Reply Brief — Southern R. Co. v. Carnegie Steel Co.

su reme Court of the United States

Lach esoo= 8, S

October Term, 1808. —No. 39.

Certiorari to the Circuit Court of Appeals for the

Fourth Circuit.

THE SOUTHERN RAILWAY COMPANY,

Appellant,

against

NOVEMBER, 1898.

THE CARNEGIE STEEL COMPANY,

LIMITED,

Appellee.

’ Brief,

For — in Reply to Appellant’s Supplemental Brief.

P. C. KNOX,

DAVID WILLCOX,

Of Counsel for Appellee.

Cc. G. Burgoyne, Walker and Centre Streets, N.Y. °

SUPREME COURT OF THE UNITED STATES,

OCTOBER TERM, 1898. No. 39.

CERTIORARL TO THE Cirevtrr Courr or APPEALS FOR THE FourrH

Circuit.

THE SOUTHERN Ratihway Company,

Appellant,

Sate ae

AGAINST Nove mber, 1898.

The CARNEGIE STEEL Company, LIMITED,

Appellee.

BRIEF,

for Appellee in reply to Appellant's Supplemental

Brief.

As a matter of convenience it seems well to restate here the

facts regarding the results of the operation of the property held by

the receivers, and the diversion of the ineome from payment of

current indebtedness of the company.

1. Receipts and expenditures upon the entire sys-

tem.

(7) Insolveney receivers from June 17, 1802, to July 33, 1893 (p.

422):

Received from net earnings. .- 22-2 -_- $3,297,792 31

Expended as against the same :

Car-trust payments ....--.- S209, 500 OO

Sinking-fund payments... - 67,205 00

Juterest and Rentals ©... 2 _- 3,249,481 89

eet er tena 232,194 54

$1,390 32

Construction

Rquipment

________ $3,839,711 55

Be oR

2

Statement.

(5) Foreclosure receivers from August 1, 1893, to December 31,

1893 (p. 423) :

eens teams Sed centiings. ......................- $1,127,861 09

Expended as against the same :

Car-trust payments------ .--- 951,160 00

Sinking-fund payments..-.--- 37,790 00

Interest and Rentals... ..-.. 626,735 85

Construction and Equipment... 43,629 89

——— $759,315 74

(c) Both receiverships combined, from June 16, 1892, to De-

cember 31, 1893 :

Tesetved trom mot earnings. ....... ....-220---4.--. 4,425,653 40

Expended as against the same :

Car-trust payments... -.-- $260,660 00

Sinking-fund payments.__. --- 104,995 00

Interest and Rentals______---- 3,876,217 74

Construction and Equipment... 357,154 55

4,599, 027 29

2. Receipts and expenditures upon the Richmond

and Danville road, taken alone and also with the

** fixed leases.”

Net earnings of insolvency receivers, from June 16,

1892, to August 1, 1893 (p. 402).........-..----.-.. 346,163 10

The earnings during the foreclosure receivership

from the Richmond and Danville road are not sepa-

rately stated, but at the same rate the earnings of

both receiverships solely from the Richmond and Dan-

ville road were, approximately... .-.--.--.------- 550,000 00

Expended as against earnings upon the Richmond

and Danville road proper (pp. 422, 423) :

Construction—

Insolvency receivers. ...---.--.- - sas T17 05

Foreclosure receivers. __-_ ~~~ -- 9,232 61

ae 28,949 66

Equipment—-

Insolvency receivers_-...------- 74,733 28

Foreclosure receivers. ..-..----- 6,791 35

81,524 63

$

PROTA Se He PRT SES Te ae a . — . ret ARS EN ORE

3

Statement.

Car-trust payments—

Insolvency receivers ..--------- 209,500 00

Foreclosure receivers---~-------- 51,160 00

—-——_ 260,660 00

Total expended out of earnings upon the Rich-

mond and Danville proper to increase the mortgage ———-——

GOCUTELY - - 2 we cnn nnn ns meee ep eceannccceneeee-- $371,134 29

In addition, the consolidated mortgage covered

certain leaseholds, which are termed “ fixed leases”

(p. 402); with two unimportant exceptions, these were

included in the decree of foreclosure (pp. 265-268).

The receivers expended upon them the following

further sams:

Construction-

Insolvency receivers. ............--- 88,416 10

Foreclosure receivers. .--..---. ----- S874 40

—— 97,290 50

This shows that out of the earnings between June

16, 1892, and December 31, 1893, there were expended

for construction and equipment and car-lrust payments

upon the identical premises deseribed in the eon. ——-——-

SAnine G 65 GaGa ccuenceeeeen sana ceanes $468,424 79

None of this was for rails purchased from the appellee, because

no such rails were purchased by the receivers until after December

31, 1803 (p. 245).

3. Floating debt of the Richmond and Danville

Company now remaining unpaid |). 3/5, 398):

Total debt remaining unpaid _-..----....--.-.----- $314,824 71

Deduct Pullman Co. for car mileage. ~-$90,752 81

Western Union Co. for constructing

joleprapn Times. - <.-= 2-54. meen 22,186 53

Sisco EEO USO. OH

Claims for materials and supplies remaining unpaid $205,385 37

consisting of :

Carnegie Co. for rails_- ~~ -- _-. $125,067 39

ADF Dtnelho en oes seek _ 80,317 98

This shows that the income, not only of the insolvency receiver-

ship, but also of the foreclosure receivership, was expended upon

LALLY LAE GL

4

First. Appellee’s claim as a supply creditor is free from objection,

the property in order to hold it together for the bondholders, while

these obligations for materials and supplies were allowed to remain

unpaid.

FIRST.

The diversion of current earnings has been fully

established.

The Supplemental Brief —- the statement that the car-trust

aud rental payments were “made for the purpose of keeping

“ the property together for the benefit of the bondholders.” The

facts upon the subject are stated in detail on pages 29 and 30 of the

Principal Brief for the Appellee. At the beginning of the proceed-

ings on June 15, 1892, that was stated in the Clyde bill as the object

of the suit (pp. 14-16). Upon June 28, 1892, in the petition for

leave to issue receivers’ certificates, it was said that the object

was to “ preserve the system of roads against dismemberment * *

“as well as to preserve and increase the present market value of the

* bonds and stocks belonging to the rece ivership ” (p. 26). On

this petition and notice to the trustee under the eonsolidated mort-

gage, an order was made authorizing the receivers to apply the in-

come coming into their hands to payment of car trusts and rentals

(pp. 25, 137). The accounts of the receivers, as above stated, show

that this application of the income was made during the eighteen

months of the two receiverships to the extent of $4,136,877.74.

The reorganization agreement of May 1, 1803, stated that this had

been done because it was “sought to hold together the various

‘ properties embraced inthe system,” (p. 512) and in so doing the

“receivers had become so depleted of cash” that they had been

obliged to default upon obligations prior to the consolidated

mortgage (p. 953, note +). This establishes that the intention

was to hold the property together for the benefit of the bond-

holders, and that the income of the receivership was expended for

that purpose.

Exhibit B, p. 431, to which the Supplemental Brief refers, shows

that between August Land November 30, 1893, the foreclosure receiv-

ers paid rentals on ten leased roads. Accordingly, in the foreclosure

5

First. Diversion of earnings has been fully established.

decree eight of the principal leaseholds were decreed to be sold (pp.

964-268), and they were bought in by the reorganization committee

and conveyed to this appellant (pp. 295, 296). This makes it clear :

that the property was in fact held together for the benefit of the

bondholders by this expenditure of the income of the receivership.

Indeed, the Supplemental Brief itself states (p. 4) that some of the :

leaseholds “were indispensable to any profitable working of the

“ Richmond and Danville Railroad.” Mi

But, as appears above (xpra, pp. 1-3), the diversion did not i

cousist merely in Interest and Car Trust payments. During the p

insolvency receivership there was expended for Construction and :

Equipment the sum of $313,524.66 and during the foreclosure 3

receivership for the same purposes the sum of $43,629.89. z

In Burnham vs. Bowen, 111 U. S., 776, expenditures of exactly

the same character were made by a receiver. It was held that this

constituted diversion and that a ereditor of the company who had :

taken its acceptances, and even renewed them after the receiver was

appointed, was entitled to payment prior to the bondholders.

The Supplemental Brief vigorously claims that the consolidated

mortgage bondholders were not chargeable with anything done in

the Clyde suit. Under date of June 28, 1892, the complainants in

that case petitioned for an order allowing the receivers to divert the

income from payment of current expenses. An order to that effect

was made upon the following day after hearing counsel for the Central

Trust Company, the trustee under the consolidated mortgage (p. 135).

The fact that counsel attended upon one day's notice and made no

opposition, indicates that the order was made with the co-operation

of the Trust Company.

Importance is attached to the fact that when the Central Trust

Company was granted leave to formally intervene in the insolvency

suit, its petition did not set forth that it was trustee under the con-

solidated mortgage. But that is a matter of very little conse-

quence. As just shown, the Trust Company, upon June 28,

1892, had co-operated in the order authorizing the receivers to di-

vert the income to payment of rentals and car trusts (pp. 28, 135,

167, 168). Upon July 18, 1892, the Trust Company filed a petition

praying to be allowed to intervene (pp. 138-141). It is true that

this did not enumerate the many mortgages under which the Trust

PIER GEDA IRA ARE AEM GD EMER LTE IY MANETS AREER HD SP SIV SIE LEVATOR

4

First. Appellee’s claim as a supply creditor is free from objection,

the property in order to hold it together for the bondholders, while

these obligations for materials and supplies were allowed to remain

unpaid.

FIRST.

The diversion of current earnings has been fully

established.

The Supplemental Brief denies the statement that the car-trust

aud rental payments were “made for the purpose of keeping

“ the property together for the benefit of the bondholders.” The

facts upon the subject are stated in detail on pages 29 and 30 of the

Pnincipal Brief for the Appellee. At the beginning of the proceed-

ings on June 15, 1892, that was stated in the Clyde bill as the object

of the suit (pp. 14-16). Upon June 28, 1892, in the petition for

leave to issue receivers’ certificates, it was said that the object

was to “ preserve the system of roads against dismemberment * *

“as well as to preserve and increase the present market value of the

“bonds and stocks belonging to the receivership” (p. 26). On

this petition and notice to the trustee under the eonsolidated mort-

gage, an order was made authorizing the receivers to apply the in-

come coming into their hands to payment of car trusts and rentals

(pp. 25, 137). The accounts of the receivers, as above stated, show

that this application of the income was made during the eighteen

months of the two receiverships to the extent of $4,136,877.74.

The reorganization agreement of May 1, 1893, stated that this had

been done because it was “sought to hold together the various

“ properties embraced inthe system,” (p. 512) and in so doing the

“receivers had become so depleted of cash” that they had been

obliged to default upou obligations prior to the consolidated

mortgage (p. 933, note +). This establishes that the intention

was to hold the property together for the benefit of the bond-

holders, and that the income of the receivership was expended for

that purpose.

Exhibit B, p. 431, to which the Supplemental Brief refers, shows

that between August 1 and November 30, 1893, the foreclosure receiv-

ers paid rentals on ten leased roads. Accordingly, in the foreclosure

5

First. Diversion of earnings has been fully established.

decree eight of the principal leaseholds were decreed to be sold (pp.

964-268), and they were bought in by the reorganization committee

and conveyed to this appellant (pp. 295, 296). This makes it clear

that the property was in fact held together for the benefit of the

bondholders by this expenditure of the income of the receivership.

Indeed, the Supplemental Brief itself states (p. 4) that some of the

leaseholds “ were indispensable to any profitable working of the

“ Richmond and Danville Railroad.”

But, as appears above (svpra, pp. 1-3), the diversion did not

consist merely in Interest and Car Trust payments. During the

insolvency receivership there was expended for Construction and

Equipment the sum of $313,524.66 and during the foreclosure

receivership for the same purposes the sum of $43,629.89. §

In Burnham vs. Bowen, 111 U. §S., 776, expenditures of exactly

the same character were made by a receiver. It was held that this

constituted diversion and that a creditor of the company who had

taken its acceptances, and even renewed them after the receiver was

appointed, was entitled to payment prior to the bondholders.

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The Supplemental Brief vigorously claims that tlie consolidated

mortgage bondholders were not chargeable with anything done in :

the Clyde suit. Under date of June 28, 1892, the complainants in

that case petitioned for an order allowing the receivers to divert the

income from payment of current expenses. An order to that effect

was made upon the following day after hearing counsel for the Central

Trust Company, the trustee under the consolidated mortgage (p. 135).

The fact that counsel attended upon one day's notice and made no

opposition, indicates that the order was made with the co-operation

of the Trust Company.

Importance is attached to the fact that when the Central Trust

Company was granted leave to formally intervene in the insolvency

suit, its petition did not set forth that it was trustee under the con-

solidated mortgage. But that isa matter of very little conse-

quence. As just shown, the Trust Company, upon June 28,

1892, had co-operated in the order authorizing the receivers to di-

vert the income to payment of rentals and car trusts (pp. 28, 135,

167, 168). Upon July 13, 1892, the Trust Company filed a petition

praying to be allowed to intervene (pp. 138-141). It is true that

this did not enumerate the many mortgages under which the Trust

ppt ogre Eten ena nallile

—

6

First. Diversion of earnings has been fully established,

Company was the trustee, and specified merely the first mortgage

and the emergency loan. But by a paper dated upon August 10,

1892, the Trust Company, as trustee under the consolidute/ mort-

gage, requested the court, if it should determine to continue its ju-

dicial possession of the property, to appoint Huidekoper and

Foster receivers (p. 167). After the date of that request aud upon

August 16, 1892, an order was entered allowing the Trust Company

to intervene generally and not as trustee under any specific mort-

gage, “on the condition that it hereby submits tothe several orders

heretofore entered herein” (p. 167). Subsequent orders were rega-

larly made on notice to the Central Trust Company generally (pp.

186, 194, 205, 208, 217).

There is, therefore, no question that the corporation which

was trustee under the consolidated mortgage had notice of every-

thing done in the Clyde case, and, whenever it saw fit, acted in

behalf of the bondholders secured thereby. The question upon

which the Supplemental Brief lays such stress is whether

the Trust Company was a party to the suit as trustee of the various

mortgages, or only of two of them. This distinction is so minute

as to be without importance. But, in any event, it must be deemed

settled by the terms of the order which made the Trust Company a

party generally without any distinction as to the various mortgages

under which, as it had already advised the court, it was trustee.

This made it a party for all purposes, and it wasin court in behalf

of whatever interests it had in the subject matter.

In any event, this point affects nothing save the action of the

insolvency receivers. But after the bill was filed to foreclose the

consolidated mortgage and the receivers were appointed thereunder,

with the consent of all parties, an order was entered (p. 245) author-

izing them to continue the same course of diverting the earnings,

and this they accordingly did. As above stated, between August

1, 1893, and December 31, 1893, the foreclosure receivers paid

out for Interest and Rentals, $626,735.85 ; for Car Trusts, $51,160;

for Construction and Equipment, $43,629.89. This diversion was

made in the foreclosure suit of the conse/i/uted bondholders

themselves. There can, therefore, be no question in regard to

their acquiescence in it, and the amount was far more than

sufficient to pay the appellee. In view of these circumstances,

under Burpham vs. Bowen, 111 U.S., 776, and Virginia and Ala-

— -

ABSA eS OY HA stoece BPR MSN ME OSIERD ES RTD THF

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‘

First. Diversion of earnings has been fully established.

bama Coal Co. vs. Central Railroad Co., 170 U.S., 355, the decree

in appellee’s favor was correct.

The statement is made (Supplemental Brief, p. 7) that the in-

solvency receivership was a burden upon the consolidated bond-

holders. So far as concerns the expenses of the insolvency receiv-

ership, this was not the case. The payments and receipts of the

foreclosure receivers on account of the prior receivership were as

follows (pp. 426, 427):

Pad TOMB. . 220 ccne ccc ceewesesenes--- $467,562 79

Loss and damage claims..------.----- 4,163 45

ii DONE: 6 oon a cenemesavees 53,257 20

-——— ——-—_ $524,983 44

bare OE IN in a. ice som ny i neenene 515,877 87

Total paid by foreclosure receivers on account of in-

solvency receivership. ..-.....---------- ..------- - $1,040,861 31

As against this there was received on account of

the former receivership :

7A AN ete a On eA At Cle Sag ABIGES Pe AUR Bilge re $141,825 19

Accounts collected. -.-...-.--.-------- 384.473 10 525,798 29

Bene MAIR. 2) nk ccs Ene w ens omesmesee ans $515,063 02

This balance was deamak exactly the amount paid for materials

and supplies. But when the new company took possession, it

received material and supplies to the amount of 3500,000 from the

foreclosure receivers (p. 303). ‘This shows that the material and

supplies for which the insolvency receivers had contracted came

into possession of the foreclosure receivers, and the estate accord-

ingly was not diminished ‘by payment therefor by the latter

recelvers.

So far as concerns the, arrears of interest during the insolvency

receivership and the issue of receivers’ certificates (Supplemental

Brief, p. 7), it has been already pointed out, and was stated in

terms in the reorganization’ agreement, that these were the results

of the effort to *S hold together the various properties embraced in

“the system” in the interest of the. bondholders (pp. 912, 5383,

notet). That effort has proved successful as is shown by the

existence of the appellant. The appellant, therefore, is not im a

position to complain that when the estate came into the hands of

the foreclosure receivers it was burdened by the results of the effort.

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SECOND.

There is nothing in the objections urged to

the appellee's standing as a supply creditor.

In the Supplemental Brief (pp. 7, 8) the appellant repeats the

claim already urged in its Principal Briefs—that the cost of these

rails is to be regarded as a permanent betterment, and not as an

expense necessary to keep the road in operation.

In support of this contention is cited Mackintosh vs. Rail-

road Co., 34 Fed. Rep., 582. That was a controversy between two

classes of stockholders under a reorganization. The reorganization

agreement provided that the holders of common stock had no rights,

but were merely “ provisional stockholders”, until the preferred

stock had been paid seven successive annual dividends of seven

percent. The new charter provided that the funds applicable

to the payment of such dividends were the net income

“after paying interest on prior bonds, repairs, expenses

“of equipment,’ ete. At the first meeting of the Board of Di-

rectors it was resolved that “under operating expenses only such

“ improvements and additions shall be included as are necessary to

‘ keep the property efficient, and that all bevond this shall be pro-

“ vided for out of funds other than net earnings.” It appeared

that a very considerable sum had = been expended in re-

placing iron rails with steel rails, using the iron rails for

sidings. The expenses of these changes were in great part

charged against the earnings, instead of being charged to new

coustruction. The court said that the fact that the charter

provided that repairs should be paid out of the net income did

not, as between the two classes of stockholders, warrant this method

of dealing with the earnings of the company. ‘Its effect was not

“to keep the track in repair—in the same state of efficiency as it

‘existed in on October 1, IS80--but to improve and enhance its

“ value at the expense of earnings, which are thus reduced, and the

provisional stockholders correspondingly postponed” (p. 608),

Reference is also made to the case of Grant vs. Railroad Co., 93

U.S. 225. The point decided there was that the expression

“ profits used in construction,” within the meaning of the Internal

tevenne Act, did not embrace earnings expended in repairs for keep-

ing the property up to its normal condition.

—_

9

Second. There is nothing in the objections urged to appellee's standing

as a supply creditor.

‘These authorities have no application to the present case. The

record does not show that these rails were used for new construe-

tion; it shows, on the contrary, that they were used merely in

order to maintain the property in suitable condition for opera-

tion. The rails were purchased from the appellee generally

and not for use in relaying any special portion of the track

or in constructing any new track (pp. 370-372). The testimony

of the General Manager (pp. 482-484) shows that the rails were

distributed over various parts of the system. These rails were,

of course, all used prior to the sppointment of the receivers.

Upon August 12, 1892, very shortly after their appointment the

receivers filed a report stating that the financial difficulties of the

Railroad Company during the last two yeamp had “ prevented the

“ operating officers from being able to expend the proper amount

«for vee rails, and upon the roadbed and structures, tv keep the

. ‘railroad in the condition in which it should he maintained, and

“it will be necessary for the receivers, during the summer and

“autumn to make a much larger eee than they would for

“ordinary maintenance” (p. 166). Upon January 16, 1894, the

foreclosure receivers again stated (p. 246) ia a petition to the court

that “for the proper and economical operation of the lines of railroad

“of which they are receivers, and for the safety of passengers and

“property transported over such roads, two thousand tons of new

“ steels rails are an absolute necessity,” and an order of the court

was made authorizing purchase of the same (p. 247). Upon April 13,

1894, the same receivers again stated in 2 petition to the court that

“for the proper, safe and economical operation of the lines of rail-

“road over which they are receivers, and the proper and safe

“handling of the freight and passenger business on said roads, as

“required by the orders of this court appointing them as_ receivers,

“ they require at the present time about twenty-five hundred (2,500)

“tons of steel rails” (p. 251), and an order of the court was made

authorizing the purchase of such rails (p. 252). In the face of these

facts there is no warrant for claiming th: at the rails now involved,

which were purchased in 1891, were’ used for new construction

rather than for the purpose of maintaining the road in a condition

suitable for operation.

Attention may again be called to the fact that in Farmers’ Loan

EN Oe TS Re

10

Second. There is nothing in the objections urged to appellee's standing

as «a supply creditor.

and Trust Co. vs. Railway Co., 33 Fed. Rep., 778, where question

was raised precisely with reference to claims preferential to the

mortgage, it was held that steel rails were entitled to preferential

payment as coming within the description of expenses of operation,

Objection was made that they were properly betterments,

but the court said, “this objection is untenable, for if these

“ betterments were necessary, and added to the value of the security

“ held by the bondholders, and were made without objection on

“their part, they cannot be heard to complain” (pp. 785, 786).

Similarly it has recently been held in N. Y. Guaranty & Indem-

nity Co. vs. Railway Co., 83 Fed. Rep., 365, that the cost of a steel

cable must be regarded as a preferential operating expense. So, too,

in Hale vs. Frost, 99 U.S., 889, and Wood vs. Railway Co., 70 Fed.

Rep., 741; 75 Fed. Rep., 54, 59, it was held that material furnished

in order to keep the equipment in condition for use must be re-

warded as of the same character. It is clear that there is no dis-

tinction in principle between material furnished for repairs upon

the equipment and that furnished for repairs upon the roadbed.

Each constitutes a very large part of the invested capital of the

company, and as to each there is the same necessity to maintain it in

condition for eficient operation.

The equitable rights of the appellee as a supply creditor are

fully supported by Burnham vs. Bowen, 111 U. S., 776, and Virginia

& Alabama Coal Co. vs. Railway Co., 170 U.S., 355, together with

the other authorities upon the subject cited upon the appellee's

Principal Brief (pp. 15-28). It is signiticant that neither the Prin-

cipal Briefs nor the Supplemental Brief on behalf of the appellant

make any substantial effort to distinguish these cases. In fact, so

far as concerns the Coal Company case, its existence is practically

ignored,

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11

THIRD. .

4

The suggestions of the Supplemental Brief re- }

garding the effect of the reorganization are without —

weight. :

1. The record fully presents the questions heretofore urged in

that regard by the appellee. :

The Reorganization Agreement was attached to the intervening

petition of the appellee, setting forth its rights and praying

enforcement thereof (pp. 365-370, 503-563). It was admitted by

the answer to said petition (pp. 376, 377, 378), and was re-

ferred to as in the case in a stipulation filed with the

Masters regarding the issue of securities under the reorganization

agreement (p. 386). The agreement was, therefore, a part of the

pleadings which were before the Masters when they passed upon

the claim of the appellee. As it was set up in the petition and ad-

mitted by the answer, it was, of course, not necessary to offer the

agreement in evidence. i

The hearing before the Masters was closed upon May 18, 1894 ©

(p. 381), and the sale did not take place until June 15, 1894 (p.

289). So that it would not have been practicable to introduce testi-

mony to show that the reorganization was carried into effect. That,

however, appears from the record, because it shows — that

the property was sold upon June 15, 1894 (p. 289); and was

purchased by the purchasing committee of the bondholders (pp.

200, 291) who vested title in a new corporation to be known as the

Southern Railway Company (p. 294), and that the Southern Rail-

way Company was accepted as the purchaser by order of court

entered upon June 15, 1894, upon condition that it should pay such

further claims as it might be directed by the court (p. 301). The |

corporation thus created is the present appellant. The tiles of the =~

court sufticiently show these facts. They ere notand cannot be con- —

troverted in any respect.

The real purchasers of the property are the reorganized

stockholders of the former company. They are its owners under

the name of the Southern Railway Company. This court of

equity still has control of the property for the purpose of com-

pelling the purchaser to do equity as regards claims generally

against the property (pp. 280, 282, 301). As the reorganization

eee |

12

Third. The suggestions of the Supplemental Brief regarding the

effect of the reorganization are without weight.

agreement provides that the stockholders of the former company shall

still have an interest in the property to the exclusion of its floating

debt, it is entirely competent for the court to direct that the stock-

holders as reorganized shall pay that floating debt. The remedy

by independent bill would be extremely slow and, as the

parties interested, namely, the appellant and the appellee, and also

the subject matter are under the full control of the court, and the

facts cannot be denied, there is no reason why the appellee should

be remitted to an independent bill which might raise difficult

questions regarding the jurisdiction and the remedy. Certainly the

statement of the Supplemental Brief that the purchase contemplated

by the reorganization plan may never be cousummated, is entitled

to no weight in view of the fact that the party which makes that

statement is shown by the record to be the product and result of

that purchase.

2. There is no merit in the distinction sought to be made be.

tween the present case and Railroad Co. vs. Howard, 7 Wall, 292.

The suggestion is made that the present case differs from the

Howard case because in the latter the bill sought a ratable applica-

tion of the fund among all unsecured creditors, while here the ap-

pellee is seeking satisfaction merely of its own debt. But this is

not an accurate statement of the position. The present appellee

is asserting its own claim, but this does not affect in any

respect the rights of those similarly situated, and no effort is

made here to prejudice those rights. As already shown (supru, p. 3)

the amount of those claims is very small; probably they also are

entitled to payment.

As regards the amounts to be received under the terms of

the reorganization plan by the stockholders of the Richmond

and Danville Company, the facts are fully stated upon pages

48 and 49 of the Principal Brief for the appellee. It will be

seeu from that statement that the holders of both bonds and

preferred and common stock of the Terminal Company received new

preferred stock and new common stock for the express reason

that they already held the capital stock of the Richmond and

Danville Company, and that none of these holders of Terminal

securities paid any assessment, save the holders of the common

stock. They, it is true, were to pay in a large amount to clear

RRL IT ERLE TBAT NS LIE LLNS RD PITTS RAMONE SL STEMS OHNE ON SRST

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13

Third. The suggestions of the Supplemental Brief regarding the

effect of the reorganization are without weight.

off the debt of the Richmond and Danville Company. This doubt-

less appeared to counsel who prepared the plan necessary by reason

of the Howard case. But no part of this fund has been applied to

paying the debts of the appellee and a few others. Why this is the

fact the record does not disclose.

It is sought to distinguish the Howard case upon the ground

that the mortgage bondholders, there in express terms released —

and discharged their lien upon the portion of the proceeds of

sale payable to the stockholders of the former company, and that, —

therefore, that portion was assets of the Railway Company. This —

does not really distinguish that case from the present. There "

the lien was discharged only by the reorganization agree- 3

ment in the manner therein prescribed. So, too, here it ;

could properly be said that the consolidated — bondholders i

released their rights against the securities representing the interest &

of the stockholders in the new company. ‘The reservation con- ©

tained in the reorganization agreement which is set forth in the ‘

Supplemental Brief (pp. 15, 14, therefore, has no bearing upon |

this question; for it was evidently useless to provide that the

claims of all stockholders and creditors should be cut off by the fore- is

closure, while at the same time a substantial interest in the prop- ©

erty was secured by the reorganization to the stockholders, but the 7

creditors were left unpaid, ‘Phe precise point ruled in the Howard e

case is that this cannot be done. H

The objections urged regarding the rights of the appellees in ©

view of the reorganization are based upon technical refinements. z

It is submitted that as there is no question as to the facts, the ad

parties are before the court and the property is still within its con- i

trol, the court will dispose of the matter apon the merits. It is not x

accurate to speak of the question as one regarding the proceeds of ;

the sale ; the point is really whether the reorganized stockholders

of the debtor company shall pay its debts before dividing among

themselves whatever equity there may be in its property.

p. C. Kyox,

Davin WiLicox,

Of Counsel.

PELL OS

ate ars,

(12100)