US SUPREME COURT DECISIONS

Certain unsecured creditors of a railroad company in Alabama instituted proceedings in equity in a court of that state on behalf of themselves and of all other creditors of the same class who should come in and contribute to the expenses of the suit to establish a lien upon the property of that company in the hands of other railroad corporations which had purchased and had possession of it. The suit was successful, and the court allowed all unsecured creditors to prove their claims before a register. Pending the reference before the register, the defendant corporations bought up the claims of complainants and other unsecured creditors. Thereupon the solicitors of complainants filed their petition in the cause to be allowed reasonable compensation in respect of the demands of unsecured creditors (other than their chanrobles.com-redchanrobles.com-red

Page 113 U. S. 117

immediate clients) who filed their claims under the decree and to have a lien declared therefor on the property reclaimed for the benefit of such creditors. The suit between the solicitors and such defendant corporations was removed to the circuit court of the United States:

Held:

(1) Within the principle announced in Trustees v. Greenough, 105 U. S. 527, the claim was a proper one to be allowed.

(2) It was also proper to give the solicitors a lien upon the property brought under the control of the court by the suit and the decree therein, such lien being authorized by the law of Alabama.

(3) That under the circumstances of this case, the amount allowed by the court below was excessive.

This was an appeal from a decree of the Circuit Court of the United States for the Middle district of Alabama in favor of the appellees, Pettus & Dawson and Watts & Sons, adjudging them entitled to the sum of $35,161.21, and interest thereon at eight percent per annum from March 7, 1881, with lien, to secure its payment, upon the roadbed, depots, side tracks, turnouts, trestles, and bridges owned and used by the appellants, corporations of the State of Georgia, in operating the railroad formerly belonging to the Montgomery and West Point Railroad Company, an Alabama corporation, and which extends from Montgomery to West Point, with a branch from Opelika to Columbus. This property was directed to be exposed to sale unless within a given time the said amount was paid. This suit is the outgrowth of certain litigation in the courts of Alabama relating to the before-mentioned and other railroad property in which the appellants are interested. A statement of its history is necessary to a clear understanding of the questions now presented for determination.

On the first of September, 1870, the Western Railroad Company, an Alabama corporation, purchased and took possession of the railroad (main line and branch) and all other property of the Montgomery and West Point Railroad Company, one of the terms and conditions of such purchase being, as was claimed, that the former company assumed the payment of all outstanding debts and obligations of the latter and agreed to issue its capital stock, dollar for dollar, in exchange for stock of the Montgomery and West Point Railroad Company outstanding. chanrobles.com-redchanrobles.com-red

Page 113 U. S. 118

It was a part of that arrangement that the last-named company should, as it subsequently did, surrender its charter to the state. When this purchase was made, there were, upon the franchises and property of the latter company, two mortgages to secure bonds proposed to be issued -- one, June 1866, for $750,000, bonds for the whole of which were issued; the other, May 1, 1868, for $400,000, bonds for $45,000 of which were issued. It had also outstanding bonds issued in 1866 and 1867, not secured by mortgage or otherwise. The Western Railroad Company had at the time of its purchase a mortgage of date September 15, 1868, upon its own property and franchises to secure $600,000 of bonds then, or at some subsequent period, guaranteed by the present appellants.

On the 15th of September, 1870, that company executed to Morris and Lowery, trustees, a mortgage upon its property and franchises (including the property transferred to it by the Montgomery and West Point Railroad Company), to secure the payment of $1,200,000 of bonds, thereafter to be issued, and of which a large amount was issued, and their payment was also guaranteed by the appellants.

Subsequently, on March 31, 1874, those trustees commenced a suit in the Chancery Court of Montgomery County, Alabama, against the Western Railroad Company, the present appellants, the surviving trustees in the mortgages executed by the Montgomery and West Point Railroad Company, and others. Its object was to procure a sale of the property of the former company, including that purchased from the latter company. A final decree was passed December 18, 1874, ordering a sale, subject, however, to a lien, in respect of the property formerly owned by the last-named company, in favor of the holders of its mortgage bonds, according to their respective priorities, and, in respect of the property of the Western Railroad Company, to a lien in favor of the holders of bonds secured by its mortgage of September 15, 1868. The sale was had, the present appellants becoming the purchasers.

On the 8th of May, 1875, Branch, Sons & Co., H. P. Hoadely, and C. S. Plank -- holding bonds of the (old) Montgomery chanrobles.com-redchanrobles.com-red

Page 113 U. S. 119

and West Point Railroad Company not secured by mortgage -- through Pettus & Dawson and Watts & Sons, their solicitors, exhibited a bill in equity in the same court against the present appellants, the Western Railroad Company, the Montgomery and West Point Railroad Company, and others. They sued for themselves as well as for all other creditors of the last-named company who should come in and make themselves complainants and contribute to the expenses of the suit. Such proceedings were had -- the Georgia corporations appearing and making defense -- that on the 1st day of May, 1877, a final decree was entered by which it was, among other things, adjudged that "the unsecured creditors of the Montgomery and West Point Railroad Company, to which class complainants belong, have a lien" upon the property transferred by it to the Western Railroad Company; that such lien was subordinate to those for the bonds issued under the several mortgages executed by the Montgomery and West Point Railroad Company that were outstanding and unpaid, but superior to that of the mortgage executed by the Western Railroad Company after its said purchase, so far as the property of the Montgomery and West Point Railroad Company was covered by that mortgage, and that the property of all kinds, belonging to the latter company, be sold to satisfy its debts according to priority.

The cause was referred to a register to ascertain and report the amounts due to the complainants and to such other unsecured creditors of the Montgomery and West Point Railroad Company as should prove their claims pursuant to the decree; also the amounts due to holders of bonds issued under its several mortgages. Upon appeal by the two Georgia corporations to the Supreme Court of Alabama, that decree was affirmed. The register thereafter proceeded with its execution. Numerous parties, including the complainants, appeared before him and had their claims registered, the creditors in each instance retaining in their own custody the evidence of their respective demands. The aggregate amount of such claims was very large.

On the 15th of April, 1879, the register not having made his chanrobles.com-redchanrobles.com-red

Page 113 U. S. 120

report upon these claims, Pettus & Dawson and Watts & Sons, by leave of the court, filed in the cause their joint petition, alleging in substance that as solicitors specially employed by the complainants, Branch, Sons & Co., Hoadley, and Plank, they prepared and filed the original bill, as well in behalf of themselves as of all other unsecured creditors of the Montgomery and West Point Railroad Company who should come in and contribute to the expenses of the suit; conducted the proceedings to a final decree; represented the same interests in the Supreme Court of Alabama; that their relations to the suit were well known to the Georgia corporations during the whole period of the litigation; that pending the reference before the register, after the rights of complainants and all creditors of the same class had been established by the final decree, those corporations made a secret arrangement with their immediate clients, whereby the claims of the latter were paid in full, principal and interest, and whereby also Branch, Sons & Co. and their co-complainants agreed to withhold from their solicitors the fact of such settlement until the Georgia corporations could buy or settle all other claims of the unsecured creditors of the Montgomery and West Point Railroad Company; that "afterwards said two Georgia companies, defendants to this suit, did buy up or settle the other claims, which had been filed in the cause, under said decree," and, "either jointly or separately, thereby acquired possession and control of said claims so filed;" that they also purchased and settled a large amount of claims, which might have been, but were not, filed with the register; that at the time of such purchase, said Georgia corporations had actual notice that petitioners, as solicitors in that suit, claimed reasonable compensation for such services as they rendered in behalf of the unsecured creditors of the Montgomery and West Point Railroad Company (other than complainants) who should come in and take the benefit of the final decree, and also the benefit of any lien upon said property that should be declared in favor of those creditors, and that in equity they

"were the assignees of a part of each claim as filed to the amount of the reasonable value of the services rendered in said cause by petitioners for the benefit of each holder and owner of

Page 113 U. S. 121

such claims respectively."

The prayer of the petition was that an account be taken of the sums thus due to them as solicitors representing the unsecured creditors of the Montgomery and West Point Railroad Company (except the complainants and other named creditors with whom they had special contracts for fees) who received the benefit of their services; that they be declared to have a lien for the value of such services on all the property of that company which had come into the possession of the Georgia corporations, and that so much of it as may be necessary for that purpose be sold to meet the amounts due them.

The register reported, on the 22d of April, 1879, that there were then no bonds or claims in the registry, except one claim, filed in court, as to which he did not report because no one had appeared and requested that it be audited.

Subsequently, April 24, 1879, the Georgia corporations presented their joint petition for the removal of the suit commenced against them by Pettus & Dawson and Watts & Sons (they being the only defendants to the petition filed by the latter) to the circuit court of the United States, in which court it was docketed, and, after answer by the defendants and proof taken, proceeded to final decree. When the cause was removed from the state court, nothing practically remained for determination between the parties to the record except the claim of appellees, citizens of Alabama, to a lien upon the property in question owned by the two Georgia corporations. chanrobles.com-redchanrobles.com-red

Page 113 U. S. 122