Pa. Steel Co. v. N.Y. City Ry. Co., 196 F. 661 (S.D.N.Y. 1912)

The amount of cash received as security on appeal does not include the value of certain other property also received for the same purpose prior to the settlement. Its suggested value is upwards of $100,000, but, whatever it may be, it, of course, goes in further reduction of the amount due on the p. 663judgment as of Hie dato of sol ¡dement. These amounts due on judgment and claim are increased by tile interest due from the date to which it is calculated (June 1. 1910) lo the date of settlement, and that interest in the case of the judgment is $20,852.84 and of the claim $17,715.00, making the total amount due on the latter on the date in question $4,028,281.10 and on the former $4,631,842.08. subject to the further reduction noted.

The answer to this question depends upon the construction to be placed upon the four agreements of May 22, 1907, entered into shortly before the receivership of the street railway companies between them and the Metropolitan Securities and Interborough-Metropolitan Companies and Mercantile p. 664Trust Company, which in certain of their aspects have already been passed upon by this court and the Circuit Court of Appeal in the action at law. At the time they were executed, certain provisions of the lease between the Metropolitan and City Companies were in force which the court in that action has said they were intended to effectuate. Those provisions- are contained in article 15 of that document, which after prohibiting, without the consent of the City Company (lessee), any increase of the Metropolitan’s funded debt or that of its subsidiaries by the lessor or the creation of, or permission to create such a debt by lessee, except as herein provided, refers to a fund of $23,-000,000 by a prior article (12) required to be “furnished” by the lessee to lessor for the purpose of paying the unfunded debt of the lessor, and providing for expenditures for improving, extending, and equipping the lines of railroad and other property of the lessor and subsidiary companies (capital expenditures), and states that “if after expenditures of such part of said sum of $23,000,000 as shall be available for additional equipment, improvements, and extensions it shall be expedient to extend the lines of railroad hereby demised, or to provide any additional and increased equipment for or make any change of motive power upon, or any radical change in the construction, location or character of, any such lines,” then, either after agreement between the parties as to the nature of the expenditures and their amount or after the determination by arbitration as to such nature’ or amount, “the lessee shall provide the moneys required for the capital expenditures so agreed upon or determined and the lessor shall issue to the lessee therefor such securities, whether stocks, bonds or other obligations as shall have been fixed by such agreement or arbitration and at the price and upon the terms so fixed.” On May 22, 1907, the whole of this $23,000,000 had been “furnished” by the lessee and the whole of that portion of it available for capital expenditures had been expended, and, in addition, a sum in contemplation' at the time and later definitely ascertained and admitted to be $2,-824,483.81 for similar purposes, and still further advances for such purposes as well as to provide for certain other indebtedness were yet to be made. Accordingly lessor and lessee entered into what is the first of the May agreements here involved which after reciting those provisions of the lease above summarized contains the following relevant recital and covenants: “Whereas, the $23,000,000 so to be paid under said leases has been -paid by the City Company to the Metropolitan Company, and no part thereof is available for additional equipment, improvements and extensions, and certain other advances have been made and are to he made to or for the Metropolitan Company for which and to provide for certain other indebtedness, the Metropolitan Company is likewise obligated to issue its securities under the terms of the lease above described. * * * Now, therefore, in consideration of the premises and the mutual covenants of the parties, it is agreed: (I) The City' Company shall as and when required, and in any event, before Jan. 1, 1909, furnish the Metropolitan Company eight million dollars in cash. (IX) The Metropolitan Company shall forthwith issue and deliver to the Metropolitan Securities Company or its order its three-year five per cent, improvement notes to the face amount of $8,000,000.”

For the purpose of securing the eight millions that it thus agreed to furnish the Metropolitan Company in cash, the City Company then entered into an agreement with the Securities Company which contains the following relevant recitals and covenants: “The City Company has entered into an agreement of even date with the Metropolitan Street Railway Company (a copy of which is hereto attached), under which the Metropolitan Street Railway Comp. 665pany lias, at the request of the City Company, delivered, or is about to deliver, to the Securities Company its thiee-year five per cent, improvement note's to the face amount of ,¥8,000,000 as in said agreement described: Now therefore, in consideration of tile premises and the mutual covenants of the parties hereto, it is agreed: (II) The Securities Company shall as and when required on reasonable notice and in any event before Jan. 1, 1000, furnish to the City Company such sums as may he required by it to carry out the attached agreement by it with the Metroxiolitan Street Railway Company. (IV) The amount of interest on the Improvement'notes of the Metropolitan Company issued and delivered to the Securities Company shall be adjusted on each half yearly interest day on the basis of such amounts as may from time to time have been advanced hereunder to the City Company for the fulfillment of its obligations to the Metropolitan Oompanj under the annexed agreement between said companies.”

One other transaction prior to the appointment of receivers of the Metro-xiolitan on October 1, 1907, but subsequent to the appointment of the City receivers on September 25, 1907, remains to be indicated, as the disposition which the court made of it has an important bearing on the main contention urged by the petitioners in support of their claim to substantially all of the fund apportioned to the action at law. It is the transaction involved in the repayment without the consent of the receivers of the City Company of $500,-000 loaned 1o the Securities Company and $.‘>00,000 loaned to the City Company out of the Cenirai Crosstown Construction fund of $814,931.12 originally held by the Metropolitan as a trust fund under article 12 of the Central Crosstown lease to it. This $800,000 thus loaned the Securities Company paid back p. 666by cheek to the Metropolitan Company dated September 25, 1007, either on that date or on October 1st following. It was among the items of indebtedness referred to in the recital ahoye quoted in the contract between the Metropolitan and City Companies which the contract itself was clearly in part made to meet, and the defendant Securities Company insisted that it should be allowed as a payment to the Metropolitan in deduction of the amount claimed in the action at law. The court held, however, and in its holding was followed on the appeal, that it was a payment intentionally made without consulting the receivers of the City Company, and for that reason refused to allow it as a credit. This is a ruling as to an issue involved in the action which is controlling here, and it means that the City Company under these contracts did have a beneficial interest in the moneys to he furnished by the Securities Company.

But, if this much seems clear, it is equally clear that the contention of the city receiver and of the creditors contract and tort that the relation between p. 667flic two street railway companies created by these contraéis was that of simple debtor and creditor cannot be accepted. I concede that if only the promise of the City Company contained- in its contract with the Metropolitan to furnish it as and when required, on reasonable notice, and in any event before January 3, 1910, $8,000,000 in cash, be considered, only the relation of debtor and creditor results, hut that promise must be construed in the light of the recital which it contains and the contract containing it, with the others in pari materia, for the purpose of discovering and effectuating the intention of the parties as disclosed by all of these agreements, and these, as thus construed in the action at law, define the sources from which the moneys should come, while the contract in question defines the purposes for which they should be used. Thus the recital referred to after stating the expenditure of the $2;?,000,000 provided for in the lease, and that no part thereof is available for additional equipment, improvements, and _ extensions, says that certain other advances (i. e., for such capital expenditures) have been made, and are to be made, to or Cor the Metropolitan Company for which and to provide for certain other indebtedness the latter is obligated to issue its securities under the terms of the lease, and it is for these and not for general purposes that promises to “furnish” the cash and to deliver the notes are given. The City’s promise, qualified by the recital, thus becomes a promise to “furnish to or for” the Metropolitan this cash for capital expenditures then already made in excess of the $2;!,000,000 as well as then in contemplation and for the payment of the other indebtedness then existing and capable of precise ascertainment. The recital, though not as matter of law strictly a part of the contract (Burr v. Butt Co., 81 N. Y. 178), does where the intent is plain, as it certainly is here, control the obligation and prevent an operation more extensive than that which it permits (National Mechanics’ Banking Ass’n T. v. Colliding, 90 N. Y. 316, 42 Am. Hep. 405, noto). It will be noted that the promise thus construed in connection with the recital accurately summarizes the obligations of the parties in respect to the capital improvements under the lease, and recognizes the practice that had existed in pursuance of which the City Company “furnished” the cash “to or for” the Metropolitan Company by itself making and paying for the improvements when their nature and amount had been agreed upon, and charging the payments to the latter against the agreed price of its securities from the proceeds of the sale of which reimbursement came.

“(b) The Metropolitan Street Railway Company then acknowledges itself indebted to the New York City Company for $2,834,483.83. (corrected amount) being amounts advanced or due to pay for construction, work of the Metrop. 668politan Street Railway Company or its subsidiary companies in excess of the $23,000,000 for which amount the New York City Company is, under the terms of the lease, entitled to obligations-of the Street Railway Company.

As to the amount actually' expended up to the time receivers were appointed for new construction on the First Avenue and Twenty-Eighth and Twenty-Ninth Street lines the petition in the last paragraph of its seventh article p. 669alleges that the City Company supplied labor and materials for construction purposes on the Metropolitan system to the amount of $1,251,741.01, and had ordered materials for the same purposes for .which claims were filed against the Metropolitan or City Companies which have been held provable against the City Company amounting to $234,880.-19. The eighth article of the petition alleges it to be the duty of the City Company and its receivers to apply the proceeds of the action at law “to the purposes for which said moneys had been raised including reimbursement of the New York City Company for the amounts it had expended,” and these purposes, summarized, are the payment of $1,386,224.01 for actual disbursements by the City Company prior to the receivership with $234,880.49 Cor obligations then incurred, but not paid, making $1,621,104.50 for expenditures made or incurred for the construction purposes contemplated at the making of the contracts of May, 1907, and the further payment of $2,563,956.50 for improvements and betterments upon the Metropolitan system not then contemplated, including new cars. These two items with the item for franchise taxes and accounts payable of $778,939 above mentioned make $4,901,000, the sum exclusive of interest for which judgment was given in the action at law.

The petitioners and the replicant Trust Company, however, insist that, as they were not parties to the action at. law, these findings of fact are not conclusive as to them, and that they are at liberty to show them to be otherwise. These findings with the petitioner’s allegations that I have noted p. 670constitute the only evidence in the record as to the amount and nature of the. capital expenditures, except that the parties have stipulated that between June 5 and September 23, 1907, the City Company expended various sums in excess of $5,000 and incurred obligations in excess of a like amount for purposes defined by the terms used in the lease for betterments on the First Avenue and Twenty-Eighth and Twenty-Ninth Street lines, and that it shall be determined whether the City receiver is entitled to retain from the proceeds of the action at law an amount equal to the aggregate of such expenditures and obligations; the determination of their amount as well as questions as to such receiver’s right to credit for other or similar expenditures prior or subsequent to the receiverships being reserved. Testimony as to two concrete instances has been adduced showing an actual expenditure of $290.04 for rails used in the extension of a loop at Twenty-Third street and Thirteenth avenue in connection with the betterment on the Twenty-Eighth and Twenty-Ninth Street line between June 5 and September 23, 1907, and an obligation incurred, but not paid, for diict conduit on First avenue during the same period for $1,423.50 for electrification.

Without, therefore, considering the facts alleged in the paragraphs of the petition now sought to be eliminated or in those findings of fact referred to on which they were based but only those suggested by the evidence as to p. 671the two types and by the stipulation referred to, I shall find, as facts, that between ¿une 5. 1907. and September 23, 1907, the City Company expended ¡>290.04 for rails used in building a loop at Twenty-Third street and Thirteenth avenue in extension ot' the Twenty-Eighth and Twenty-Ninth Street line, and Hint it incurred an obligation during tbe same period which had not then been met for $1,423.00 for duet conduit used in the electrification of its First Avenue line, that during the same period it expended various sums in excess of $5,000 and incurred various obligations in excess of a like amount for similar purposes on the First Avenue and on the Twenty-Eighth and Twenty-Ninth Street lines; that such expenditures were made with the consent of the Metropolitan Company; and as conclusions of law that they constitute the capital expenditures contemplated by the lease for which the Metropolitan Company was obligated to issue its securities in accordance therewith and to meet which the City Company by its agreement with the Metropolitan of May 23, 1907, agreed to furnish $8,000,000 in cash, and that out of the proceeds of the settlement apportioned to the action at law the receiver of the City Company is entitled to retain an amount equal to such expenditures thus made and such obligations thus incurred during said period.

“(3) That the Metropolitan Securities Company and the Interborongh Metropolitan Company shall surrender to you, duly indorsed so as to transfer title, four certain improvement notes of the Metropolitan Street Railway Company each for $1,000,000 now in the hands of the Interborongh Metropolitan Company, and shall assign, transfer, and set over to you any right, title, or interest that they or either of them may have in or to any claims which the Metropolitan Street Railway or its receivers now have or may hereafter have against any of the subsidiary companies, excepting only the four promissory notes, all dated'April 30, 3907, and payable to the Mercantile Trust Company and now in the hands of that company, being the notes specified in paragraph 7 of the complaint in said action at law, no interest in which notes or in the claims represented thereby is intended to be transferred or p. 672•surrendered to you or to your company or to the Metropolitan Company or its receivers.

The receiver of New York City Railway Company is not entitled to use four certain 5 per cent, improvement notes of Metropolitan Street Railway Company of the face value of $1,000,000 each,, now in his possession, as a set-off or counterclaim in respect to the claim of Metropolitan Street Railway Company to that part of the proceeds of the settlement apportioned to the action at law, but is entitled to retain and use them to the extent only that they represent a sum equivalent to the excess, if any, of the amount expended by New York City Railway Company and its receivers for the purposes contemplated by the contract of May 22, 1907, between New York City Railway Company and Metropolitan Street Railway Company, as construed by p. 673the court, over the total payment?, including said part of said proceeds of settlement so apportioned, on the $8,000,000 agreed to be paid to said New York City Railway Company by Metropolitan Securities Company under contract between them of the same date.

RACOMBE, Circuit Judge, [1 ] The first question submitted to the special master was the apportionment of the lump sum paid by defendants in the two actions in compromise of the claims therein prosecuted. When negotiations for compromise were being discussed, the court instructed the receiver that no proposal would be accepted by which de-' fendants should designate the distribution of what they paid. When the proposed adjustment was set down for hearing, it was expected! that any party or person interested, who thought the proposal should he accepted only on the condition that the claim in which he was inp. 674terested should be paid in full, would indicate his position. But that was probably not plainly indicated, and the exceptants to the special master’s report were quite correct in insisting that they were to be heard in this proceeding as to the basis of apportionment. Indeed, the order of approval expressly reserved that right. This contention was recognized, and all testimony which they offered has been taken and considered. In the absence of any persuasive proof to the contrary, a proportionate distribution is the correct rule — equality is equity. No evidence persuasive to a departure from this rule is found in the record. There is no force in the suggestion that the action at law had terminated in a judgment, made final by the adverse decision of all appeals from it, while the equity suit had only been submitted to the trial court on final hearing. All that could be obtained by execution under the judgment against the Metropolitan Securities Company had been collected. The judgment debtor had been squeezed dry, and the $1,000,000 which had been secured from it has been allotted by the special master in solido to the action at law, without any apportionment. No more was in sight, or in existence, except such as might be realized by ancillary proceedings instituted by the judgment creditor against stockholders of the judgment debtor. These had been initiated, but had not advanced as far as the equity suit had. In these proceedings as in the equity suit there were legal questions involved which made the result of both uncertain. As to the realization of the fruits of a profitable victory in the ancillary proceedings, there might also be some question. There was never any suggestion that a judgment in the equity action for the full amount claimed would not be paid in full. The last paragraph of the memorandum in 180 Fed. 514, indicates that a like assurance was not then felt as to the financial results of the other proceedings. We must go back and view the situation as it was at the time of the settlement, disregarding what improvement in financial conditions two years of good fortune may have brought about. Four millions of the money paid in compromise was, it is true, raised on notes of the principal stockholder of the defendant in the lawsuit, but the amount of those notes was advanced by defendants in the equity suit at par. Whether the same notes could have been sold at that price in the open market at that time is open to question. As to which proceeding-it was which brought about the payment of this large sum, $5,500,000, and should therefore be credited with the accomplishment of the pleasing result, is a question not susceptible of proof. The writer who was advised of the negotiations for.compromise, which went on for months, may have his individual opinion, but, if so, it is a mere guess, and nothing in this record affords more solid ground for a conclusion.

In the brief for the trustee under first mortgage, there is a suggestion of various things which might have happened had the trustee objected to the acceptance of the offer of compromise, unless the proceeds were so distributed that the interests represented in the action at law should be paid in full and the discount allowed on settlement should fall wholly upon the New York City Company. The suggestion omits the most probable result of such insistence at that time, p. 675viz., a rejection of the proposal outright, leaving each interest to obtain what it could as a result of the prosecution to a finish of the independent litigations then pending. What would have happened had the pending proposal been rejected is entirely problematical, but it is a reasonable supposition that an offer would have been made to settle the equity suit for a sum in excess of $1,500,000, which defendants in that suit individually contributed to the payment actually made in settlement of both actions. Whether a sum large enough to induce a settlement of the equity suit would have been offered is mere guesswork. Whether upon rejection of the pending proposal any substantial offer would have been made by the Interborough-Metropolitan to settle the pending proceedings against stockholders of the Securities Company no one can now tell or could then foresee. Counsel who then represented that company as defendant in those proceedings certainly manifested confidence in their ability ultimately to defeat such proceedings. The whole situation as it existed at that time is so filled with unsolvable problems that the special master’s distribution of the fund is approved as the only equitable solution.

The third and only remaining question is the disposition of the four $1,000,000 notes of the Metropolitan. Nothing is found in the record to sustain the proposition that they were turned over, properly indorsed to pass title, for the sole purpose of cancellation or destruction. The master’s finding to the same effect is approved. If the arguments of the counsel for New York receiver and for the plaintiff in the creditors’ bill convince the Court of Appeals, there will be no third question to answer. Taking the case as it now stands, as it is disposed of by what has been said supra in this opinion, the question as to their disposition is easily solved. Had the receiver offered them on the open market and had some one bought them, the cash p. 677proceeds of that sale would be distributed in the same proportion as all other cash realized on the settlement. Not having been sold the notes should be distributed in the same ratio. This would.leave one note to be split up, which could be done by indorsing receipt for payment of the proper proportional part.

It is of the utmost importance that this entire group of proceedings p. 678be kept together, and argued at the same time before the appellate court. In no other way can a comprehensive and harmonious solution of these intricate problems be worked out.