Opinion ID: 1502420
Heading Depth: 1
Heading Rank: 1

Heading: The Character of the Litigation.

Text: In any inquiry whether costs as between solicitor and client should be allowed a litigant in an equity suit, the character of the litigation is one of the main determining factors. It becomes necessary, therefore, in the instant suit to examine into the character of the litigation. The bill filed by the Cambria Steel Company (hereafter called the Cambria Company) September 6, 1900, against the Kansas City Suburban Belt Railroad Company (hereafter called the Belt Company) and various other corporations, including the Guardian Trust Company, purported to be a creditor's bill against the Belt Company. In addition to the usual allegations, however, the bill alleged that the Trust Company had caused the incorporation of the constituent companies which afterward became the Belt Company, and absolutely dominated and controlled their affairs; that it had caused several other corporations to be formed for the purpose of building railroads, caused them to issue bonds to pay for the same, and completely dominated their affairs; that the Trust Company had caused the stocks and bonds of these various companies to be delivered to it, had sold the same, and had applied the excess of the proceeds over the cost of the railroads in the payment to itself of commissions and for services; that the Trust Company had assumed the position of trustee and agent in managing and disposing of these stocks and bonds, and had failed and refused to make an accounting therefor; that the Trust Company by reason of these transactions was owing the Belt Company a large amount of money. The bill alleged further that the Trust Company had caused the legal title to properties necessary to be used by the railroad companies, including the Belt Company, to be placed in certain dummy companies with the fraudulent intent and purpose of preventing the properties being reached by the creditors of the railroad companies; that the Trust Company caused the Belt Company to enter into a pretended contract for the building of a certain link of railroad, which resulted in a loss of several hundred thousand dollars; that the contract for the construction in reality belonged to the Trust Company, and the resulting loss was its loss; that the Trust Company had charged up the loss to the Belt Company and was claiming the same as a liability in its favor against the Belt Company; that this action by the Trust Company was fraudulent in fact and in law; that the Trust Company had caused the Belt Company to transfer to it bonds, stocks, and other property as collateral for various pretended claims which it fraudulently asserted to exist in its favor against the Belt Company; that the Trust Company fraudulently caused pretended notes to be given to it by the Belt Company as representing debts owing to it by the Belt Company; that the Trust Company had fraudulently appropriated to itself a large amount of the property of the Belt Company, consisting of stocks, bonds, and other securities; that the domination of the Trust Company over the Belt Company ceased in April, 1900. The relief asked included that the Trust Company be adjudged to hold the said stocks of various companies and certain bonds in trust for the creditors of the Belt Company; that receivers be appointed for the Belt Company, with power to institute proceedings to recover the assets of that company; that an injunction issue, restraining the Trust Company from disposing of the property held by it as alleged collateral to indebtedness of the Belt Company. Receivers were appointed for the Belt Company, and a restraining order was issued against the Trust Company. On November 20, 1901, the receivers of the Belt Company filed an ancillary bill in the Cambria Company suit. The Trust Company was made one of the defendants. This ancillary bill alleged largely the same facts as the Cambria Company bill, to wit, the formation of corporations by the Trust Company and the domination of them, including the Belt Company; the retention by the Trust Company of proceeds of sale of the stocks and bonds of said companies under the fraudulent pretenses that it was retaining them for the payment of commissions and services; the causing by the Trust Company of the signing by the Belt Company of pretended promissory notes, payable to the Trust Company, and causing stocks and bonds to be delivered to it as collateral to the notes. It was further alleged that the execution of the promissory notes and the delivery of the collateral were fraudulent and void. The prayer of this ancillary bill asked for an accounting by the Trust Company as a trustee and agent for the Belt Company, that the notes be canceled as fraudulent, and that the Trust Company be restrained from transferring the collateral securities. March 22, 1905, an amended and supplemental ancillary bill was filed by the receivers of the Belt Company. This bill reiterated to a large extent the charges made in the two preceding bills. It also charged conversion by the Trust Company of property of the Belt Company; also that the Trust Company occupied a fiduciary relation to the Belt Company, and by reason thereof had no right to charge any sums as profits; that the Trust Company in pursuance of a fraudulent plan sold worthless securities to the Belt Company; that the Trust Company fraudulently made overcharges on its books against a subsidiary company of the Belt Company, which charges afterward became charges against the Belt Company; that the Trust Company made sales of stocks and bonds for the Belt Company and reported the same as made at less than the actual figures, thereby securing for itself a profit; that the Trust Company caused the Belt Company to declare and pay dividends when it was insolvent, and that the Trust Company as a stockholder in the Belt Company received such dividends; that the Trust Company caused the Union Terminal Company, whose stock was owned by the Belt Company, to issue bonds and deliver the same to the Belt Company contrary to the provisions of the mortgage in which the Trust Company was trustee, and further caused the Belt Company to deliver said bonds to the Trust Company, which company thereupon sold them and kept the proceeds, crediting the amount to the account of the Belt Company, all in violation of the duties of said Trust Company as trustee under said mortgage; that the Trust Company sold bonds belonging to the Belt Company, and fraudulently refused to account for the proceeds; that the Trust Company fraudulently appropriated several hundred shares of stock belonging to the Belt Company. The prayer for relief in this amended ancillary bill was that the Trust Company account as trustee and as agent for the Belt Company; that the promissory notes of the Belt Company held by the Trust Company be found to have been fraudulently executed and for fraudulent purposes. On the 2d of July, 1906, the surviving receiver of the Belt Company filed a second amended and supplemental ancillary bill. This bill also contained charges against the Trust Company of dominating over the Belt Company and its subsidiary and allied corporations; of causing fraudulent execution of the promissory notes of the Belt Company held by the Trust Company; of fraudulent delivery of the collateral by the Belt Company to the Trust Company; of fraudulent appropriation of bonds in connection with the construction of the railroad of a company known as the Suburban Company; of appropriation and conversion to its own use by the Trust Company of stocks and bonds of the companies subsidiary to the Belt Company. The bill also alleged that the Trust Company occupied a fiduciary relation to said companies, and that any contracts providing for trustee fees for the Trust Company were unlawful; that the Trust Company sold stocks and bonds of the Belt Company and reported to the Belt Company amounts of sales at less figure than the actual sales, and retained the balance. The bill also reiterated the charges against the Trust Company of violation of its duties as trustee under the Union Terminal Company mortgage. The prayer of this bill also was for an accounting by the Trust Company, that the promissory notes executed by the Belt Company and held by the Trust Company be declared fraudulent and be canceled, and that the Trust Company be restrained from disposing of the stocks and bonds held by it as alleged collateral to the promissory notes of the Belt Company. Meanwhile, on February 27, 1905, the Southern Company filed an intervening petition in the Cambria Company suit, and on May 1, 1905, it filed an amended intervening petition. Among other things the amended petition alleged: The foreclosure suits of the several mortgages, heretofore mentioned, on property of the Belt Company or its subsidiary companies, and sale of the properties to the Southern Company December 31, 1901; the foreclosure of the mortgage on the Kansas City, Pittsburg & Gulf Railroad Company, and sale of the property to a committee acting for the Southern Company; that the Trust Company was either sole trustee or cotrustee under each of said mortgages; that the Trust Company had caused each of said companies to be formed, and thereafter dominated their affairs; that the Trust Company claimed to hold, as collateral to an alleged indebtedness of the Belt Company to it, a large amount of stocks and bonds of a number of companies which were subsidiary to the Belt Company; that these securities had been owned by the Belt Company; that they had become included in the mortgage of the Belt Company by reason of an after-acquired property clause; that at the foreclosure sale under that mortgage these securities had been acquired by the Southern Company; that the Trust Company as trustee under the mortgage made by the Belt Company did not in any degree or in any way carry out the duties imposed upon it as trustee in said mortgage, but exercised its powers and duties as trustee in said mortgage in its own interest and in violation of its trust; that the Trust Company had also violated its duties as trustee in the several mortgages of the subsidiary companies of the Belt Company and the Gulf Company by appropriating to itself as collateral to an alleged indebtedness of the Belt Company to it, large amounts of stock and bonds of said companies. The petition further alleged that the Trust Company, as co-trustee under the mortgage of the Union Terminal Railroad Company (one of the companies allied with the Belt Company), wrongfully and fraudulently and contrary to the terms of the mortgage, caused a large amount of the bonds to be sold and the proceeds to be applied on the alleged indebtedness of the Belt Company to the Trust Company. The prayer of this petition was that the Trust Company be required to account for and pay over to the Southern Company the value of the stocks and bonds which it had wrongfully appropriated as set forth in the petition. To these various bills and petitions the Trust Company answered. It denied among other things, that it had caused the Belt Company and its allied or subsidiary companies to be incorporated, or had dominated any of them; denied that it occupied any fiduciary relationship to the Belt Company or its allied or subsidiary companies, except that it had acted as trustee under mortgages executed by them; denied any wrongful or fraudulent action on its part, either as trustee or otherwise; alleged that the transactions between it and the Belt Company were shown upon the books of both companies, and that the books of the Trust Company had been repeatedly examined by the expert accountants of the Belt Company; admitted that it held collateral given to it by the Belt Company as security for the debts owed to it by that company; alleged that the collateral was given in good faith and to secure just debts evidenced by promissory notes and an open account, amounting to upwards of $300,000; denied that the securities held by it as collateral had become included in the Belt Company mortgage by virtue of the after-acquired property clause, or had been sold to the purchaser at the foreclosure sale under said mortgage, or had been acquired by the Southern Company; alleged that at the request of the Belt Company, it had acted as financial agent for several of the subsidiary companies, and sold their stocks and bonds and received compensation therefor, all the facts relative to which were known and approved by the officers of the respective companies and of the Belt Company; alleged that all financial transactions of the Trust Company with or for the Belt Company or its allied or subsidiary companies were fully and fairly accounted for and approved by the officers of those companies. In its answer to the amended and supplemental ancillary bill of the receivers of the Belt Company, the Trust Company prayed for judgment against the Belt Company and its receivers on the indebtedness owing by the Belt Company, and prayed further that the court protect and enforce the interest of the Trust Company in and to the stocks, bonds, and other property held by it as collateral. In its answer to the amended intervening petition of the Southern Company, the Trust Company also alleged that the Southern Company, by virtue of its acquirement of the properties of the Belt Company under the reorganization plan set out, had become liable for the debts of the Belt Company, including the debt owing to the Trust Company. From the foregoing analysis of the pleadings it will be seen that among the issues raised were: Whether the Trust Company had been guilty of fraud in its dealings with the Belt Company and with its allied and subsidiary companies. Whether the Trust Company had occupied a fiduciary relation with said companies or any of them, except in so far as it had acted as trustee in several of the mortgages made by those companies; and, if so, whether it had violated that relationship. Whether the Trust Company, while acting as trustee in said mortgages or any of them, had violated its trust. Whether the Belt Company was indebted to the Trust Company. Whether the Trust Company was entitled to hold the collateral which it claimed had been pledged to it by the Belt Company in connection with the debt. Whether the said collateral came under the mortgage of the Belt Company and had been acquired by the Southern Company through the foreclosure sale under that mortgage. Whether the Southern Company was liable to the Trust Company for the indebtedness of the Belt Company. These issues were first passed upon by the special master. He found as follows: No stockholder has at any time objected to any of the transactions complained of in the bill. The transactions in dispute were open, not secret or concealed, and were either known to the stockholders, or could have been, if they had been at all diligent in trying to understand such transactions, which are spread with much explanatory detail, not only on the books of the Trust Company, but also on the books of the railway companies, and the very nature of the transactions, their magnitude and the long period of time over which they extended, tend thoroughly to negative the idea of ignorance on the part of any stockholders. The transactions now attacked in the bill were expressly ratified by the stockholders, as shown by the minutes of the corporate meetings. The transactions in question are executed contracts, closed and consummated years before the original bill was filed, and, as the accounts between the Trust Company and these other companies were settled, from time to time, the Belt Company gave its notes for the balances due, and which notes were also paid off, from time to time. It is shown by the record that the bookkeeping was full, complete, and accurate as to all original entries and otherwise, and that the accounts between the companies were regularly stated and audited each month by formal certificates exchanged by their respective auditors, and that the books tallied to a cent. The Belt, in the transactions which are now attacked, received therefrom certain benefits and advantages, which the complainants have never offered to return, and, in the nature of things, cannot return. The status quo cannot be restored, which fact, if true, becomes a most important one in the final determination of the issues involved in the bill, and, especially so in the absence of fraudulent intent, or actual fraud, on the part of Trust Company, which is not shown by the proofs in the record. The Trust Company did not dominate and control the Belt Company, or any of the other companies involved in this controversy, as claimed by complainants in their bill.    The Trust Company was under no such duty to the Belt bondholders as would prohibit it from taking collateral security to secure an indebtedness to it from the Belt Company, nor was there any express covenant in the mortgage creating such duty, nor was there any such duty by implication of law. The master held further that the Trust Company was entitled to hold all of the collateral mentioned in the Southern Company's petition in intervention, that the collateral did not become included under the Belt Company mortgage, and that the Southern Company had not acquired any right, title, or interest therein by virtue of the foreclosure sale under that mortgage. The master recommended that the Cambria Company bill be dismissed for want of equity and that the injunction restraining the Trust Company from disposing of its collateral be dissolved. The master recommended, further, that the second amended and supplemental ancillary bill of the receiver of the Belt Company be dismissed as without equity, except as regards three small items of account, two of which had been admitted in the answer of the Trust Company. The master recommended, further, that the amended petition of intervention of the Southern Company be dismissed as being without either law or equity, except as to one paragraph in regard to certain lands standing in the name of the Central Improvement Company, one of the subsidiary companies, and that the Trust Company was entitled to hold and subject to the payment of the debt to it from the Belt Company all of the collateral mentioned. The master recommended, further, that the Southern Company be held not liable for the indebtedness of the Belt Company. The trial court approved and confirmed the report of the special master, and entered a decree adjudging: (a) That there was no equity in the bill of the Cambria Company, and that it be dismissed, and that the injunction issued in said cause against the Trust Company be dissolved. (b) That the allegation in the ancillary bills of the receivers of the Belt Company as to the three items above mentioned were true, and that the Belt Company should have credit therefor; that as to all of the other allegations in said bills, the bills were without equity and were dismissed. (c) That the allegations of the Trust Company touching the indebtedness of the Belt Company to it were true, and that there was due the Trust Company from the Belt Company $639,658.86, with interest. (d) That the Trust Company was entitled to subject all the securities pledged to it (setting them out as claimed by the Trust Company) to the debt owed by the Belt Company. (e) That the Southern Company was entitled to a conveyance from the Central Improvement Company of the lands standing in the name of that company. (f) That the Southern Company was not liable for the debt of the Belt Company to the Trust Company. Upon appeal, this court held with the trial court as to provisions of the decree set out in (a), (b), (c), and (d), supra, overruled the trial court as to provisions (e) and (f), supra, held further that the Trust Company, as pledgee of the stock of the Central Improvement Company, had a right in the lands of the Central Improvement Company superior to the right of the Southern Company, and held further that the Southern Company was liable for the debt of the Belt Company to the Trust Company, and that the Trust Company was entitled to judgment against the Southern Company for $639,658.86 and interest  the amount of the debt of the Belt Company to the Trust Company. From the foregoing synopsis of the pleadings, findings, and decree in the litigation, it is clear that the charge that the Trust Company had committed fraud against the Belt Company was adjudged not true; the charge that the Trust Company had violated fiduciary relations with the Belt Company and its subsidiary companies was adjudged not true; the charge that the Trust Company had violated its duty as trustee under mortgages of the Belt Company and its subsidiary companies was adjudged not true. On the other hand, the claim of the Trust Company that the Belt Company was indebted to it in a large amount was adjudged true; the claim of the Trust Company that it held securities pledged by the Belt Company as collateral to the debt, and that it had a right to subject said securities to the payment of the debt, was adjudged true; the claim of the Trust Company that the Southern Company by its acquirement of the assets of the Belt Company had become possessed of property which in equity constituted a fund for the payment of the creditors of the Belt Company, including the debt of the Trust Company  was adjudged true. It may not be amiss at this point to note, also, that this court, after the fullest consideration, reached the conclusion that all of the foregoing bills, ancillary bills, and petitions against the Trust Company were in reality sponsored by the Southern Company. This court characterized the Cambria Company suit as baseless and unwarranted. In reference to the existence of a trust fund for the payment of creditors of the Belt Company, which fund had been disclosed in the litigation, this court said (210 F. 703, 708): Moreover, the property of the Belt Company was a trust fund. The stockholders of that company were trustees charged with the duty to apply that property to the payment of the claims of the Trust Company and of the other creditors of the Belt Company before they took to themselves any share in or benefit therefrom. When the Southern Company took their stock and gave them $4,750,000 par value of its stocks and bonds for their interest in the property of the Belt Company, it stepped into their shoes and became a trustee for the creditors of the Belt Company with plenary notice that the interest of those creditors in the property was at least as much as the value of the stocks and bonds it was giving for the interest of the stockholders, for the rights of the creditors in the Belt property were prior and superior to those of the stockholders.    If the Southern Company had been the owner of the bonds of the Belt Company only, and knowing the condition and indebtedness of the Belt Company, as it did, had paid to the stockholders of that company $475,000 to the exclusion of the creditors for a conveyance of its property by the Belt Company to the Southern Company, it could not have escaped liability to the creditors of that company for that amount. Much less can it do so when it became owner of nearly all the Belt Company's stock, and in equity a trustee for its creditors. Story's Equity Jurisprudence, §§ 1261, 1262; Grenell v. Detroit Gas Co., 112 Mich. 70, 70 N. W. 413; Camden Interstate Ry. Co. v. Lee (Ky.) 84 S. W. 332, 333; Central of Georgia Ry. Co. v. Paul, 93 F. 883, 884, 35 C. C. A. 639; Luedecke v. Des Moines Cabinet Co., 140 Iowa, 223, 118 N. W. 457, 458, 32 L. R. A. (N. S.) 616; Hibernia Ins. Co. v. St. Louis & N. O. Trans. Co. (C. C.) 13 F. 516, 519.       The Southern Company became liable to the Trust Company to the extent of its claim for the value of the $4,750,000 of its stocks, which it issued to the stockholders of the Belt Company to secure the property of the Belt Company and divert it from its creditors. Central of Georgia Ry. Co. v. Paul, 93 F. 883, 884, 35 C. C. A. 639; Camden Interstate Ry. Co. v. Lee (Ky.) 84 S. W. 332, 333.       The transaction was a conveyance of the property of the Belt Company in fraud of creditors and a breach of trust by the Southern Company, which company, with full knowledge of all the facts, actively participated in the entire transaction and thereby acquired the property of the Belt Company, so that that property and the improvements the Southern Company has made thereon, free from the $1,000,000 Belt mortgage and free from any charge for the expenses which the Southern Company has made thereon, stands in its hands charged with a trust to pay the claim of the Trust Company against the Belt Company, which the court may execute by a seizure and sale by its master or receiver. Railroad Co. v. Soutter, 80 U. S. (13 Wall.) 517, 522, 524, 20 L. Ed. 543; Guckenheimer v. Angevine, 81 N. Y. 394, 397; Goble v. O'Connor, 43 Neb. 49, 61 N. W. 131, 132. Such was the character of the main litigation and the outcome. We have not deemed it necessary for the purposes in hand to review such suits as the two unwarranted injunction suits brought by the Southern Company against the Trust Company, which were subordinate to the main litigation. They, however, furnish additional proof, if it were needed, of the vexatious character of the whole litigation. The history of those suits is to be found in (C. C. A.) 146 F. 337, and 171 F. 43. We next turn to the consideration of the principles of law applicable to the foregoing facts and bearing upon the question: Whether the Trust Company is entitled to any costs as between solicitor and client.