Story Case

The St. Louis and Iron Mountain Railroad was organized as a consolidation of several other companies, which had built practically the entire road before the new company was organized. Each of the four companies which became so consolidated, was already mortgaged. Therefore, the new corporation executed a mortgage to cover its property, income, and franchise for $28,000,000, for the purpose of taking up the old mortgages, and to finance the completion of the road. The Union Trust Company was made the trustee. This was in the year 1874. The mortgage trust deed contained all the usual stringent covenants of a railroad mortgage; among others, an authority to the trustee to take possession of the mortgaged property, which included the income of the road, upon failure to pay any installment of interest when it fell due, and, after three months of continued default in such payment, to advertise and sell the whole property, rights, and franchises of the company.

The business of the company prospered, but not sufficiently to pay the interest on its bonded indebtedness; the company fell behind in the payments, although it was evident that the affairs were in a good condition, and it only required a matter of a short time for the company to be on a paying basis. The facts showed that the company had completed its tracks into Texas, tapping rich fields in that state, and presaging on reliable data, a tremendous volume of business.

Baring Brothers, bankers, were the principal bondholders of the company, and the Union Trust Company acted largely under instructions from this banking organization. Baring Brothers were consulted and finally a plan was agreed upon for paying part of the interest, and depending upon the leniency of the bondholders to wait for the balance. The officers of the railroad company, however, were perfectly willing, at the time, to borrow all the money necessary to pay the interest due bondholders. This they could do from St. Louis banks, where the company's credit was good.

"Without any notice of change of purpose on their part, Baring Brothers presented their entire claim for interest due in April, 1876. The company could not secure the money to pay this huge interest payment, within forty-eight hours thereafter. Baring Brothers, acting through the Union Trust Company, demanded possession of the property, under the trust deed. This was refused by the officers of the company, and the trust company, therefore, brought this petition for a receiver of the road. The railroad officers showed in court that the railroad was yielding more than the interest on its bonds; that prior to the unreasonable and unexpected attack of Baring Brothers, its credit was so good as to enable it to carry its burden without serious difficulty, until the income would be ample to pay the interest, its floating debt, and current expenses ; that the road was just on the point of reaping the benefit of its completed connections with other roads, east and west. The company maintained that no grounds for a receivership existed.

It was insisted on behalf of Baring Brothers, acting1 through the Union Trust Company, that the failure to pay the interest, and to deliver possession of the road on demand, left no discretion in the court to refuse to place the road in the hands of a receiver; that, because the income of the road was pledged for the payment of bonds, and the trustees were authorized, on failure to pay installment of interest, to take possession, the court was required as a matter of law, without regard to the resources of the company, and without reference to any showing of danger of ultimate loss to the bondholders to take possession of the property of the company. What should the court do?

Ruling Court Case. Bill And Bondholders Vs. New Albany Railroad Company, Volume 2 Bissell, United States Reports, Page 390

This was a petition for an accounting and the appointment of a receiver by bondholders and stockholders.

Williamson was the trustee of the New Albany Railroad Company by a trust deed, covering $5,000,000 in bonds, and giving him the power to foreclose for nonpayment of interest. Early in the history of the road, it failed to pay its interest indebtedness, and a bill for a receiver was asked for, but denied by the court on the ground that the remedy of the bondholders was adequate in their power through the trustee to foreclose. With the aid of the court, however, a basis of settlement was agreed upon between three-fourths of the bondholders, stockholders, and creditors, with the understanding that the settlement should be effective when they all agreed to it. Some of the stipulations of the settlement were that the time of payment of a portion of the bonds was to be extended; certain of the bonds were to be converted into stock; certain stockholders might surrender their stock and receive a percentage of new stock, and a new organization of the company was provided for, together with an issue of short time notes to pay $200,000 in pressing claims.

The road, however, did not prosper. Certain creditors secured judgments, and, as judgment creditors, attempted to secure a receiver for the road in the state courts, but were forestalled for the time being because of the proceedings in the United States Courts.

Following this, Williamson, without notice to or permission of the United States Court, which still had jurisdiction of the original case, filed a bill in the court of White County, Indiana, to foreclose the same mortgages which were the subject of the bill filed in the United States Court. The court of White County-appointed a receiver, and authorized him to take possession. The receiver did take possession, and under order of the court, sold the property at foreclosure to certain bondholders, who were in league with Williamson, for $100,000. The sheriff of White County, in obedience to an order of the court of that county, executed a sheriff's deed for the entire railroad and all its appurtenances. Following these proceedings, the present bill was filed in the United States Court, asking for a receiver to be appointed to wind up the affairs of the company for the benefit of all parties interested.

Justice Drummond rendered the opinion of the court: "Whether a receiver be appointed is a question often attended with difficulty, and to answer it properly is one of the most embarrassing duties a court of chancery has to perform. The difficulty is increased under a decree of a state court; but it would seem to follow that this United States Court has not lost control of the subject matter of the suit, and that the interference of the state court in dealing with and disposing of the property at the time within the jurisdiction of this court, was unauthorized. The only inquiry, therefore, is whether there is any necessity for the appointment of a receiver while the court is settling the rights of the parties. The company is insolvent, the former trustee is dead, having made no reports to this court of the manner in which he performed in trust, the present trustee was party to the action in the state court, and is acting hostile to the decree of this court. It would appear to be impossible to give any relief to the bondholders, unless the court shall take control and possession of the property." It was ordered, therefore, that a receiver be appointed.

Ruling Law. Story Case Answer

Whenever a railroad company or other public service company fails to pay its obligations, and the right on the part of bondholders and other mortgagees, exists to take possession of the road and sell it through the agency of the trustee, or the right to foreclose and sell exists, these methods could readily be followed, if it were not that usually many other parties are interested and have legal rights.

First, there is the public; its welfare must be considered, which may require that the road shall never cease a day in its operations. Then, there are the stockholders, unsecured creditors, and perhaps other lien holders; as, for instance, second or third mortgagees, where liens are effective only after the first mortgage is satisfied. It is apparent that a mere foreclosure proceeding, which has for its object the satisfying of debts, owing to those who bring the action, will not take care of all the people interested. Therefore, the institution known as "the receiver" has been created by the courts, and is extensively used in the United States. The receiver is an officer of the court, who is given absolute possession of certain property for the purpose of protecting and satisfying the interests and claims of all who may have legal rights against the property. He is given power to conduct the business and incur indebtedness to cover running expenses which have priority over the first mortgage.

The appointment of a receiver is not, however, a matter of right on the part of any one, but rests in the sound discretion of the court, and although in this country it has been exercised with great freedom, it nevertheless, is a power exercised sparingly and with caution. Upon the application for a receiver by mortgage creditors, it is generally necessary to show something more than the fact that a default has occurred in the payment of interest. Ordinarily, it must be shown that the debtor is insolvent; that the mortgage creditors are in danger of suffering irreparable loss, and that the entire matter is in a complicated situation, requiring the consideration of conflicting claims and rights. A creditor who has reduced his claim to judgment, and cannot have it satisfied, may petition for a receiver, and a receiver will be appointed where the conditions essential to such proceedings exist.

The Story Case is based upon the facts in the Union Trust Company vs. St. Louis, Iron Mountain and Southern Railway, Volume 4 Dillon, United States Reports, Page 114; the court admitted the right of the complainants to foreclose their mortgage, but declared that the facts established in the case did not show danger of ultimate loss to the bondholders by permitting the property to remain in possession of the owners, and it, therefore, refused to take possession of the property through a receiver.