U.S. Supreme Court
Kent v. Lake Superior Ship Canal Co., 144 U.S. 75 (1892)
Kent v. Lake Superior Ship Canal, Railway and Iron Company
Argued January 8, 1892
Decided March 14, 1892
144 U.S. 75
Remedy for error in a decree for the foreclosure and sale of property mortgaged to a trustee for the benefit of holders of bonds issued under the mortgage, or in the sale under the decree, must be sought in the court which rendered the decree and confirmed the sale.
A canal company which had issued several series of bonds, secured by mortgages on its property, defaulted in the payment of interest on all. Bills were filed to foreclose the several trust deeds, and a receiver was appointed. On due notice to all parties, receiver's certificates were issued to a large amount for the benefit of the property, which certificates were made a first lien upon it. The property was sold under a decree of foreclosure and sale, and the purchasers paid for the same in receiver's certificates, the amount of the bid being less than the amount of the issue of such certificates. On a bill filed by a holder of bonds issued under one of the mortgages foreclosed,
(1) That his remedy should have been sought in the court which rendered the decree. chanroblesvirtualawlibrary
(2) That the paramount lien of the receiver's certificates having been recognized by the trustee of the mortgage under which the bonds were issued, his action in that respect was, so far as appeared, within the discretion reposed in him by his deed.
This was a bill in equity brought in the Supreme Court in and for the County of Kings, New York, February 7, 1884, by Andrew Kent, as executor and trustee of the last will and testament of Jonathan T. Wells, deceased, against the Lake Superior Ship Canal, Railway and Iron Company; Theodore M. Davis; Theodore M. Davis, as receiver of the Ocean National Bank of New York; J. Boorman Johnston, Isaac H. Knox, and Gordon Norrie, being the surviving partners of the firm of J. Boorman Johnston & Co.; Frederick Ayer, sole surviving partner of the firm of J. C. Ayer & Co.; Frederick F. Ayer, Josephine Ayer, and Benjamin Dean, administrators with the will annexed of the estate of James C. Ayer, deceased, and Thomas N. McCarter, and subsequently removed into the Circuit Court of the United States for the Eastern District of New York.
The bill alleged that July 6, 1864, the Portage Lake and Lake Superior Ship Canal Company was organized as a corporation under the laws of Michigan for the purpose of constructing a ship canal to connect the waters of Portage Lake and Lake Superior; that by an Act of Congress approved March 3, 1865, two hundred thousand acres of public land were granted to the State of Michigan "to aid in building a harbor and ship canal at Portage Lake, Keweenaw Point, Lake Superior," subject to the condition, among others, that they should revert to the United States in case the said canal and harbor should not be completed in two years from the passage of the act; that by an act entitled
"A bill to accept a grant of land by act of Congress to aid in the construction of the ship canal at the head of Portage Lake with Lake Superior, and to provide for the construction of the same,"
passed March 16, 1865, by the Legislature of Michigan, the grant was accepted and conferred upon said Portage Lake and Lake Superior Ship Canal Company, subject to the condition
"that none of said lands shall be sold or otherwise disposed of except
for the purposes of hypothecation, until said canal shall be completed as therein provided,"
and that July 1, 1865, the company executed a deed of trust conveying to C.C. Douglas and his successors its canal and franchises and the two hundred thousand acres of land to secure the payment of 1,000 bonds, of $500 each, John L. Sutherland being thereafter substituted as trustee.
The bill further averred that by Act of Congress approved July 3, 1866, a second two hundred thousand acres of land were granted to the State of Michigan for the above purposes, and it was provided by the act that this second grant should inure to the use and benefit of the company in accordance with the act of the Michigan Legislature of March 16, 1865; that July 1, 1868, the company executed a deed of trust of the second land grant, together with the equity in the canal and other property already conveyed to Douglas in trust, to Martin and Davis, to whom Lucien Birdseye subsequently succeeded as trustee, to secure one thousand other bonds, of five hundred dollars each, and that Jonathan T. Wells purchased eighty of these last-named bonds, and paid cash therefor, which money was applied by the company in the construction of the harbor and canal. It was further alleged that July 1, 1870, the company made its third deed of trust, conveying its canal and the two land grants to Charles L. Frost, to secure twelve hundred and fifty bonds, of one thousand dollars each, two hundred and fifty of which were paid, redeemed, and cancelled by the company by bonds of a subsequent issue, known as the "Union Trust bonds;" that Thomas N. McCarter succeeded Frost as trustee, July 1, 1872, and that Wells become the holder and owner of forty of the bonds secured by this third trust deed. The bill continued that on or about April 29, 1871, the name of company was changed to "The Lake Superior Ship Canal, Railway and Iron Company," which on May 1, 1871, became seised and possessed by purchase of the entrance canal, by way of Portage River, into Portage Lake, with the franchises appertaining thereto, and also acquired title to two hundred thousand acres of land or thereabouts, situated in the State of Michigan, and known as the "Wagon chanroblesvirtualawlibrary
Road Lands;" that May 1, 1871, the company executed a deed of trust to the Union Trust Company of New York as trustee, conveying the canal, with all rights and franchises thereunto appertaining, and the six hundred thousand acres of land, to secure the payment of bonds which the company proposed to issue to the number of thirty-five hundred at one thousand dollars each, of which there were after wards issued and negotiated thirteen hundred, and no more.
It was further averred that between 1865 and 1872, the company hypothecated certain of the bonds issued under the first three deeds of trust, and during the years 1871 and 1872 hypothecated certain of the bonds issued under the fourth deed of trust, and only a small proportion of the bonds of each issue was ever sold outright by the company; that in November, 1871, and on January 18, 1872, the company defaulted in the payment of the interest then due upon these bonds, and that at that time large amounts of them were held by the Ocean National Bank, Johnston & Co., and Ayer & Co., as collateral to certain loans, which plaintiff charges were of doubtful legality, made by the parties to the canal company at different times before the default, and it was claimed by the company that the bonds pledged as security for the loans were issued unlawfully, and in violation of the law of Michigan.
That in December, 1871, the Ocean Nation