The New Albany Railway Company, whose road was in several
states, guaranteed bonds of a Kentucky railway company to a large
amount. It attempted by suit to avoid this guarantee as
ultra
vires. Its contention was sustained by the circuit court, but
that decree was reversed by the circuit court of appeals, and this
Court has sustained that decision. After the decision of the
circuit court of appeals, Mills, a creditor of the company,
commenced suit in the circuit court of the United States. The
company appeared and confessed judgment, and execution was issued
and returned unsatisfied. Thereupon the creditor flied a bill
praying for the
Page 174 U. S. 675
appointment of a receiver for the entire road, and that the
court would administer the trust fund, and order the road sold and
the proceeds from the sale divided among the different creditors
according to their priority. The New Albany Company admitted the
allegations of the bill and interposed no objections, whereupon a
receiver was appointed. These proceedings took place on the same
day. Subsequently proceedings were commenced at different times for
the foreclosure of different mortgages, all of which suits were
consolidated. Then the Trust Company, as holder of some of the
guaranteed bonds, intervened. Then a decree. of foreclosure was
entered, and a sale ordered, made and confirmed. Then the Trust
Company filed another intervening petition charging that Mills'
proceedings had been procured by the New Albany Company for the
purpose of hindering and delaying the general or unsecured
creditors in the enforcement of their debts and praying that the
decree of foreclosure might be set aside, and other prayers. This
was denied, and a sale was ordered. An appeal by the Trust Company
to the circuit court of appeals resulted in the affirmation of the
decree below. The proceedings being brought here on certiorari, it
is
held that, under the circumstances as presented by this
record, there was error; that the charge of collusion was one
compelling investigation, and that the case must be remanded to the
circuit court with instructions to set aside the confirmation of
sale, to inquire whether it is true, as alleged, that the
foreclosure proceedings were made in pursuance of an agreement
between the bondholder and stockholder to preserve the rights of
both and destroy the interests of unsecured creditors, and that if
it shall appear that such was the agreement between these parties,
then to refuse to permit the confirmation of sale until the
interests of unsecured creditors have been preserved.
The facts in this case are as follows: the Louisville, New
Albany & Chicago Railway Company, hereinafter called the "New
Albany Company," in 1889 and 1890 placed a guaranty upon $1,185,000
of the first mortgage bonds of a Kentucky railroad corporation. In
April, 1890, the New Albany Company, guarantor, commenced a suit in
the Circuit Court of the United States for the District of Kentucky
against divers parties claiming to hold such bonds to have the
guaranty declared void. In 1894, that court rendered a final
decree, sustaining its contention and adjudging the guaranty
ultra vires and void. 69 F. 431. From that decree the
holders of the guaranty bonds appealed to the Circuit Court of
Appeals for the Sixth circuit, which, in June, 1896, reversed the
decree of cancellation and held the guaranty binding.
Page 174 U. S. 676
75 F. 433. On application of the New Albany Company, the case
was then removed on certiorari to this Court, and at the time of
the proceedings hereinafter referred to was still undecided.
Judgment therein has since been entered sustaining the guaranty.
Louisville, New Albany and Chicago Railway Company v.
Louisville Trust Company, ante, 174 U. S. 552.
After the decision in the circuit court of appeals, and on
August 24, 1896, one John T. Mills, Jr., commenced an action in the
Circuit Court of the United States for the District of Indiana,
alleging that he was a creditor of the New Albany Company to the
amount of $494,911.35. That company appeared and confessed
judgment, and an execution was issued and returned unsatisfied.
Whereupon Mills filed his bill of complaint in the same court,
based upon this unsatisfied execution and praying the appointment
of a receiver. The bill set forth the property belonging to the
judgment debtor, the New Albany Company, alleged that its capital
stock amounted to $16,000,000, of which $7,000,000 was preferred;
that its outstanding funded debt, divided into five classes,
amounted to $7,700,000 in six percent bonds, and $6,100,000 in five
percent bonds. The bill also alleged the existence of a floating
debt amounting to nearly $1,000,000, consisting of outstanding
notes and other obligations, held by the complainant and other
bona fide creditors. It then set forth the guaranty of the
bonds of the Kentucky railroad company, the proceedings in court by
which the guaranty had been sustained, and averred that the
officers of the defendant company reported a diminution of current
earnings by reason of a short wheat crop and lessened traffic, and
that it would be impracticable to realize from the earnings after
the payment of operating expenses, taxes, and rentals a sum
sufficient to pay the shortly accruing mortgage interest. The bill
also alleged many matters, among others the fact that the lines of
the New Albany Company were in three different states, and subject
to the jurisdiction of different courts, which seemed to justify
the taking possession of the property by a receiver to prevent its
dismemberment or any disturbance of its continued operations as a
common carrier. The prayer of the bill was:
Page 174 U. S. 677
"Inasmuch, therefore, as the complainant has no adequate remedy
at law for the grievances hereinbefore stated, and can only have
relief in equity, he files this bill of complaint in behalf of
himself and all others in like relation to the said property, and
prays that due process of law issue against the defendant, the
Louisville, New Albany & Chicago Railway Company, and that it
be summoned to appear in this Court, and answer this bill, but
without oath, all answers under oath being hereby expressly waived
under the rules to stand to and abide by such orders and decrees as
the judges of this Court may from time to time enter in the
premises; that, for the purpose of enforcing the rights of
complainant and all other creditors of said insolvent corporation
according to their due equities and priorities, and to preserve the
unity of the said railway system as it has been and now is
maintained and operated, and to prevent the disruption thereof by
the separate attachments, executions, or levies, this Court will
forthwith appoint a receiver for the entire railroad; . . . that
the court will fully administer the trust fund, in which the
complainant is interested as a judgment creditor, and will for such
purpose marshal all the assets of said insolvent corporation and
ascertain the several liens and priorities existing upon the said
system of railways or any part thereof, and the amount due upon
each and every of such liens, whether by mortgage or otherwise, and
enforce and decree the rights, liens, and equities of each and all
of the creditors of the said Louisville, New Albany & Chicago
Railway Company as the same may be finally ascertained and decreed
by the court upon the respective claims and interventions of
several of such creditors or lienors in and to not only the said
line of railroad, appurtenances, and equipment, or any part of
them, but also to and upon each and every portion of the assets and
property of the said insolvent corporation, and that said railroad
and all the assets of such corporation shall be sold by proper
decree of the court, and the proceeds divided among the different
creditors according as their liens and priorities may be decreed by
the court, and for such other and further relief as to the court
may seem proper, and as may be necessary to
Page 174 U. S. 678
further enforce the rights and equities of the complainant and
all other creditors of such corporation."
The New Albany Company appeared by its general solicitor, filed
its answer, admitting the material allegations of the bill, and
interposing no objections, whereupon the court made an order
appointing as receiver a gentleman who was the vice-president of
the company and its general manager. The order of appointment was
in the ordinary form of such orders.
All of these proceedings, including the filing of the original
complaint, the confession of judgment, the issue and return of the
execution, the filing of the bill, and the appointment of a
receiver, took place on the same day, to-wit, August 24th. Up to
this time, there had been no default in any of the interest due on
the several series of bonds. On November 12, 1896, the trustees in
one of the mortgages (one executed May 1, 1890) filed a bill of
foreclosure alleging default in the payment of interest on November
1, 1896. On the same day, the trustee in another mortgage, dated
January 1, 1896, filed a similar bill, alleging default on October
1, 1896. On November 24, 1896, the court, on application of the
receiver, entered an order authorizing the receiver to borrow
$200,000 on receiver's certificates, payable out of the earnings,
and expend the same in the construction of new bridges, the repair
of freight cars and engines, and ballasting and making new
alignment of track, and the equipment of engines and cars with air
brakes and automatic couplers. What action was taken under this
order is not disclosed in the record, although the final decree
provided for payment in advance of the bonds
"of any indebtedness of said receiver which has not been or
shall not be paid out of the earnings and income of the property
coming into the hands of said receiver."
On the 14th day of December, 1896, the trustee in a mortgage
executed September 1, 1894, commenced foreclosure, alleging default
on December 1, 1896. On the 21st of December, 1896, an order of
consolidation was made of these several foreclosure suits.
On the 23d of January, 1897, the petitioner, the Louisville
Page 174 U. S. 679
Trust Company, filed its petition asking generally to be
admitted to appear in the suit and to take such steps and
proceedings in its own behalf as it might deem necessary, which
petition was sustained, and leave granted accordingly. This
petition alleged the endorsement heretofore referred to of the
bonds of the Kentucky railway company by the New Albany Company,
that it (the petitioner) was the holder of $125,000 of those bonds,
and had obtained a decree adjudging the validity of the
guaranty.
On the same day, the various parties to the foreclosure suits
having all appeared and filed, so far as was necessary, answers
admitting the allegations of the bills, a decree was entered
foreclosing the three mortgages in suit and directing a sale of the
property.
On February 27, 1897, the Louisville Trust Company filed a full
intervening petition, verified by affidavit, setting forth the
guaranty of the Kentucky bonds, its ownership of $125,000 of them,
the decree of the court of appeals and the certiorari obtained from
this Court by the New Albany Company, the proceedings in the action
instituted by John T. Mills, Jr., in respect to which it alleged
that
"the said J. T. Mills, Jr., claimed to be a creditor to the
amount of $494,911.35, but did not disclose or discover to the
court in his proceedings that he was not a general creditor, but he
was at the time, if a creditor at all, secured with collateral
securities, the value whereof is unknown to your petitioner. And
the petitioner charges that the proceedings in behalf of the said
John T. Mills, Jr., were procured by the said New Albany Company
for the purpose of hindering and delaying the general or unsecured
creditors of the said company in the enforcement of their debts,
and that, since the entry of the said order of appointment, no step
has been taken in the said cause either to ascertain or to bring
into court the assets which are subject to the payment of the said
debts, and no proceeding has been taken to notify or to bring
before the court the said general or unsecured creditors."
It then set forth the filing of the foreclosure bills, the entry
of the decree of foreclosure, and alleged
"that, prior to the entry of the said decree, the
Page 174 U. S. 680
holders of the bonds secured by the mortgages to the Farmers'
Loan & Trust Company and the Central Trust Company aforesaid,
and the holders of the preferred and common stock of the said
Louisville, New Albany & Chicago Railway Company, or a part
thereof, had entered into an arrangement or agreement for the
purpose of procuring the sale of the said property, its purchase by
and in behalf of the parties entering into such combination and
reorganization thereof, and the issue of securities to the said
parties, including said stockholders, without the payment of the
debts and liabilities of the said company, and for the purpose of
hindering and delaying the said creditors, and with a view to
prevent the collection or enforcement of such debts and
liabilities, and that the said decree of sale was obtained by the
said company and said complainants in order to carry out such
unlawful purpose, and to prevent the general or unsecured creditors
of the said company from having an opportunity to be heard in
matters arising in the said cause."
It also alleged that the New Albany Company was formed by
consolidation, and that one of the consolidating companies was a
corporation of Illinois, and had its property in that state; that
it had no power to enter into such consolidation, as had been
decided by the Supreme Court of that state, and therefore that the
mortgages executed by the New Albany Company, and which were being
foreclosed, were not liens upon so much of its property as had
belonged to the Illinois corporation, and was situated in that
state. It also claimed that, under the provisions in the mortgages,
there had been no such default as justified a foreclosure, and
prayed as follows:
"Wherefore your petitioner prays that the decree of foreclosure
and sale heretofore entered in this cause be set aside, that the
pretended consolidations herein mentioned be adjudged void, and
that the said mortgages before mentioned be declared to be invalid;
that this cause be referred to a commissioner to ascertain and
report what assets of the said New Albany Company are embraced by
any liens and what are not so included, and the amounts and
descriptions thereof, and that, among other things, the master be
directed to ascertain
Page 174 U. S. 681
what portion of the capital stock has not been paid for and the
amounts due thereon, and that the receiver herein be directed to
take steps to enforce the collection of any amounts due to the said
company; that due and proper advertisement be given for the proof
of debts, and that said master be directed to ascertain and report
the names of the creditors herein, and the amounts of debts due to
them; that it be adjudged that the said master ascertain what net
earnings have accrued and shall hereafter accrue from the operation
of the said railway in the hands of the receiver, and that the
amount thereof be adjudged and declared to be a fund to be
distributed among the general and unsecured creditors of the said
company, and that all such other and further proceedings be had for
the sale of the assets of the said company and the distribution
thereof according to law and the rights of the parties."
On the 9th of March, 1897, its petition was denied. On the 10th
of March, a sale was made by the master appointed therefor, and on
the same day, his report thereof was filed, and the sale confirmed.
An appeal was taken by the Louisville Trust Company to the Court of
Appeals of the Seventh circuit, which appeal was argued on the 16th
day of November, 1897. On the 5th of February, 1898, the decree of
the circuit court was affirmed. 84 F. 539. Whereupon application
was made to this Court, and the proceedings were brought before it
by certiorari.
MR. JUSTICE BREWER, after stating the facts in the foregoing
language, delivered the opinion of the Court.
The questions in this case are novel and important. They
Page 174 U. S. 682
arise on the foreclosure of certain railroad mortgages, and
suggest to what extent the same rules and considerations obtain in
them as in the foreclosures of ordinary mortgages upon real estate.
It goes without saying that the proceeding in the foreclosure of an
ordinary mortgage on real estate is simple and speedy. No one need
be considered except the mortgagor and mortgagee, and if they
concur in the disposition of the foreclosure, it is sufficient, and
the court may properly enter a decree in accordance therewith.
Other parties, although claiming rights in antagonism to both or
either mortgagor and mortgagee, may be considered outside the scope
of the foreclosure, and whatever rights they may have may properly
be relegated to independent suits.
But this Court long since recognized the fact that in the
present condition of things (and all judicial proceedings must be
adjusted to facts as they are), other inquiries arise in railroad
foreclosure proceedings accompanied by a receivership than the mere
matter of the amount of the debt of the mortgagor to the mortgagee.
We have held in a series of cases that the peculiar character and
conditions of railroad property not only justify, but compel, a
court entertaining foreclosure proceedings to give to certain
limited unsecured claims a priority over the debts secured by the
mortgage. It is needless to refer to the many cases in which this
doctrine has been affirmed. It may be and has often been said that
this ruling implies somewhat of a departure from the apparent
priority of right secured by a contract obligation duly made and
duly recorded, and yet this Court, recognizing that a railroad is
not simply private property, but also an instrument of public
service, has ruled that the character of its business and the
public obligations which it assumes justify a limited displacement
of contract and recorded liens in behalf of temporary and unsecured
creditors. These conclusions, while they to a certain extent
ignored the positive promises of contract and recorded obligations,
were enforced in obedience to equitable and public considerations.
We refer to these matters not for the sake of reviewing those
decisions, but to note the fact that foreclosure proceedings of
mortgages covering extensive
Page 174 U. S. 683
railroad properties are not necessarily conducted with the
limitations that attend the foreclosures closures of ordinary real
estate mortgages.
We notice, again, that railroad mortgages or trust deeds are
ordinarily so large in amount that, on foreclosure thereof, only
the mortgagees or their representatives can be considered as
probable purchasers. While exceptional cases may occur, yet this is
the rule, as shown by the actual facts of foreclosure proceedings
as well as one which might be expected from the value of the
property and the amount of the mortgage.
We may not shut our eyes to any facts of common knowledge. We
may not rightfully say that the contract of mortgage created
certain rights, and that, when those rights are established, they
must be sustained in the courts, and no inquiry can be had beyond
those technical rights. We must therefore recognize the fact -- for
it is a fact of common knowledge -- that, whatever the legal rights
of the parties may be, ordinarily foreclosures of railroad
mortgages mean not the destruction of all interest of the mortgagor
and a transfer to the mortgagee alone of the full title, but that
such proceedings are carried on in the interests of all parties who
have any rights in the mortgaged property, whether as mortgagee,
creditor, or mortgagor. We do not stop to inquire, because the
question is not presented by this record, whether a court is
justified in permitting a foreclosure and sale which leaves any
interest in the mortgagor -- to-wit, the railroad company and its
stockholders -- and ought not always to require an extinction of
all the mortgagor's interest and a full transfer to the mortgagee,
representing the bondholders. Assuming that foreclosure proceedings
may be carried on to some extent, at least, in the interests and
for the benefit of both mortgagee and mortgagor (that is,
bondholder and stockholder), we observe that no such proceedings
can be rightfully carried to consummation which recognize and
preserve any interest in the stockholders without also recognizing
and preserving the interests not merely of the mortgagee, but of
every creditor of the corporation. In other words, if the
bondholder wishes to foreclose and exclude inferior lienholders or
general unsecured creditors
Page 174 U. S. 684
and stockholders, he may do so; but a foreclosure which attempts
to preserve any interest or right of mortgagor in the property
after the sale must necessarily secure and preserve the prior
rights of general creditors thereof. This is based upon the
familiar rule that the stockholder's interest in the property is
subordinate to the rights of creditors -- first of secured and then
of unsecured creditors. And any arrangement of the parties by which
the subordinate rights and interests of the stockholders are
attempted to be secured at the expense of the prior rights of
either class of creditors comes within judicial denunciation.
Now the intervening petition of the petitioner, duly verified,
directly charged that the foreclosure proceedings were for the
benefit alone of bondholder and stockholder, and under an agreement
between the two for a sale and purchase for both, and with a view
of thereby excluding from any interest in the property all
unsecured creditors; that this agreement was entered into after and
in consequence of the decree of the United States courts of appeals
adjudging the New Albany Company liable on its guaranty. If that
fact be true, would it not be -- and we quote the language of the
court of appeals -- "a travesty upon equity proceedings"? Can it be
that when in a court of law the right of an unsecured creditor is
judicially determined, and that judicial determination carries with
it a right superior to that of the mortgagor, the mortgagor and
mortgagee can enter into an agreement by which, through the form of
equitable proceedings, all the right of this unsecured creditor may
be wiped out, and the interest of both mortgagor and mortgagee in
the property preserved and continued? The question carries its own
answer. Nothing of the kind can be tolerated.
Beyond the positive and verified statement of the petition of
the Louisville Trust Company are many facts appearing in the record
which strongly support this allegation. That a corporation whose
stock consists of $16,000,000, $7,000,000, of which is preferred
stock, all of which must be expected to be wiped out if a mortgage
interest of $13,800,000 is fully asserted, hastens into court and
confesses judgment on an alleged unsecured
Page 174 U. S. 685
liability, on the same day responds to an application for a
receiver and assents thereto, makes no effort during the
receivership to prevent default in interest obligations, tacitly at
least, consents to an order made on application of the receiver for
the issue of $200,000 worth of receiver's certificates in aid of
betterments on the road, when the same sum might have paid the
interest and delayed the foreclosure, and, when foreclosure bills
are filed, not only makes no denial, but admits all the averments
of mortgage obligation and default -- in other words, seems a
debtor most willing to have all its property destroyed, and this
because of one short wheat crop -- these matters suggest, at least,
that there is probable truth in the sworn averment of the
petitioner that all was done by virtue of an agreement between
mortgagee and mortgagor (bondholder and stockholder) to preserve
the relative interests of both, and simply extinguish unsecured
indebtedness. When, in addition to this fact it appears that these
proceedings are initiated within a few days after a decree of the
circuit court of appeals -- a decree final unless brought to this
Court for review in its discretion. by certiorari -- and that a
large amount of unsecured indebtedness was by that decree cast upon
the mortgagor, we cannot doubt that such a condition of things was
presented to the trial court that it ought, in discharge of its
obligations to all parties interested in the property, to have made
inquiry and ascertained that no such purpose as was alleged in the
intervening petition was to be consummated by the foreclosure
proceedings.
It is said by the appellee that the Louisville Trust Company was
dilatory, and that, by reason thereof, it was not entitled to
consideration in a court of equity. There is some foundation for
this contention, and yet there was not such delay as justified the
court in refusing to enter upon an inquiry. Indeed it does not
appear that either the circuit court or the circuit court of
appeals considered the petitioner dilatory, or denied its
application on the ground of delay. It must be borne in mind that
the bill of complaint filed on August 24th by one who had that day
become, by consent of the defendant, a judgment creditor, was
affirmatively
"for the purpose of enforcing the
Page 174 U. S. 686
rights of complainant and all other creditors of said insolvent
corporation according to their due equities and priorities,"
and to
"decree the rights, liens, and equities of each and all of the
creditors of the said Louisville, New Albany & Chicago Railway
Company as the same may be finally ascertained and decreed by the
court upon the respective claims and interventions of several of
such creditors or lienors in and to not only the said line of
railroad appurtenances and equipment or any part of them, but also
to and upon each and every portion of the assets and property of
the said insolvent corporation."
Although this bill was filed in the avowed interest of himself
and all other creditors, no action was taken to notify any
creditors or to bring them into court to present their several
claims. Any creditor might well have waited, even with knowledge of
what had taken place, and after an examination of the bill thus
filed, until publication or other notice. Whether this petitioner
was in fact aware of these proceedings is not disclosed. Even if it
were, its waiting a reasonable time for what in the ordinary course
of procedure all creditors had a right to expect is not a neglect
which destroys its equities. It and all other creditors might
justly assume that this proceeding was initiated in good faith to
subject the property of the common debtor to the payment of all its
debts. Primarily it may be its secured debts, but also generally
all its debts, secured or unsecured, and that whenever it was
necessary, due notice would be given, and all creditors called upon
to present their claims. It would not have been justified in
treating this proceeding as solely in the interest of the mortgagee
and mortgagor (the bondholder and stockholder) and for the purpose
of destroying all claims of unsecured creditors.
It is true that the filing of the bills of foreclosure was
notice of an intent to subject the property belonging to the
mortgagor to the satisfaction of the mortgage; and, for the purpose
of the present inquiry, it may be conceded that the intervening
petition disclosed no legal defense to the claims of the mortgagees
to foreclosure. In other words, for the inquiry we desire to
pursue, we shall assume without question that the matters referred
to in the petition in respect to the property
Page 174 U. S. 687
in Illinois, the decision of the Supreme Court of that state and
the effect of the attempted consolidation, and all other matters
stated or suggested, separately or together, constitute no valid
defense to the foreclosure bills. But this foreclosure proceeding
did not, either directly or by suggestion, disclose any purpose to
protect the mortgagor (the stockholder) at the expense of unsecured
creditors, and, as heretofore stated, this unsecured creditor was
not bound to presume that there was any such purpose in the minds
of the two parties to the foreclosure. So that its failure to
intervene at the first instant cannot be fatal delay or
neglect.
It is also true that no evidence was offered by the petitioner
in support of the allegations of its petition, but it is not true
that, in revising and reversing the final action of the circuit
court, we are acting on mere suspicion, or disturbing either settle
rules or admitted rights. The allegations of this intervening
petition as to the wrong intended and being consummated were
specific and verified. The delay, under the circumstances, was not
such as to deprive the petitioner of a right to be heard. The facts
apparent on the face of the record were such as justified inquiry,
and upon those facts, supported by the positive and verified
allegations of the petitioner, it was the duty of the trial court
to have stayed proceedings and given time to produce evidence in
support of the charges. Taking them as a whole, they are very
suggestive, independent of positive allegation -- so suggestive, at
least, that when a distinct and verified charge of wrong was made,
the court should have investigated it.
We cannot shut our eyes to the fact that one claiming to be a
general creditor for nearly half a million of dollars commences
proceedings to establish his right which, by the consent of the
debtor, result on the very day in a judgment, execution, and return
thereof unsatisfied, a bill for a receivership, and the appointment
of a receiver, and yet, notwithstanding this was initiated in
support of this large claim, as well as for the protection of other
unsecured creditors, shortly thereafter foreclosure proceedings are
instituted and carried on to completion which absolutely ignore the
rights of this alleged
Page 174 U. S. 688
unsecured creditor, and leave as the result of the sale himself
the actor who has brought on the possibility of foreclosure
stripped of all rights in and to the mortgaged property. Was he a
real creditor, and did that real creditor make a generous donation
of this large claim? Were arrangements made with him and the
stockholders to protect both, and by virtue of such arrangements
was this foreclosure hastened to its close? Questions like these
which lie on the surface of these proceedings cannot be put one
side on the suggestion that they present only matter of
suspicion.
It is no answer to these objections to say that a bondholder may
foreclose in his own separate interest, and, after acquiring title
to the mortgaged property, may give what interest he pleases to
anyone, whether stockholder holder or not, and so these several
mortgagees foreclosing their mortgages, if proceeding in their own
interest, if acquiring title for themselves alone, may donate what
interest in the property acquired by foreclosure they desire. But
human nature is something whose action can never be ignored in the
courts, and parties who have acquired full and absolute title to
property are not, as a rule, donating any interest therein to
strangers. It is one thing for a bondholder who has acquired
absolute title by foreclosure to mortgaged property to thereafter
give of his interest to others, and an entirely different thing
whether such bondholder, to destroy the interest of all unsecured
creditors, to secure a waiver of all objections on the part of the
stockholder, and consummate speedily the foreclosure, may proffer
to him an interest in the property after the foreclosure. The
former may be beyond the power of the courts to inquire into or
condemn. The latter is something which, on the face of it, deserves
the condemnation of every court, and should never be aided by any
decree or order thereof. It involves an offer, a temptation, to the
mortgagor, the purchase price thereof to be paid not by the
mortgagee, but in fact by the unsecured creditor.
We may observe that a court, assuming in foreclosure proceedings
the charge of railroad property by a receiver, can never rightfully
become the mere silent registrar of the agreements
Page 174 U. S. 689
of mortgagee and mortgagor. It cannot say that a foreclosure is
a purely technical matter between the mortgagee and mortgagor, and
so enter any order or decree to which the two parties assent
without further inquiry. No such receivership can be initiated and
carried on unless absolutely subject to the independent judgment of
the court appointing the receiver, and that court, in the
administration of such receivership, is not limited simply to
inquiry as to the rights of mortgagee and mortgagor (bondholder and
stockholder), but, considering the public interests in the
property, the peculiar circumstances which attend large railroad
mortgages, must see to it that all equitable rights in or connected
with the property are secured.
While not intending any displacement of the ordinary rules or
rights of mortgagor and mortgagee in a foreclosure, we believe that
under the circumstances as presented by this record, there was
error; that the charge, alleged positively and supported by many
circumstances, of collusion between the bondholder and the
stockholder to prevent any beneficial result inuring by virtue of
the decree of the Circuit Court of Appeals for the Sixth Circuit in
reference to the guaranty obligations of the New Albany Company,
was one compelling investigation, and the order will therefore be
that the decrees of the circuit court and of the circuit court of
appeals be reversed, and the case be remanded to the circuit court,
with instructions to set aside the confirmation of sale; to inquire
whether it is true, as alleged, that the foreclosure proceedings
were made in pursuance of an agreement between the bondholder and
stockholder to preserve the rights of both and destroy the
interests of unsecured creditors; and, if it shall appear that such
was the agreement between these parties, to refuse to permit the
confirmation of sale until the interests of unsecured creditors
have been preserved, and to take such other and further proceedings
as shall be in conformity to law.
Decree accordingly.
MR. JUSTICE PECKHAM dissented.
