Carey v. Houston & Texas Central Ry. Co.
161 U.S. 115 (1896)

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U.S. Supreme Court

Carey v. Houston & Texas Central Ry. Co., 161 U.S. 115 (1896)

Carey v. Houston and Texas Central Railway Company

No. 642

Submitted December 23, 1895

Decided March 2, 1896

161 U.S. 115

Syllabus

A bill in equity by a corporation, or by the stockholders of a corporation, in a circuit court of the United States to set aside a final decree of that court against the corporation in a foreclosure suit upon the ground that the decree was obtained by collusion and fraud and that the court had

Page 161 U. S. 116

no jurisdiction to make it is an ancillary suit and a continuation of the main suit so far as the jurisdiction of the circuit court as a court of the United States is concerned.

As the jurisdiction of the circuit court of the United States was invoked throughout this litigation upon the ground of diverse citizenship, and as this bill must be regarded as ancillary, auxiliary, or supplemental to the suit for the foreclosure of the mortgage, or, as it were, in continuation thereof, the decree of the circuit court of appeals in that suit being made final by section 6 of the Act of March 3, 1891, c. 517, 26 Stat. 826, no appeal lies to this court.

This was a bill filed by Carey, a citizen and resident of New Jersey, and seven other persons, citizens and residents of New York and citizens of Great Britain, respectively, as stockholders of the Houston and Texas Central Railway Company, in their own behalf and in behalf of all others similarly situated, in the Circuit Court of the United States for the Eastern District of Texas, against the Houston and Texas Central Railway Company, No. 1, a corporation created by and existing under the laws of the State of Texas, and a citizen of that state residing in the Eastern District; the Houston and Texas Central Railway Company, No. 2, likewise a citizen of Texas, and a resident of the Eastern District; the Central Trust Company of New York, a citizen of New York; the Farmers' Loan and Trust Company of New York, as trustee, a citizen of New York; Nelson S. Easton and James Rintoul, as trustees, citizens and residents of New York; Benjamin A. Shepherd, trustee, a citizen of Texas, and many other persons and corporations, citizens of New York, Kentucky, Texas, and Louisiana, to impeach and vacate a certain decree of the circuit court entered in the consolidated cause hereafter mentioned.

The Houston and Texas Central Railway Company was a corporation and citizen of the State of Texas and a resident of the Eastern District of that state, owning a railway consisting of a main line from Houston to Dennison; a line from Hempstead to Austin, called the Western Division, and a line from Bremond to Ross, known as the Waco and Northwestern Division, and a large quantity of lands acquired from the state. The property of the company was subject to the lien of seven mortgages, known as the "Main Line First Mortgage,"

Page 161 U. S. 117

"Western Division First Mortgage," "Waco and Northwestern Division First Mortgage," "Main Line and Western Division Consolidated Mortgage," "Waco and Northwestern Division Consolidated Mortgage," "Income and Indemnity Mortgage," and "General Mortgage." The company made default January 1, 1885, in the payment of interest on its Main Line first mortgage bonds and its Western Division first mortgage bonds. On February 11, 1885, Nelson S. Easton and James Rintoul, citizens and residents of the State of New York, trustees under the Main Line first mortgage and Western Division first mortgage, filed their two bills in equity in the Circuit Court of the United States for the Eastern District of Texas against the Houston and Texas Central Railway Company as a corporation and citizen of the State of Texas for the purpose of enforcing the trust provided in the mortgages, protecting the trust property, obtaining proceedings for the sale of certain lands covered by the mortgages, and for other relief, and prayed for an accounting, an injunction, a decree of sale of part of the trust property, and for a receiver. These suits were numbered 183 and 184 on the equity docket. The railway company appeared and answered these bills.

On February 16, 1885, the Southern Development Company, a corporation organized under the laws of California and a citizen and resident of that state, in its own behalf and in behalf of all other persons similarly situated who might intervene in the suit to protect their own interests, filed its bill of complaint in the circuit court against the railway company as a corporation organized under the laws of Texas, alleging, among other things, that it was a creditor of the defendant for large sums advanced for supplies, labor, operating, and managing expenses and other necessary expenses which defendant had promised to pay out of its earnings; that the indebtedness was in equity a charge upon defendant's income and property; that there had been a diversion of the income, and that by reason thereof a lien had resulted in complainant's favor which it was entitled to have enforced. The bill alleged the absolute insolvency of the railway company, and that loss and injury would be occasioned by a sale of the property in

Page 161 U. S. 118

parcels, and prayed for the appointment of receivers, and the payment of complainant's claim out of the rents, revenues, and earnings of the property. The railway company appeared in this suit, which was numbered 185, and on February 20, 1885, an order was made by the circuit court appointing Benjamin G. Clark and Charles Dillingham joint receivers of all the property, real and personal, of said company. On the succeeding 20th of April, the Southern Development Company amended its bill, making Nelson S. Easton and James Rintoul, trustees, the Farmers' Loan and Trust Company, a corporation and citizen of the State of New York, and Benjamin A. Shepherd, trustee, under the Income and Indemnity mortgage, a citizen of Texas, and a resident of the Eastern District of that state, defendants thereto, and praying that accounts might be taken, liens and encumbrances marshaled, net earnings applied, and, if the amounts realized should not be sufficient for the payment of the claim, that the property should be sold for that purpose. The railway company answered the bill on its merits, and the defendants Easton and Rintoul, trustees, filed demurrers.

March 18, 1885, the Farmers' Loan and Trust Company, a corporation and citizen of New York, filed its bill in equity in the circuit court against the railway company, which was numbered 188 on the equity docket, alleging that it was the trustee under the Waco and Northwestern Division first and consolidated mortgages, and the Main Line and Western Division consolidated mortgages; that the mortgagors had violated many of their agreements, and that default had been made in the payment of interest; that the company was insolvent; that the suits hereinbefore mentioned were pending; that the trust property was in jeopardy, and it prayed for an accounting, injunction, and a decree of sale of part of the trust property, and for a receiver of all the property of every description of the railway company, with the usual powers. The railway company answered this bill on the merits June 22, 1885.

The circuit court made three orders on May 7, 1885, in these cases: in No. 185, as to sales of lands and their proceeds, and directing the receivers to account; in Nos. 183 and

Page 161 U. S. 119

184 making that order applicable to those cases, and in No. 188 making the same order as to that case.

January 21, 1886, Easton and Rintoul, trustees in the two mortgages involved in Nos. 183 and 184, citizens of the State of New York, filed two other bills in equity for the foreclosure and sale of the railway property covered by those mortgages. That to foreclose the Main Line first mortgage was numbered 198, and that to foreclose the Western Division first mortgage was numbered 199. In No.198, complainants made the Houston and Texas Central Railway Company and Benjamin A. Shepherd, a citizen and resident of Texas and trustee under the Income and Indemnity mortgage, defendants, and as to the Farmers' Loan and Trust Company averred that, as trustees under the mortgages or deeds of trust

"hereinafter described, that company would be found benefited by, and it is to their advantage that, the judgment and relief hereinafter prayed for, or some part thereof, should be granted to your orators. That said property covered by the said first mortgage on said main line, as well as all the other property, assets, and effects of said railway company, being now in the hands of this court, by the receivership existing in respect of the same, and your orators thereby being required by law to institute this action in this court and to come before this tribunal in order to reach the property in its possession and to obtain its rights concerning the same, and all the parties interested in the property covered by said mortgage on the main line, as well as all the other mortgages and property of said railway company, being now before the court in said actions hereinbefore described as Nos. 183, 184, 185, and 188 on the equity docket of this court, the said Farmers' Loan and Trust Company may and should be made a party defendant in this cause, irrespective of its citizenship, and said corporation should be brought in as a defendant herein by the order and direction of this court, and should be bound by the judgment and proceedings herein."

The record does not show that this company was made a defendant or appeared at this stage of the proceedings.

In No. 199, the same parties were joined as defendants, and a like

Page 161 U. S. 120

averment made as to the Farmers' Loan and Trust Company. Process was issued under both of these bills against the railway company and Shepherd, trustee, and duly served upon them. Thereafter, and on April 24, 1886, the Farmers' Loan and Trust Company filed a bill in equity in the circuit court for the foreclosure of the general mortgage, which was numbered 201. The railway company was made sole party defendant, and the bill prayed for a sale of all the property of the railway company to satisfy the mortgage doubt. Process was issued and served.

On May 26, 1886, an order was entered by Mr. Justice Woods and the circuit judge in the six suits upon the mortgages, whereby it was ordered, adjudged, and decreed that no further proceedings should be taken in causes Nos. 183, 184, and 188 without notice to the railway company, and that causes Nos.198, 199, and 201 should be consolidated under No. 198, under the name and style of

"Nelson S. Easton and James Rintoul, Trustees, and the Farmers' Loan and Trust Company, Trustee, against the Houston and Texas Central Railway Company and Benjamin Shepherd, Trustee, Consolidated Cause;"

that in said cause, Easton and Rintoul should stand as complainants, as trustees under the mortgages made by the defendant railway company dated, respectively, July 1, 1866, and December 21, 1870; that the Farmers' Loan and Trust Company, expressly assenting thereto, should stand as complainant as trustee under the mortgages made by the railway company dated, respectively, June 16, 1873, October 1, 1872, May 1, 1875, and April 1, 1881; that Shepherd should stand as defendant as trustee under the mortgage made by the railway company dated May 7, 1877; that the bills filed in causes Nos.198, 199, and 201 should stand as bills in the consolidated cause, and might be amended by either complainant, as it might be advised, and that any party might file an answer to any original or amended bill, and that in case any one or more of the bills filed by the complainants in the causes consolidated should be finally dismissed, the remaining bill or bills should continue to stand as the bill in such consolidated cause. On the same day, an order was made in said

Page 161 U. S. 121

consolidated cause No.198 appointing Nelson S. Easton, James Rintoul, and Charles Dillingham receivers of all the property of the railway company and directing Clark and Dillingham, as receivers in No. 185, to immediately transfer and deliver all said property to the receivers so appointed. May 27, 1886, and after the possession of all the property in controversy had passed into the hands of Easton and Rintoul and Dillingham as receivers, the court made a decree dismissing the bill of the Southern Development Company in No. 185 for want of equity, and declared and directed that:

"All said property being now in the custody of the court, and such custody and control being continuous, the entry of this decree shall operate ipso facto a transfer of the legal custody of said property from said Clark and Dillingham to the said receivers in No. 198."

Various amendments were subsequently filed.

The railway company answered in consolidated cause No. 198, September 3, 1886. The Farmers' Loan and Trust Company, though co-complainant in the consolidated cause, answered the bills of Easton and Rintoul, trustees, August 2, 1886.

On April 30, 1888, Shepherd, trustee, with leave of court, filed a cross-bill in No. 198 to foreclose the Income and Indemnity mortgage, and the railway company answered, admitting the truth thereof.

On May 1, 1888, the Farmers' Loan and Trust Company filed bills in the nature of cross-bills, with leave of court, to foreclose the Main Line and Western Division consolidated mortgage and the Waco and Northwestern Division consolidated mortgage. The railway company answered these bills May 2, 1888, and the Farmers' Loan and Trust Company answered Shepherd's cross-bill on the same day. All the mortgages were thus under foreclosure except the Waco and Northwestern Division first mortgage.

On May 4, 1888, the court made its decree of foreclosure and sale in consolidated cause No.

Page 161 U. S. 122

198. The property was sold under the decree September 8, 1888 at Galveston, Texas. The property covered by the Waco and Northwestern Division first mortgage was purchased subject to that mortgage by George E. Downs for $25,000, and all the residue of the property of the railway company was sold to Frederick P. Olcott, President of the Central Trust Company, for $10,580,000. The sale was duly confirmed December 4, 1888.

On December 23, 1889, Carey and others, as stockholders of the Houston and Texas Central Railway Company, filed their bill in the circuit court for the vacation of said sale and decree, and an amended bill February 18, 1890. The contents of these pleadings are largely set forth in Carey v. Houston & Texas Railway,150 U. S. 170. The gravamen of the bill was that the decree was entered through collusion and fraud. Briefly, the bill alleged that, prior to 1883, defendant Huntington, who, with his associates, controlled the Southern Development Company, formed a syndicate with them for the purpose of acquiring in his own interest and in the interest of that company and of the Southern Pacific Company the control of the Houston and Texas Central Railway Company in such manner that the railway might be run solely in the interest of the syndicate and the Southern Pacific Company, the rights of the stockholders being effectually shut out and barred. The bill further alleged that in January, 1885, the holders of the first mortgage bonds presented their coupons for payment, and it was fraudulently contrived by Huntington and his associates so that the coupons were cashed and secretly taken up by the Southern Development Company without notice to the holders thereof; that thereupon that company commenced suit against the Houston and Texas Central Railway Company in the circuit court, and in February, 1885, the appointment of receivers was procured in that suit, the order being made with the consent of the railway company through its solicitors; that subsequently defendants Easton and Rintoul, trustees, filed their bills in the circuit court for foreclosure, and the Farmers' Loan and Trust Company filed its bill, which said bills were numbered 198, 199, and 201, and the causes were by consent consolidated as No. 198; that the suit of the Southern Development Company was dismissed, and thereupon receivers of the railway company were appointed

Page 161 U. S. 123

in the consolidated cause, the company, through their counsel, consenting. It was also averred that in none of the mortgages was it provided that the failure to pay interest upon any of the bonds should be taken to precipitate the maturity of the principal, nor did they provide for nor permit the sale of the railway prior to the maturity of the principal of the bonds, and that the answer of the railway company in said suits expressly denied that the principal sum of the bonds had become due or demandable, and averred that the court had no power to decree a sale of the railway prior to the maturity thereof, or prior to the sale of the lands covered by the mortgages.

The bill then set up an agreement for the reorganization of the railway company, and alleged that, in pursuance thereof and of the scheme mapped out, complainants in the consolidated causes applied for, and on consent procured to be entered, the decree of May 4, 1888, for the foreclosure of the mortgages and a sale of the property, and the sale followed accordingly.

The bill charged that:

"The said decree was and is absolutely invalid and void, and beyond the power of the court to grant; that there was no foundation for said decree, or jurisdiction in the court to award it, and that the same was entered by consent and agreement, and without any investigation or adjudication by the court, but was the result of agreement simply, and was procured, as complainants allege on information and belief, by collusion and fraud on the part of said Huntington and his associates and the directors and officers of said Houston and Texas Central Railway Company, and was and is a part of the scheme to acquire possession of said railway in the interest of said Huntington and the said Southern Pacific Company without regard to the rights or interests of the holders of the stock of the said company No. 1, and in direct disregard of the provisions and terms of the mortgages; that the defenses interposed that the principal of the mortgages had not become due, and that the said railway could not be sold without a sale first of the lands, and the other defenses interposed, were substantially abandoned and withdrawn as part

Page 161 U. S. 124

of the said wrongful and fraudulent scheme herein referred to; that the said defenses were never submitted to the court for adjudication or determination, nor was evidence heard or offered to sustain the same, but the decree was the result of the agreement which the bondholders had made with the said Southern Pacific Company and Central Trust Company, and the rights of the stockholders were not considered or protected by any of the parties to the record in said cause, nor submitted to the court for adjudication or investigation, nor were the stockholders in any way advised or permitted to be informed of the transaction herein complained of."

It was further averred that the decree fixed no amount due and no amount which the company was required to pay to redeem, and that it contradicted the provisions of the mortgages.

The organization of a company styled the Houston and Texas Central Railway Company, designated in the bill as No. 2, after possession under the sale was acquired, for the purpose of operating the railway was then set up, and the terms on which the stockholders of the original company were informed September 1, 1889, they could participate in the new company, which required payment of an enormous and unnecessary assessment and constituted an attempt to compel the stockholders of company No. 1 to turn over their stock to Huntington and his associates, etc. The prayer of the bill was that the decree rendered by the court May 4, 1888, in the consolidated cause be vacated and set aside and adjudged to be fraudulent, collusive, illegal, and void, and that complainants be permitted to intervene and become parties defendant in said suit, and be heard and defend the same; that the sale of the railway and lands of the Houston and Texas Central Railway Company, No. 1, under said decree, be vacated and set aside, and the said railway and lands be restored to the possession of the receivers; that defendants be enjoined temporarily and perpetually from delivering or recording any mortgage upon the property of the company referred to in said decree, and from issuing, alienating, or parting with any of the shares of stock of the new or reorganized

Page 161 U. S. 125

Houston and Texas Central Railroad Company, No. 2, or any bonds secured by mortgage upon any property claimed to be possessed by said company, or any stock or bonds issued or intended to be issued pursuant to the reorganization agreement, and for general relief.

The principal defendants at first demurred, and then answered the bill, denying the allegations upon which complainants sought to impeach the validity of the decree of the circuit court in the foreclosure proceedings and the other transactions referred to. Complainants filed replications. A motion for an injunction pendente lite was denied. 45 F. 438.

The cause came on for final hearing on the pleadings and proofs November 16, 1892, and the circuit court entered a final decree dismissing the bill as to all the defendants with costs. 52 F. 671.

Complainants prayed two appeals from this decree, one to the Circuit Court of Appeals for the Fifth Circuit and the other to this Court. The appeals were allowed, citations issued, and assignments of errors filed. On motion of appellees, the appeal to this Court was dismissed November 13, 1893. Carey v. Houston & Texas Central Railway,150 U. S. 170. The case on the appeal taken to the circuit court of appeals was heard by that court, Circuit Judge McCormick presiding, and on June 5, 1894, being one of the days of November term, 1893, a decree was rendered affirming the decree of the circuit court.

May 2, 1895, a petition was presented to Circuit Judge McCormick, praying the allowance of an appeal from the decree to this Court, which on the same day was allowed by an order in writing upon the petition, and at the same time a citation was signed, and a cost bond approved. The petition for appeal and the order allowing the same and the bond and an assignment of errors were all filed May 2, 1895, in the office of the clerk of the circuit court of appeals. The record was filed here June 4, 1895, and appellees now move to dismiss the appeal.

Page 161 U. S. 126

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