Canada Southern Ry. Co. v. Gebhard - 109 U.S. 527 (1883)
U.S. Supreme Court
Canada Southern Ry. Co. v. Gebhard, 109 U.S. 527 (1883)
Canada Southern Railway Company v. Gebhard
Argued October 24, 1883
Decided December 10, 1883
109 U.S. 527
1. The Parliament of Canada has authority to grant to an embarrassed railway corporation within the Dominion power to make an arrangement with its mortgage creditors for the substitution of a new security in the place of the one they hold, and to provide that the arrangement shall be binding on all the holders of obligations secured by the same mortgage when it shall have received the assent of the majority, provision being made for the protection of the minority in the enjoyment of rights and privileges in the new security identical with those of the majority.
2. When the Parliament of the Dominion of Canada authorizes a corporation, existing under its authority, to enforce upon its mortgage creditors a settlement by which they are to receive other securities of the corporation in place of their mortgage bonds, and the scheme is assented to by a large majority of bondholders and goes into effect, and the right of citizens of the United States who are bondholders to participate in the reorganization on the same terms as Canadians or other British subjects is preserved and recognized, the settlement is binding upon bondholders who are citizens of the United States, and who sue in courts of the United States to recover on their bonds.
3. A corporation dwells in the place of its creation, but may do business wherever its charter allows and local laws do not forbid. A corporation of one country doing business in another country is subject to such control in respect to its powers and obligations as the government which created it may properly exercise. Every person who deals with it anywhere impliedly subjects himself to such laws of its own country affecting its power and obligations as the known and established policy of that government authorizes. Anything done in that country under the authority of such law, which discharges it from liability there discharges it everywhere.
4. As individual holders of mortgage bonds issued by a railroad corporation and secured by the same mortgage have mutual contract interests and relations, there is nothing inequitable, when the power exists, in subjecting a small minority to the will of a decided majority, in reorganizing the mortgage indebtedness when the corporation is embarrassed. Semble that if this were done by virtue of a statute of the United States, enacted under the provision of the Constitution conferring power to establish uniform laws on the subject of bankruptcy, it would not be regarded as impairing the obligation of a contract.
Suits (commenced in the supreme court of the New York and removed to the Circuit Court of the United States for the Southern District of New York) by holders of mortgage bonds of the Canada Southern Railway Company and of extension bonds to recover on their extension bonds and on the interest coupons on their mortgage bonds. The following are the facts as stated by the Court:
What is now known as the Canada Southern Railway Company was originally incorporated on the 28th of February, 1868, by the Legislature of the Province of Ontario, Canada, to build and operate a railroad in that province between the Detroit and Niagara Rivers, and was given power to borrow money in the province or elsewhere and issue negotiable coupon bonds therefor, secured by a mortgage on its property, "for completing, maintaining, and working the railway." Under this authority, the company, on the 2d of January, 1871 at Fort Erie, Canada, made and issued a series of negotiable bonds, falling due in the year 1906, amounting in all to $8,703,000, with coupons for semiannual interest attached, payable, principal and interest at the Union Trust Company, in the City of New York. To secure the payment of both principal and interest as they matured, a trust mortgage was executed by the company
covering "the railway of said company, its lands, tolls, revenues present and future, property and effects, franchises and appurtenances." Every bond showed on its face that it was of this kind and thus secured.
Before the 31st of December, 1873, the company became satisfied that it would be unable to meet the interest on these bonds maturing in the coming January, and so it requested the holders to fund their coupons falling due January 1, 1874, July 1, 1874, and January 1, 1875, by converting them into new bonds payable on the first of January, 1877, and by so doing only, in legal effect, extend the time for the payment of the interest, without destroying the lien of the coupons under the mortgage or otherwise affecting the obligation of the old bonds. Some of the bondholders funded their coupons in accordance with this proposition and accepted the extension bonds, but under the arrangement, their coupons were not to be cancelled until the new bonds were paid. In this condition of affairs, the Parliament of Canada, on the 26th of May, 1874, enacted that the Canada Southern Railway, which was the railway built by the Canada Southern Railway Company under its provincial act of incorporation, "be declared to be a work for the general advantage of Canada," and a "body corporate and politic within the jurisdiction of Canada," for all the purposes mentioned in, and with all the franchises conferred by, the several incorporating acts of the legislature of the province. This, under the provisions of the British North America Act, 1867, passed by the Parliament of Great Britain "for the union of Canada, Nova Scotia, and New Brunswick, and the government thereof," made the corporation a dominion corporation and subjected it to the legislative authority of the Parliament of Canada.
On the 15th of March, 1875, another series of bonds, amounting in the aggregate to $2,044,000 or thereabouts, was issued and secured by a second mortgage to trustees. After the issue of all the bonds, the company found itself unable to pay its interest and otherwise financially embarrassed, and a joint committee, composed of three directors and three bondholders, after full consideration of all the circumstances, submitted to
the company and to the bondholders "a scheme of arrangement of the affairs of the company," which was approved at a meeting of the directors on the 28th of September, 1877. This scheme contemplated the issue of $14,000,000 of thirty-year bonds, bearing three percent interest for three years and five percent thereafter, guaranteed, as to interest, for twenty years, by the New York Central and Hudson River Railroad Company, the first coupons being payable January 1, 1878. These new bonds were to be secured by a first mortgage on the property of the company, and exchanged for old bonds at certain specified rates. The old bonds of 1871 were to be exchanged for new at the rate of one dollar of principal of the old for one dollar of the new, nothing being given either for the past-due coupons or the extension bonds executed under the arrangement in December, 1873. The proposed issue of bonds was large enough to take up all the old indebtedness at the rates proposed, whether bonded or otherwise, and leave a surplus, to be used for acquiring further equipment, and for such other purposes of the company as the directors might find necessary. This scheme was formerly assented to by the holders of 108,132 shares of the capital stock out of 150,000; by the holders of the bonds of 1871 to the amount of $7,332,000 out of $8,703,000, and by the holders of $1,590,000 of the second series of bonds out of $2,029,000 then outstanding. Upon the representation of these facts to the Parliament of Canada, the "Canada Southern Arrangement Act, 1878," was passed and assented to in the Queen's name on the 16th of April, 1878.
This statute, after reciting the scheme of arrangement, with the causes that led to it, and that it had been assented to by the holders of more than two-thirds of the shares of the capital stock of the company, and by the holders of more than three-fourths of the two classes of bonds, enacted that the scheme be authorized and approved; that the new bonds be a first charge "over all the undertaking, railway works, rolling stock, and other plant" of the company, and that the new bonds be used for the purposes contemplated by the arrangement, including the payment of the floating debt. Section 4 is as follows:
"4. The scheme, subject to the conditions and provisos in this act contained shall be deemed to have been assented to by all the holders of the original first mortgage bonds of the company secured by the said recited indenture of the fifteenth day of December, one thousand eight hundred and seventy, and of all coupons and bonds for interest thereon, and also by all the holders of the second mortgage bonds of the company secured by the said recited indenture of the fifteenth day of March, one thousand eight hundred and seventy-five, and of all coupons thereon, and also by all the shareholders of the Canada Southern Railway company, and the hereinbefore recited arrangement shall be binding upon all the said holders of the first and second mortgage bonds and coupons, and bonds for interest thereon, respectively, and upon all the shareholders of the company."
Under the arrangement thus authorized, the New York Central and Hudson River Railroad Company executed the proposed guarantee, and the scheme was otherwise carried into effect.
The several defendants in error are and always have been citizens of the State of New York, and were at the time the scheme of arrangement was entered into and confirmed by the Parliament of Canada the holders and owners of certain of the bonds of 1871 and of certain extension bonds, these last having been delivered to them respectively at the Union Trust Company in the City of New York, where the exchanges were made, in December, 1873. Neither of the defendants in error assented in fact to the scheme of arrangement, and they did not take part in the appointment of the joint committee. Their extension bonds have never been paid, neither have the coupons on their bonds of 1871, which fell due on the first of July, 1875, and since, though demanded. The company has been at all times ready and willing to issue and deliver to them the full number of new bonds, with the guarantee of the New York Central and Hudson River Railroad Company attached, that they would be entitled to receive under the scheme of arrangement.
These suits were brought on the extension bonds and past-due coupons. The company pleaded the scheme of arrangement as a defense, and at the trial tendered the new bonds in exchange
for the old. The circuit court decided that the arrangement was not a bar to the actions, and gave judgments in each of them against the company for the full amount of extension bonds and coupons sued for. To reverse these judgments, the present writs of error were brought.