used in the payment of operating expenses and taxes, and it was so used, or upon the promise that it should be so used, which was broken by its diversion to the payment of interest, or, if there was no such promise, express or implied, then that the application of the advances to the payment of interest entitled the Houston Company to preference by way of subrogation, or because by such payment the Texas Company was kept running for five years, which without such payment would have been impossible.
"it was hoped and expected, however, that an improvement in the business of the road would take place, and that the company would be enabled to reimburse the advances;"
"inasmuch as the expectations of the parties in regard to the enterprise were not realized, without any fault of theirs, that the mortgage securities should bear the loss which must be sustained either by the bondholders or the appellant."
From the account stated it appears that the gross earnings were each year sufficient to pay the operating expenses and taxes, and that the deficit of each year was produced by the payment of interest on the bonded debt. But if the advances could therefore be treated as having been specifically procured for, or specifically applied to, the payment of interest as such (although there is no evidence to that effect), still such payment would afford no basis for the assertion of a preference as against the bondholders. So far as disclosed, the interest coupons were paid, not purchased, Ketchum v. Duncan, 96 U. S. 659; Wood v. Guarantee Trust Co., 128 U. S. 416, and cannot be set up as outstanding, and the contention is wholly inadmissible that the bondholders, because they received what was due them, should be held to have assented to the running of the road at the risk of returning the money thus paid if the company, by reason of unrealized expectations on the part of those who made the advances, should ultimately turn out to be insolvent and unable to go on. By the payment of interest, the interposition of the bondholders was averted. They could not take possession of the property, and should not be charged with the responsibility of its operation.
lacks self-sustaining ability. To allow another corporation, which for its own purposes has kept a railroad in operation in the hands of the original company by enabling it to prevent those who would otherwise be entitled to take it from doing so, a preference in reimbursement over the latter on the ground of superiority of equity would be to permit the speculative action of third parties to defeat contract obligations, and to concede a power over the property of others which even governmental sovereignty cannot exercise without limitation. And if all these advances should be considered as applied in payment of the operating expenses only, upon the theory, where such was not literally the fact, that they supplied a deficit created by the payment of interest out of the gross earnings, the same remarks would be applicable.
use the income which comes into its own hands as, if practicable, to restore the parties to their original equitable rights. . . . Whatever is done therefore must be with a view to a restoration by the mortgage creditors of that which they have thus inequitably obtained. It follows that if there has been in reality no diversion, there can be no restoration, and that the amount of restoration should be made to depend upon the amount of the diversion."
Burnham v. Bowen, 111 U. S. 776; Union Trust Co. v. Illinois Midland Co., 117 U. S. 434.
and then transferred on the books to the treasurer of both companies, as treasurer of the Texas Company; that whenever there was a deficit of funds on the part of the Texas Company, such deficit was made up by the Houston Company, and that the latter company received and disbursed everything. Under such circumstances, it cannot be maintained against the first mortgage bondholders that a balance of such a running account of five years' duration represents money so applied to the current expenses of the road, or so diverted therefrom to the payment of interest on the bonds, as to carry with it a superior equity for repayment. Penn v. Calhoun, 121 U. S. 251; Kneeland v. American Loan & Trust Co., 136 U. S. 89; St. Louis, Alton &c. Railroad v. Cleveland, Columbus &c. Railway, 125 U. S. 658.
"a full, complete, perfect, and equitable mortgage and lien upon said railway, and upon all of the property, incomes, tolls, and profits in said deed of trust of October 1, 1885, described,"
"that out of the proceeds of any sale which may be made to satisfy any decree of this honorable court, your orator's claim for said amount be paid and satisfied."
It is thus seen that the Morgan Company asserted its equities as based on the third mortgage bonds, which renders it still clearer that upon this record no reason exists for the subordination of the first and second mortgages to this claim. Our conclusion is that the circuit court, while it decreed a lien to the Morgan Company, rightfully refused to give it preference over the paramount lien of the first and second mortgage bonds.
and that, if treated as an original bill, it cannot be maintained, for want of jurisdiction, the Farmers' and Metropolitan Companies being citizens of New York, the Morgan Company, of Louisiana, and the Texas Company, of Texas. Under the original bill filed by the Morgan Company, and on its application, the court had taken possession of the property of the Texas Company through receivers. The Farmers' and Metropolitan Companies were then brought into court by an amended and supplemental bill, which prayed for an account of all liens and encumbrances on the property of the Texas Company, and of all its assets, and for a decree adjudging the sums alleged to be due to the Morgan Company liens upon the net earnings of the Texas Company and all its property, superior in rank to the claims of the said trustees, and of the holders of the mortgage bonds issued under the various deeds of trust, the giving of which had been set up in the original bill, and copies thereto annexed, and that the amount due to it by reason of its advances to the Houston Company should be paid out of the net earnings, and, if they proved insufficient, then that a sale be ordered of the property in bulk, and that the amount decreed to the Morgan Company be paid out of the proceeds in preference to the amounts due on the mortgage bonds. It was also specifically prayed, as has been stated, that the rights of the Morgan Company under the certificates given it by the Houston Company, in lieu of the bonds issued under the third mortgage, should be decreed to be an equitable mortgage upon the property of the Texas Company, and, inferentially at least, superior to the lien of the first two mortgages.
"ex vi terminorum implies a bill brought by a defendant in a suit against the plaintiff in the same suit, or against other defendants in the same suit, or against both, touching the matters in question in the original bill. A bill of this kind is usually brought either (1) to obtain a necessary discovery of facts in aid of the defense to the original bill, or (2) to obtain full relief to all parties, touching the matters of the original bill."
"It also frequently happens, and particularly if any question arises between two defendants to a bill, that the court cannot make a complete decree without a cross-bill, or cross-bills, to bring every matter in dispute completely before the court, to be litigated by the proper parties, and upon the proper proofs."
Bank v. Calhoun, 102 U. S. 256; Krippendorf v. Hyde, 110 U. S. 276.

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