When a mortgage provides that the principal shall become due for
the purposes of foreclosure upon a default in interest continuing
for sixty days, the trustees in the mortgage may proceed for the
collection of the whole amount of principal and interest by bill in
equity, without a formal declaration of the maturity of such
principal.
Page 137 U. S. 172
If a mortgage contains a power of sale by advertisement at
public auction for cash upon the request of the holder or holders
of seventy-five percent in the amount of the bonds secured thereby,
that remedy is cumulative, and the restriction does not operate
upon the right to foreclose by bill in equity, especially when in a
separate clause it is provided that nothing in the mortgage
contained shall be held or construed to prevent or interfere with
the foreclosure of the instrument by any court of competent
jurisdiction.
The mere fact that money loaned to a railroad corporation was
expended in payment of interest on its first mortgage bonds or of
operating expenses does not entitle the lender to preference over
the first mortgage bonds by way of subrogation, or on the ground of
superior equities.
Although advances may have enabled a railroad company to
maintain itself as a going concern, that fact alone does not give
such advances priority over first mortgage bonds upon the theory
that the interests of the public and of the bondholders were
subserved by such advances.
A bill filed by a defendant, on leave, in order to a complete
decree upon the whole matter in dispute, is properly styled a
cross-bill, and where on the bill of the original complainant
possession of property has been taken by a circuit court of the
United States, the jurisdiction of the court in passing upon such a
cross-bill in the disposition of the property does not depend upon
the citizenship of the parties.
Morgan's Louisiana and Texas Railroad and Steamship Company, a
corporation organized under the laws of the State of Louisiana,
filed its bill on April 2, 1885, in the Circuit Court of the United
States for the Northern District of Texas against the Texas Central
Railway Company, averring that the latter company was originally
organized and incorporated under the general laws of Texas on May
31, 1879, to build and operate a railroad from Ross Station, in
McLennan County, to the center of Eastland County; that on or about
May 12, 1881, its charter was amended so as to authorize it to
extend its railway from the latter point to a point on the north
boundary line of the state, and to construct branch railways; that
the company had built and owned about two hundred and twenty-eight
miles of road, namely, from Ross to Albany and from Garrett to
Roberts, and was also the owner of certain town lots, and of
equipment as described; that on or about the 15th of September,
1879, said Texas Company executed to the Farmers' Loan and Trust
Company of New York, as trustee, a mortgage to secure the payment
of a series of bonds of $1,000
Page 137 U. S. 173
each, covering its railroad, built and to be built, from Ross to
the center of Eastland County, payable thirty years after November
1, 1879, with interest payable semiannually, and bonds to the
amount of $2,145,000 had been issued and were outstanding; that on
May 16, 1881, the Texas Company executed to the same trust company,
as trustee, a mortgage to secure the payment of another series of
bonds of one thousand dollars each, covering its entire main line
of railroad, built and to be built, and also its branch lines as
described, payable in thirty years, with interest semiannually, and
bonds to the amount of $1,254,000 had been issued and were
outstanding under this mortgage; that on October 1, 1884, the Texas
Company executed to the Metropolitan Trust Company of New York, as
trustee, a mortgage of all its railway and railway lines, whether
constructed or to be constructed, to secure an issue of bonds to be
known as "general mortgage bonds" of said railway company, which
bonds had been signed and sealed, but not certified, by the
trustee, because of delay in recording the trust deed in all the
counties of the state into which the road had been actually built;
that the Texas Company, finding itself in great financial
embarrassment, and requiring pecuniary assistance, and being
already indebted to the Houston and Texas Central Railway Company
in a very large amount, obtained further advances from the latter
company, making, "with amounts theretofore loaned to it" by the
Houston Company, a total indebtedness from the Texas Company to the
Houston Company of $761,992.04; that for the security of "said
advances then and theretofore made by said Houston and Texas
Central Railway Company to said Texas Central Railway Company," the
Texas Company, on the 1st of November, 1884, made and executed its
sixteen certain promissory notes, fifteen thereof for the sum of
$50,000 each, and one thereof for the sum of $11,992.04, and for
the security of said sixteen notes the Texas Company pledged to the
Houston Company all the "general mortgage bonds" which it was
authorized to issue for the length of road already built by it;
that all of the notes were dated November 1, 1884, and all due on
demand, but the Texas Company,
Page 137 U. S. 174
though requested, had refused and failed to pay the same; that
in order to make the pledge of the bonds, which were not yet
countersigned and certified by the trustee, the Texas Company
issued and delivered to the Houston Company its certificates,
obligating itself to deliver the bonds as soon as executed and
signed by the trustee; that the Houston Company pledged said notes
and certificates to complainant, as part security for an
indebtedness exceeding $1,000,000 due by the Houston Company to
complainant, and complainant is now the holder, as pledge, of all
of the notes and certificates; that the deed of trust, with the
certificates, constituted a full, complete, and perfect equitable
mortgage and lien upon the railway and the property therein
described; that the advances by the Houston Company to the Texas
Company were made at various times for taxes, fuel, supplies,
labor, repairs, operating and managing expenses, proper equipment,
useful improvements, and other necessary expenditures, by which the
Texas Company's railway had been kept in running order, and its
business and improvements increased, and thereby rendered more
beneficial to the bondholders, and to all other creditors of the
Texas Company; that the indebtedness was contracted by the
defendant upon the consideration of its promise to pay the same out
of the earnings of its railway, and the same was and is, in equity
and good conscience, a first lien upon the income and property of
said railway, but the defendant, instead of paying the debt out of
the earnings of said railway, had failed to pay any part of it, and
had used a large amount, at least $500,000, of said earnings during
the years 1882, 1883, and 1884, for the payment of coupons upon its
first mortgage bonds, although the holders of such coupons were
only entitled to receive payment thereof after the defendant had
paid the complainant the amounts advanced and expended in the
manner and for the purposes in the bill set forth; that unless the
relief sought is obtained, the certificates which complainant
holds, and the bonds when issued, will be greatly depreciated in
value, and any effort to foreclose complainant's pledge would
result in imposing a debt of $2,286,000 upon said defendant without
any
Page 137 U. S. 175
adequate relief to complainant, and defendant has no property
upon which to levy an execution save and except the properties
mortgaged, and the sale of the property would be ineffectual by
reason of the uncertainty as to the rights which would be acquired
by the purchaser; that the Texas Company is in embarrassed
circumstances, the payrolls for January and February, 1885, are
unpaid, and those for March will not be paid, and the company will
default upon the interest of its bonds due May 1; that it has no
money in its treasury and no credit upon which to raise it; that it
has no supplies; that many suits are pending against it which will
ripen into judgments for large amounts of money; that the receipts
have been growing less, and there is no hope of their increase in
the immediate future; that the road runs through a new and
undeveloped country in which great financial depression exists at
the present time,
"and that, unless said railway be administered in such a manner
as to maintain it with unimpaired efficiency during this period of
depression, its assets will be sacrificed without any adequate
benefit to any of its creditors;"
that the financial embarrassments of the Texas Company are
aggravated by the fact that it was originally built as relying on
business connections with the Houston Company; that it has always
been managed and operated in connection with the latter; that it
has no roundhouses or repair shops, and its maintenance and
transportation business has always, until recently, been conducted
entirely by the officers of the operating department of the Houston
Company without any additional expense to the Texas Company, but
that the Houston Company has lately been placed in the hands of
receivers by the order of the United States Circuit Court for the
Fifth Judicial District and Eastern District of Texas in a suit
entitled "
The Southern Development Company v. The Houston and
Texas Central Railway Company," and the result of said
receivership has been to deprive the Texas Company of its former
operating officers and of the benefit of the harmonious business
relations formerly existing with the Houston Company, and the
interdependence of said two railways upon each other has been such
that it is to the vital
Page 137 U. S. 176
interests of both companies that that interdependence should be
maintained; that the Houston Company owns over one-third of the
capital stock of the Texas Company, and the Houston Company is also
obligated for the indebtedness of $761,992.04, pledged by it to
complainant, and it is of vital importance to both of said roads
that the management of the two should be under one common head.
Complainant prayed for the appointment of one or more receivers of
the property of the defendant, and for a decree for the payment and
satisfaction of its claims out of the rents, revenues, issues, and
profits coming to the receivers. Copies of the deeds of trust from
the Texas Central Railway Company to the Farmers' Loan and Trust
Company of September 15, 1879, and of May 16, 1881, and of that to
the Metropolitan Trust Company of October 1, 1884, were attached to
the bill.
On the 4th of April, 1885, the receivers of the Houston Company
were appointed receivers of the Texas Company, the Texas Company
appearing and submitting the motion for such action of the court as
might seem just and equitable. On the second of May, complainant
filed its amended and supplemental bill against the Farmers' Loan
and Trust Company, trustee, and the Metropolitan Trust Company,
trustee, as well as the Texas Central Railway Company, which
recapitulated the averments of the original bill and insisted that
the indebtedness of $762,000 was an equitable lien upon all the
property of the railway company, and entitled to be paid, in case
of sale, out of the proceeds of such sale, before any money is paid
to the holders of the said mortgage bonds; that the indebtedness
should have been paid by the railway company out of its annual
earnings, which were sufficient for that purpose, but, instead of
paying the debts incurred for labor, material, betterments, and
services necessary to the operation of the railway, and to keep the
same in proper condition of repair and running order, the defendant
railway company expended its revenues in paying the interest on the
mortgage bonds, leaving the complainant and others similarly
situated unpaid, and they are entitled, in equity and good
conscience, to stand in the place and stead of said mortgage
creditors for the amounts the
Page 137 U. S. 177
latter have respectively received, and to have their claims
satisfied out of the property of the railway company or out of the
proceeds of any sale thereof. The bill prayed, among other things,
for a decree of lien by reason of the certificates, an accounting,
a sale of the property if necessary, and the payment of the amounts
decreed to be due the complainant, out of the proceeds, in
preference to any amounts due on the mortgage bonds, etc.
The Texas Company answered, admitting in general the allegations
of the bill but submitting to the court that the bill was destitute
of equity.
The Metropolitan Trust Company filed its answer August 17, 1885,
admitting the allegations in respect to the mortgage executed to it
as trustee on October 1, 1884, and that it refused to certify bonds
thereunder until the completion of the recording of the mortgage.
The Farmers' Loan and Trust Company answered September 24, 1885,
and denied, on information and belief, the allegations of the bill
in respect to the advances by the Houston Company to the Texas
Company, and also that the indebtedness stated in the bill was a
first lien upon the income or property of the Texas Company, and
averred that if any advances were made, they were payments which,
in equity, should be imputed to complainant; that the Houston
Company and the complainant are the owners of the Texas Company and
of its property, holding the same as a mere appendage to the
Houston road, and the mortgages executed by the Texas Company were
in fact mortgages procured to be made by the parties controlling
the complainant and the Houston Company, and, in various averments,
recited the facts and circumstances attending the formation of the
Morgan Company, its ownership of the Houston Company, and the
creation of the Texas Company, and of the Southern Development
Company, upon whose application receivers had been appointed for
the Houston Company in the suit referred to in complainant's bill.
It alleged that the complainant in that suit and in this
represented practically and substantially the same interests, the
two complainant corporations being owned and controlled by the same
persons, and that all the
Page 137 U. S. 178
proceedings and acts of the defendant, the Texas Company, from
its organization are, in fact and law, those of the complainant,
and to be equitably imputed to the complainant. And it denied that
the Texas Company had used its earnings for making payment of
coupons upon its first mortgage bonds, and which the holders were
not entitled to receive, and asserted that the bill, as framed, was
open to demurrer, for reasons given.
Subsequently the Farmers' Loan and Trust Company, upon leave
duly granted, filed its cross-bill in the cause against complainant
and its codefendants. This set up the mortgages and averred that
the mortgagor had failed to pay the interest on all the bonds
secured by the mortgages respectively, which became due and payable
May 1, 1885, and all interest since that date; that payment of such
interest had been duly demanded; that said default had continued
sixty days after such demand, and thereupon the principal of all
the bonds was and had become immediately due and payable; that the
lien of the deed of trust to the Metropolitan Company was
subsequent and subsidiary to the lien of the trust deeds or
mortgages made to complainant, and that, if the claim of the Morgan
Company, as set forth in its bill, was a lien at all on the
property, it was subject and inferior to the liens of the mortgages
to complainant. The bill alleged the insolvency of the Texas
Company and the insufficiency of its net earnings to pay the
floating debt and discharge the interest on the mortgage bonds, and
concluded with the usual prayers for the appointment of a receiver,
an injunction, and an account of the bonds, and the amounts due the
holders, and for a decree that the amounts so found due shall
constitute a first lien on the property; that the railway company
pay into court the amount found due, together with costs, and that,
in default of such payment, the property and franchises of the
railway company be sold, and for judgment for any deficiency. The
fourteenth paragraph of this cross-bill averred that the Texas
Company had made default upon the first deed of trust held by it,
by failing to pay the interest on the bonds which became due and
payable on the first day of May, 1885; that payment of such
Page 137 U. S. 179
interest had been duly demanded, "and said default had continued
sixty days after such demand," and that
"thereupon the principal of the said bonds secured by said
last-mentioned mortgage or deed of trust is and has become
immediately due and payable, and the same and all said interest so
in arrears as aforesaid remains still due and unpaid."
Paragraph 15 made the same averments as to the second mortgage
held by the cross-complainant.
The Texas Company, in its answer, admitted the allegations of
the bill of the Farmers' Loan and Trust Company as to the execution
of the mortgages, and admitted the fourteenth paragraph of the bill
to be true, except that it set up, by way of explanation, that its
roads and property were placed in the hands of receivers on May 14,
1885, on the bill filed by the Morgan Company. It admitted the
allegation in the fifteenth paragraph to be true, as stated.
The Morgan Company, in its answer, reiterated all the averments
in its original and amended bills and claimed that it had a lien
upon the property of the Texas Company and that, in any foreclosure
proceedings, it was entitled to be paid out of the proceeds of sale
by preference over the mortgage creditors. It admitted that the
matters set forth in the fourteenth and fifteenth paragraphs of the
cross-bill were true.
The Metropolitan Company admitted the allegations of the
cross-bill respecting the mortgage executed to it, as trustee, by
the railway company, in October, 1884, and alleged that no bonds
had, to its knowledge or belief, been issued secured by the lien of
the said mortgage.
Replications were filed and proofs were taken.
Evidence was given of the issuing of the bonds under the two
mortgages to the Farmers' Loan and Trust Company, and of a request
to that company for the institution of proceedings to foreclose the
trust deeds, but not on behalf of the holders of seventy-five
percent of the bonds of either issue. The three trust deeds or
mortgages referred to in the original bill, the sixteen notes,
amounting to $761,992.04, and the certificates of the Texas
Company, were also put in evidence, and a statement from the books
of the Texas Company, as follows:
Page 137 U. S. 180
image:a
The Morgan Company called as a witness E. W. Cave, treasurer for
the receivers, and treasurer for the Texas Company in 1880, 1881,
1882, 1883, and 1884, and also of the Houston Company, and produced
the resolution of the directors of the Houston Company of December
1, 1884, pledging the notes and certificates to the Morgan Company,
and the receipt of the latter therefor. Mr. Cave testified that the
notes were given by the Texas Company to the Houston Company in
settlement of the indebtedness of the former to the latter, which
arose from cash advances and payments made by the Houston Company
for the benefit of the Texas Company; that the account between the
Houston Company and the Texas Company was adjusted and closed about
the last of October, 1884; that there was no year during the five
years mentioned when the Texas Company earned enough to pay its
operating expenses and fixed charges, including taxes; that the
funds advanced were used in paying the operating expenses of the
Texas Company for material and supplies, for maintenance, and such
things as had to be done to improve or keep the property up, and
some portion of it may have been applied to the maintenance of its
security by the payment of interest on its bonds; that some of the
money necessarily went for that, because whatever money was used by
the
Page 137 U. S. 181
company out of its own gross earnings from its general business,
for the payment of interest, left a deficit in its operating
expenses and maintenance, which had to be covered by advances; that
the officers of the Houston Company had of the Texas Company were
practically the same; that no salary was paid to the officers of
the Texas Company, which was organized in the interest of the
Houston Company; that the Houston Company owned about two-fifths of
the Texas Company's stock, and the Morgan Company the other
three-fifths; that the directors of the two companies were mainly
the same, and the Morgan Company owned a majority of the stock of
the Houston Company; that the bonds that were issued under the
mortgage to the Farmers' Loan and Trust Company were negotiated by
the president of the Houston Company; that the Texas Company was
practically a part of the Houston Company, and the latter company
collected its revenues and accounts; that the money was disbursed
from the moneys that were collected, and only as the deficit arose
and increased were the advances made by the Houston Company; that
the road was operated practically as a division of the Houston
Company; that the officers of the Houston Company acted as officers
of the Texas Company; that the revenues came in and went into
accounts, and then those accounts went on to the books of the Texas
Company where matters were not kept direct; that the earnings went
into the books of the Houston Company, and, when the Texas Company
got into debt, the executive officers of the Houston Company
advanced the money; that they were authorized to advance it, and
the debts of the Texas Company were paid; that the Houston Company
collected all the earnings of the Texas Company, and when the
latter was short it received help; that that was the way this
balance of nearly $762,000 arose, it being the balance of running
account beginning from the time the road commenced to be operated
as a road; that when the settlement was made upon which these notes
were issued, the account was brought down to date, interest
calculated by the auditor of the Houston Company, understood and
acknowledged, and a balance of interest struck, and the balance
found to be as stated, about
Page 137 U. S. 182
$762,000; that interest was computed on both sides; that there
was a continual running account; that, when the Texas Company had
funds and balances, it paid the interest on the bonds, and did not
have to call on the Houston Company for funds, and whenever it did
not have funds, as in the matter of interest or as in other
matters, whatever balance was needed was supplied, but the Texas
Company's coupons were paid by Cisco & Son, upon separate
account, that firm being the fiscal agent of both roads. The
following are questions to and answers of the witness:
"Q. The accruing funds, the income of the Central Company, was
there any special use of its own funds, of its own earnings, toward
paying running expenses, rather than interest, or toward paying
interest, rather than running expenses, or was that all a matter or
running account?"
"A. It was all in one account, so far as the account of the
Houston and Texas Central Railway Company was concerned, and
whether the advances were made for one purpose or another they were
charged so much cash; but the Texas Central Railway Company, of
course, took cognizance of what it was used for."
"Q. So that whenever it was behindhand on its current
indebtedness, and needed money, the Houston and Texas Central
Railway Company paid it, and when it came to pay interest, and did
not have funds, the Houston and Texas Central Railway Company paid
it?"
"A. The Houston and Texas Central Railway Company let it have
the money."
On the 12th of April, 1887, the circuit court entered its
decree. The decree finds the execution and delivery to the Farmers'
Loan and Trust Company of the two mortgages of September 15, 1879,
and May 16, 1881, and of the mortgage of the 1st day of October,
1884, to the Metropolitan Trust Company; that the liens and claims
of the Metropolitan Company and the beneficiaries under its trust
are in all respects subsequent, subsidiary, and junior to the
rights and equities of the Farmers' Company and its beneficiaries,
both
Page 137 U. S. 183
of the mortgages to the Farmers' Company being prior liens to
the mortgage to the Metropolitan Company, the first as to the
property therein described, and the second as to the entire
property of the defendant, the Texas Company; that the Morgan
Company has an equitable lien upon all the property of the Texas
Company to the amount of $761,992.04, with interest from November
1, 1884, said lien, however, being junior and subordinate in all
respects to the liens under the mortgage deeds of trust to the
Farmers' Company; that in each of the mortgages it is provided that
in case the Texas Company (defendant) shall fail to pay any of the
interest on any of the bonds due under the mortgage at any time
when the same may become due and payable, and said default shall
continue sixty days after said demand, then and thereupon the
principal of all of the said bonds shall become immediately due and
payable; that the Texas Company was on May 1, 1885, and still is,
insolvent, and unable to meet or pay its obligations, including the
coupons issued on its bonds secured by the said mortgages to the
Farmers' Company, and maturing upon that date, and that it wholly
failed to pay the same, and made default in the payment of all the
coupons upon said bonds, and has not paid any of the said coupons
which fell due November 1, 1885, or May 1, 1886, nor any coupons
which matured since that date; that payment of said interest has
been duly demanded, and said default has continued sixty days after
such demand, and that the principal of all the bonds under both
mortgages is and has become immediately due and payable. It finds
the amount of principal and interest due on both sets of bonds, and
that by reason of the default of the Texas Company to pay the
interest and any of it, and by reason of other matters and things
hereinabove alleged, the conditions of the mortgages and of each of
them held by the Farmers' Company have been broken, and the said
mortgages, and deeds of trust, and both of them, have become
absolute, and the trustee is entitled to a decree for the sale of
all the mortgaged property to satisfy the principal and interest of
the said bonds, and the decree then orders, adjudges, and decrees
that the principal sums have
Page 137 U. S. 184
become due and payable, and that unless the defendant, the Texas
Company, shall within ten days pay into court the sum found due,
with interest, and an amount sufficient to defray the costs, the
equity of redemption of said defendant, and of all the parties to
the suit, and of all the holders of bonds or other claims secured
by the mortgage to the Metropolitan Company in or to the mortgaged
property, shall be barred and foreclosed, and the mortgaged
premises and property shall be sold to the highest bidder for cash,
as provided. It further orders, among other things, that in case
the amount of the bid shall be more than sufficient to pay the sums
and amounts found and adjudged to the Farmers' Company, the
overplus shall be applied to the payment of the sums decreed to be
due to the Morgan Company, and provides for deficiency decrees in
favor of the Farmers' Company and the Morgan Company.
From this decree separate appeals were prosecuted by the Morgan
Company and the Texas Company. On behalf of the Morgan Company, it
is insisted that the court erred in adjudging that its claim was
not in equity a lien and charge upon the property of the Texas
Company, prior and superior in right to the lien of the mortgages
of the Farmers' Company, and justly entitled to be paid out of the
proceeds of the sale of the property in preference to the mortgage
bonds, and in granting leave to the Farmers' Company to file the
bill of complaint for the foreclosure of the mortgages, and
rendering a decree thereon, and that, if it had jurisdiction to
entertain the bill of the Farmers' Company, then it erred in
proceeding to a decree for foreclosure and sale to pay the
principal of the bonds upon a default in the payment of interest,
without averring and proving that the bill had been filed for that
purpose by the request of the holders of seventy-five percent in
amount of the outstanding bonds. On behalf of the Texas Company,
errors are assigned to the action of the court in entertaining the
bill of the Farmers' Company, and rendering the decree of
foreclosure and sale thereon, and also in adjudging the principal
sums of the bonds to be due and payable, and in decreeing
foreclosure and sale without proof of a request to the trustee, by
the holders of seventy-five percent in amount of the bonds, to
foreclose.
Page 137 U. S. 190
MR. CHIEF JUSTICE FULLER, after stating the facts as above,
delivered the opinion of the Court.
The objection that the Farmers' Company could not proceed to a
foreclosure and sale to pay the principal as well as the interest
of the bonds upon a default in the payment of interest, without
averring and proving that the bill had been filed for that purpose
by the request of the holders of seventy-five percent in amount of
the outstanding bonds, rests upon the language of the conditions of
the mortgages. Each of them, after providing that it should be void
in the event that the railway company should pay the principal of
the bonds and the several installments of interest as they became
due, stipulated as follows:
"But in case the Texas Central Railway Company shall fail to pay
the principal, or any part thereof, or any of the interest on any
of the said bonds at any time when the same may become due and
payable according to the tenor thereof, and if the said default
shall continue sixty days after having been demanded, then and
thereupon the principal of all the said bonds hereby secured shall
be and become immediately due and payable, and upon the request of
the holder or holders of seventy-five percent of said bonds then
outstanding, and written notice of said request being served on the
New York agency of the party of the first part at which said bonds
and coupons are made payable, the said trustee, who may act by its
president or attorney, or its successor or successors in this
trust, may and shall take actual possession (with or without entry
or foreclosure) of said railway hereby conveyed, and of all and
singular the said mortgaged property, and shall manage and operate
the same, and receive all the income and profits of the same,
together with all the books, papers, records, accounts, and money
of said railway company, first defraying out of the same the
expenses of the road and its needful repairs and the management of
said trust, and the surplus to pay the interest and principal of
all the bonds issued hereunder which may be due and outstanding and
hereby secured
pro rata, and, upon request of the holder
or
Page 137 U. S. 191
holders of seventy-five percent in amount of the bonds so in
default which may be at any time outstanding under this deed of
trust, it shall be the duty of the said Farmers' Loan and Trust
Company of the City of New York, by its president or agent duly
appointed in its behalf, to foreclose this mortgage or deed of
trust, and sell the property herein and hereby conveyed at the City
of Houston, Texas at public auction, to the highest bidder for
cash, after having given at least sixty days' notice of the time,
place, and terms of sale by advertisement in at least two daily
newspapers published in the City of Houston, and two daily
newspapers published in the City of New York,"
etc.
It is contended on behalf of the appellants that by the true
construction of the foregoing conditions, the action of the trustee
in enforcing the stipulation that, upon the prescribed default in
the payment of the interest, the principal of the bonds should
become due, is so far subjected to the wishes of the bondholders
that the trustee is without right or power to institute proceedings
for the collection of the principal sum before the date of payment
in course, by foreclosure and sale upon such default on interest,
except upon the request of the holders of seventy-five percent in
amount of the bonds outstanding. We do not agree with this view.
Whenever default upon the interest should continue sixty days after
maturity and demand, then and thereupon it was declared that the
principal of all of the bonds should be and become immediately due
and payable, and that the trustee, upon the request of the holder
or holders of seventy-five percent of the outstanding bonds, and
written notice thereof being served on the New York agency of the
mortgagor, where the bonds and coupons were made payable, might
take possession and operate the road, and upon like request it was
made the duty of the trustee to foreclose the mortgage and, after
advertisement, sell the property at public auction to the highest
bidder for cash. Hence, although, as to the particular form of
foreclosure and sale at public auction by advertisement, and
without the aid of the court, the proper construction would be that
that course could not be taken without the request prescribed, this
not
Page 137 U. S. 192
only did not limit the power of the trustee to proceed by
application to a court of equity to foreclose, but each of the
mortgages contained near its close the following clause:
"It is hereby further agreed that nothing herein contained shall
be held or construed to prevent or interfere with the foreclosure
of this instrument, the appointment of a receiver, or any other act
or proceeding appropriate in such cases, by any court of competent
jurisdiction."
There was nothing in the mortgages which took away the inherent
right of resort to the courts, and this clause did not impart what
existed without it, but its insertion, evidently out of abundant
caution, made it perfectly clear that the provisions relied on by
appellants did not apply to foreclosure by bill in equity, but to
the cumulative remedy specified. It is easy to see why taking
possession and selling without the intervention of the court should
be guarded against, and the trustee not be required or allowed to
proceed in that summary manner except on the request of a certain
percentage of the holders of the bonds. Such proceedings might
result in injury which could not be predicated of those regularly
taken in a court of equity. Arbitrary procedure by the trustee was
not deemed desirable in view of the interests of both mortgagor and
the bondholders as a class, while each would find the protection to
which it might be entitled at the hands of the court.
Mercantile Trust Co. v. Missouri, Kansas & Texas
Railway, 36 F. 221.
The case of
Chicago & Vincennes Railroad v.
Fosdick, 106 U. S. 47, is so
different upon the facts from that in hand as to deprive it of the
weight attributed to it by appellants. The mortgage in controversy
in that suit contained no provision saving to the trustees the
right to resort to the courts for a foreclosure. It provided for a
remedy in case of default by entry and sale by the trustees and
also by foreclosure and sale, but it was provided that demand for
possession should not be made by the trustees until they were
required to take such possession by the holders of at least
one-half of the outstanding bonds, and that where there was a
default on interest, continued for six months after demand, the
trustees might
Page 137 U. S. 193
declare the principal due and give notice to the mortgagor, and,
upon the written request of the holders of a majority of such
bonds, proceed to collect both principal and interest by
foreclosure and sale, or otherwise, as provided. 106 U.S.
106 U. S. 49-50.
This Court held that the restriction on the acceleration of the
principal did not prevent a foreclosure suit for overdue interest,
and that, as the company in that case was in default on some of the
coupons, the trustees or any bondholder, independently of the
particular provisions just referred to, on nonpayment of any
installment of interest, could file a bill for the enforcement of
the security, and obtain a decree
nisi for such defaulted
interest and, if the same were not paid as directed, a sale would
be ordered. But as the finding of the amount due was the foundation
of the right of the mortgagee to proceed, and the right to redeem
would not be taken away except upon a strict compliance with the
steps necessary to divest it, it became, said Mr. Justice Matthews,
speaking for the Court,
"of the first importance to ascertain whether the decree of
foreclosure and sale, in the present case, found due and required
to be paid, as the condition of exercising the right to redeem, a
larger sum than was then due."
The evidence being examined, it was found that there was none to
establish that "any coupon, not afterwards funded, was presented,
and payment thereof refused," and it was pointed out that under the
eighth article of the mortgage there involved, which provided that
if default was made in the payment of any half-year's interest on
any of said bonds, and the coupons for such interest should have
been presented, and such default should have continued for six
months after such demand without the consent of the holder of said
coupon or bond, then the principal of all of the said bonds should
be and become immediately due and payable, anything in said bonds
to the contrary notwithstanding, and that the trustees might so
declare the same, and notify the party of the first part thereof,
the forfeiture must stand or fall upon the fact of such declaration
and notice, as it might be justified or not by the circumstances
existing when they were made, and that whether the whole debt had
become due or not must rest exclusively
Page 137 U. S. 194
upon the alleged default, which had been found insufficient. And
it was further held that under the same article which provided for
a foreclosure on the written request of the holders of the majority
of the outstanding bonds, even if the principal sum of the mortgage
deed had been rightfully declared due and the required notice
given, nevertheless the foundation for proceeding to foreclose
would fail without proof that the bill had been filed for that
purpose upon such written request.
In the case at bar, the proof of the presentation and default
upon the coupons was full, and was not disputed. The mortgages
specifically provided that upon such default's continuing for sixty
days after demand, the principal of all the bonds should become
immediately due and payable. The Texas Company and the Morgan
Company both admitted that the principal had become due and
payable. The instruments did not require a written request for a
declaration by the trustee that the principal was due, or such a
declaration and notification to the defaulting company, in order to
make the principal mature. That was a consequence of a default
continuing sixty days after demand. Nor was there any restriction
upon the power to proceed by bill in equity, but on the contrary
any intention to impose such a restriction was disavowed.
The Morgan Company insisted by its pleadings that it was justly
entitled to be paid out of the proceeds of the sale decreed in
preference to the first mortgage bonds, because, as it alleged, the
Houston Company under which it claims advanced the amount in
question to the Texas Company to be used for taxes, operating
expenses, equipment, improvements, and other necessary
expenditures, by which the Texas Company's railway had been kept in
safe running order, its business and importance increased, and it
thereby rendered more valuable to the first mortgage bondholders;
that the indebtedness was contracted by the Texas Company upon
consideration of its promise to pay the same out of the earnings of
its railway; that (as is charged upon information and belief) the
company had used at least $500,000 of said earnings during the
years 1882, 1883, and 1884, for the payment of coupons of its
first
Page 137 U. S. 195
mortgage bonds, although the holders of the coupons were only
entitled to receive payment thereof after the Texas Company had
paid the amounts advanced and paid as aforesaid, and that the
Morgan Company was entitled to stand in the place and stead of said
mortgage creditors for the amounts received. In other words, the
contention seemed to be that the Houston Company should be awarded
priority of lien because it advanced the amount in question to be
used in the payment of operating expenses and taxes, and it was so
used, or upon the promise that it should be so used, which was
broken by its diversion to the payment of interest, or, if there
was no such promise, express or implied, then that the application
of the advances to the payment of interest entitled the Houston
Company to preference by way of subrogation, or because by such
payment the Texas Company was kept running for five years, which
without such payment would have been impossible.
We do not, however, understand it to be claimed upon the
evidence that any express agreement is made out for the application
of the advances to any particular purpose, or for the right of
subrogation between the Houston Company and either the Texas
Company or the first mortgage bondholders, or that any of the
interest coupons upon the first mortgage bonds, which were paid by
the Texas Company, were taken by the Houston Company as security
for advances. But it is argued that the advances were for the
payment of operating expenses, taxes, and interest during five
years, whereby the railroad property was preserved as a "going"
concern; that at the time the road was constructed the country
through which it ran was in a prosperous condition, but afterwards
unfavorable conditions supervened and continued throughout the
period covered by the advances; that
"it was hoped and expected, however, that an improvement in the
business of the road would take place, and that the company would
be enabled to reimburse the advances;"
that the advances were made to meet the particular deficits as
they occurred from time to time to pay operating expenses when
there was a deficiency in the earnings, and to pay interest on the
bonds when there
Page 137 U. S. 196
was not enough from the earnings to pay it, and, as a whole,
constituted the ways and means of maintaining the goodwill and
integrity of the enterprise, and preserving the property, business,
and franchises, and that, as all that was done by the Houston
Company inured directly for the benefit of the public and of the
property, it was just and equitable,
"inasmuch as the expectations of the parties in regard to the
enterprise were not realized, without any fault of theirs, that the
mortgage securities should bear the loss which must be sustained
either by the bondholders or the appellant."
From the account stated it appears that the gross earnings were
each year sufficient to pay the operating expenses and taxes, and
that the deficit of each year was produced by the payment of
interest on the bonded debt. But if the advances could therefore be
treated as having been specifically procured for, or specifically
applied to, the payment of interest as such (although there is no
evidence to that effect), still such payment would afford no basis
for the assertion of a preference as against the bondholders. So
far as disclosed, the interest coupons were paid, not purchased,
Ketchum v. Duncan, 96 U. S. 659;
Wood v. Guarantee Trust Co., 128 U.
S. 416, and cannot be set up as outstanding, and the
contention is wholly inadmissible that the bondholders, because
they received what was due them, should be held to have assented to
the running of the road at the risk of returning the money thus
paid if the company, by reason of unrealized expectations on the
part of those who made the advances, should ultimately turn out to
be insolvent and unable to go on. By the payment of interest, the
interposition of the bondholders was averted. They could not take
possession of the property, and should not be charged with the
responsibility of its operation.
It is true that a railroad company is a corporation operating a
public highway, but it does not follow that the discharge of its
public excuses it from amenability for its private obligations. If
it cannot keep up and maintain its road in a suitable condition and
perform the public service for which it was endowed with its
faculties and franchises, it must give way to those who can. Its
bonds cannot be confiscated because it
Page 137 U. S. 197
lacks self-sustaining ability. To allow another corporation,
which for its own purposes has kept a railroad in operation in the
hands of the original company by enabling it to prevent those who
would otherwise be entitled to take it from doing so, a preference
in reimbursement over the latter on the ground of superiority of
equity would be to permit the speculative action of third parties
to defeat contract obligations, and to concede a power over the
property of others which even governmental sovereignty cannot
exercise without limitation. And if all these advances should be
considered as applied in payment of the operating expenses only,
upon the theory, where such was not literally the fact, that they
supplied a deficit created by the payment of interest out of the
gross earnings, the same remarks would be applicable.
The doctrine of
Fosdick v. Schall, 99 U. S.
235, is that a court of equity may make it a condition
of the issue of an order for the appointment of a receiver; that
certain outstanding debts of the company shall be paid from the
income that may be collected by the receiver or from the proceeds
of sale; that the property being in the hands of the court for
administration as a trust fund for the payment of encumbrances, the
court, in putting it in condition for sale, may, if needed,
recognize the claims of materialmen and laborers, and some few
others of similar nature, accruing for a brief period prior to its
intervention, where current earnings have been used by the company
to pay mortgage debt or improve the property, instead of to pay
current expenses, under circumstances raising an equity for their
restoration, as, for instance, where the company, being insolvent
and in default, is allowed by the mortgage bondholders to remain in
possession and operate the road long after that default has become
notorious, or where the company has been suddenly deprived of the
control of its property and the pursuit of any other course might
lead to cessation of operation.
Miltenberger v. Logansport
Railway, 106 U. S. 286,
106 U. S.
311-312. If the officers of the company, remarked Mr.
Chief Justice Waite in
Fosdick v. Schall,
"give to one class of creditors that which properly belongs to
another, the court may, upon an adjustment of the accounts, so
Page 137 U. S. 198
use the income which comes into its own hands as, if
practicable, to restore the parties to their original equitable
rights. . . . Whatever is done therefore must be with a view to a
restoration by the mortgage creditors of that which they have thus
inequitably obtained. It follows that if there has been in reality
no diversion, there can be no restoration, and that the amount of
restoration should be made to depend upon the amount of the
diversion."
Burnham v. Bowen, 111 U. S. 776;
Union Trust Co. v. Illinois Midland Co., 117 U.
S. 434.
In the light of these decisions, the inquiry before us is
whether these bondholders are to be postponed in respect to the
proceeds of the sale of the corpus of the property, upon which
their lien is first and paramount, to this claim of the Houston
Company upon the ground of the particular application of these
moneys or that they supplied a diversion by the officers of the
Texas Company equitably binding as such upon the bondholders. Now
if these advances were made generally, as needed by the Texas
Company, it matters not whether they were devoted to the payment of
running expenses or not. The relation of debtor and creditor
existed, and no equity could arise in favor of the creditor as
against other creditors holding security prior in time by reason of
the voluntary application the debtor might make of the money
borrowed. We repeat that so far as appears, the money advanced to
one road by the other was simply a loan. The account between the
companies was a running account, and the balance was only a balance
for cash advances made from time to time. Moneys received from the
operation of the Texas road, and moneys received from the Houston
Company, all went into a common fund, from which payments were made
for expenses, taxes, and so on. It is also shown that the Texas
Company and the Houston Company had the same fiscal agent in New
York, who paid the coupons of both; that the management of the
Texas Company was during its entire existence in the hands of the
same officers and directors who managed the Houston Company; that
these officers derived their compensation from the Houston Company;
that all receipts from the Texas Company were first received by the
Houston Company,
Page 137 U. S. 199
and then transferred on the books to the treasurer of both
companies, as treasurer of the Texas Company; that whenever there
was a deficit of funds on the part of the Texas Company, such
deficit was made up by the Houston Company, and that the latter
company received and disbursed everything. Under such
circumstances, it cannot be maintained against the first mortgage
bondholders that a balance of such a running account of five years'
duration represents money so applied to the current expenses of the
road, or so diverted therefrom to the payment of interest on the
bonds, as to carry with it a superior equity for repayment.
Penn v. Calhoun, 121 U. S. 251;
Kneeland v. American Loan & Trust Co., 136 U. S.
89;
St. Louis, Alton &c. Railroad v. Cleveland,
Columbus &c. Railway, 125 U. S. 658.
It is to be observed also that the Morgan Company counted upon
the certificates of the Texas Company, whereby it bound itself to
deliver to the Houston Company the third mortgage bonds as soon as
executed by the Metropolitan Company as trustee, and asked for a
decree against all the defendants, declaring the amount found due
to complainant, as holder of such certificates, to be
"a full, complete, perfect, and equitable mortgage and lien upon
said railway, and upon all of the property, incomes, tolls, and
profits in said deed of trust of October 1, 1885, described,"
and prayed
"that out of the proceeds of any sale which may be made to
satisfy any decree of this honorable court, your orator's claim for
said amount be paid and satisfied."
It is thus seen that the Morgan Company asserted its equities as
based on the third mortgage bonds, which renders it still clearer
that upon this record no reason exists for the subordination of the
first and second mortgages to this claim. Our conclusion is that
the circuit court, while it decreed a lien to the Morgan Company,
rightfully refused to give it preference over the paramount lien of
the first and second mortgage bonds.
Notwithstanding the decree was properly rendered upon the
merits, we are urged to reverse it upon the further ground that the
bill of the Farmers' Company ought not to have been allowed to be
filed because not in time, and not a cross-bill,
Page 137 U. S. 200
and that, if treated as an original bill, it cannot be
maintained, for want of jurisdiction, the Farmers' and Metropolitan
Companies being citizens of New York, the Morgan Company, of
Louisiana, and the Texas Company, of Texas. Under the original bill
filed by the Morgan Company, and on its application, the court had
taken possession of the property of the Texas Company through
receivers. The Farmers' and Metropolitan Companies were then
brought into court by an amended and supplemental bill, which
prayed for an account of all liens and encumbrances on the property
of the Texas Company, and of all its assets, and for a decree
adjudging the sums alleged to be due to the Morgan Company liens
upon the net earnings of the Texas Company and all its property,
superior in rank to the claims of the said trustees, and of the
holders of the mortgage bonds issued under the various deeds of
trust, the giving of which had been set up in the original bill,
and copies thereto annexed, and that the amount due to it by reason
of its advances to the Houston Company should be paid out of the
net earnings, and, if they proved insufficient, then that a sale be
ordered of the property in bulk, and that the amount decreed to the
Morgan Company be paid out of the proceeds in preference to the
amounts due on the mortgage bonds. It was also specifically prayed,
as has been stated, that the rights of the Morgan Company under the
certificates given it by the Houston Company, in lieu of the bonds
issued under the third mortgage, should be decreed to be an
equitable mortgage upon the property of the Texas Company, and,
inferentially at least, superior to the lien of the first two
mortgages.
"A cross-bill," says Mr. Justice Story, Eq.Pl. § 389,
"
ex vi terminorum implies a bill brought by a defendant
in a suit against the plaintiff in the same suit, or against other
defendants in the same suit, or against both, touching the matters
in question in the original bill. A bill of this kind is usually
brought either (1) to obtain a necessary discovery of facts in aid
of the defense to the original bill, or (2) to obtain full relief
to all parties, touching the matters of the original bill."
And, as illustrative of cross-bills for relief, he says,
Page 137 U. S. 201
(§ 392):
"It also frequently happens, and particularly if any question
arises between two defendants to a bill, that the court cannot make
a complete decree without a cross-bill, or cross-bills, to bring
every matter in dispute completely before the court, to be
litigated by the proper parties, and upon the proper proofs."
It seems to us that in order that a decree might be made upon
the whole matter in dispute, brought completely before the court,
the bill in question was necessary, and was correctly styled a
"cross-bill." In no proper sense were new and distinct matters
introduced by it which were not embraced in the original and
amended and supplemental bills, and while it sought equitable
relief, it was such as, in point of jurisdiction over the subject
matter, the court was competent to administer. It may be that so
far as it sought the further aid of the court beyond the purposes
of defense to the original bill, it was not a pure cross-bill, but
that is immaterial. The subject matter was the same, although the
complainant in the cross-bill asserted rights to the property
different from those allowed to it in the original bill and claimed
an affirmative decree upon those rights. A complete determination
of the matters already in litigation could not have been obtained
except through a cross-bill, and different relief from that prayed
in the original bill would necessarily be sought. This bill was
filed, on leave, before the testimony was taken, and though there
should be as little delay as possible in filing bills of this kind,
yet that was a matter entirely within the discretion of the court,
which could have directed it to be filed even at the hearing. And
whether this bill be regarded as a pure cross-bill, as an original
bill in the nature of a cross-bill, or as an original bill, there
is no error calling for the disturbance of the decree because the
court proceeded upon it in connection with the other pleadings. The
jurisdiction of the circuit court did not depend upon the
citizenship of the parties, but on the subject matter of the
litigation. The property was in the actual possession of that
court, and this drew to it the right to decide upon the conflicting
claims to its ultimate possession and control.
Minnesota
Co. v. St. Paul Co., 2 Wall. 609;
Page 137 U. S. 202
Bank v. Calhoun, 102 U. S. 256;
Krippendorf v. Hyde, 110 U. S. 276.
The decree of the circuit court is
Affirmed.