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KNEELAND V. LUCE , 141 U. S. 491 (1891)
U.S. Supreme Court
Kneeland v. Luce , 141 U.S. 491 (1891)
Kneeland v. Luce (No. 2)
Argued October 19-20, 1891
Decided November 9, 1891
141 U.S. 491
In a suit in equity brought against a railroad company by a judgment creditor for the sale of its road because of insolvency, the road being covered by numerous mortgages, a receiver was appointed, on whose petition an order was made directing him to issue receiver's certificates to various parties, who claimed to be subcontractors for building the road, and were about to sell certain shares of the stock of a company whose road formed part of the line of road and were held in pledge for the debts. The order directed that the certificates should be a first lien on a certain part of the road and should so state on their face. They were so issued. The trustee in the mortgages was a party defendant to the snit, when the receiver was appointed, and, by its counsel, consented to the issue of the certificates. The trustee also filed a foreclosure bill, in which a decree of foreclosure and sale was made, providing for the payment of "court and receiver's indebtedness," prior to the payment of the bondholders, and gave leave to the purchaser at the sale to appeal from any order directing the payment of claims as prior to the mortgage bonds. The road was sold, and the purchaser, under the order of the court, received the shares of stock referred to. The claims of the holders of the certificates were reported favorably by a master, and, on exceptions to the report, by the purchaser, for himself and other bondholders, the court allowed all the certificates as prior liens, and directed the purchaser to pay their amount into court.
(1) The issue of the certificates was proper.
(2) Good faith required that the promise of the court should be redeemed.
(3) The purchaser and the bondholders were estopped from setting up any claim against the priority of the certificates.
The appeal was dismissed as to the claims of the appellees which did not exceed $5000.
The Court stated the case as follows:
The Toledo, Cincinnati & St. Louis Railroad Company (hereinafter called the "St. Louis Company") was organized about June, 1881, and was formed by the consolidation of ten local railroad companies, which were engaged in building lines of narrow gauge railroad in Indiana and Illinois, between Kokomo, Indiana, and East St. Louis. A construction company, known as the "Western Construction Company" (hereinafter called the "Construction Company") before that, and in 1880, had entered into contracts with these local railroad companies for the construction of their roads, whereby the Construction Company was to receive for the work all the stock and bonds of the several railroad companies, and, in some cases, in addition, certain local aid which had been raised along the respective lines. The lines had been located and the work was in progress when, in the summer of 1881, it was concluded that it would be better to organize a continuous line of railroad, and with that view the St. Louis Company was formed by consolidation.
There was a local company, called the "Frankfort and state Line Railroad Company" (hereinafter called the "Frankfort Company"), which had been organized in 1874 to build a line of road from Frankfort, Indiana, westward to the west line of that state. The road was located in part, and a broad gauge railroad was built from Frankfort west for a distance of about 11 miles, in Indiana. In August, 1880, the Construction Company contracted with the Frankfort Company to build the road of the latter, as a narrow gauge road, from Frankfort west to the west line of Indiana. The Construction Company was to receive the 11 miles of road, on which there was a mortgage, and $4,000 per mile in local aid taxes and subscriptions, which had been voted and raised, and $10,000 per mile in first mortgage bonds, and all the stock of the railroad company, being $2,000,000, except what it should be necessary to deliver to tax payers for local aid, for which $200,000 was reserved; the length of the line, including the 11 miles, being 67 miles. In February, 1881, the Construction Company made a contract with Barnes and Co., which was assigned to the Iowa
Construction Company, for the grading of the line and some other work. The line was located early in 1881 by the engineer of the Construction Company. The work was commenced, and the grading had been done to a considerable extent, when, after the formation of the St. Louis Company, the construction company entered into a contract with the St. Louis Company to construct a line of narrow gauge railroad running west from Frankfort, Indiana, to a point on the west line of that state, for which the Construction Company was to receive the bonds and stock of the St. Louis Company.
The Frankfort Company was not included in the consolidation, and the stock of that company was not exchanged for the stock of the St. Louis Company, while the stock of all the consolidated companies was so exchanged. It was not the intention to construct two lines of railroad, but the object was ultimately to consolidate the Frankfort Company with the new organization, and thus form a continuous line. This was not done then, for the reason that it was supposed that if the consolidation should include the Frankfort Company, it would render void the local taxes voted and the local subscriptions made in aid of that company, which amounted to over $170,000. It was determined therefore to keep up the separate organization of the Frankfort Company, although the line of the two roads would be continuous.
The construction of the Frankfort Railroad was completed in 1881 or early in 1882, and much of the work was done on the whole line to East St. Louis; but the Construction Company was unable to sell the bonds and stock of the new line, and could not proceed further, and early in 1882 a syndicate was formed in Boston, known as the "Delphos Trust," which agreed to take all of the bonds and stock then unsold, and pay an amount equal to that estimated as required to complete the road. Under that arrangement, all of the securities then unsold were turned over by the Construction Company to the Delphos Trust except the stock of the Frankfort Company. At the time this arrangement was made, the Construction Company was entitled to the whole of the stock of the Frankfort Company, because the Construction Company had completed
its contract with that company, and had at the time $1,000,000 of such stock, and soon after received the remaining $800,000 of it, and it was arranged between the Delphos Trust and the Construction Company that the president of the latter should hold the $1,800,000 of stock until all of the debts of the Construction Company due to its subcontractors were paid. Those debts not being paid, the subcontractors filed their several claims for liens, and commenced suits to foreclose those liens, prior to March 20, 1883, making the Construction Company and the St. Louis Company parties to the suits.
The road was completed during 1882, but the debts due to the subcontractors were not paid, and they, having learned of the fact that the stock of the Frankfort Company was held by the president of the Construction Company to secure their claims, being about to commence proceedings to attach such stock, a written agreement was entered into on the 20th of March, 1883, by the St. Louis Company, the Construction Company, the Frankfort Company, the American Loan and Trust Company of Boston (hereinafter called the "Trust Company"), and certain of the subcontractors, namely, Patrick Dowling, H. S. Hopkins and Co., Cochran & Brown, the Iowa Construction Company, and Beeson & Hammond, whereby the St. Louis Company gave its notes to said creditors for the amounts of their several claims, payable in installments, the last to become due running for a year, and, to secure the payment of such notes, the stock of the Frankfort Company, being $1,800,000 in par value, held by the Construction Company, was deposited with the Trust Company, as collateral security, and it was provided that it should be sold in case of default in the payment of the notes, and that on payment of the notes the stock was to pass to the St. Louis Company. In the meantime the creditors were not to prosecute further their mechanic lien suits. Two creditors, namely, William F. Richie and Henry McPherson, did not sign the agreement or receive any notes.
The reason why the St. Louis Company assumed the debts due to the subcontractors was that its officers became fearful
that, by the seizure and sale of the stock of the Frankfort Company, that stock would get into hostile hands, and the St. Louis Company would thus lose 67 miles of its line of road, and they were anxious to stay the mechanic lien foreclosure suits, because they feared that if those suits were pressed a receivership of the road might become necessary.
On the 1st of August, 1883, one Braman, a citizen of Massachusetts, filed a bill in equity in the Circuit Court of the United States for the District of Indiana against the St. Louis Company, as a citizen of Illinois, founded on a judgment obtained by him against that company in a state court of Ohio, asking for the appointment of a receiver of the company and for the sale of its road to satisfy his debt and the debts of other creditors of the St. Louis Company, on the ground of the insolvency of that company. The bill set forth the contents of various mortgages, which covered in the aggregate the entire property of the St. Louis Company, although there was no mortgage made by it on its line as a whole. These several mortgages were sixteen in number, nine of them being first mortgages and seven second mortgages, the first mortgages amounting to $10,500,000 and the second mortgages to $9,250,000. The Central Trust Company of New York, a corporation of New York, was the sole trustee in all of the mortgages except one, and in that it was a trustee conjointly with Thomas A. Hendricks, and that company and Hendricks were made defendants to the bill.
On the 2d of August, 1883, an order was made by the court, the St. Louis Company and the Central Trust Company appearing by solicitors, the former assenting and the latter not objecting, appointing Edward E. Dwight as receiver, to take possession of and operate the railroad from Toledo, Ohio, through Indiana and Illinois to East St. Louis, and sundry branches in Ohio. Hendricks also appeared and waived process, and stated that he did not object nor consent to the appointment of a receiver.
On the 14th of November, 1883, Dwight, the receiver, filed his petition to enjoin the American Loan and Trust Company from selling the stock of the Frankfort Company. The petition
set forth the agreement of March 20, 1883, and stated that the indebtedness secured by the pledge of the stock was overdue, and had not been paid; that the creditors secured by the agreement had demanded of the Trust Company that the stock be sold; that the Trust Company had notified the St. Louis Company that it would, on November 21, 1883, in Boston, sell the $1,800,000 of stock at public auction for cash; that it was claimed by the holders of the bonds secured by the mortgage on the railroad extending from Kokomo to East St. Louis that that mortgage was at least an equitable lien on the road of the Frankfort Company; that that claim was disputed by certain of said creditors; that it would be ruinous to the interests of the stockholders and bondholders and creditors of the St. Louis Company and to the interests of the public if by the sale of said stock the legal title to that portion of the road between Frankfort and the State of Illinois, and possibly the right of its possession, should be sold away, and the continuity of the line be destroyed; that in that view the receiver submitted to the court whether it was not to the advantage of the holders of the mortgage bonds and of all parties in interest that the court should protect the title, continuity, and possession of said line of railroad by the issue of receiver's certificates or otherwise, whereby the indebtedness covered by the agreement of March 20, 1883, might be paid off, and that he was informed and believed that the creditors secured by said agreement were willing to appear voluntarily in the case, and to set forth their claims, and ask the decision of the court thereon.
The prayer of the petition was that the court would order said parties so to appear and interplead and set forth their respective claims in the matter of the stock, that the court might thereupon take such action as equity would permit, and that in the meantime it would enjoin the American Loan and Trust Company from the threatened sale of said stock. By an order made by the court on November 28, 1883, William J. Craig was appointed receiver in the place of Edward E. Dwight, resigned.
On the third of January, 1884, William F. Richie filed an
intervening petition, claiming the benefit of the agreement of March 20, 1883, on the ground that the Construction Company owed him $12,921.98 for lumber and cross-ties delivered by him to that company, to be used in building the road of the St. Louis Company, and the lines with which it has been consolidated, and praying that he might participate in the fund to be raised from the sale of the $1,800,000 of stock.
On the 28th of January, 1884, the court made an order on the receiver's petition of November 14, 1883, which set forth that all of the parties named in the receiver's petition, which included H. S. Hopkins and Co., Cochran & Brown, W. F. Richie and Co., Kapp & Co., the Iowa Construction Company, Patrick Dowling, and Beeson & Hammond, appeared in open court, in person or by attorney; that the court found that the facts set forth in the petition were true, and that it would be injurious to the interests of the stockholders, bondholders, and creditors of the St. Louis Company -- more especially to the bondholders of the portion thereof between Kokomo and East St. Louis -- and to the interests of the public, so far as interested therein, that the stock of the Frankfort Company, the legal title to the portion of the road between Frankfort and Illinois, and possibly the right to the possession of the same, should be sold, and the connection and continuity of the line be destroyed, and that it was desirable and necessary for the protection of the rights of all of said parties, and particularly the rights and interests of the holders of the bonds secured by the mortgage on the portion of the line between Kokomo and East St. Louis, that the court should authorize the issue of receiver's certificates in the manner, for the purpose, and on the conditions afterwards set forth in said order. It was ordered therefore that the receiver issue and deliver to each of said creditors the respective amounts due to them and so secured, to-wit: H. S. Hopkins and Co., $30,475.13; Cochran & Brown, $20,061.66; Kapp & Co., $1,731.98; the Iowa Construction Company, $33,750; Patrick Dowling, $3,375, and Beeson & Hammond, $11,626.14. This did not include William F. Richie, or W. F. Richie and Co., or Henry McPherson.
The order directed that the certificates should bear interest
at 6 percent per annum from April 3, 1883, and should bear date of their issue, and be payable on or before one year thereafter, and it made the indebtedness evidenced by them a first and best lien on all the railroad lying between Kokomo, Indiana, and East St. Louis, Illinois. The order gave the form of the certificates to be issued, which form stated that the certificate was issued in settlement of the indebtedness mentioned in the order of the court, and in a like order made by the Circuit Court of the United States for the Southern District of Illinois, and was a first and best lien on all the line of the railroad company lying between Kokomo and East St. Louis. The order further directed that the certificates should not be delivered until the parties had all of them cancelled all mechanics' liens claimed by them, and dismissed all pending actions therefor, and surrendered to the receiver the notes of the company held by them, and caused the American Loan and Trust Company to consent in writing to the order, and to deliver to the receiver all of the stock so held in pledge. The order reserved for consideration the claim of W. F. Richie and Co.
On the 4th of March, 1884, the court made an order on the intervening petition of Richie, allowing his claim at $12,921.28, with interest at 6 percent per annum from July 20, 1882, and directing the receiver to issue and deliver to him receiver's certificates for the amount due him, and the order contained further provisions like those found in the order of January 28, 1884.
On the 16th of April, 1884, Henry McPherson filed his intervening petition, stating that he was a contractor under a contract with the Construction Company to build in Illinois a portion of the road of the St. Louis Company; that he completed his contract, and, being thus a creditor of the Construction Company, brought suit to enforce his lien, which amounted to $20,000, and received, on January 29, 1883, from the St. Louis Company, notes for that amount, all of that date, the longest running for twelve months. He claimed a participation in the benefit of the agreement of March 20, 1883, and in the security of the $1,800,000 of stock, and prayed for an order for the issue to him of receiver's certificates to the amount of $20,000.
The petition of McPherson was referred to a master, who after taking testimony, filed a report thereon on August 29, 1884. The report was in favor of the petitioner, and exceptions were filed to it. The court made an order, on March 26, 1885, which stated the appearance of the Central Trust Company, of the bondholders' committee of the St. Louis Company, of McPherson, and of the receiver, and overruled the exceptions to the report and confirmed it, and directed, "the parties present consenting," that the receiver issue to McPherson receiver's certificates for the amount of his notes, and made provisions in regard to those certificates similar to the provisions contained in the orders of January 28, 1884, and March 4, 1884, in respect to the other certificates.
On the 17th of June, 1884, the Central Trust Company filed a bill in the Circuit Court of the United States for the District of Indiana, against the St. Louis Company, as a corporation of Indiana and Illinois; a corporation of the same name created by the laws of Ohio, Indiana, and Illinois; the Frankfort Company, as a corporation of Indiana; Thomas A. Hendricks, as a citizen of Indiana, and Braman, praying for the foreclosure of the mortgages on the line of railroad, including the line of the Frankfort Company. There were various answers to this bill, and on the 12th of November, 1885, a decree was made in the suit brought by the Central Trust Company, and in another suit which had been consolidated with it, brought by Edward F. Leonard, which foreclosed a mortgage made July 23, 1881, by the St. Louis Company of Indiana and Illinois, to the Central Trust Company and Hendricks, on its road from Kokomo, Indiana, through Indiana and Illinois to East St. Louis, 270 miles long, and securing 3,000 bonds of $1,000 each. The decree directed the sale of the property and the assignment to the purchaser of the $1,800,000 of the stock of the Frankfort Company. It appointed two special masters to make the sale, and directed the execution of a deed to the purchaser by them on compliance with the prescribed terms of sale. It directed the distribution of the proceeds of sale, and provided for the payment of "court and receiver's indebtedness," prior to the payment of anything upon the bonds and
coupons secured by the mortgage foreclosed. It directed that a certified copy of the decree be delivered to the Circuit Court of the United States for the Southern District of Illinois, and contained this clause:
"Leave is hereby reserved to said trustees and to the purchaser or purchasers at the foreclosure sale under this decree, to appeal from any order or final decree made by the court directing the payment of claims as prior and paramount to said mortgage bonds and coupons."
On the 21st of December, 1885, and order was made appointing a special master to report upon claims against the property. On the 30th of December, 1885, the special masters appointed to sell the property filed their report of sale stating that they had sold it on that day to Sylvester H. Kneeland, for $901,000. On the 5th of February, 1886, an order was made confirming the sale and ordering the delivery of a deed of the property on the performance by the purchaser of the terms of sale specified in the decree. On the 10th of March, 1886, an order was made approving the form of the deed to the purchaser then presented to the court, and directing the deed to be delivered to him. On the 27th of March, 1886, on the petition of Kneeland, the purchaser, and order was made that the clerk of the court assign and deliver to Kneeland the certificate for the $1,800,000 stock of the Frankfort Company.
On the 25th of May, 1886, an order was made directing the special master appointed as to claims to report to the court, among other things:
"What receiver's certificates have been issued by said receiver Craig, to whom such certificates were issued, for what consideration they were issued, when the indebtedness accrued upon which they are based, and whether any of said certificated were issued for a greater or less sum than was proper, and what, if any, of said certificates should be contested, giving dates and amounts of certificates."
On the 4th of April, 1887, such special master filed a report as to the receiver's certificates. He attached to his report an exhibit showing what certificates had been issued, and to whom, and for what consideration, when the indebtedness accrued upon which they were based, and who then held
them. This exhibit covered, among others, the certificates so issued to H. S. Hopkins & Co., Cochran & Brown, W. S. Kapp & Co., the Iowa Construction Company, Patrick Dowling, Beeson & Hammond, William F. Richie, and Henry McPherson. The master reported that he had taken testimony offered for the purpose of showing that the court which authorized the certificates had been misled as to the amounts justly due to the parties who applied for them, and of showing that they had been in fact issued for a greater sum than was proper, but that, as the parties had once had a full hearing before the court, he did not feel that the testimony then offered was sufficient to justify opening the decrees as to the amounts allowed, and he therefore found that the certificates were not issued for a greater sum than was proper. He stated that he construed the order of reference as authorizing him to report all facts necessary to enable the court to distribute the proceeds of sale to the persons who had the first lien and claim thereon. He then set forth the proceedings in regard to the issuing of the certificates, as hereinbefore stated, including the contents of the petition of the receiver, and stated that in the proceedings under that petition all parties in interest were duly represented and fully heard, the first mortgage bondholders being represented by their trustee as fully and fairly as such trustee was by law authorized to represent them and bind them by its action, and that after full hearing and consideration, the court made the decree of January 28, 1884. He then set forth the proceedings in regard to the certificates issued to Richie, and stated that all persons parties to the other proceedings were made parties to the petition of Richie, and the proceedings on the petition of McPherson, in regard to which he stated that there were appearances by all parties in interest, including the trustee for the first mortgage bondholders. He further stated that no appeal was taken, and no review had of those proceedings, and that the certificates had passed into the hands of their present holders for due consideration, without notice of any proposed contest, and, as was claimed, with the knowledge of the chairman of the bondholders' committee, who was now contesting them. He
further stated that the representative of certain of the first mortgage bondholders contended that such proceedings were not binding upon them, and that they ought to be allowed to contest the certificates and dispute their priority, alleging that the court did not have before it all the facts relating to the original transactions; that the additional evidence taken before him showed that the creditors had no lien prior to the first mortgage bondholders; that the lien of the latter upon the 67 miles of road was prior to that of the creditors; that the claims of the latter were nothing more than unsecured construction accounts; that the trust agreement of March 20, 1883, was made without consideration to the St. Louis Company; that its recitals were false and misleading; that it did not and could not give to the creditors, who were parties to it, any lien upon the stock of the Frankfort Company, and that the court was not justified in enforcing it. He further stated that if such allegations were true, the certificates ought to be contested, and he then proceeded to state the material facts in reference to each of the eight claims referred to.
Sylvester H. Kneeland, for himself and others, holders of the first mortgage bonds of the St. Louis division of the St. Louis Company, filed exceptions to the report of the master. On the 16th of September, 1887, the court heard the case and overruled the exceptions and confirmed the report. The order of the court made on that day allowed all the receiver's certificates mentioned in the report and the schedule attached thereto as valid and just claims against the St. Louis Division of the road, extending from Kokomo, Indiana, to East St. Louis, Illinois, and as a lien thereon prior to the first mortgage, and to be paid from the proceeds derived from the sale of that division in pursuance of the decree of foreclosure. It adjudged who were the owners and holders of the receiver's certificates issued to H. S. Hopkins & Co., Cochran & Brown, the Iowa Construction Company, Patrick Dowling, Beeson & Hammond, William F. Richie, Henry McPherson, and Kapp & Co., and named as such owners and holders: C. L. Luce and Co. and John T. Newton, for $82,891.25; C. L. Luce and Co., for $7,374.73; the National State Bank of Mt. Pleasant, Iowa, for $36,989.46; the First National Bank of Mt. Pleasant,
Iowa, for $1,286.59; the National State Bank of Terre Haute, Indiana, for $6,353.65; W. W. Whitney and Co., for $1,696.70, H. E. Bowers, for $1,286.59; Emily Worthington, for $2,573.18; T. P. M. Roome, for $2,573.18; Hugh Dougherty, for $2,573.18; William J. Craig, for $1,689; John T. Newton, for $13,934.93, and unknown owners, for $11,361.75; the aggregate amount due on all the certificates being $172,681.44, with interest at 6 percent per annum from September 15, 1887, until paid.
The order further directed that the purchaser of the St. Louis division of the road of the St. Louis Company pay into the registry of the court all of the said sums, with interest; that they be paid over to the owners and holders of the certificates, and that the certificates be surrendered to the clerk of the court, and cancelled. From this order Kneeland has appealed to this Court.
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