Equitable Trust Company of New York.

In the United States Circuit court of appeals for the ninth circuit. Ex parte Equitable Trust Company of New York, Original no. 169. In the matter of the Petition of the Equitable Trust Company of New York as trustee, for a Writ of Mandamus, Original no.2757. In the matter of the appeal of the Equit online

. (page 1 of 25)
Online LibraryEquitable Trust Company of New YorkIn the United States Circuit court of appeals for the ninth circuit. Ex parte Equitable Trust Company of New York, Original no. 169. In the matter of the Petition of the Equitable Trust Company of New York as trustee, for a Writ of Mandamus, Original no.2757. In the matter of the appeal of the Equit → online text (page 1 of 25)
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"I



No.



IN THE



Mnxtth S^tatrs (Etrnttt (Umirt nf Apin^ala



FOR THE

NINTH CIRCUIT



Ex parte Equitable Trust Company of
New York, Orij^inal No. 169.



In the Matter of the Petition of The
Equitable Trust Company of New York,
as Trustee, for a Writ of Mandamus,
Original No. 2757.



In the Matter of the Appeal of The
Equitable Trust Company from the
Order Issuing the Injunction, dated
February 21, 1915. -



Brief of Petitioners and Appellants.



MURRAY, PRENTICE & ROWLAND,

JARED HOW,

W. E. S. GR IS WOLD,

Attorneys for Equitable Trust Company
"f Vow York.
E. W. M. CUTCriEOX.

JOHN F. rowh:.

Amici Curiae.



Filed this day of March, 1916.

F. D. MONCKTON, Clerk.

By - - „ „ , Deputy

THE JAMES H. BARRY CO



o

^" No.



IN THE



l^nxtth ^tatFFi (Etrruit (Emtrt nf A^iprala



FOR THE

NINTH CIRCUIT



Ex parte Equitable 'J>ust Company of
New York, Original No. 169.



In the Matter of the Petition of The
Equitable Trujt Company of New York,
as Trustee, for a Writ of Mandamus,
Original No. 2757.



In the Matter of the Appeal of The
Equitable Trust Company from the
Order Issuing the Injunction, dated
February 21, 1915.



BRIEF OF PETITIONERS AND APPELLANTS.



SUxMMARY OF QUESTIONS OF LAW.

The primary questions of law involved in these
proceedings are:

(i) Can a court whose jurisdiction has been in-
voked for the purj")ose of obtaining a decree fore-

o a O O s> ^^



closing a mortgage, both principal and interest of the
debt being due, refuse to proceed with the fore-
closure suit, though all parties request a decree, until
the liability of a guarantor who has undertaken to pay
interest is determined?

(2) Can this Court, acting on its own motion,
against the Welshes of all parties, direct that the guar-
antor be made a party to the foreclosure proceeding,
and require that the liability of the guarantor be
therein ascertained prior to making a decree of fore-
closure?

(3) Assuming that a chose in action forms part of
the assets pledged to secure a mortgage (and this is
our opponent's claim, and is not the fact), can the
court whose jurisdiction is invoked solely for the pur-
pose of foreclosure, refuse to s-ell the property mort-
gaged and pledged until its receiver has by judicial
proceeding attempted to realize upon the choses in
action?

STATEMENT OF FACTS.

Under date of June 23, 1905, the Denver and Rio
Grande Railroad Company and the Rio Grande
Western Railroad Company (since consolidated as
the Denver & Rio Grande Railroad Company of
Colorado and Utah, and hereafter referred to as the
Denver Company), as parties of the first part; the
Western Pacific Railway, as party of the second part,
and the Bowling Green Trust Company, as trustee of



the First Mortgage of the \\\'stcrn Pacific Railway,
as party of the tliird part, entered into two contracts,
referred to for convenience as Contracts "A" and "B".

CONTRACT "A".

This Contract recites:

(a) The virtual ownership of the Western Pa-
cific Railway by the Denver Company.

(b) The desire of the Denver Company to afford
credit essential to enable the Western Pacific Com-
pany to sell its First Mortgage Bonds, and construct
its road.

To accomplish this end the Denver Company
covenants to purchase at 75 Second Mortgage Bonds
of the Western Pacific to the principal amount of
$25,000,000, if the proceeds of such sale be neces-
sary to provide funds for the construction of the
Western Pacific Railway.

This Contract has been fully performed.

CONTRACT "b".

This Contract contains substantially the same recitals
as Contract "A", but the covenants w^ere as follows:

(a) That the respective Railroads should be
operated as a joint transportation system, each giv-
ing to and handling for the other all business within
its power.



(b) A covenant by the Denver Company to lease
equipment to the Western Pacific Company.

(c) The grant of a right to the Denver Com-
pany by which a through passenger train could be
operated between Denver and San Francisco.

These provisions are termed for convenience the
traffic features of Contract "B". The financial fea-
tures were as follows:

(a) A covenant by the Denver Company to pay
semi-annually to the trustee of the First Mortgage
of the Western Pacific Company prior to the ma-
turity of the interest coupons a sum which, added
to the moneys then in the hands of the Fiscal Agents
of the Pacific Company, should equal the amount
necessary to pay the coupons maturing,

(b) A covenant by the Denver Company to pay
to the trustee, prior to the maturity of each sinking
fund payment to be made, a sum which, when added
to the sinking fund payments actually made by the
Pacific Company, should equal the amount required
by the mortgage.

In addition to the contract of suretyship above set
forth, the Contract provided for the convenient ac-
complishment of the same object by obligating the
Denver Company to loan to the JVestern Pacific



Company on ifs unscciiyiul promissory notes moneys
sufficient, loi!;rl/icr lu't/i the e<irnin\rs of tfuit rodtl. to
p(i\ taxes. mtiiiiten(in( e mid interest and sinfcni'^ fund
requirements under tfie First Mortira^e.

The trartic riglus assured to the Denver Company
hv the trallic features above mentioned were among
the inducements which led that Company to under-
take the enterprise. But as every right accorded to
the Denver Company under these provisions could
easily have been obtained through its stock control of
the Pacific Company or by subsequent contract, it is
obvious that the reason for including these provisions
in the contract was that of assuring the Pacific Com-
panv bondholders an outlet for that road east of Salt
Lake Citv. Such an outlet might be of the utmost
importance to the Pacific Company. Accordingly, it
w'as provided for in this contract. But inasmucli as
t/ie provisions for interclian^e miglit become unde-
sirable, Contract "B" provided tliat in tfie event of
default by the Pacific Company in the payment of
principal or interest, or the performance of any of
the covenants of the deed of trust securing the First
Mortgage Bonds, every provision of Contract " B" ,
except the provision uhereby the Denver Company
assumed the obligations of suretyship so far as con-
cerned the payment of interest and the making of
sinking fund payments to the Trustee, could and should



(1)

'rovision giv-
ig single
ondholdei-
ight to en-
jrce conti-act.



)bligation of
he Denver Co.
pay to
'rustee.



be terminated by the Trustee on request of the holders
of tuo-thirds in amount of the bonds.

Sec. 14, Art. VI, Contract "B."

ESSENTIAL PROVISIONS OF CONTRACT B.

The Trustee covenants and agrees that it will,
from time to time, upon the request of any holder
or holders of bonds secured by said First Mort-
gage of the Pacific Company and being satisfac-
torily indemnified against the expense of so doing,
acting either alone or with the Pacific Company,
take steps to enforce by a suit or suits in equity
or at law or by other proper proceedings to be
prosecuted or taken in its own name or in the name
of the Pacific Company, or in the name of both,
all the terms and provisions of Article II hereof
that require any paymicnts to be made to the Trus-
tee by the parties of the first part or either of
them, and, upon the request of the holder or hold-
ers of twenty per cent (20%), in amount of said
bonds at the time being outstanding, will likewise
enforce any and all other provisions of this agree-
ment, and likewise of all modified agreements, if
any, substituted therefor, as provided in Section
14 of Article VI hereof.

Art. V.

The amount of moneys to be paid to the Trustee
by the parties of the first part, and to be applicable
to the payment of such interest, as provided in
Section 4 of Article II hereof, shall be equal to the
difference between the amount so required, less the
amount so held by the Trustee, and such sum as
shall at the date of such notice actually have been
paid by the Pacific Company to its fiscal agent or



fiscal i\\rc\ns for the purpose of iiiakiiii; such pay-
niciit of interest;

Sec. 7, Art. VI.

4. (a) I he Deiner Lonipaiiv and the \\ Cbtcrn mnver to lo.-.t
Company, parties of the first part aforesaid, jointly ^^ '^^^ ^'- '^^
and severally covenant and agree to purchase semi-
annuallv, beginning with the date hereof except
as otherwise "expressly stated, and to pay therefor,
dollar for dollar in cash, at the dates and in the
manner hereinafter provided, promissory notes of
the Pacific Company, bearing interest at the rate
of five per cent' (5^r) per annum and payable
upon demand, to the amount face value, by which
the gross earnings and income of the Pacific Com-
pany during the preceding fiscal half vear shall
be insufficient to meet the sum of the following:

(i) Its operating expense, including rentals
pavable under leases and, particularly, any lease
of terminals at Salt Lake City, also current pay-
ments upon claims for damages to persons or prop-
erty, and its ordinary, including all necessary, ex-
penses of maintenance;

(2) Its taxes, including all assessments and
other governmental charges against it or that may
become a lien upon any of its property;

(3) From and after the first day of Sejnem-
ber, 1908, or the earlier acquisition and comple-
tion of the Pacific Company's main line of rail-
road from San Francisco to Salt Lake City, all
interest falling due during the then current calen-
dar half year upon the Pacific Company's Fiftv
million dollars ($50,000,000), face value, of First
Mortgage Five Per Cent. Thirtv-Year Gold
Bonds ;

(4) The Pacific Company's annual contribu-
tion to the sinking fund provided for in its said
First Mortgage, if the same be payable during
the then current calendar half year;



8



'rovision de-
lyiiiR W. P.
'iiy right of
)Ossession of
noney paid
Trustee.



(5) Any other charge or expense that it may
be necessary that the Pacific Company shall pay,
in order to assure the continued and efficient opera-
tion of its property and to protect unimpaired the
lien and priority of its said First Mortgage;

(6) Any tax or taxes which the Pacific Com-
pany may be required by law or permitted to pay
upon or deduct from the principal or interest
of its said First Mortgage bonds, so that the hold-
ers of such bonds shall, under all circumstances,
receive the principal and interest thereof without
deduction for any tax or taxes;

(7) All interest for such current calendar half
year upon all indebtedness of the Pacific Com-
pany, other than its said First Mortgage bonds.

Sec. 4, Art. II.

Neither the Pacific Company nor any one claim-
ing under it, save only such persons or corpora-
tions as may be entitled to receive the interest upon
said First Mortgage Bonds, shall be entitled to
or possess any interest in, lien upon or claim to
said fund, or any part thereof.

Sub A, Sec. 4, Art. II.



rrafRc
)rovision.



I. So far as the same lawfully may be done,
the parties of the first part and each of them will
give and turn over or cause to be given and
turned over to the Pacific Company all such west-
bound traffic of every description controlled by
them, or either of them, whether originating on or
passing over any of their lines, or any of the lines
of either of them, or otherwise so controlled, as
shall be destined to anv point or points upon or
that can be reached with reasonable convenience



by or via any line oi liiics dI the Pacific Company,
or any part or branch thereof, whether alone or
in conjunction witli other lines of railway; and
will cause all east-bouml traflic of every descrip-
tion, vvhicii shall originate in territory in any way
tributary to, or which with reasonable conveni-
ence may be forwarded over, any line of the Pa-
cific Company and destinecf to any point or points
upon, or that can be reached bv or via any line or
lines of the Pacific Company, whether alone or in
conjunction with other lines of railway, and which
is within their control, or the control of either of
them, to be delivered to the Pacific Company, for
transportation to as great an extent as any of its
lines are available for that purpose, and that so
far as practicable their lines of railway and the
lines of railway of each of them shall be operated
with the lines of railway of the Pacific Company
as a joint transportation system for all transporta-
tion purposes.

Each of the parties of the first part will re-
ceive and promptly transport to its destination or
over its line and deliver to the connecting carrier
all east-bound freight routed over its line and ten-
dered to the Western Company by the Pacific
Company.

Sec. I, Art. 1 1.

Section lo of Article \'I provides:

"The refusal, neglect or other failure of the Pa- rharacSr of
cific Company to perform any or all of the cove- ^°''*'"^"'^-
•nants, agreements or conditions herein contained by
it to be performed shall not constitute ground for
the rescission of or refusal to perform or delav in
performing this contract by the parties of the first
part, or either of them; but in event of any such re-
fusal, neglect or other failure, the party or parties



10



of the first part aggrieved thereby may have resort
to such remedy by suit for specific performance or
action for damages as may be appropriate."

Section 13 of Article VI provides:



Life of obliga-
tion and pro-
vision declaring
the same sliall
run with land.



"This agreement shall, except as hereinafter pro-
vided, continue in full force and efifect, and be
binding upon all the parties hereto, from the date
hereof until all of said $50,000,000, face value, of
First Mortgage Five Per Cent. Thirty Year Gold
Bonds of the Pacific Company shall be fully paid,
principal and interest, or until said bonds shall be
called for redemption and provision made for pay-
ment thereof in full, principal and interest, as pro-
vided in the First Mortgage of the Pacific Com-
pany, and shall run with the railways of the said
several Railway Companies, parties hereto, into
whosesoever hands the same mav come."



Covenant to
sunnve fore-
closur*.



Section 14 of Article VI provides:

"Notwithstanding anything herein contained or
anything contained in said First Mortgage of the
Pacific Company, neither the obligation of the par-
ties of the first part nor the obligation of either of
them to make any of the payments provided for in
paragraphs 4 and 5 of Article II of this agreement,
as and at the times herein provided, shall be abro-
gated or in any manner modified until all of the
bonds secured by the Pacific Company's First
Mortgage shall be fully paid, principal and inter-
est, or until said bonds shall be called for redemp-
tion and provision made for payment thereof in
full, principal and interest, as provided for in the
First Mortgage of the Pacific Company."



II



RlRht of bon.l-



III case tlic Pacific Company, or any ot its sue- h„i,ier on <ie-
cessors or assiirns, shall make default in the pay- mrnato^ii pro-



., ■=■.'.,. . ^ J*U^ visions except

merit of the principal ot or interest ai^recd to r)e thoso lequirinK

• 1 -11 I ■ J J ' ,. 'A piiynient of

paid Upon its bonds to be issued under its said mtonst and

T^- > f J • . .1 ^ J ^CC^^,. flnklnj? fund

iMrst Mortgage, according to the tenor and ettect to Trustee.



of said bonds and the interest coupons pertaining
thereto, or in event of any default in the cove-
nants or conditions of said First Mortgage where-
by a right of foreclosure shall thereunder accrue
to the Trustee or the holders of the bonds secured
thereby, the Trustee s/ia/l have and shall forthwith
become vested with the right, upon the written
request of the holders of two-thirds in amount of
the bonds outstanding and secured by said mort-
gage executed and authenticated in the manner
aforesaid, to, and upon any such request, the Trus-
tee SHALL TERMINATE this agreement {save and
excepting always the provisions for payments of
interest, sinking fund contributions and taxes con-
tained in paragraphs 4 and j of Article II here-

of)r

Section 14 continues:

,, , .. /■ 1 • ^111 i Provision con-

but such termination of this agreement shall not tinuing obiiga-

, , , 1 1 ,1 t 111 tion to pay

be deemed to and siiall not release, nor shall aii\- inierost and
thinp; else done hereunder release, the rights of the to^Trustee

rr- ,-1 III i- t ■^'•^^f^ after termina-

Trustee or of the holders of the rirst Mortgage tion of other
Bonds of the Pacific Company to the benefits of the '"°' "*'"''■
agreements of the Railway Companies, parties of
the first part, to make the payments provided for in
paragraphs 4 and q of Article II hereof, or upon
or against anv fund derived or constituted as pro-
vided in any of said paragraphs. Nothing herein
contained shall be taken to authorize or to result
in the termination of this agreement in anv event
or contingency (prior to tlie payment or provision
for payment of all of said First Mortgage Bonds,
principal and interest, as aforesaid), except upon



12



Right to re-
quire payment
of interest in
.spite of de-
fault and sale
survives to
Trustee.



the election of the Trustee made with the written
approval of the holders of two-thirds in amount of
the outstanding bonds secured by the Pacific Com-
pany's First Mortgage given and evidenced in man-
ner and form as above provided; but, on the con-
trary, at all times prior to such termination thereof,
whether before or after default as aforesaid, the
Trustee as well as the Pacific Company, its succes-
sors and assigns, shall be entitled to specific per-
formance of the same and of any agreement sub-
stituted therefor and to enforce the same by suits
in equity or actions at law or otherwise, as may be
appropriate,"

The rights of the Western Pacific Company, not
those of the trustee, were pledged under the First
Mortgage of the Western Pacific Company, and this
Mortgage, executed on the same day as Contracts "A"
and "B," was drawn in contemplation of the execu-
tion of these agreements, and provided that the obli-
gations of the Denver Company as surety should not
be sold on foreclosure, but should survive to the
Trustee. Thus the Mortgage provided for a sale of
the property of the mortgagor excepting

''the right of the Trustee and of the holders of
the bonds secured hereby under said agreement be-
tween The Denver and Rio Grande Railroad Com-
pany, The Rio Grande Western Railway Company,
Western Pacific Railway Company and Bowling
Green Trust Company, to require said two first
named companies and each of them to make any
payment or payments of money to the Trustee, and
to recover dai?iages from said companies or either
of them in default of any such payment or pay-
ments, which said rights and all rights secured by



said agreement necessary for the enjoyment and en-
forcement of such rights shall remain in and sur-
vive to the Trustee for the benefit of the holders of
the bonds secured hereby, after and despite any and
everv sale made by virtue of this indenture,
wlicther under the power of sale hereby granted
and conferred or pursuant to judicial proceed-
ings."

Sec. 3, Art. V, First Mortgage.

The Mortgage further provided:

. I 1 Provision for

"The Trustee shall hold all monevs received by payment of

. . /- • J " i. U moneys col-

it pursuant to the provisions of said agreement be- lected on

"■-^ 1 f\ " ^'~y 1 T» * 1 J /"'* Contract rJ

tvveen the Denver and Rio Grande Railroad Com- after default

-^^ ,_ .TIT T~> • 1 r^ or sale.

panv, The Rio Grande Western Railway Com-
pany, Western Pacific Railway Company and
Bovvling Green Trust Company, prior to any sale
of the mortgaged and pledged premises and prop-
erty, whether made under the power of sale here-
by granted or pursuant to judicial proceedings,
in trust for, and will apply the same and cause the
same to be applied, at the times and in the manner
therein provided, to the uses and purposes therein
prescribed with respect of such moneys; provided,
however, that any moneys paid to the Trustee
under the provisions of said agreement and prior
to any such sale, for the benefit of the sinking fund
provided for in this mortgage, shall be held, in-
vested and disposed of in accordance with the pro-
visions concerning the establishment, investment
and disposition of the sinking fund contained in
Article VIII hereof. After any sale or sales,
whether under the power of sale hereby granted
or pursuant to judicial proceedings, any and all
monevs that may be received by the Trustee under
the provisions of said agreement between The
Denver and Rio Grande Railroad Company, Tlie



Rio Grande Western Railway Company, Western
Pacific Railway Company and Bowling Green
Trust Company, intended to provide the Trustee
with moneys wherewith to pay interest upon the
bonds secured hereby, shall forthwith be applied
by the Trustee to the payment pro rata of the in-
terest upon such of the bonds secured hereby as
shall then remain unpaid in whole or in part
whether or not the same shall have been reduced
to judgment; and any and all moneys that may be
received by the Trustee, after any such sale or
sales, under the provisions of said agreement in-
tended to provide the Trustee with moneys where-
with to make payments into the sinking fund here-
by established shall forthwith be applied by the
Trustee to the payment pro rata of the amounts
remaining due for principal and interest upon
the bonds secured hereby and then unpaid in
whole or in part. The amount so payable shall
in each case be paid only upon presentation of
the bond or bonds and coupons (in the case of
coupon bonds) whereon the same is to be paid and
the amount of such payment shall be endorsed
thereon."



Provision keep-
ing alive bonds
after sale for
preservation
of rights on
Contract B.



Sec. 9, Art. IV (pp. 62-1), First Mortgage.

Section 11, Art. V, of the Deed of Trust, provides:

"In case of sale of the mortgaged and pledged
premises and property or any part thereof, the
purchaser in settlement or payment for the prop-
erty purchased shall he entitled to use and apply
towards payment of the purchase price of the prop-
erty purchased any bonds and any matured and
unpaid interest and coupons herebv secured, by
presenting such bonds and coupons (in the case of
coupon bonds) so that there may be credited and
endorsed or stamped as paid thereon the sums



15

applicable to such payment out of tiie net pro-
ceeds of such sale as provideil in Section lo of
this article; and such purchaser shall thereupon
be credited on account of the purchase price pay-
able bv him with the sums so applicable and
credited on the bonds and coupons so presented.
Such honJs and coupons so prcscnii'd by the pur-
chaser shall be deemed lo he paid only to the
extent of the amounts so credited as paid thereon."

The Mortgage also contained an unusually strong
clause giving to a majority of the bondholders the
right to control the Trustee in the exercise of the
powers conferred upon it. The majority was also ac-
corded the right to require the Trustee to declare due
the principal debt in the event that an interest de-
fault continued for the period of six months.

Section 12 of Art. V of the Mortgage provided:

// I . . , . . , ^ • J ^ ^1 Provision for

anythmg in this indenture contained to the con- majority



trary notwithstanding, the holders of a majority
in amount of the bonds hereby secured and out-
standing shall have the right from time to time, if
they so elect and manifest such election by an in-
strument in writing executed and delivered to the
Trustee, to direct and control the method of con-
ducting anv and all proceedings for anv sale of the
premises and property hereby conveved, mortgaged
and pledged, or for the foreclosure of this indenture
or for the appointment of a receiver or for any
other action or proceeding hereunder, and for such
purpose to instruct the Trustee to exercise its right
of election to declare said bonds due or to waive
the exercise of the same, or if exercised, to annul
the same, or to institute, continue or discontinue
any proceedings hereunder."



i-ontrol.



i6



Direct guarantv
onclorsed or
some bonds



ondorsed'on''"*^' In additioii to these provisions, and pursuant to an
agreement with the underwriters, and in order to ob-
tain a more ready market for the Western Pacific
bonds, the Denver Company endorsed on any bond,



Online LibraryEquitable Trust Company of New YorkIn the United States Circuit court of appeals for the ninth circuit. Ex parte Equitable Trust Company of New York, Original no. 169. In the matter of the Petition of the Equitable Trust Company of New York as trustee, for a Writ of Mandamus, Original no.2757. In the matter of the appeal of the Equit → online text (page 1 of 25)