Pennsylvania Steel Co. v. New York City Ry. Co., Nos. 2-9, 2-33, 2-149, 3-37

Nos. 2-9, 2-33, 2-149, 3-37 | U.S. Circuit Court for the District of Southern New York | Jun 27, 1911

LACOMBE, Circuit Judge.

On January 20, 1898, the Second Avenue Railroad Company executed a mortgage of all its real estate, franchises, railroad property, and equipment, then owned or thereafter to be owned, to secure an issue of bonds of which $5,682,000 are actually outstanding. The petitioners are the owners and holders of nearly $4,000,000 of these bonds. At about the same time the Second Avenue Company leased its entire railway system to the Metropolitan Street Railway Company. That company assumed the payment of these bonds in the lease, and by indorsement on the back of each bond before actual issue it guaranteed to the trustee of the mortgage for the benefit of the holders punctual payment of principal and interest “at the time and in the manner specified therein.” In 1902 the Metropolitan leased its entire system to the New York City Railway Company which thereby became a sublessee of the Second Avenue road. The New York City by its lease undertook to pay all rentals and other sums of money (except-principal) which the Metropolitan was obligated 'to pay under any leases or other contracts by which it had acquired possession of the property of the various subsidiary companies which made up its system. On September 24, 1907, receivers of the New York City Company were appointed by this court, and on October 1, 1907, the same individuals were appointed receivers of the Metropolitan. They held the estates of both companies until midnight of July 31, 1908, when a separate receiver of the New York City Company was appointed. The principal of the mortgage debt of the Second Avenue road was to come due February 1, 1948. The instrument contained the usual provisions for declaring principal due upon default in the payment of interest; also the usual provisions for foreclosure.

Being uncertain at first whether or not the Second Avenue road was a valuable part of the system, the receivers paid the coupons which fell due February 1, 1908, but subsequently decided not to accept the lease. They defaulted on the interest due August 1, 1908, and returned the road to its owners. Promptly upon default (in August or September, 1908) the mortgage trustee began a foreclosure suit in the state court, and a receiver of the property of the Second Avenue road was appointed September 19, 1908. There is no suggestion anywhere in this record of any possible defense which the mortgagor might have sustained to the foreclosure suit, nor even of any ostensible defense which might have operated to delay the trustée in performing its duty to collect the amount secured by the mortgage out of the property primarily liable therefor, so far as the same would go. Strange to say, however, the foreclosure suit has not been pressed, no decree has been entered, and of course there has been no sale and no judgment for any deficiency. So far as this record discloses the value of the property enumerated in the mortgage may be greatly in excess of the amount of bonds issued thereon. In February, 1910, in compliance with request of a majority of the bondholders the trustee notified the mortgagor that it elected to declare the entire principal due.

• The record does not show whether or not the bondholders who have filed these claims or a majority of them, are also stockholders of the Second Avenue road. If they are, it can be easily understood why the foreclosing trustee has been thus held back till the claims now under consideration could be filed and prosecuted against the estates of the lessee (and guarantor) and the sublessee. The claims were filed in February, 1910. Briefly stated they are as follows:

It is contended that the Metropolitan Company should pay to the holders of these bpnds the full amount of the principal thereof (less the present value of coupons paid subsequent to October 1, 1907) amounting to $3,979,854.38. It is also contended that New York City Railway should pay all the coupons falling due till February 1, 1948 (with proper rebate for present payment), as if each coupon were its own promissory note due at the future date named therein. This amounts to $3,438,039.07. It is not understood that any preference is insisted on for either of these claims, but it is contended that they are entitled to share in the assets equally with the creditors of these two roads. If it should come to pass, in some way, that these estates could marshal enough assets to pay their debts substantially in full, the Second Avenue bondholders would thus collect the amount of their bonds, principal and future interest, without taking anything from the estate of the Second Avenue road which was the primary security for the loan. Such a result seems most inequitable, but as the special master points out in his careful and exhaustive discussion of the question the documents which regulate and define the rights of respective parties do not lead to any such conclusion.

[ 1 ] It is not thought necessary to add anything; the court concurs fully in his opinion. Whatever may have been held in other- jurisdictions it is certainly the rule in this circuit that the reference in the bond to the mortgage does put the bondholders and their trustees on notice as to its terms. National Salt Co. v. Ingraham, 122 Fed. 40, 58 C. C. A. 356.

[2] As to the clause in the mortgage that “for the debt and bonds secured hereby the railroad company is liable in personam and any deficiency, after exhausting the mortgage security, may be enforced against the railroad company,” I concur with the special master in concluding that it would be superfluous and meaningless, unless it be construed as requiring that resort be first had to the mortgage security.

[3 ] As to the agreement of the New York City Company to pay all the various sums of money which its lessor, the Metropolitan, was obligated to pay from time to time in order to maintain possession of the various subsidiary roads which made up its system, and all other sums which it agreed to pay to persons designated by its lessor, I am very clearly of the opinion that, by whatever name called, they are in reality rent agreed to be paid for the use of the property leased, and, upon the termination of the lease, should be treated accordingly.

The' exceptions are overruled, and the report of the special master is confirmed.