65 F. 351 | U.S. Circuit Court for the District of Kentucky | 1895
(orally). The first question arises upon the bill of foreclosure filed by Joseph P. Lloyd and James B. Hawes, trustees under a second mortgage made by the Chesapeake, Ohio & Southwestern Railroad Company. I think there ought not to be an independent 'receivership under this bill. That would require the discharge of the receivers heretofore appointed, and the winding up of that receivership, for there could not be two independent receiverships of the same property. The proper practice is to extend the receivership already in existence to this second foreclosure suit, and that the two cases be consolidated, and heard together. A decree to this effect will therefore be drawn.
The next question is, to my mind, a very simple one. It is presented by the petition of the trustees under the second mortgage, asking that the interest which fell due on the first mortgage bonds August 1, 1894, be paid by the receivers. An application of like'- character was made by the same trustees some few days since, but before they had filed their foreclosure bill, which application I will consider along with the one made since the filing of their bill; against the Chesapeake, Ohio & Southwestern Railroad Company. On the
The parties applying for a direction to the receivers to pay the August interest upon the first mortgage bonds are the trustees under the second mortgage, and George W. Norton, a holder of second mortgage bonds, who has been permitted to intervene. The ground upon which (he application is made is this: That in the mortgage securing the first series of bonds issued by the Chesapeake, Ohio & Southwestern Railroad Company there is a provision whereby the maturity of these bonds may he precipitated if interest shall continue in default for a period of six months. An installment of interest fell due August 1,1894, which, if not paid by the 1st day of February, 1895, may result In maturing the six millions of bonds known as the “First Mortgage Bonds.” The petitioner trustees applying for this order represent that the vital interests of the second mortgage bondholders and other creditors subordinate to the first mortgage require that the maturity of the first mortgage bonds shall be avoided by an immediate payment of tbe interest now in default. The trustees under the first mortgage were made parties defendant to Huntington’s original bill. No relief was sought against them, and, indeed, none could have been had. The railroad company was not in default with respect to either the principal or interest secured under the first mortgage. The first mortgagees were, therefore, not necessary parties, and only proper parties for the purpose of ascertaining the amount of their debt and the extent of their lien. Neither Huntington’s bill nor that of the trustees of the second mortgage seeks to sell the property clear of the first mortgage, but, upon the contrary, the object all along has been to bring the prop
It has been argued that the surplus earnings, after paying operating expenses, should be applied in discharge of the pending claims which are, by reason of their character, entitled to priority ovei- the entire bonded indebtedness of the debtor railroad company. There are two answers to this: First. That each and every one of the claims asserted as preferential claims are litigated. Second. If it be assumed that these claims shall be established, and that they shall be held as claims entitled to preference over both the first and second mortgage, they can only be paid by making default in the interest due upon the first mortgage bonds. The result would be that, if the entire earnings of the road are applied to discharge claims entitled to preference over the first mortgage, it would be at the expense of the accumulation of interest upon the first mortgage. What the first mortgagees would gain by having claims paid which are ahead of them they would lose by an accumulation of interest upon their bonds. Tims it seems to me that the first mortgage bondholders are not: interested; that it is the same thing to
' General creditors, having no security for their debts, have a very deep interest in preventing a maturity of the first mortgage. If the first mortgage shall be foreclosed, preferential claims must be first paid; the first mortgage bonds must next be paid; the second mortgage bonds then paid, and the surplus only would be applicable to the payment of such unsecured claims. It seems to me, therefore, that the only interest which is to be in any degree affected by the application of future earnings to the payment of past-due interest on the first mortgage bonds is that of the second mortgage bondholders themselves. Their trustees, who are entitled to represent them, regard it of vital importance that that interest shall be paid: In that opinion the court fully concurs, and would regard them as grossly derelict in the discharge of their duty, on the facts as they appear in this case, if they so far failed to appreciate the
It is not now proper to pass upon the question as to the conduct of the trust company, under the trust to it, in submitting its conduct with respect to the bonds and oilier securities held by it, and its attitude in this litigation, to the domination of one of the interests represented by it. Whether it should not, with respect to the emergency now threatening the second mortgage bondholders, exercise its own judgment with an eye single to the interests of the second mortgage bondholders as a class, and not suffer its action to be dictated by one of the beneficiaries under the trust, especially when that beneficiary is much more largely interested in an antagonistic class of securities, is a question which I will not now pass upon. The duty of the trust company is quite complicated, and presented embarrassments not ordinary. It is sufficient for me to say that when that trust company undertakes to» speak as a holder of a majority of these subordinate bonds, it does so, by its own confession, under coercion. “The voice is Jacob’s voice, but the hands are the hands of lisau.” It does not pretend tha t it is to the interest of the second mortgage bondholders as a class that the maturity of the first mortgage shall be precipitated, and that the interest of the second mortgagees in this property shall be thereafter held subject to the power of the prior and larger interest to foreclose at its will unless redeemed by the second mortgagee. I cannot accept its objection as of any moment when considering the rights and interests of the second mortgagees. There is a class of second' mortgage bondholders — a minority it is true, yet aggregating more than a million in value— whose interests in the second mortgage a,re identical with its own. Acquiring its bonds after suit had been instituted on them for the benefit of all other holders of such bonds, its voice should not be potential when it confesses that its action is dominated by a majority of the reorganization committee of the mortgagee desiring to precipi
But it is said that the court has no power to authorize the borrowing of money by the receivers to meet interest. It seems to me that if the court has the right to use earnings to pay off the indisputable debt of the Chesapeake, Ohio & Southwestern Railroad Company, it has equally the right to anticipate earnings in a crisis like that now- presented. The receivers in open court have stated that the surplus earnings of the next four months will be sufficient, after paying operating expenses, to meet the interest which must be paid by the 1st day of February if the maturity of the first mortgage bonds is to be prevented. In view of the fact that the question has been made by general creditors that the surplus earnings, under Huntington’s bill, are properly applicable only to the payment of Huntington’s judgment and other debts of like class which have since intervened, I ought not, on this application, to appropriate such earnings, as against the objection of that class of creditors, to the payment of this interest. While, as I have already said, a very strong impression that the bill of Mr. Huntington as amended is to be treated as a bill impounding the earnings for the benefit of second mortgage bondholders as well as general unsecured creditors, I do not deem it necessary or proper for me to now decide this question. • Since the filing of the foreclosure bill by the trustees of the second mortgage there can be no further contention that future earnings are to be regarded as exclusively impounded for the benefit of general creditors. These trustees themselves consent that these future earnings, instead of being applied to the payment of the principal or interest of the bonds represented by them, shall be applied to the preservation of the general interests of the second mortgage bondholders by preventing a maturity of the first mortgage. These trustees also agree that the peril to the interests represented by them is so great that they are willing that money borrowed to avert this threatened evil shall be paid out of the corpus of the property before the claims of the second mortgage. I do not' think that the duty of preserving the property in charge of the receivers is limited to a mere preservation of the physical structure of the railroad. If the earnings were insufficient to pay off taxes which were a prior lien upon the property, or to pay off mechanics’ liens, the enforcement of which would result in a serious disintegration of the road, or to pay off any other claim which was entitled to preference, and which was so situated that for its satisfaction the property might be brought to a premature sale, the court could not only use the earnings in the hands of the receivers, but could charge the property, and every interest in the property, with receivers’ certificates, issued for the purpose of avoiding consequences quite as serious in their ultimate effect to subordinate interests as would be the destruction of a bridge. I am convinced that, where large financial interests are secured by a lien of a subordinate character, and a foreclosure of this subordinate lien is sought, subject to prior incumbrances, it is within the scope and día