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creditors thereof.

3. Foreclosure of a railroad mortgage by collusion between bondholders and stockholders, for the purpose of destroying the interests of unsecured creditors, may be set aside on their application as a fraud.

The failure of an unsecured creditor to intervene at the first instant on a bill for the foreclosure of a railroad mortgage filed in the avowed interest of all creditors, without taking any action to notify them or bring them into court, will not be a fatal delay or neglect which will prevent relief against a foreclosure by collusion to preserve the rights of bondholders and stockholders and to cut

off unsecured creditors.

[No. 263.]

Argued April 24, 1899. Decided May 22,


Company, hereinafter called the New Albany
company, in 1889 and 1890 placed a guar-
anty upon $1,185,000 of the first-mortgage
bonds of a Kentucky railroad corporation.
In April, 1890, the New Albany company,
guarantor, commenced a suit in the circuit
court of the United States for the district
of Kentucky against divers parties claiming
to hold such bonds to have the guaranty de-
clared void. In 1894 that court rendered a
final decree, sustaining its contention, and
adjudging the guaranty ultra vires and void.
69 Fed. Rep. 431. From that decree the
holders of the guaranty bonds appealed to the
circuit court of appeals for the sixth circuit,
which, in June, 1896, reversed the decree of
cancelation, and held the guaranty binding.
43 *U. S. App. 550. On application of the [676]
New Albany company the case was then re-
moved on certiorari to this court, and at the
time of the proceedings hereinafter referred
to was still undecided. Judgment therein
has since been entered sustaining the guar-
anty. Louisville, New Albany, & Chicago
Railway Company v. Louisville Trust Com-
pany [174 U. S. 552, ante, 1081].

After the decision in the circuit court of

appeals, and on August 24, 1896, one John T. Mills, Jr., commenced an action in the cirO`States Circuit Court of Appeals for the tor of the New Albany company to the N WRIT OF CERTIORARI to the United cuit court of the United States for the district of Indiana, alleging that he was a credSeventh Circuit to review a decree of that amount of $494,911.35. That company apcourt affirming the decree of the Circuit Court of the United States for the District peared and confessed judgment, and an execution was issued and returned unsatisfied. of Indiana denying an intervening petition Whereupon Mills filed his bill of complaint filed by the Louisville Trust Company in the same court, based upon this unsatis against the Louisville, New Albany, & Chi-fied execution, and praying the appointment cago Railway Company in an action instituted by John T. Mills, Jr., in said Circuit Court, against the Louisville, New Albany, & Chicago Railway Company, for the ap; pointment of a receiver of said company, and the marshaling of its assets, and the ascertaining and enforcement of the liens and priorities, whether by mortgage or otherwise, of all of the creditors of said company, its assets, and for a division of the proceeds among the creditors. The intervening petition prayed that the decree of foreclosure and sale entered in the cause be set aside, and that certain mortgages be declared to be invalid, and that the assets of said company be declared to be a fund to be distributed among its creditors, and for the distribution thereof. Decrees of Circuit Court and Circuit Court of Appeals reversed, and case re manded to the Circuit Court, with instructions to set aside the sale, and to ascertain whether there was any legal agreement between the bondholders and the stockholders to preserve their rights and destroy the interests of unsecured creditors, and, if such was the agreement, to refuse confirmation of the sale until the interests of unsecured creditors shall have been preserved, etc.

See same case below, 69 Fed. Rep. 431, and 43 U. S. App. 550, 75 Fed. Rep. 433, 22 C. C. A. 378, and 56 U. S. App. 208, 84 Fed. Rep.

539, 28 C. C. A. 202.


Statement by Mr. Justice Brewer: [675] *The facts in the case are as follows: Louisville, New Albany, & Chicago Railway

of a receiver. The bill set forth the property belonging to the judgment debtor the New Albany company, alleged that its capital stock amounted to $16,000,000, of which $7,000,000 was preferred; that its outstanding funded debt, divided into five classes, amounted to $7,700,000 in six per cent bonds, and $6,100,000 in five per cent bonds. The bill also alleged the existence of a floating debt, amounting to nearly $1,000,000, consisting of outstanding notes and other obligations, held by the complainant and other bona fide creditors. It then set forth the guaranty of the bonds of the Kentucky Railroad Company, the proceedings in court by which the guaranty had been sustained, and averred that the officers of the defendant company reported a diminution of current earnings by reason of a short wheat crop and lessened traffic, and that it would be imprac ticable to realize from the earnings after the payment of operating expenses, taxes, and rentals a sum sufficient to pay the shortly accruing mortgage interest. The bill also alleged many matters, among others the fact that the lines of the New Albany company were in three different states and subject to the jurisdiction of different courts, which the property by a receiver to prevent its disseemed to justify the taking possession of memberment or any disturbance of its con tinued operations as a common carrier. The prayer of the bill was:

*"Inasmuch, therefore, as the complainant[677] has no adequate remedy at law for the griev

filed a bill of foreclosure, alleging default in the payment of interest on November 1, 1896. On the same day the trustee in another mortgage, dated January 1, 1896, filed a similar bill, alleging default on October 1, 1896. On November 24, 1896, the court, on application of the receiver, entered an order authorizing the receiver to borrow $200,000 on receiver's certificates, payable out of the earnings, and expend the same in the construction of new bridges, the repair of freight cars and engines, the ballasting and making new alignment of track, and the equipment of engines and cars with air brakes and auto

der this order is not disclosed in the record, although the final decree provided for payment in advance of the bonds "of any indebtedness of said receiver which has not been or shall not be paid out of the earnings and income of the property coming into the hands of said receiver." On the 14th day of December, 1896, the trustee in a mortgage executed September 1, 1894, commenced foreclosure. alleging default on December 1, 1896. On the 21st of December, 1896, an order of consolidation was made of these several foreclosure suits.

ances hereinbefore stated, and can only have relief in equity, he files this bill of complaint in behalf of himself and all others in like relation to the said property, and prays that due process of law issue against the defendant, the Louisville, New Albany, & Chicago Railway Company, and that it be summoned to appear in this court and answer this bill, but without oath, all answers under oath being hereby expressly waived under the rules to stand to and abide by such orders and decrees as the judges of this court may from time to time enter in the premises; that for the purpose of enforcing the rights of complainant and all other creditors of said in-matic couplers. What action was taken unsolvent corporation according to their due equities and priorities, and to preserve the unity of the said railway system as it has been and now is maintained and operated, and to prevent the disruption thereof by the separate attachments, executions, or levies, this court will forthwith appoint a receiver for the entire railroad. That the court will fully administer the trust fund, in which the complainant is interested as a judgment creditor, and will for such purpose marshal all the assets of said insolvent corporation, and ascertain the several liens and priorities existing upon the said system of railways or any part thereof and the amount due upon each and every of such liens, whether by mortgage or otherwise, and enforce and decree the rights, liens, and equities of each and all of the creditors of the said Louisville, New Albany, & Chicago Railway Company, as the same may be finally ascertained and decreed by the court upon the respective claims and interventions of several of such creditors or lienors in and to, not only the said line of railroad, appurtenances, and equipments, or any part of them, but also to and upon each and every portion of the assets and property of the said insolvent corporation, and that said railroad and all the assets of such corporation shall be sold by proper decree of the court, and the proceeds divided among the different creditors according as their liens and priorities may be decreed by the court, and for such other and further relief as to the court may seem [678]proper and as may be necessary to further enforce the rights and equities of the complainant and all other creditors of such corporation."

The New Albany company appeared by its general solicitor, filed its answer admitting the material allegations of the bill and interposing no objections; whereupon the court made an order appointing as receiver a gentleman who was the vice president of the company and its general manager. The order of appointment was in the ordinary form of such orders.

On the 23d of January, 1897, the petitioner. the Louisville Trust Company, filed its pe-[679 tition asking generally to be admitted to appear in the suit and to take such steps and proceedings in its own behalf as it might deem necessary, which petition was sustained, and leave granted accordingly. This petition alleged the indorsement heretofore referred to of the bonds of the Kentucky Railway Company by the New Albany com pany, that it, the petitioner, was the holder of $125,000 of those bonds, and had obtained a decree adjudging the validity of the guaranty.

On the same day the various parties to the foreclosure suits having all appeared and filed so far as was necessary answers admitting the allegations of the bills, a decree was entered foreclosing the three mortgages in suit and directing a sale of the property.

On February 27, 1897, the Louisville Trust Company filed a full intervening petition, verified by affidavit, setting forth the guaranty of the Kentucky bonds, its ownership of $125,000 of them, the decree of the court of appeals and the certiorari obtained from this court by the New Albany company, the proceedings in the action instituted by John T. Mills, Jr., in respect to which it alleged that "the said J. T. Mills, Jr., claimed to be a creditor to the amount of $494,911.35, but did not disclose or discover to the court in his proceedings that he was not a general creditor, but he was at the time, if a creditor at all, secured with collateral securities, All of these proceedings, including the fil- the value whereof is unknown to your petiing of the original complaint, the confession tioner. And the petitioner charges that the of judgment, the issue and return of the proceedings in behalf of the said John T. execution, the filing of the bill and the ap- Mills, Jr., were procured by the said New pointment of a receiver, took place on the Albany company for the purpose of hindersame day, to wit, August 24. Up to this ing and delaying the general or unsecured time there had been no default in any of the creditors of the said company in the enforceinterest due on the several series of bonds.ment of their debts; and that since the enOn November 12, 1896, the trustees in one of the mortgages, one executed May 1, 1890,

try of the said order of appointment no step has been taken in the said cause, either to

ascertain or to bring into court the assets, | crued, and shall hereafter accrue, from the which are subject to the payment of the said operation of the said railway in the hands debts, and no proceeding has been taken to of the receiver, and that the amount thereof notify or to bring before the court the said be adjudged and declared to be a fund to be general or unsecured creditors." It then set distributed among the general and unsecured forth the filing of the foreclosure bills, the creditors of the said company; and that all entry of the decree of foreclosure, and al- such other and further proceedings be had leged "that prior to the entry of the said for the sale of the assets of the said com[680]decree the holders of the bonds secured by pany and the distribution thereof, according the mortgages to the Farmers' Loan & Trust to law and the rights of the parties." Company and the Central Trust Company On the 9th of March, 1897, its petition was aforesaid, and the holders of the preferred denied. On the 10th of March a sale was and common stock of the said Louisville, made by the master appointed therefor, and New Albany, & Chicago Railway Company, on the same day his report thereof was filed or a part thereof, had entered into an ar- and the sale confirmed. An appeal was rangement or agreement for the purpose of taken by the Louisville Trust Company to procuring the sale of the said property, its the court of appeals of the seventh circuit, purchase by and in behalf of the parties en- which appeal was argued on the 16th day tering into such combination and reorganiza- of November, 1897. On the 5th of January, tion thereof, and the issue of securities to 1898, the decree of the circuit court was afthe said parties, including said stockholders, firmed. 56 U. S. App. 208. Whereupon apwithout the payment of the debts and lia- plication was made to this court, and the bilities of the said company, and for the pur-proceedings were brought before it by cerpose of hindering and delaying the said cred- tiorari. itors and with a view to prevent the collection or enforcement of such debts and liabilities; and that the said decree of sale was obtained by the said company and said complainants in order to carry out such unlawful purpose and to prevent the general or unsecured creditors of the said company from having an opportunity to be heard in matters arising in the said cause."

It is also alleged that the New Albany
company was formed by consolidation, and
that one of the consolidating companies was
a corporation of Illinois and had its property
in that state; that it had no power to enter
into such consolidation as had been decided
by the supreme court of that state, and there-
fore that the mortgages executed by the New
Albany company and which were being fore-
closed were not liens upon so much of its
property as had belonged to the Illinois cor-
poration and was situated in that state.
also claimed that under the provisions in the
mortgages there had been no such default as
justified a foreclosure, and prayed as fol-


"Wherefore, your petitioner prays that the decree of foreclosure and sale heretofore entered in this cause be set aside, that the pretended consolidations herein mentioned be adjudged void, and that the said mortgages before mentioned be declared to be invalid; that this cause be referred to a commissioner to ascertain and report what assets of the said New Albany company are embraced by any liens, and what are not so included, and the amounts and descriptions thereof; and that, among other things, the [681]master be directed to ascertain what portion of the capital stock has not been paid for, and the amounts due thereon; and that the receiver herein be directed to take steps to enforce the collection of any amounts due to the said company; that due and proper advertisement be given for the proof of debts, and that said master be directed to ascertain and report the names of the creditors herein and the amounts of debts due to them; that it be adjudged that the said master ascertain what net earrings have ac

Messrs. St. John Boyle and Swagar Sherley for petitioner.

Messrs. Adrian H. Joline, Herbert B. Turner, George W. Kretzinger, and E. C. Field for respondents.

*Mr. Justice Brewer delivered the opin [681] of the court:

The questions in this case are novel and important. They arise on the foreclosure of[682] certain railroad mortgages, and suggest to what extent the same rules and considerations obtain in them as in the foreclosures of ordinary mortgages upon real estate. It goes without saying that the proceeding in the foreclosure of an ordinary mortgage on real estate is simple and speedy. No one need be considered except the mortgagor and mortgagee and if they concur in the disposition of the foreclosure it is sufficient, and the court may properly enter a decree in accordance therewith. Other parties, although claiming rights in antagonism to both or either mortgagor and mortgagee, may be considered outside the scope of the foreclosure, and whatever rights they may have may properly be relegated to independent suits.

But this court long since recognized the fact that in the present condition of things (and all judicial proceedings must be adjusted to facts as they are) other inquiries arise in railroad foreclosure proceedings accompanied by a receivership than the mere matter of the amount of the debt of the mortgagor to the mortgagee. We have held in a series of cases that the peculiar character and conditions of railroad property not only justify, but compel, a court entertaining foreclosure proceedings to give to certain limited unsecured claims a priority over the debts secured by the mortgage. It is needless to refer to the many cases in which this doctrine has been affirmed. It may be, and has often been, said that this ruling implies somewhat of a departure from the apparent priority of right secured by ac ontract obligation duly made and duly recorded, and yet this court, recognizing that a railroad is not

simply private property, but also an instrument of public service, has ruled that the character of its business, and the public obligations which it assumes, justify a limited displacement of contract and recorded liens in behalf of temporary and unsecured creditors. These conclusions, while they to a certain extent ignored the positive promises of contract and recorded obligations, were enforced in obedience to equitable and public considerations. We refer to these matters, not for the sake of reviewing those decisions, but to note the fact that foreclosure proceed[683]ings of mortgages covering extensive railroad properties are not necessarily conducted with the limitations that attend the foreclosures of ordinary real-estate mortgages.

We notice, again, that railroad mortgages, or trust deeds, are ordinarily so large in amount that on foreclosure thereof only the mortgagees, or their representatives, can be considered as probable purchasers. While exceptional cases may occur, yet this is the rule, as shown by the actual facts of foreclosure proceedings, as well as one which might be expected from the value of the property and the amount of the mortgage. We may not shut our eyes to any facts of common knowledge. We may not rightfully say that the contract of mortgage created certain rights, and that when those rights are established they must be sustained in the courts, and no inquiry can be had beyond those technical rights. We must therefore recognize the fact, for it is a fact of common knowledge, that, whatever the legal rights of the parties may be, ordinarily foreclosures of railroad mortgages mean, not the destruction of all interest of the mortgagor and a transfer to the mortgagee alone of the full title, but that such proceedings are carried on in the interests of all parties who have any rights in the mortgaged property whether as mortgagee, creditor, or mortgagor. We do not stop to inquire, because the question is not presented by this record, whether a court is justified in permitting a foreclosure and sale which leaves any interest in the mortgagor, to wit, the railroad company and its stockholders, and ought not always to require an extinction of all the mortgagor's interest and a full transfer to the mortgagee, representing the bondholders. Assuming that foreclosure proceedings may be carried on to some extent at least in the interests and for the benefit of both mortgagee and mortgagor (that is, bondholder and stockholder), we observe that no such proceedings can be rightfully carried to consummation which recognize and preserve any interest in the stockholders without also recognizing and preserving the interests, not merely of the mortgagee, but of every creditor of the corporation. In other words, if the bondholder wishes to foreclose and exclude inferior lienholders or general unse[684]cured creditors and stockholders he may do so, but a foreclosure which attempts to preserve any interest or right of mortgagor in the property after the sale must necessarily secure and preserve the prior rights of general creditors thereof. This is based upon the familiar rule that the stockholder's interest

in the property is subordinate to the rights of creditors; first, of secured, and then of unsecured, creditors. And any arrangement of the parties by which the subordinate rights and interests of the stockholders are attempted to be secured at the expense of the prior rights of either class of creditors comes within judicial denunciation.

Now, the intervening petition of the petitioner, duly verified, directly charged that the foreclosure proceedings were for the benefit alone of bondholder and stockholder and under an agreement between the two for a sale and purchase for both, and with a view of thereby excluding from any interest in the property all unsecured creditors; that this agreement was entered into after and in consequence of the decree of the United States courts of appeals adjudging the New Albany company liable on its guaranty. If that fact be true would it not be, and we quote the language of the court of appeals, “a travesty upon equity proceedings? Can it be that when in a court of law the right of an unsecured creditor is judicially determined and that judicial determination carries with it a right superior to that of the mortgagor, the mortgagor and mortgagee can enter into an agreement by which through the form of equitable proceedings all the right of this unsecured creditor may be wiped out, and the interest of both mortgagor_and_mortgagee in the property preserved and continued? The question carries its own answer. Nothing of the kind can be tolerated.

Beyond the positive and verified statement of the petition of the Louisville Trust Company are many facts appearing in the record which strongly support this allegation. That a corporation whose stock consists of $16,000,000, $7,000,000 of which is preferred stock, all of which must be expected to be wiped out if a mortgage interest of $13,800,000 is fully asserted, hastens into court and confesses judgment on an alleged unsecured *lia-[685) bility; on the same day responds to an application for a receiver and assents thereto; makes no effort during the receivership to prevent default in interest obligations; tacitly, at least, consents to an order made on application of the receiver for the issue of $200,000 worth of receiver's certificates in aid of betterments on the road, when the same sum might have paid the interest and delayed the foreclosure; when foreclosure bills are filed not only makes no denial, but admits all the averments of mortgage obligation and default-in other words, seems a debtor most willing to have all its property destroyed, and this because of one wheat crop; these matters suggest, at least, that there is probable truth in the sworn averment of the petitioner that all was done by virtue of an agreement between mortgagee and mortgagor (bondholder and stockholder) to preserve the relative interests of both, and simply extinguish unsecured indebtedness. When, in addition to this fact, it appears that these proceedings are initiated within a few days after a decree of the circuit court of appeals a decree final unless brought to this court for review in its discretion by cer tiorari; that a large amount of unsecured


indebtedness was by that decree cast upon the mortgagor, we cannot doubt that such a condition of things was presented to the trial court that it ought, in discharge of its obligations to all parties interested in the property, to have made inquiry and ascertained that no such purpose as was alleged in the intervening petition was to be consummated by the foreclosure proceedings.

It is said by the appellee that the Louisville Trust Company was dilatory, and that by reason thereof it was not entitled to consideration in a court of equity. There is some foundation for this contention, and yet there was not such delay as justified the court in refusing to enter upon an inquiry. Indeed it does not appear that either the circuit court or the circuit court of appeals considered the petitioner dilatory or denied its application on the ground of delay. It must be borne in mind that the bill of complaint filed on August 24 by one who had that day become, by consent of the defendant, a judgment creditor, was affirmatively ]"for the purpose of enforcing the rights of complainant and all other creditors of said insolvent corporation according to their due equities and priorities," and to "decree the rights, liens, and equities of each and all of the creditors of the said Louisville, New Albany, & Chicago Railway Company as the same may be finally ascertained and decreed by the court upon the respective claims and interventions of several of such creditors or lienors in and to, not only the said line of railroad appurtenances and equipment or any part of them, but also to and upon each and every portion of the assets and property of the said insolvent corporation."

Although this bill was filed in the avowed interest of himself and all other creditors, no action was taken to notify any creditors or to bring them into court to present their several claims. Any creditor might well have waited, even with knowledge of what had taken place, and after an examination of the bill thus filed, until publication or other notice. Whether this petitioner was, in fact, aware of these proceedings is not disclosed. Even if it were, its waiting a reasonable time for what in the ordinary course of procedure all creditors had a right to expect, is not a neglect which destroys its equities. It, and all other creditors, might justly assume that this proceeding was initiated in good faith to subject the property of the common debtor to the payment of all its debts; primarily it may be its secured debts, but also generally all its debts, secured or unsecured, and that whenever it was necessary due notice would be given and all creditors called upon to present their claims. It would not have been justified in treating this proceeding as solely in the interest of the mortgagee and mortgagor, the bondholder and stockholder, and for the purpose of destroying all claims of unsecured creditors.

It is true that the filing of the bills of foreclosure was notice of an intent to subject the property belonging to the mortgagor to the satisfaction of the mortgage. And for the purposes of the present inquiry it may be

conceded that the intervening petition disclosed no legal defense to the claims of the mortgagees to foreclosure. In other words. for the inquiry we desire to pursue we shall assume without question that the matters referred to in the petition in respect to the property in Illinois, the decison of the su-[687] preme court of that state and the effect of the attempted consolidation, and all other matters stated or suggested, separately or together, constitute no valid defense to the foreclosure bills. But this foreclosure proceeding did not either directly or by sugges tion disclose any purpose to protect the mortgagor, the stockholder, at the expense of unsecured creditors. And, as heretofore stated, this unsecured creditor was not bound to presume that there was any such purpose in the minds of the two parties to the foreclosure. So that its failure to intervene at the first instant cannot be fatal delay or neglect.

It is also true that no evidence was offered

by the petitioner in support of the allegations of its petition, but it is not true that in revising and reversing the final action of the circuit court we are acting on mere suspicion, or disturbing either settled rules or admitted rights. The allegations of this intervening petition as to the wrong intended and being consummated were specific and verified. The delay, under the circumstances, was not such as to deprive the pe titioner of a right to be heard. The facts apparent on the face of the record were such as justified inquiry, and upon those facts, supported by the positive and verified allega tions of the petitioner, it was the duty of the trial court to have stayed proceedings, and given time to produce evidence in support of the charges. Taking them as a whole, they are very suggestive, independent of positive allegation; so suggestive at least, that, when a distinct and verified charge of wrong was made, the court should have investigated it.

We cannot shut our eyes to the fact that one claiming to be a general creditor for nearly half a million of dollars commences proceedings to establish his right, which, by the consent of the debtor, result on the very day in a judgment, execution, and return thereof unsatisfied, a bill for a receivership and the appointment of a receiver; and yet notwithstanding this was initiated in support of this large claim, as well as for the protection of other unsecured creditors, shortly thereafter foreclosure proceedings are instituted and carried on to completion, which absolutely ignore the rights of this alleged unsecured creditor, and leave as the[688] result of the sale himself the actor who has brought on the possibility of foreclosure stripped of all rights in and to the mortgaged property. Was he a real creditor, and did that real creditor make a generous donation of this large claim? Were ar rangements made with him and the stockholders to protect both, and by virtue of such arrangements was this foreclosure hastened to its close? Questions like these which lie on the surface of these proceedings cannot be put one side on the suggestion that they present only matter of suspicion.

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