The Vicksburg, Shreveport, and Texas Railway Company issued bonds to the amount of $761,000, and secured them by a mortgage upon its railroad and franchise and personal property, together with more than 400,000 acres of land. On the twenty-third of December, Jackson Sudeling, a holder of forty of the mortgage bonds, upon which interest coupons to the amount of $7,200 were due and unpaid, obtained from a judge of a court in the State of Louisiana an exparte order of sale; that is, the railroad was not represented when the order was secured. The bondholder's petition did not disclose the name of any other bondholder, and no notice to the other bondholders, the most of whom resided in other states, was asked for, or given. But this was all carefully done, in accordance with proper legal procedure. The sale was fixed for the earliest possible day permitted by the statute, February third, of the year following. The sheriff properly advertised the sale, but only in one newspaper, published in the town of Monroe, and also posted a copy of the advertisement on the local Baptist church door, and at the door of his office. By a law of the state, the property seized, was required to be appraised, and could not be sold for less than two-thirds of its appraised value. It consisted of a railroad about 190 miles in length, with numerous stations, buildings, warehouses, depots, and depot grounds, cars, locomotive engines, wagons, machinery, utensils, bills receivable to the amount of more than $40,000, unpaid stock subscriptions exceeding $320,000, together with the franchise of the company. The appraisers met to appraise this property only on the day of sale, but there could be no legal objections to this, since it was in accordance with Louisiana procedure. The appraisers were appointed by Ludeling, and by the acting president of the road, upon whom proper service had been made, so that the company was considered as within the jurisdiction of the court. The entire property was appraised at $75,000, and the sale proceeded. The sheriff, however, exacted an onerous condition that the purchaser should pay cash to meet the interest coupons then due, and should give security for the credit portion of the bid, which should cover all other interest which might, in the future, become due on the bonds. The property was bid to $550,000, and then was struck off to the highest bidder, but the bidder failed to pay at once the interest coupons then due, and presented. Thereupon, the sheriff declared the sale void, and put the property in its entirety under the hammer for a new sale. Ludeling and several directors and officers, thereupon, became the successful bidders, paying $50,000 cash for the property.

After the sale, they entered into possession of the property, and organized a new corporation to conduct the business of the road. The other bondholders, who resided principally in other cities, then brought a bill in equity to set aside the sale. The purchasers defended on the ground that the sale was conducted in accordance with the law. What shall the court do?

Ruling Court Case. Investment Registry, Limited, Vs. Chicago And Milwaukee Electric Railroad Company, Volume 129 United States Circuit Court Of Appeals Reports, Page 130; Volume 212 Federal Reporter, Page 594

This action started with a creditor's bill, brought by the Investment Registry, Limited, to have a receiver appointed to take charge of the property of the defendant, the Chicago and Milwaukee Electric Railroad Company, and to apply the revenues of the line to the payment of the debts of the company. The receiver, having been appointed, was ordered by the court to sell the entire property of the company, for it had been demonstrated that the operation of the road by the receiver was causing a deficit instead of a profit. The property had previously been encumbered by the company by a trust deed, securing an issue of $4,000,000 worth of bonds. It could, therefore, be sold by the receiver, only subject to the rights of the bondholders and the lien of the trust deed. The owners of all the bonds except about $160,000 worth, combined for the protection of their interests, and selected a committee to act for them at the sale. A plan was worked out, whereby the road was to be purchased and re-organized. At the sale, the only bid made was that of the committee of the bondholders, called the Re-organization Committee, which was for $1,650,000. Upon objection being made by some of the bondholders, who had not participated in the selection of the committee, the trial court decided that the bid was inadequate, that the property was reasonably worth about $4,500,000, and that the absence of other bids was caused by the action of the Re-organization Committee in suppressing other bids, and in buying off or colluding with other possible purchasers. The court refused to complete the sale at the amount bid, because of those conditions, and directed that a new sale be held. From this order, the Re-organization Committee appealed.

The action of the trial court was upheld by the Circuit Court of Appeals. The situation was explained and the considerations applicable to such a case were discussed in a learned opinion by Mr. Justice Baker. He said: "At execution sales and at foreclosure sales of ordinary farms or town lots, the general public may, in fact, be interested as intending bidders, because of their separate financial ability to purchase. But in modern times, when vast railroad and industrial enterprises are financed by selling millions of bonds, payable to bearer, through the world's exchanges, a different class of sales has appeared. Courts have had to recognize that separate individual ability is not equal to the purchase and rehabilitation of a broken down railroad. 'Re-organization' has become familiar. This means, usually, that the equity of the stockholders, if any ever existed in actual value, has vanished through business losses; that the property virtually belongs in equity to the bondholders; and that, if the bondholders will combine for the mutual protection of their interest, they will have a practical monopoly of the bidding. This last is so because, if all the bondholders are in the combination, whatever they bid at the sale, up to the full amount of the bonded indebtedness, will at once be paid back to them in discharge of their bonds, and, therefore, it is utterly immaterial to them whether they bid the full amount of the decree or a sum that will pay only one cent on the dollar of the bonds. By creating that masterful situation, they can force any outside combination to offer the full amount of the decree, without danger or expense to themselves. Most commonly, the controversies over these sales arise from the fact that some of the bondholders are not included in the organization and do not participate in the plan. When such a controversy is on, the court not only has the right, but owes the duty of being vigilant to see, on the one hand, that the majority does not use its power, unique in sales of this class, to oppress a helpless minority, and, on the other, that a dissentee be not permitted to oppose the re-organization merely to secure an extortionate price for his bonds. The solitary and distant bondholder must accept the organization plan or let it alone, as it is written. The committee, realizing the equality of all bondholders, usually offers a plan that will give these common owners of the mortgage benefits through the foreclosure, usually becomes nothing but the agency through which the bondholders act for their mutual protection. In such a re-organization, if a bondholder does not come through the foreclosure as well off as any other bondholder, it is his own fault. If he objects to the sale on the ground that the Reorganization Committee's bid is inadequate, and less than fair value, the answer is that his co-owners of the common mortgage and of the common decree offer him the opportunity to share equally with them in the benefits of the purchase. No matter what the plan, it does not matter whether the committee bids much or little, if all the bondholders are in. But here some $160,000 of bonds were not represented by the Re-organization Committee. The committee was not a mere agency for all the bondholders. It was authorized to buy bonds, to take up subordinate claims, and to do anything and everything it saw fit to do. Preferential treatment of some of the bondholders was accorded in many ways. The property, which in equity belonged to all the bondholders, would be, in the hands of the Re-organization Committee, loaded down with premiums, bonuses, services, expenses, etc., as a result of the contracts entered into by the committee. The temptation to use the monopoly of bidding for the purpose of recouping partially the outside expenses and losses of the majority at the expense of the minority, seems to have been too strong. Our conclusion is that the court was warranted in refusing to confirm the sale."