Farmers' Loan & Trust Co. v. Northern Pac. R.

69 F. 871, 1895 U.S. App. LEXIS 3163

• Court: U.S. Circuit Court for the District of Washington
• Decided: September 2, 1895
• Status: Published

Opinions

■ GILBERT, Circuit Judge.

On August 15, 1893, a bill in equity was filed against the Northern Pacific Railfoad Company, in the circuit court of the United States for the Eastern district of Wisconsin, by P. B. Winston, the Farmers’ Loan & Trust Company, and William C. Sheldon & Co. • The bill described the railroad of the Northern Pacific Company, and the various tributary and connected branch lines operated by it as a part of its system, and set forth the mortgages upon the said road, showing that the funded or secured debt of the company amounted to over $152,000,000, upon which the annual interest and sinking-fund charges aggregated over $9,000,000, in addition to more than $900,000 guarantied annual interest upon con Ungen C liabilities on guaranties of bonds upon the branch lines to the amount of over §15,000,000, and alleged that the gross earnings of the railroad company were and continued to be insufficient to pay operating expenses and fixed charges, and that the company was insolvent. It set forth the fact that the floating debt of said company amounted to more than $11,000,000, and that its available assets liad been hypothecated to secure- loans, and by reason of the decline in value of such collaterals the same would be sold at such a low price as to leave large deficiencies against the company, which would result in numerous actions at law to recover therefor. It further showed that during the fall of 1894, from September to December, large payments would fall due front said railroad company for interest on its several mortgages, and for interest on branch lines, etc., and that the company would be unable to meet the same. Winston was alleged to be an unsecured creditor of the company, and likewise a stockholder. Sheldon & Co. were alleged to be creditors of the railroad company to the extent of $150,000, for which they were insufficiently secured by collaterals. The bill alleged that the lines owned and operated by the railroad company were in and were subject to the jurisdiction of 10 different slates, but that they formed one system, and made one line, and that this fact constituted one of its main ingredients of value, and that its severance would result in ruinous sacrifice to every interest in the property, and that unless the court would deal with the property as a single trust fund, and take it into custody for the protection of those interested therein, individual creditors -would assert their remedies in different courts, and that a race of diligence would result, judgments and priorities .would be attempted, etc., and thereby the company would be prevented from the discharge of its duties as a public carrier, and a vast and unnecessary multiplicity of suits would-ensue. The bill prayed for the protection and preservation of the property, the marshaling of the company’s assets, the ascertainment of the liens and priorities existing, and for the appointment of receivers of the entire system of railroad and all the property of the company. The Northern Pacific Railroad Company answered the bill on the day it was filed, admitting the allegations thereof to be true, and consented to the appointment of one or more receivers as prayed therein. On the same day an order was entered in said court appointing the present receivers. Thereafter the same bill and answer were filed in the circuit courts of the United 8 fates for the various districts in which said railroad is situate, to wit, in (he Western district of Wisconsin, the district of Minnesota, the district of North Dakota, the district of Montana, the district of Idaho, the district of Washington, and the district of Oregon, and in the Southern district of New York, in'which is the home office of said corporation; and between the lot'll day of August, 1893, and the 17th day of the same month, orders were made in all these courts appointing the same receivers. At the time of filing said bill in the Eastern district of Wisconsin, the Northern Pacific Kailroad Company was in the possession of and was operating the Wisconsin Central lines, the larger portion of which were in said district, under a lease dated April 1, 1890, and running for a term of 99 years. Immediately upon their appointment, the receivers entered into possession of the said Wisconsin Central lines, and operated the same under the lease for more than a month. On September 26, 1893, the lease having been canceled by the lessor for nonpayment of rent, the circuit court for the Eastern district of Wisconsin ordered the receivers to turn back the said lines to the lessor. On the 18th day of October, 1893, the Farmers’ Loan & Trust Company filed in the circuit court for the Eastern district of Wisconsin its bill to foreclose the second, third, and the consolidated general mortgages upon the road, alleging that, since the filing of the creditors’ bill, defaults had occurred in the payment of interest on said mortgages, and praying for a decree of foreclosure. Winston, Sheldon & Co., and the receivers were made parties defendant. On the day the foreclosure bill was filed the Northern Pacific Company entered its general appearance, and on the same day the court appointed in that suit the receivers formerly appointed in the creditors’ suit. Thereafter the foreclosure bill was filed, and similar orders were made in all the circuit courts of the districts before mentioned. The receivers so appointed have since remained in the possession and management of the road and the property of the Northern Pacific Railroad Company, under the direction of the circuit court for the Eastern district of Wisconsin, and under the authority of said court have issued an aggregate of $5,000,000 of receivers’ certificates, which have been "sold and are now outstanding. They have also, under the orders of said court, expended money in payment of interest on the first mortgage, have sold railroad lands to various purchasers, have paid indebtedness of said company, and have made leases and traffic contracts with certain branch lines and other carriers. They have also expended money in improvements find in the purchase of railroad material, rolling stock, and supplies, etc.

„ On the - day of August, 1895, the Northern Pacific Railroad Company filed in this court the affidavit of Brayton Ives, its president, stating, in substance: That no part of the railroad or land grant of the Northern Pacific Railroad Company was or ever has been in the Eastern district of Wisconsin, and that at the time of the appointment of the receivers by that court there was no property of said company within the jurisdiction of said court, and that none of the property covered by the mortgages which were sought to be foreclosed in said suit was situate within the said district. That, by the order of this court by which said receivers were appointed of the property in the district of Washington, said receivers were ordered and directed to pay, out of the money which should come into their hands from the operation of said road, current expenses, amounts due for interchange of traffic supplies and materials used, wages, and rentals of rolling stock, and, with the sanction of this court, such amounts as might be necessary for protecting the property of said corporation from sale under mortgage, etc.; and they were also directed to hold the money of said 'company not so used by them until authorized to dispose of the same under the order of this court. That the receivers have not complied with the terms of said order, but have deposited the moneys received by them in this district in banks other than those authorized by this court, and, without the sanction of this court, have applied the same to the payment of debts alleged to exist against said company, other than those contemplated by said order, and (hat they have not filed with or submitted to this court any account of the disposition made by them of any of the property which came into their possession, nor any statement of their receipts and disbursements, nor any reports to this court as, by the order of their ai>pointment, they were directed to make; that they have misapplied divers large sums of money received by them from the sales of lands and other property of the company, and from the operation of said road, by appropriating the same to the payment of alleged debts of said railroad company which were noi entitled to he paid in preference to the interest and principal due under the mortgages. That said railroad company has a claim against Henry Villard for $545,133.42, arising out of a sale made by him, when chairman of the hoard of directors of said company, of the capital stock of the Northern Pacific & 'Manitoba Railway Company, in violation of his duty as director, and in fraud of said company; and another claim against said Henry Villard for $224,-800, arising out of a sale by him to said railroad company of the capital stock of the Rocky Fork & Cooke City Railroad Company, made in violation of his duty as a director, and in fraud of his company; and another claim against Henry Villard, Charles L. Colby, and Colgate Hoyt, who were directors of said Northern Pacific Railroad Company, for the sum of $2,(500,000, arising out of the lease of the railroad of the Wisconsin Central Company, the Wisconsin Central Railroad Company, and Chicago & Northern Pacific Railroad Company, in violation of their duties as directors, and in fraud of said Northern Pacific Railroad Company. The affidavit further alleges, in substance: That the said bills so filed in the circuit court of the United states for the Eastern district of Wisconsin were procured to be filed by said Henry Villard, collusively and for the purpose of controlling (he suits and naming (he receivers to he appointed therein; that he procured his personal counsel to prepare said creditors’ bill; and that the said receivers were decided upon as the result oí a conference between Thomas F. Oakes, Henry Villard, Charles L. Colby, Colgate Hoyt, and Villard’s personal counsel, William Nelson Cromwell, each in his own interest and Rosewell G. Rolston, as director of the Northern Pacific Railroad Company and president of the Farmers’ Loan & Trust Company, for the purpose of protecting the interests of those participating1 in the transactions and liable to the claims above mentioned. That the receivers selected for their counsel, and intrusted the direction of the legal business of sai'd railroad company to, the said William Nelson Cromwell, who had been counsel for the said Henry Villard in making the sale of said capital stock of the Northern Pacific & Manitoba Railway Company and the Rocky Fork & Cooke City Railroad Company to said Northern Pacific Railroad Company, and who continues to act as counsel for said Villard. That the said receivers have been directed by the circuit court of the United States for the Eastern district of Wisconsin to sue the said Henry Villard to recover the sums fraudulently acquired by him from the Northern Pacific Railroad Company, and to sue any of the former directors of said company to recover all sums of money improperly or illegally received by them, yet, in violation of their duty in the premises, they have taken no proceedings whatever to carry out said order. That, notwithstanding the existence of said claims, the receivers have paid to said Henry Villard $480,000, with interest thereon, in payment of two notes of said Northern Pacific Railroad Company held by said Henry Villard, which debt should have been applied by the receivers in reduction of the debt of said Villard to the company. That the receivers have sold large tracts of land of said company within the state of Washington, and have made no' report thereof to this court, and have not accounted to this court for the disposition of the proceeds thereof. That they have entered into divers contracts relating to the custody, management, and disposition of the property of said company within the jurisdiction of this court, without the knowledge of this court or its authority.

Upon said .affidavit the receivers were required to show cause before this court why the order entered on the 17th day of October, 1893, appointing them receivers of the Northern Pacific Railroad Company within this district, should not be vacated and set aside. The Farmers’ Loan & Trust Company and the receivers now object to the jurisdiction of this court to entertain the motion, and they urge, in support of their objection, that the circuit court of the United States for the Eastern district of Wisconsin is the court of primary jurisdiction,—the court which first appointed receivers and thereby took possession of the property of the Northern Pacific Railroad Company,—and that the well-settled rule of comity requires all other courts within whose jurisdiction the property of said corporation is situated to refer to that court all questions concerning the general management of the property, the custody and preservation thereof, and the appointment and discharge of the receivers; that at the time of filing of both the creditors’ bill and the bill to foreclose the mortgages there was situate within the jurisdiction of said court for the Eastern district of Wisconsin personal property of said corporation, consisting of rolling stock, rails, materials, money, and leased railroad lines which it was operating in connection with its own lines; that the appearance of the Northern Pacific Company in answer to said bills gave to that court the jurisdiction to hear and determine said suits, and that the existence of said personal property within said district at that time gave to that court jurisdiction to take the same into its possession by said receivers, and that, notwithstanding the fact that at the present time there may be no property of the corporation within said district, or in the. possession of said court by its receivers, yet, the jurisdiction having once attached by reason of the facts existing at the time of the commencement of the suits, it will be and must remain unquestioned until the final determination of all matters in litigation; and that for ¡his court to now say that the court of the Eastern district of Wisconsin is not the court of primary jurisdiction over the property of the said railroad company in receivership is to collaterally attack the validity of a judgment: of that court.

We find in the case no question of an attack upon the jurisdiction of the circuit court for the Eastern district of Wisconsin. It must be conceded that that court had jurisdiction of the bilis that wore filed, and liad jurisdiction to appoint receivers to take into its possession the property of the railroad company that was within its territory, and to remove the .same.- The question for consideration here is not one of the jurisdiction of that court in the suits pending before it, but it is whether or not that court is to-day the court of primary jurisdiction for the management and control of the property of the Northern Pacific Railroad Company in the hands of receivers, and whether the rule of comity, as settled by the decisions of the courts, requires this court to decline jurisdiction of the motion until the 'matters here in issue shall have been adjudicated by another tribunal All of the bills that were filed in the various jurisdictions in which the property of the Northern Pacific Railroad Company is situated were original bills. It is true that each bill filed after the initiation of x>roceedings in the Eastern district of Wisconsin recited and referred to those xu-oceedings as the basis of action in file other courts; and it is also true that the other courts, in following the rule of comity, ajpoiuted in their own districts, without question, the receivers so named by the first court. The actual possession of the property of the insolvent corporation by the first court, through its receivers, however, could extend no further than the territorial limits of that court's jurisdiction. The rights the receivers are accorded in courts wlio.se jurisdiction is exterior to that of initial proceeding have their basis in comity. Hindi comity rests upon the fact that another court is in the actual possession of a. portion of property which cannot well be segregated, and which the best interests of all concerned require to be managed as a single system. Here, however, it is shown that at the time of filing- (his application to remove the receivers there is no part of the railroad line of the Northern Pacific Conrpany within the jurisdiction of the court that first, ajpointed them, and that there is in that district no personal property held in receivership. All the property that remains to be disposed of is in oilier jurisdictions. It follows from this state of facts (hat that court: is powerless to make an order which affects in any way the management or possession of any of the property of the corporation. No foreclosure sale of said mortgages can be had, no possession to a purchaser can be given, until the courts which have the actual possession of said road shall consent thereto. In our judgment, the rule of comity which has been invoked in exposition to the motion does not. apjily to such a case as this. Hie foundation of the rule is the recognition of a right that exists in another jurisdiction. It is predicated upon the fact that another court has first taken and retained the possession of property. Its reason consists in the fact that the court of initiatory proceeding has in its possession, and must necessarily administer, a portion of property which a wise policy declares must not he disintegrated. That reason does not exist in this case. Not only does it not exist, but many considerations urge us to believe that a wiser, more satisfactory management of a railroad may be obtained by a court which has jurisdiction over at least some of the territory wherein the same is situated, or in which the home office of the company is located.

Numerous authorities are cited by counsel both on behalf of the motion and in opposition thereto, but no case is found which is direct authority either for or against the conclusion which we have reached. In a well-considered case in the supreme court of Texas (Railway Co. v. Gay, 26 S. W. 599) it was held that the United States circuit court for a district in Lousiana has no jurisdiction to appoint a receiver, and through him to take possession and control of a railroad, no part of which was within that state. Said the court:

“No case can arise in which a court will have power to appoint a receiver unless there be property of which the court may take possession through its receiver; and, if the property be immovable (or movable, but so connected with the immovable as are ears or other like property necessary to and used in operating a railway), then the suit in which a receiver to take possession of them may be appointed is necessarily one local in character, for in such .case the court operates directly upon the thing. Such a proceeding is not one strictly in rem, but such is its nature; and, under general rules everywhere recognized, such proceedings can be had only where the thing to be taken into possession is within the territory within which the court has power to act.”

It was said by the court in Young v. Railroad Co., 2 Woods, 618, Fed. Cas. No. 18,166, that:

“If there are any adjudged cases which would authorize this court to interfere with the possession, of a receiver appointed by another court having jurisdiction, and who is in actual possession of the property, they have never fallen under my observation.”

But it is made clear from a consideration of that case that, in declining to interfere with a receiver who was “in actual possession of the property,” the court had in mind the fact that in that case the court of initial proceeding had within its jurisdiction and in the custody of its receiver a portion of the road and of the property of the railroad company; and it is evident that such actual possession was considered a necessary feature of the receivership of another court, which, in the opinion of that court, could not be interfered with.

The fact that certificates of stock in other corporations which were held by the Northern Pacific Railroad Company have since the receivership been transferred to the receivers, and stand in their names, has no bearing upon the question under consideration. The situs of such property is not changed by the fact of such transfer. Shares of stock held by the Northern Pacific Railroad Company must be presumed to have been held by it at its home office in the city of New York. If those shares have been transferred to the receivers, such transfer has been made at the home office, and must have been made under the authority of the circuit: court for that district; and, if they are held by the receivers, they are held under flie direction and control of that court, and they are not in the possession or under the custody of the court for the Eastern district of Wisconsin.

It is strongly urged against the assumption of jurisdiction by this court to entertain the motion that during the receivership receivers’ certificates have been issued to a large amount, and that the same are now held by innocent purchasers, and that to deny the primary jurisdiction of the court for the Eastern district, of Wisconsin over the receivership is to hold that those certificates were unlawfully issued. We find no ground for such contention. If the receivers’ certificates have been authorized by the courts of the various districts in which the property in receivership is situated, they are valid liens upon that: property, irrespective of the question whether the court for the Eastern district of Wisconsin had jurisdiction to order their issuance. If they have not been so authorized, it is not perceived how the action of this court can in any way affect: the question of their validity. It must he conceded, in any view of the case, that the receivers are at the present time, and have been since their appointment, the lawful appointees of all the courts in the jurisdiction of which the property of the Northern Pacific Railroad Company is situated. They are the receivers of the railroad, and hoik? of their acts, done within the .scope of their authority, and under the orders of the courts which have control over said property, are invalid.

It is further contended Unit, if the circuit court for the Eastern district of Wisconsin is held not to be the court: of primary jurisdiction over the property in receivership, such primary jurisdiction falls either to the circuit court for tire Western district of Wisconsin, in whose jurisdiction a portion of the company’s railroad lies, and in which receivers were appointed before they were appointed in this court, or to the circuit: court for the ¡Southern district of New York, in which is located the home office of the corporation and a large portion of its personal property. It is sufficient: to- say, in answer to this, that it is not shown that either of said courts has assumed such jurisdiction, or that they will do so. We see, therefore, no ground upon which this court should decline to hear tiie motion which is presented. The objection to the jurisdiction will be overruled.