Court Opinion

ID: 8856058
Source: CourtListenerOpinion
Date Created: 2022-11-26 17:30:44.374017+00
Date Added: 2024-06-11T17:05:39.603539
License: Public Domain

SPEER, District Judge
(dissenting). Regrettably for myself, I have not been able to reach the conclusions attained by the majority of the court in this case. Deference and respect for my learned brethren seem to require that I should state the considerations which have prevented a coincidence of opinion with them.
The first mortgage bondholders of the Marietta & North Georgia Railroad Company had a security which seemed to them adequate for their investment in the bonds of the company. This was the property of that railroad, within the .state of Georgia. The road extended from Marietta to the Georgia line. These bonds amounted to only $680,000. It was, when the bonds were purchased, a narrow-gauge road, but the region which it penetrated is noted for its rapidly developing wealth of field, forest, and mine; its immense deposits of variegated and beautiful marble; for its romantic charm of scenery and for its healthful climate. Its future seemed propitious. For nearly 10 years there was no default on these bonds. In 1887, however, a scheme was formed to enlarge and extend this road; to give it a broad gauge; and by traversing a mountainous country, and bridging numerous rivers, — among them, the Tennessee, — to reach the city of Knoxville. In furtherance of this project the road itself was consolidated with the Georgia & North Carolina Railroad Company of North Carolina, and the new corporation, under the name of the Marietta & North Georgia Railway Company, issued what are termed its “consolidated bonds,” to the amount of $3,821,-000. The Central Trust Company of New York became trustee for these bondholders. It was a part of the scheme for the new trunk line that the holders of the first mortgage bonds, amounting to $680,-000 of face value, and the holders of a second issue of $480,000, should exchange these securities for the consolidated bonds of the railway company. Practically all of the second mortgage bondholders did this, and all of the first mortgage bondholders likewise, except the holders of 382 bonds of $1,000 each. These bonds so exchanged are now held by the Central Trust Company as collateral security for the consolidated bonds. The holders of 382 of the first mortgage bonds, and the. Boston Safe-Deposit & Trust Company, the trustee for the first and second mortgage bonds, had nothing to do with the scheme for the new railway to Knoxville. They were not parties to any proceeding with that purpose.in view. As I think they had the right to do, they relied upon the security of their bonds, namely, the productive property of the railroad in Georgia. Their *203security seemed unassailable. The consolidated mortgage under which the new millions of bonds were issued in express terms recognized that it was subordinate to the first mortgage bonds. The consolidation took effect on the 1st day of January, 1887, but the first mortgage bondholders did not take part in it, and were not affected by it. There was as yet no default on their interest. On the 12th of January, 1891, the Central Trust Company filed its bill to foreclose the consolidated bonds. This bill was filed against the new Marietta & North Georgia Railway Company. It had no averments in it affecting the 382 bonds of the Marietta & North Georgia Railroad Company, whose holders had not exchanged them for the securities of the new company. The old company was not made a party, although, as a legal entity, it still existed. The trustee of these outstanding bdtuls, the Boston Safe-Deposit & Trust Company, was at ibis time in no wise connected with the suit, either as a plaintiff or as a defendant, nor were any of the holders of these bonds. A receiver was appointed, and proceeded to carry out the purpose of that bill. That purpose was plainly to aid a plan of reorganiza lion in the interest of the holders of the consolidated mortgage bonds, and, as wc have seen, to extend the road to Knoxville, make it a through trunk line, and build an expensive bridge over the Tennessee river. It may be observed at this point that a scheme for reorganization of corporation properly must either be effected by the consent of the security holders, or by providing for the payment and discharge of tin' obligations they hold, or by a judicial proceeding giving to each creditor the right to which, under all the cirannsi anees, his lien or claim entitles him. It cannot be accomplished by a majority of the security holders. Any one may stand on his legal rights, and (he court is bound to protect them. Oourls may, and frequently do, encourage plans of reorganization; but they cannot, in a compulsory way, «'organize objecting securities out of existence' because a majority of the creditors desire it. This important: fact in this case should also be observed. The court did not undertake, as courts may do, merely to keep the insolvent railroad a going concern, but, through its receiver, undertook to build, improve, enlarge, and extend a, new railroad, of which the primary investors never dreamed when their bonds were issued. The complainant was in effect a promoter, and the court, by its receiver, a builder, of a new road, of a, very expensive character, traversing the territory of two states other than that in which the property originally pledged for the first mortgage bonds was located. In the case of Shaw v. Railroad Co., 100 U. S. 613, the supreme court declared:
“Tlie power oí the courts ought never to be used in enabling railroad mortgagees to protect their securities by borrowing money to build intervening roads, except under extraordinary circumstances. It is always better to reorganize the enterprise on the basis of existing mortgages as stock, or something which is equivalent, and by a new mortgage with a lien superior to the old, to raise money which is required, without asking the courts.to engage in the business of railroad building.”
In furtherance of the project above mentioned, the receiver was authorized to buy a large amount of rolling stock and other equipment, and to contract for building the bridge before mentioned over *204the Tennessee river. The debts incurred by the receiver' were not paid. The road in Georgia on which the first mortgage bonds were placed may have been fairly productive, but the new scheme was a chimera. The parties who furnished the rolling stock, and the contractor who built the bridge, filed their interventions, for the purpose of obtaining judgments on their claims; and these were referred to a special master, who reported that they were liens of the highest dignity, and should be paid. The Central Trust Company, complainant in the original bill, usually filed exceptions; but they were all overruled, and the circuit court confirmed the reports. These interventions each possessed all of the characteristics of a separate suit, and in its decree on each the circuit court proceeded to ascertain, and fix by formal decrees, the amount due, and also the dignity and priority of the lien, as compared with the other liens upon the property. This action on the part of the court, I think, as will be presently seen, was conclusive, as affecting the issues now presented to this court. Upon the intervention of S. W. Groome for the price of freight cars, on which a decree was rendered on the 3d of July, 1891, the court expressly held that the lien of the intervenor was “superior to the mortgage represented by the Central Trust Company of New York.” Not only is this true, but, the intervention having been, appealed to this court, the judgment of the court below was adopted literally, and in its entirety. This appears by the mandate of this court made the 14th day of December of the same year. On the intervention of the Jackson Woodin Manufacturing Company, a decree rendered July 6, 1891, again fixes the lien as “superior to the mortgage represented by the Central Trust Company of New York.” This judgment, also, in its literal entirety, was affirmed by this court. Precisely the same holding was made by the circuit court on the intervention of the Rhode Island Locomotive Works, and on the intervention of the Jackson-Sharp Company. Both interveners sued for the price of equipments. When another intervention of S. W. Groome for car trucks was presented to the circuit court, a decree in his favor for $22,500 was rendered, directing the receiver to give Groome a note being a first lien on the property in the hands of the receiver, “superior to the lien of the mortgage represented by the Central Trust Company.” On appeal this court reduced the amount of the claim to $5,500, but did not alter the rank of the lien as fixed by the circuit court. By the mandate the receiver was directed to pay this sum to Groome within 15 days, and in case of his inability to do so the receiver was directed to redeliver the property purchased. The receiver did neither, whereupon the circuit court issued an order fixing the lien of Groome as superior to the consolidated mortgage, and also to the first mortgage. This order seems to have been made by the court, sua sponte, in June, 1895, and without any pleadings seeking the promotion of a lien given its rank by the circuit court in 1891, and affirmed by this court in 1892. Many terms had intervened. On the intervention of George Eager, the master reported that $2,276.75 was due; and the court, do doubt inadvertently, gave the decree for $3,276.75, and declared it to be “a first lien on all property of said railway com*205pany.” This order was not taken until the 4th of July, 1892. With the exception, then, of this decree, and the S. W. Groome $5,500 decree, all of these judgments were judicially declared to be a lien "superior to the mortgage represented by the Central Trust Company;” namely, the consolidated mortgage. They were final judgments, even where they did not receive the additional sanction of the affirmance by this court. Central Trust Co. v. Grant Locomotive Works, 135 U. S. 207, 10 Sup. Ct. 736. They were final, then, not only as to the amount, but as to the dignity of their respective liens, if they had not been final, they could not have been appealed from. When, therefore, the court fixed the lien of these several decrees on as many separate interventions to be superior to the lien of the mortgage represented by the Central Trust Company, that being the third mortgage, it was judicially declared that they were inferior to the lien of the first mortgage represented by the Boston Safe-Deposit & Trust Company. “Expressio unius est exclnsio alterius.” With relation to the receiver's certificate to build the bridge across the Tennessee river, it is true that in the order authorizing the issue of the certificate it is recited that it shall be the first lien on the whole Marietta & North Georgia Bailwav Company, extending from Marietta, in Georgia, to Knoxville, in Tennessee. This, I submit, should not affect the rights of the holders of the first mortgage bonds who took no part in the project of which the bridge was an instrumentality, and the lien of whose bonds is restricted to the property in Georgia, and who at the time of the order authorizing the certificates, the 9th of December, 1891, were neither themselves, nor by their trustees, parties to the bill. They were given no opportunity 1o appear, or to be beard on the evidence as to the propriety of this expenditure. They had not their day in court. This right, under the* circumstances, should have been afforded them. It cannot be doubted that if this was a question of necessary repairs to the railroad pledged to secure their bonds, or even to complete an uncompleted portion thereof, or to procure the necessary rolling stock, or to prevent the deterioration of the properly, the power of the court to issue the certificate without prior notice to the bondholders would be recognized. Much power is always, however, to be exercised with great caution; hut having changed the gauge of the road, having extended it more than 100 miles through another state, without the consent of the outstanding bondholders, then, without giving the latter an opportunity to be heard on the evidence as to the propriety of the expenditures, and the postponement of their liens, an outlay of $130,000, by which they could never he benefited, was, in my judgment, unwarrantable, as against their interest.
Reliance is had on the cases of Wallace v. Loomis, 97 U. S. 146, and Miltenberger v. Railroad Co., 106 U. S. 286, 1 Sup. Ct. 140, — to support the priority which, without any notice to them or their trustee, the original order gave to these certificates. But in Wallace V. Loomis the bill was filed by the trustees of the first mortgage. It followed that all expenditures made by tlie receiver for necessary improvements for the preservation and management of the property were superior to the liens of those bondholders who had imposed *206that duty upon the court. In that case, also, the second mortgagees, whose trustees likewise objected, had due and legal service of the application to issue certificates, and made no objection. The court held that the bondholders were bound by the nonaction of their trustees, who were parties. In the case of Miltenberger v. Railroad Co., supra, the first mortgagees had appeared and answered, and were therefore parties to the record. In this case, as already stated, at the time this order was issued neither the bondholders nor their trustees had any connection with the litigation, but were relying upon the fact that the consolidated mortgage made for the purpose of extending the road was expressly subordinate to theirs; and they had the right to conclude that the court Avould do as to future expenditures, for completing and equipping the new road, as it had done with those past, and would give a lien superior only to the lien of the consolidated mortgage. I think that the circuit court itself must have recognized the inequitable character of the order making the bridge certificates superior to the first mortgage bonds, and attempted to correct it in the final decree. In the most important proviso of that decree, which relates to this matter, it is declared “that the receiver’s certificates issued, or to be issued, for the construction of the bridge and approaches OA^er the Tennessee river at Knoxville, Tennessee, aggregating not more than $160,000, are to be a charge solely on the line of the railway in the state of Tennessee.” This decree was entered on the 13th of May, 1893, and it was the final decree. This is true both as matter of laAv, and by its own terms. It finally disposed of all matters, except cei'tain questions that it submitted to the standing master, in which submission the court makes the reservation above quoted, and thus itself judicially 'declares that the bridge certificates haA'e a lien solely on the line of railway property in Tennessee. The bill had accomplished its purpose, and was final as to the relief prayed for. See Forgay v. Conrad, 6 How. 204; Ex parte Horton, 108 U. S. 242, 2 Sup. Ct. 490; Thomson v. Dean, 7 Wall. 342; Iron Co. v. Meeker, 109 U. S. 181, 3 Sup. Ct. 111. The holders of the bridge certificates might haA’e appealed from the decision restricting their lien to the property in Tennessee, and it was' therefore final as to them. Central Trust Co. v. Grant Locomotive-Works, 135 U. S. 207, 10 Sup. Ct. 736; Central Trust Co. v. Florida Ry. & Nav. Co., 43 Fed. 751. As the bill of the Boston Safe-Deposit & Trust Company had been previously filed and consolidated with the original bill, it was a party to the decree. The decree, then, was final as to that party, also, and therefore final as to outstanding bondholders whom it represented. Duiing the term at which this decree-was passed, the court, even on its own motion, might have amended, corrected, or vacated it. Henderson v. Coke Co., 140 U. S. 40, 11 Sup. Ct. 691. But after the term has passed the court could not vacate or amend the decree, as to the priority of the receiver’s certificates. Brooks v. Railroad Co., 102 U. S. 107. An amendment after the first term is not simply irregular; it is void. Glenn v. Dimmock, 43 Fed. 550.
The case of Central Trust Co. v. Grant Locomotive Works, 135 U. S. 207. 10 Sup. Ct. 736, is precisely in point, both as' to this and *207the other decrees fixing the lien of equipment claims. There it was held, on an intervention filed in a suit for foreclosure of a railroad mortgage, that locomotive works furnishing engines in the possession of the receiver, and in use, were justly entitled to priority over the bonds secured by the mortgage, and that such holding was a final decree upon a matter apart from the general subject of litigation, and could not be vacated by the court after the expiration of the term at which it was granted. A fortiori was such an adjudication in a final decree for or against a particular claim conclusive, and beyond the power of the court to alter it at a subsequent term. Xow it is true in this case that at a term subsequent to that in which the final decree was passed, and more than two years thereafter, on four days’ notice, the court made its decree changing the rank of the judgments which it had theretofore granted. The liens on the receiver’s notes for rolling stock and equipments were now declared to be superior, not only to the bonds “represented by the Central Trust Coinjiany,” but; to the bonds represented by the Boston Safe-Deposit & Trust Company. The bridge certificate was also accorded a rank superior to that of the first mortgage bonds, and extended to the entire property, including that in Georgia as well as in Tennessee. This new view of the situation simply obliterated the security of the first mortgage bondholders, and I think was erroneous. The holding the court originally made on the several interven! ions, and in its final decree, was correct, substantially; and if it unfortunately turned out afterwards that (here was uot enough of value in the hands of the receivers to protect the firs!; lien of the outstanding first mortgage bondholders, and also the indebtedness created by the receiver, the equities of the parties were not to he altered on this account, especially in view of the general character of the receivership. I am of the opiuion that the outstanding 382 first mortgage bonds are entitled to the first claim on the property in Georgia, and to such a share in the proceeds of the equipment as will be fairly proportioned to equipment originally pledged to secure their bonds. Although their mortgage pledges after-acquired property, I do not think they are entitled to share in the property afterwards acquired by the receiver for the purpose of carrying out the project of the new line to Knoxville; and it is conceded that they have no lien on the property in Tennessee, or on the bridge and its approaches. And, further, I think that the Central Trust Company, having become, in furtherance of the extension scheme, the trustee for the consolidated mortgage bonds, and having taken as collateral security §777,000 worth of the first and second mortgage bonds of the Marietta & North Georgia Railroad Company, is subrogated only to the rights of the holders of those bonds so exchanged. And since those holders themselves entered upon the scheme to build a new railroad with the knowledge and approval of the Central Trust Company, their bonds exchanged for an equal number of tbe consolidated bonds issued in pursuance of such schemes are either merged in the new bonds, or have no greater dignity in the hands of the company than the consolidated bonds, and are therefore not entitled to a greater share of the proceeds of *208■the sale than the consolidated bonds themselves. This is especially . true in view of the fact that the Central Trust Company, representing the consolidated bonds, brought the bill under which the expenses of the receivership were incurred, as its counsel admits in judicio, for the purpose of furthering the reorganization. I am further of the opinion that the supplementary decree of June 8, 1895, appealed from, and other decrees thereafter taken, in so far as they tend to change the judgment on the several interventions, or the dignity of the liens, where fixed by the final decree of May 13, 1893, are void, and that the outstanding bondholders are in no sense responsible for embarrassments which have grown up under such subsequent decrees. Nor do I think that these bondholders of the Boston Safe-Deposit & Trust Company were in any sense in laches. They were doubtless aware that the court was managing the property under the bill of the Central Trust Company, but, no matter how closely they might have scrutinized its action, they would have discovered that it was creating debts superior only to the lien of the Central Trust Company, and therefore subordinate to their outstanding bonds. They had the right to conclude from this action of the court, and from the action of the circuit court of appeals affirming the same, that their interest under the first mortgage bonds would have been carefully conserved. The decree of June 8, 1895, having been appealed from, no subsequent decree reaffirming its purport was of any effect; and the decree of May 13, 1893, having declared the bridge certificates to be a charge solely on the line in Tennessee, 'not having been appealed from, the decree of October 13, 1895, authorizing the purchasers of the entire road to turn in bridge certificates as cash, is utterly null and void, and the purchaser took no right under it, and is not bound by it. If it be true, as stated dehors the record, that the property is now sold on these terms, either the sale should not be confirmed, or, if confirmed, the order of confirmation should be revoked.
When the bill of the Boston Safe-Deposit & Trust Company was filed, the usual order in respect to the proceedings of the court theretofore had was taken. This merely ratifies the management generally, and does not purport to ratify particular liens. This did not inhibit the Boston Safe-Deposit & Trust Company, and the bondholders it represented, from insisting that their bonds were superior to the lien of the certificates which had been authorized when they were not parties; and surely, as to their bonds, the rank of those certificates was still to be determined by the court. The case of Kneeland v. Luce, 141 U. S. 508, 509, 12 Sup. Ct. 32, does not conflict with this view. In that the case of the bondholders who objected to the priority of the receiver’s certificates were by their trustee made parties to the suit in which the decree was rendered, and the court expressly held that they consented to the issue of the certificates. Prom the master’s report, it appeared that, in the proceedings under the petition to issue the certificates, all parties in interest were duly ■represented. The fact that the first mortgage bondholders, then, were represented by their trustee as fully and fairly as such trustee was by law authorized to represent them, bound them by this action. *209After full hearing and consideration the court made the decree, that upon these facts and the consent of the Trustees the issue of the certificates was binding upon every bondholder, and under all the circumstances of the case the bondholders were precluded from claiming priority over the receiver’s certificates which were issued for the purpose of preserving mortgaged property. It is superfluous to repeat that no such conditions appear from the record before this court, and tbe upshot of this case is to wipe out, by proceedings to which they were never parties, over §382,000 invested in good faith, in the bonds of tbe narrow-gauge railroad by its first creditors, and to inflict this loss upon them because of tbe ambition existing with other people, elsewhere, to build another and a broad-gauge railroad in other and different states, — an enterprise in which they were never concerned, and from which it is plain they could have received no benefit whatever. For these reasons I think that the judgment of the court should be reversed, with instructions.