FARMERS' LOAN & TRUST CO. v. McHENRY

FARMERS’ LOAN & TRUST CO. v. McHENRY. N. Y. Supreme Court, First District ; Special Term, March, 1878. Injunction to Stay Pending Actions.—^Trustees of Mortgage made to Secure Railroad Bonds.—Rights of Minority Bondholders. Pending an action to remove the trustees under a mortgage made to secure the bondholders of a railroad, the defendants cannot, by bringing an action in another department against the prosecuting bondholders, on the theory that such bondholders are improperly resisting a scheme to which a large majority of the bondholders have assented, and which is for the best interest of all, obtain an injunction perpetually staying the action for their removal. And this rule will be applied even though the trustees seek, in the action brought by them, to perform such parts of the trust as they are charged with having neglected. A majority of owners in interest does not control in such cases. Motion to continue injunction. The injunction sought to be continued was granted in a suit brought by the Farmers’ Loan and Trust Company, as trustee," against James McHenry, John H. Brown, Charles Frederick Evans and the Erie Railway Company, and restrained the defendants McHenry, Brown and Evans from proceeding with a suit previously brought by them against the present plaintiffs and others. McHenry, Brown and Evans claimed to be the owners of a portion of the first consolidated mortgage bonds of the Erie Railroad. The Farmers’ Loan and Trust Company was the trustee to whom the mortgage was made for the benefit of the bondholders. On the 26th of November, 1877, McHenry, Brown and Evans commenced an action, on behalf of themselves and all other bondholders who should come in, against the Erie Railway Company, the Farmers’. Loan and Trust Company, and others. The complaint in that action set forth the incorporation, franchises, and property of the Erie Railway, and the making by it of a mortgage on that property to the Farmers’ Loan and Trust Company, to secure its bonds. That the bonds were negotiated and the interest on them past 'dne and unpaid, although payment had been demanded. That the mortgage gave the Farmers’ Loan and Trust Company, on such default, the right to take possession and sell the property. It then alleged the failure of that company to take possession of the property and execute the trust; that the profits of the railroad would be sufficient to pay the interest on the bonds, and that said Farmers’ Loan and Trust Company had permitted the road to be mismanaged and its income misapplied. The complaint then set up that in a suit brought by the attorney-general against the Erie Railway Company, its directors, and the Farmers’ Loan and Trust Company, charging the said directors with malfeasance, an agreement was entered into between one Hugh H-. Jewett, the president of said Erie Railway Company, its other officers and the representatives of the attorney-general, by which the complaint was amended, the defense withdrawn, and said Jewett was appointed receiver; that such agreement was fraudulent, and procured by said Jewett by the payment of money which belonged to the corporation ; that since then said Jewett had been corrupt and wasteful in his management, and that all of the foregoing proceedings were taken with the consent of the Farmers’ Loan and Trust Company ; that said company also consented to the granting of an injunction in that suit, restraining any action by it. That subsequently said company brought an action for foreclosure of the mortgage which secures plaintiffs’ bonds, and which is known as the first consolidated mortgage, and also of a subsequent mortgage known as the second" consolidated mortgage; and in said action asked for the continuation of the Jewett receivership. That in such suit a portion of the bondholders under each mortgage, and said Jewett, agreed upon a scheme for the re-organization of the Erie Railway Company, and conspired to coerce their co-bondholders into assenting to it, said scheme being unfair and prejudicial to the bondholders under the first consolidated mortgage, and the said Farmers’ Loan and Trust Company, instead of remaining neutral, as was its duty, had become hostile to the plaintiffs. That in pursuance to this conspiracy the parties obtained various orders prejudicial to plaintiffs’ rights, particularly one, which provided that interest on the bonds should only be paid to such bondholders as assented to the scheme ; such order being obtained ex parte, and by withholding the material facts from the court. That in said action the Farmers’ Loan and Trust Company filed an amended complaint, by which they abandoned proceedings under the first consolidated mortgage, and they then obtained a foreclosure of the second consolidated mortgage, which provided for the carrying out of the said scheme of reconstruction, and declared all the indebtedness created by said Jewett, as .receiver, to be a prior lien to the first consolidated mortgage which secured plaintiffs’ bonds, although a great part of said indebtedness was unlawfully created. That said Farmers’ Loan and Trust Company had allowed the creation of unlawful incumbrances, sanctioned mismanagement, and had neglected to protect the plaintiffs’ security; and being therefore unfit to represent the bondholders and hostile to the plaintiffs, said plaintiffs claimed a right to sue for the foreclosure of the mortgage. The judgment demanded was that an account be taken of the standing bonds ; that the Farmers’ Loan and Trust Company be removed and another trustee appointed ; that the substituted trustee be given possession of the railroad ; that the further prosecution of the suit begun by the Farmers’ Loan and Trust Company, and all proceedings to carry ont the scheme of reconstruction, be enjoined ; that a receiver be appointed and the mortgage forclosed. On ¡November 28, two days after this action had been commenced, the Farmers’ Loan and Trust Company began an action against McHenry, Brown and Evans and the Erie Railroad Company, alleging in their complaint the making of two mortgages to them by the Erie Railroad Company to secure its bonds, one being made on September 1, 1870, and the other on February 4, 1874. That default had been made under the mortgage of 1874, and that the interest is due and unpaid on the bonds secured by the mortgage of 1870, but that the payment of said interest had not been demanded and there had been no refusal to pay it except a general notice that the company could not pay it at maturity. Said company, however, had been and now was unable to pay it; that the mortgage of 1874 was foreclosed by the plaintiff, and Hugh H. Jewett appointed receiver, he having also been previously appointed as such in an action brought by the People against the Erie Railway Co. That the plaintiff had acted in accordance with the wishes of a very large majority of both the stockholders and the various classes of bondholders, and had recognized the necessity of a readjustment of the affairs of the corporation, through the instrumentality of a foreclosure of the mortgages and the creation of a new corporation; that in the action brought by the plaintiff for the foreclosure of the mortgages, a plan of reorganization was agreed upon by a large majority of the bondholders, which did not contemplate the foreclosure of the mortgage of 1870, and that in accordance wherewith the plaintiff amended its complaint by omitting to pray for the foreclosure of that mortgage. The complaint further alleged the bringing of the action by McHenry, Brown and Evans against the plaintiffs; that plaintiff had no knowledge whether said parties owned any bonds. That at no time had they or any other bondholder requested the plaintiff to take any steps for the purpose of enforcing the .security, and that it had been at all times ready to enforce such security on being requested so to do ; and that in the absence of a request and refusal said McHenry, Brown and Evans were not entitled to maintain an action to forolose the mortgage. That the verification of the complaint in said McHenry suit was improper, and that the allegations therein concerning the alleged mismanagement of the railroad, the misapplication of its income and plaintiff’s knowledge of the same, are false, but that, on the contrary, the plaintiff had caused the receiver’s accounts to be carefully examined and passed upon by a referee, and that the bondholders had an opportunity to appear before said referee and examine said accounts, but none of the bondholders availed themselves thereof. That the proceedings in the suit begun by the People, and which resulted in the appointment of a receiver, were taken by the attorney, general for the benefit of the parties interested in the property, and said action was only discontinued after the commencement of the foreclosure suit by. the plaintiff. That in the action by the People, the attorney-general rendered many services, which he could not have been called upon to perform in his official capacity ; and the money which he received was paid him to compensate therefor, and not for the purpose alleged in the McHenry complaint; that the allegation in said complaint that a portion of the bondholders had com-' bined with said Jewett to coerce their co-bondholders into assenting to the scheme of reorganization, and had concealed the facts from the court, was false ; that all allegations of said complaint, charging plaintiff with neglect of its duty as trustee and with hostility to the interests of the bondholders, were false; that the said McHenry, Brown and Evans were seeking, through the instrumentality of their action, to usurp the functions of the plaintiff; and that the foreclosure of the mortgage of 1874, and the judgment in that foreclosure action could not affect the bondholders under the mortgage of 1870, as that mortgage is a prior lien. The complaint then asked : 1st. For an inquiry to ascertain whether McHenry, Brown and Evans are bondholders, and whether there are any bondholders who disapprove of the scheme of re-organization, and who are entitled to demand and do demand a foreclosure ; and if there are such, that plaintiff may be permitted to proceed with the foreclosure in this action, unless the Erie Railway Company shall pay to the plaintiff, to the use of such bondholders, the amount they are entitled to receive. 2d. That the prosecution of the action brought by McHenry, Brown and Evans be permanently enjoined. The plaintiffs, the Farmers’ Loan and Trust Company, then obtained a preliminary injunction, enjoining the prosecution of the action brought against them, which injunction they now moved to continue. On this motion a great number of affidavits were introduced, on both sides, but they disclosed substantially the same facts as are set out in the respective complaints. William M. Evarts, George E. Qomstoclc, Herbert B. Turner, William W. Macfarland and William DorsTieimer, for plaintiffs, in support of the motion. James Emott, Aaron J. Vanderpoel, AsTibel Green, and Henry L. Burnett, for defendants, opposed. [MAJORITY — Brady, J.] Brady, J. The motion to continue the injunction granted in this action was distinguished by the introduction of numerous papers, and the consideration and discussion of a variety of subjects, directly, incidentally and collaterally bearing upon it, as supposed by the learned gentlemen arrayed on either side, and these papers and arguments have been duly read, examined and considered. In the view of it which impressed itself upon the court on the presentation of the motion, and is confirmed after due deliberation, it is not necessary, however, to express any opinion on more than one of the various subjects referred to. The charges and counter-charges, crimination and recrimination, indulged in, yield to an abstract question which stands at the very threshold of this investigation. If that were not controlling, it would be necessary, and doubtless advantageous to the cestuis que trust of the Erie Railway Company, to treat of the many revelations which were made by the affidavits and papers ; but, as intimated, the time has not yet arrived for that purpose, and it must be left for some other tribunal. The importance of the question of law suggested was fully appreciated by the senior counsel for the plaintiffs herein, and discussed by him as a leading obstacle to the success of the motion. It may be briefly stated. One of the objects of the plaintiffs, in the suit of McHenry and others against the plaintiffs herein and others, was to remove the plaintiffs herein from their position as trustees under the mortgages mentioned in this complaint; and the assault made, of which that was expected to be the result, was predicated of allegations of misconduct, mismanagement and neglect, all operating to the prejudice of the estate to which the trust related. The charges are sufficient in substance to justify the relief thus demanded (if true), and whether they are true or not is an issue which the plaintiffs in that suit have the right to present, and to have determined therein. The action brought by them is pending in this court, and was so when this one was commenced, and they had therefore inaugurated a proceeding which struck at the very life of the plaintiffs herein as trustees; and which, if successful, must end it. The latter could in that action have vindicated themselves, and doubtless placed the whole controversy before the court, which was material to be considered, and it may be that this action, except for the purpose of arresting the continuance of the actions of McHenry and others, was substantially unnecessary. Indeed, it is claimed by the defendants McHenry and others that it is one chiefly for an injunction, because that is its main object. The prayer of the complaint furnishes justification for this view, inasmuch as it prays that an inquiry be directed to ascertain whether the plaintiffs, McHenry and others, are owners of the bonds claimed by them ; also as to the bonds outstanding under the mortgages not embraced in the plan of reorganization, and as to who and what owners of such bonds disapprove of the plan and agreement of reorganization, and if it shall appear, upon such inquiry, that there are any such bondholders who are entitled to demand that the plaintiff shall proceed with the foreclosure of the mortgage for the benefit of such bondholders, and who do require and demand that the plaintiff shall so proceed, that the plaintiff may be at liberty to proceed with the foreclosure thereof in this action; and further, that McHenry and others may be permanently restrained from prosecuting the actions brought by them. This is substantially the whole of the prayer. It cannot be said that this action is a cross action. The relations existing between the plaintiffs herein and the plaintiffs McHenry and others in the other action, so far as disclosed by the complaint herein, are not such as to form the subject of an independent action against the latter personally. The plaintiffs herein urge no personal claim or demand against them or either of them. The gravamen or theory of the complaint herein, is that they are resisting improperly and unjustly a scheme, plan or agreement of organization to which a large majority of the bondholders and stockholders assented, and which would, if carried out, be for the best interest of all. It is said, indeed, that the union of millions in advocacy of the plan of reorganization should prevail in the consideration of the court, and prevent the continuance of the action commenced by McHenry and others ; but this is no answer to the proposition that this department should not interfere with and stay the proceedings in an action pending in another department, and aimed at the very existence of the plaintiffs, for any purpose connected with the active control of the Erie Railway Company, or its property. If this proceeding were designed to accomplish the dissolution of an injunction obtained by McHenry and his co-plaintiffs in their action, restraining the plaintiffs and others from completing the plan of reorganization or interfering with them in any way, the merits of their claim or status in court would be a proper subject for consideration, but it is not, and the merits do not, therefore, form a legitimate issue on this motion. It is enough for the purposes of this application that a cause of action is revealed in the other case which the plaintiffs herein would not prevent on this, namely, the alleged forfeiture of the trust reposed in them by misconduct, which the plaintiff McHenry and his co-plaintiff asseverate and seek to establish in their action. The plaintiffs, McHenry and others, asserting that they are owners of bonds of the company, and being, if that be true, some of the cestuis que trustent, are entitled, to protection to the extent of- their interests, equally with the others, and have a right to seek it from the courts. No man can be justly censured for essaying to enforce in a court of justice what he is advised or believes to be his right. If the results of such an effort show him to have been mistaken or misled, he pays, in the costs imposed, the penalty of unjust litigation. Having this privilege, it is in the case of McHenry and others against the plaintiffs herein that the examination of the charges made against the latter should be disposed of, and not upon affidavits and documents in this- action and on motion. The subject presented by them is grave, and demands at least the usual mode of inquiry, and they are so pointed and impressive as to call for impartial and deliberate investigation. The plaintiffs, McHenry and others, having made their accusation, cannot be foiled by this action in anticipation of their proof. The plaintiffs herein having been assailed as suggested cannot in other words change the field of action by commencing a suit to restrain the inaugurated inquiry as to their fidelity, and place the assailants on the defensive. The first assault relates .to the propriety of permitting the plaintiffs to do anything other than to retire from the trust itself, and affects the justice, therefore, of permitting them to do anything active in regard to it. They (the plaintiffs McHenry and others) are advised that the plaintiffs herein have been derelict, and have abused their trust,' and being thus guilty can no longer exercise the authority conferred upon them. The plaintiffs herein deny these imputations, it is true, and may be entirely innocent; but that does not affect the question. The other plaintiffs have a right to their day in court in their action, and whether the plaintiffs herein have any real standing on account of the charges made against them will be determined if that action be proceeded with by the plaintiffs therein, or be dismissed for failure to prosecute. It would seem to be a self-evident proposition that if a trustee be impugned by action for violations of duty, and his removal be asked, he cannot be allowed to prevent the prosecution so begun by becoming himself a plaintiff against his assailant, even though he seek also to perform such parts of his trust as he is charged with having omitted or neglected. The reason is plain, and it is that whether he should act further at all as a trustee is the question involved in the first action—whether, in other words, he has not forfeited all authority to act in his representative character. The right of a bondholder thus to impugn the trustee cannot be questioned and will not be discussed, and it has been justly said that a suitor in the same court in an action between the same parties should not be enjoined from proceeding with his action except in an extreme case, and when the most serious consequences would result from a refusal to enjoin him (Erie Eailway Company v. Ramsey, 45 N. Y. 653. See also opinion of Justice Daniels, relating to this subject in this case, just delivered). This motipn is thus disposed of on the proposition that the plaintiff 'herein cannot be allowed by this action to prevent the investigation in regard to the performance of their trust, which the defendants McHenry and others have begun. The examination to which it has been subjected, and the principles which govern it having been considered and applied, leave no doubt of the correctness of the conclusions expressed. It may be, perhaps it is, unfortunate that the action of McHenry and others was commenced first, but that is one of the incidents of property held in common by numerous persons having similar rights. A majority of owners in interest, even in cases where that is a proper element of consideration in the controversy, does not always control in courts of justice, and one owner having a comparatively small share may demand and must receive the full consideration of Ms rights. This cannot well be gainsaid, and must be carried out as an element in the due administration of the law. For these reasons the motion must be denied. Order accordingly. See page 255 of this vol.