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U.S. Supreme Court

In re Metropolitan Railway Receivership, 208 U.S. 90 (1908)

In re Metropolitan Railway Receivership

No. 11, 12, Original

Argued December 9, 1907

Decided January 1, 1908

208 U.S. 90


An unsatisfied justiciable claim of some right involving the jurisdictional amount made by a citizen of one state against a citizen of another state is a controversy or dispute between the parties within the meaning of chanroblesvirtualawlibrary

Page 208 U. S. 91

the statutes defining the jurisdiction of the circuit court (Acts of March 3, 1875, c. 137, 1, 18 Stat. 470; March 3, 1887, c. 373, 1, 24 Stat. 552; August 13, 1888, c. 866, 1, 25 Stat. 433), and such jurisdiction doe not depend upon the denial by the defendant of the existence of the claim or of its amount or validity.

In this case, there being such a claim, and the requisite diversity of citizenship, the circuit court had jurisdiction although the defendant admitted the facts and the liability, waived the objection that the complainants were not entitled to equitable relief, and joined in the request for appointment of receivers.

The mere fact that the defendant is engaged in interstate commerce does not give the circuit court jurisdiction; in cases in which this Court has sustained the jurisdiction of the circuit court in the appointment of receivers, jurisdiction existed by reason of diversity of citizenship, and not merely because the defendants were engaged in interstate commerce.

The defense in an equity suit that the complainant has not exhausted his remedy at law, or is not a judgment creditor, may be waived by defendant, and when waived -- as it may be by consenting to the appointment of receivers -- the case stands as though the objection never existed.

Where the averments of the bill are true, and there is no question as to the diversity of citizenship, or any evidence that a case was fraudulently created to give jurisdiction to the federal court, the case will not be regarded as collusive merely because the parties preferred to resort to the federal court instead of to a state court; in the absence of any improper act, the motive for bringing the suit is unimportant.

After the federal court has properly obtained jurisdiction over a corporation and has appointed receivers thereof, an order permitting other parties closely identified therewith to intervene and extending their receivership over them is not of a jurisdictional nature, and in this case, the discretion was, in view of all the facts, properly exercised.

A receivership of a railroad as a going concern, although at times necessary and proper -- as in this case, where the refusal to appoint a receiver would have led to sacrifice of property, confusion among the creditors, and great inconvenience to the traveling public -- should not be unnecessarily prolonged, and in case of unnecessary delay, the court should listen to the application of any creditor upon due notice to the receiver for the prompt termination of the trust or vacation of the order appointing receivers.

These are original applications to this Court for leave to file a petition for a mandamus, or, in the alternative, for a prohibition, addressed to the Honorable E. Henry Lacombe, one of the circuit judges of the Second Circuit, commanding him and the circuit court to dismiss the bill of complaint against the railroad companies hereinafter mentioned, and all proceedings chanroblesvirtualawlibrary

Page 208 U. S. 92

therein, and to vacate injunctions therein issued by such judge, and also to vacate the orders appointing pointing the receivers of such railroads, and to desist from exercising any further jurisdiction over such roads in such suit, or, in the alternative, commanding the judge to allow petitioners' intervention, or that a writ of prohibition might issue to obtain the same relief.

It is alleged in the petition in No. 11 that the petitioners are creditors of the Metropolitan Street Railway Company on account of injuries alleged to have been received by each, through the negligence of the company's servants -- in one case sometime prior to June 27, 1895, and in the other on or about June 13, 1892. Actions had been brought by each, and are still pending at the time of this application.

In No. 12, it is alleged that the petitioner is the administrator of one Paul Planovsky, deceased, and as such he recovered a judgment for damages for the death of the decedent against the New York City Street Railway Company for over $8,000, which is still unpaid, the company having appealed from the judgment to the appellate division of the supreme court of the State of New York, and the appeal is still pending. The petitioner also alleged a cause of action in his own behalf, arising out of the refusal of the company to give him tickets entitling him to transfers, by which he was, as he alleged, damaged by the payment of additional fares to the amount of at least $200.

The further facts set up in each of the petitions are substantially identical.

Upon reading the petitions, orders were made allowing them to be filed, and rules to show cause why the petitions should not be granted were thereupon entered, returnable before this Court on the ninth of December, 1907.

On that day, there was duly filed a return of the circuit judge in each proceeding, who gave therein a short history of the litigation culminating in the appointment of receivers of the railroads mentioned, and stating the then condition of such chanroblesvirtualawlibrary

Page 208 U. S. 93

litigation. There were filed as a part of such returns copies of the bill of complaint under which the receivers were appointed and of the answer of the New York City Railway Company, and also copies of certain affidavits made in behalf of complainants and defendant in the suit.

It is upon the case made by the petition for a mandamus and the return of the circuit judge that the questions arise for the decision of this Court.

It appears from such record that, in September, 1907, the New York City Railway Company and the Metropolitan Railway Company were corporations organized under the laws of the State of New York, and that the New York City Railway Company was operating a system of surface street railroads in New York County, as the owner or some and the lessee of others. The Metropolitan Railway Company was interested either as owner or as lessee of some eighteen separate and independent railroads, all of which it had leased to the New York City Railway Company by lease dated February 14, 1902, for 999 years.

While the New York City Railway Company was operating these various railways, a bill against it was filed September 24, 1907, in the United States circuit court for the Southern District of New York by the Pennsylvania Steel Company, a citizen of Pennsylvania, and by the Degnon Contracting Company, a citizen of New Jersey, as complainants, in which the complainants alleged an indebtedness due from the railway company oon Contracting Company, a citizen of New Jersey, as complainants, in which the complainants alleged an indebtedness due from the railway company oon Contracting Company, a citizen of New Jersey, as complainants, in which the complainants alleged an indebtedness due from the railway company of over $30,000 to the steel company and over $11,000 to the Degnon Company for rails and other track material and for labor done for the company at its request, and that payment of the debts had been demanded of the railway company by each of the complainants, and refused. It also appeared that the defendant was insolvent; that it was operating -- as owner of some and lessee of other portions -- a system of some 500 miles of track, covering substantially all the surface railroads in New York, comprising many different companies, which owned many different railroads, chanroblesvirtualawlibrary

Page 208 U. S. 94

which had been leased to the Metropolitan Railway Company and by it leased to the defendant company; that all the roads which had been leased to the defendant company were covered by many separate and independent mortgages for different sums, maturing at different times; the New York City Railway Company was under obligations to pay the interest on the funded debt of its lessor, by reason of the lease from the Metropolitan Railway Company under which it was operating these various roads. Failure to meet the interest on the funded indebtedness as it matured would operate as a default and would render the mortgages enforceable.

One of these mortgages was for over twelve and another for over sixteen millions of dollars, and other mortgages increased the whole mortgage debt, on all the lines, to about one hundred millions of dollars. The New York City Railway Company, as lessee, had expended more than twenty millions of dollars in improvements, and was also indebted in other large sums, aggregating between five and ten millions of dollars more, by reason of expenditures for equipment and for repairs; also for taxes, and also for a large amount of floating indebtedness, besides which there were a great number of suits pending against it to recover damages for alleged injuries sustained through alleged negligence of its servants, and which were on the calendars of the New York courts, and the plaintiffs therein were pressing for trial. If judgment were obtained in any of these cases, or in any other of the cases where creditors were pressing their demands, it would result in disastrous consequence to the public, by a possible sale and dismemberment of the system under which the railroads were then operated, and might result in sales of portions of the roads to different individuals or corporations, by reason of which it would be impossible to continue the transfer of passengers from one road to another for one fare, such as was then in operation, and a sale of the roads would probably be for a sum greatly beneath their value, and thus the security for all the creditors for the ultimate payment of their claims would be impaired and very chanroblesvirtualawlibrary

Page 208 U. S. 95

greatly injured. The defendant was, as it is stated, unable to pay these various obligations as they matured.

For these and other reasons stated with great detail in the bill, it was asked that the court would take the road into its possession, and that the creditors of the defendant might be ascertained and the court fully administer the fund, consisting of the entire railroad system and other assets of the defendant; that the assets should be marshaled and the respective liens and priorities existing therein should be ascertained, and that the court should enforce and decree the rights, liens, and equities of all the creditors of the defendant, as the same might be finally ascertained by the court; that, for the purpose of preserving the unity of the system, a receiver might be appointed, with power to collect all the assets of the company, and with authority to run and operate the railroads and collect and receive all the rents due and apply the income thereof, under the direction of the court, for such period as the court should order, and for the purpose of protecting and preserving the railroads and assets and property, real and personal, from being sacrificed under proceedings liable to be taken, which might prejudice the same, and that, temporarily and pending the suit, an injunction might issue against the defendant and all persons claiming to act by, through, or under it, and all other persons, restraining them from interfering with the receiver taking possession of the property, and that complainants might have such further relief as was proper.

Upon the filing of this bill, a subpoena was duly issued and served upon the defendant, the New York City Railway Company, and an answer was put in by that company, which admitted all the allegations of the bill, and it joined in the prayer of the bill that the court should take possession, by receiver, of the system of railroads operated by the defendant, and that the receiver should, after taking possession of the entire property, preserve, manage, operate, and control the same, and should pay all the indebtedness due or to become due, and chanroblesvirtualawlibrary

Page 208 U. S. 96

otherwise discharge all the duties imposed by courts upon receivers in similar cases.

Upon this bill and answer, an application was made to the circuit judge for the appointment of a receiver, and such application was granted, and receivers were duly appointed, with directions to operate the road. They were given power to borrow money, if needful in their judgment, in order to comply with the order, and make appropriate payments on account of accruing rent and other necessary charges, so far as might be necessary to pay off current expenses for labor and supplies, but for no other purpose without the order of the court. The defendant and its officers, and all persons claiming to act under the defendant, and all other persons, were enjoined from interfering in any way with the possession and management of the property by the receivers, and it was ordered that the defendant should show cause on the seventh of October, 1907, why the receivership should not be continued during the pendency of the suit, and upon the hearing thereon, it was ordered that any other creditors of the defendant, or any other party in interest, might be heard.

Prior to the seventh of October, 1907, the Metropolitan Railway Company presented a petition to the circuit court, wherein it asked to be made a party to the original suit of the steel company and others against the New York City Railway Company, and that the receivership under the bill might be extended so as to expressly embrace the interests of the Metropolitan Railway Company in the property. The petition showed the foregoing facts in relation to the lease of the property to the New York City Railway Company, and it averred that, by reason of these leases and the various mortgages upon portions of the property, and the operation of all the miles of railroad as one system, and because of the fact that the property of the Metropolitan Railway Company was all of it so leased to the New York City Railway Company that it had to depend on the solvency of the latter company in order that payment might be made on the various mortgages on the chanroblesvirtualawlibrary

Page 208 U. S. 97

various roads for which the Metropolitan Railway Company was responsible as lessee, and which it had also leased to the New York City Company, the two companies were so inextricably bound together that, if the New York City Railway Company went into the hands of a receiver, and all its property were taken possession of by that officer, it was necessary, in the interest of all concerned, that the Metropolitan Railway Company should also be made a party to the suit and the receivership extended to it. Under this petition, the court granted an order making the Metropolitan Railway Company a party defendant and extending the receivership to it, and the injunction was also extended so as to enjoin that company from interfering with the possession of the receivers.

In October, 1907, an application was made to the circuit court on the part of those who are now petitioners in this Court, in which application it was alleged that the bill of complaint in the above-mentioned suit, and the answer consenting to the appointment of receivers, and admitting the allegations in the bill, were filed collusively for the purpose of avoiding the jurisdiction of the courts of the state, and for the purpose of creating a case cognizable under the Judiciary Act of the United States by the United States courts. And it was averred that the suit in which the bill and answer were filed did not and does not really and substantially involve any dispute between the parties, nor did it involve any real or substantial controversy between them, or any dispute between them which was within the jurisdiction of the court. All these averments were reiterated in the petitions presented to this Court. Various other facts were included in the petition to the circuit court, and it was prayed that an order might be made dismissing the bill in equity for fraud, collusion, and want of jurisdiction, and setting aside the order appointing a receiver, or, in case that application was denied, then that the order appointing a receiver should be amended by providing that liabilities for personal injuries and for causing the death of individuals should have the preference over other claims on chanroblesvirtualawlibrary

Page 208 U. S. 98

the distribution of the assets. The petition was subsequently amended so as to add a further prayer that the petitioner, individually and as administrator, might be allowed to intervene in the suit on behalf of himself individually and as administrator and on behalf of all other judgment creditors of the defendant who might come in and contribute to the defense of the suit.

In opposition to this application, affidavits were presented by the persons who had verified the original bill of complaint in behalf of the two companies against the New York City Railway Company (and copies of these affidavits are made parts of the returns of the circuit judge), denying that the purpose of the suit or of the application for the receivership was for stock jobbing or other improper purposes, and each admitted that the suit was brought in the circuit court of the United States for the purpose of having that court take jurisdiction, and denied that there was any impropriety or collusion or anything else wrongful in the conduct of the complainants. Each affidavit contained an averment that, as nonresidents of the State of New York, complainants had an absolute right to decide whether to bring the suit in the courts of the United States or in the courts of the State of New York, and it was denied that the object of the suit was anything else than appears on the face of the bill -- namely, the administration of the assets of the defendant in a proper court having jurisdiction thereof. All charges of collusion and suppression of facts and of wrongdoing were denied absolutely. And a similar affidavit was made by the officers of the New York City Railway Company who had verified the answer to the bill of complaint, and copies thereof are also made part of the returns of the circuit judge. The application was denied.

On October 25, 1907, a decree was entered adjudging the New York City Railway Company to be insolvent and ordering a reference to a master to take proof of claims and report to the court, providing that all claims should be presented to the master on or before November 30, 1907, and that the chanroblesvirtualawlibrary

Page 208 U. S. 99

master should give public notice accordingly, the notice to contain a statement of the time and place of first hearing before the master.

On the ninth of November, 1907, the court made a similar order, adjudging the Metropolitan Railway Company insolvent, and adjudging that its assets should be marshaled, and appointing a master as in the other case.

The order containing the appointment of the receivers permitted all pending suits against the New York City Railway Company and the Metropolitan Railway Company, which were begun before the receivers were appointed, to be prosecuted to judgment. In regard to claims for damages resulting from accidents before the receivers had been appointed, but in which suit had not been commenced at the time of such appointment, it was provided that they might be filed with the receivers, and might go to a master for adjustment, and, in any case, it was ordered that, if the plaintiff wished a jury trial, he might have it, and the claim, if judgment were obtained, would thereby be liquidated, and would rank with claims already in suit.

As a reason for commencing these proceedings, petitioners averred that they could not appeal from the order of the circuit court denying their application for leave to intervene in the suit commenced by the Pennsylvania Steel Company and others, nor could they take any steps in that suit, and, as they were enjoined from taking any proceeding in regard to the possession by the receivers of the property of the two railway companies, they were without any remedy looking toward a review of the order's and decrees of the circuit court other than by the application to this Court in the manner they are proceeding.

In the course of his decision on the application to make the receivers permanent, the circuit judge said, in relation to the allegations of collusion, as follows:

"There is no collusion apparent in any legal sense. It is, of course, manifest that complainants and defendants were entirely

Page 208 U. S. 100

in accord, and arranged together that the suit should be brought to the federal court, and that the averments of the bill should be admitted by the answer. But there was no colorable assignment of some claim to a citizen of another state, nor any misrepresentation or distortion of facts to mislead the court. On the contrary, examination of the books shows that the financial situation is precisely such as was averred in the complaint."

And in relation to extending the receivership to the Metropolitan Railway Company and allowing that company to be made a party defendant, the court said:

"Having taken its entire property into possession of the court under conditions which left it powerless to recover the same for a year, the receivership left it wholly without means to meet its obligations, and it seems to be clearly the duty of the court which has thus deprived it of its resources to protect it against execution while receivers handle and distribute those resources. "

Page 208 U. S. 106

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