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The People's Welfare and the Origins of Corporate Reorganization: The Wabash Receivership Reconsidered

Published online by Cambridge University Press:  13 December 2011

Bradley Hansen
Bradley Hansen
Affiliation:
BRADLEY HANSEN is assistant professor of economics atMary Washington College, Virginia.
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Abstract

The 1884 receivership of the Wabash, St. Louis, and Pacific Railway is widely regarded as a turning point in the development of corporate insolvency law. It is said to have created a “new-fashioned receivership,” which enabled debtors to initiate and, to a great extent, control receiverships. It is said that these new-fashioned receiverships facilitated reorganization of the insolvent firm at the expense of creditors' rights. An examination of the history of railroad receiverships reveals that for decades before 1884 judges allowed managers to initiate receiverships, appointed managers as receivers, and forced creditors to accept changes in their contractual rights. Judges also refused to extend reorganization procedures to corporations outside the railroad industry, justifying their special treatment of railroads on the grounds that the foremost obligation of railroads was to serve the public. Analysis of railroad bond prices supports the conclusion that creditors' rights were not transformed by the courts in the mid-1880s.

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Articles
Information
Business History Review , Volume 74 , Issue 3 , Autumn 2000 , pp. 377 - 405
Copyright
Copyright © The President and Fellows of Harvard College 2000

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References

1 Classic studies of the influence of railroads on management and finance are Chandler, Alfred, Railroads: The First Big Business (New York, 1956)Google Scholar and The Visible Hand: The Managerial Revolution (Cambridge, Mass., 1977). More recent studies of the influence of railroads on corporate finance include Baskin, Jonathan Barron and Miranti, Paul, A History of Corporate Finance (Cambridge, U.K., 1997)CrossRefGoogle Scholar; and Tufano, Peter, “Business Failure, Judicial Intervention, and Financial Innovation: Restructuring U.S. Railroads in the Nineteenth Century,” Business History Review 71 (Spring 1997): 1–40.CrossRefGoogle Scholar Studies that have emphasized the relation of railroads to legal evolution include Merkel, Philip, “The Origins of an Expanded Federal Court Jurisdiction: Railroad Development and the Ascendancy of the Federal Court,” Business History Review 58 (Autumn 1984): 326–58CrossRefGoogle Scholar; Berk, Gerald, Alternative Tracks: The Constitution of American Industrial Order, 1865–1917 (Baltimore, 1994)Google Scholar; Freyer, Tony, Forums of Order: The Federal Courts and Business in American History (Greenwich, 1979)Google Scholar; and Karsten, Peter, Heart versus Head: Judge-Made Law in Nineteenth-Century America (Chapel Hill, 1997)Google Scholar.

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5 See Smith, John W., The Law of Receiverships (Chicago, 1897), 4.Google Scholar The appointment of a receiver is an equitable remedy that evolved in English judge-made law to address situations where common-law remedies were considered inadequate. On the evolution of equity and its role in American legal history, see Hoffer, Peter, The Law's Conscience: Equitable Constitutionalism in America (Chapel Hill, 1990).Google Scholar

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11 New York Times, May 29, 1884, 2. Judge Treat himself described the events in Central Trust Co. of New York v. Wabash, St. Louis and Pacific Railway Co., 29 Fed. 618 (1886).

12 Chamberlain, “New Fashioned Receiverships,” 143, citing Atkins et al. v. Wabash, St. Louis and Pacific Railway Co. et al., 29 Fed. Rep. 161 (1886).

13 Central Trust Co. of New York v. Wabash, St. Louis and Pacific Railway Co., 29 Fed. Rep. 618 (1886).

14 For a fuller description of the eventual reorganization, see Dewing, Arthur S., “Theory of Railroad Reorganization,” American Economic Review (1918): 786Google Scholar, and Grodinsky, Jay Gould, 427–46.

15 Quiney, Missouri and Pacific Railroad Co. v. Humphreys, 145 U.S. 82 (1892).

16 These attacks took place on both sides of the Atlantic. Julius Grodinsky, Jay Gould, 446-7, cited critical editorials in Bradstreet, the New York Times, the New York Herald, London Railway News, and the London Standard. To this list one may add North American Review 375 (Feb. 1888): 182; and the Commercial and Financial Chronicle, June 21, 1884, 720.

17 Bradstreet, August 2, 1884, 72.

18 New York Times, August 3, 1884, 7.

19 Central Law Journal 21 (1885): 2, quoted in Levi and Moore, “Bankruptcy and Reorganization: A Survey of Changes II,” 226. See also “The Wabash Receivership Case,” American Law Review 21 (Jan.-Feb. 1987): 144.

20 Chamberlain, “New Fashioned Receiverships,”

21 Atkins et al. v. Wabash, St. Louis and Pacific Railway Co. et al., 29 Fed. Rep. 161 (1886).

22 Quiney, Missouri and Pacific Railroad Co. v. Humphreys, 145 U.S. 82 (1892).

23 Chamberlain, “New Fashioned Receiverships,”144.

24 Ibid., 145.

25 Martin, “Railroads and the Equity Receivership,” 685.

26 Ibid., 692 and 708.

27 Ibid., 686.

28 Berk, Alternative Tracks, 58. For an alternative view of the 1898 Bankruptcy Act, see Hansen, “Commercial Associations and the Creation of a National Economy,” which argues that the law was the result of efforts by trade creditors, who wanted an effective law for the liquidation of an insolvent debtor's assets.

29 Roy, Socializing Capital, 108.

30 See Berk, Alternative Tracks, 56–60; and Roy, Socializing Capital, 108–09.

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32 See Chamberlain, “New Fashioned Receiverships.”

33 See Martin, “Railroads and the Equity Receivership.”

34 Berk, Alternative Tracks, 60.

35 Macon and Western Railroad Company v. Parker, 9 Ga. 377 (1851).

36 The analogy between a decedent's estate and that of an insolvent corporation has been emphasized by Glenn, Gerrard, ‘The Basis of Federal Receivership,” Columbia Law Review 25 (1925): 434CrossRefGoogle Scholar; and Stern, Jeffrey, “Failed Markets and Failed Solutions,” Columbia Law Review 90 (1990): 783.CrossRefGoogle Scholar

37 Macon and Western Railroad Company v. Parker, 9 Ga. 377 (1851). See also Glenn, “The Basis of Federal Receivership,” 442.

38 Macon and Western Railroad Company v. Parker, 9 Ga. 377 (1851).

39 The Covington Drawbridge Company and Richard M. Nebeker, Appelants v. Alexander O. Shepherd And Others, 62 U.S. 112 (1859).

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43 Kroeger, Harry, “Jurisdiction of Courts of Equity To Administer Insolvents' Estates, considered In Relation To Historical Antecedents,” St. Louis Law Review 2 (1924): 179.Google Scholar

44 Brassey v. New York & New England Railroad. Co. and others, 19 Fed. Rep. 663 (1884). See also Sage v. Memphis and Little Rock Railroad Co., 18 Fed. Rep. 571 (1883), in which a federal appeals court overturned the appointment of a receiver obtained at the behest of Gould's partner, Russell Sage, on the grounds that Sage had colluded with the management of the railroad and that it had in fact not even been insolvent. However, the Supreme Court later ruled that there had been nothing improper in the appointment. Sage v. Memphis and Little Rock Railroad Co., 150 U.S. 361 (1888).

45 Byrne, James, “The Foreclosure of Railroad Mortgages in the United States Courts,” in Cravath, Paul D. (ed.) Some Legal Phases of Corporate Financing, Reorganization, and Regulation (New York, 1917), 77.Google Scholar

46 See, for example, Smith, The Law of Receiverships, 4: “A receiver is an indifferent person between parties to the cause.” See also Wait, Frederick, A Practical Treatise on Insolvent Corporations (New York, 1888), 147.Google Scholar

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49 Daggett, Stuart, Railroad Reorganization (Boston, 1908), 39, 267, and 81.CrossRefGoogle Scholar

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51 Swain, “Economic Aspects of Railroad Receivership,” 99.

52 Central Trust Co. of New York v. Wabash, 29 Fed. 618 (1886).

53 Lauren C. Woodruff, Appellant, v. The Erie Railway Company et al., Respondents, 93 N.Y. 609.

54 Martin, “Railroads and the Equity Receivership,” 691.

55 See, for example, Foner, Eric, Reconstruction: America's Unfinished Revolution, 1863-1877 (New York, 1988), 512Google Scholar; and Friedman, Milton and Schwartz, Anna Jacobson, A Monetary History of the United States, 1867–1960 (Princeton, 1963), 56.Google Scholar

56 See Winks, Robin W., Frederick Billings: A Life (New York, 1991), 212Google Scholar; and Cochran, Thomas C., Railroad Leaders, 1845–1890 (Cambridge, 1953), 48.Google Scholar A peculiar feature of the case was that the reorganized company, the Northern Pacific Company, was allowed to keep its name. Typically, the name of the company would be changed in order to complete the illusion that the assets of the insolvent firm had been purchased by another corporation at a foreclosure sale. Often the name change was as simple as changing from Railway to Railroad. The Northern Pacific, however, needed to ensure that its land grants were not lost.

57 Kirkland, Men, Cities and Transportation, vol. 1, 56.

58 Brassey v. New York & New England Railroad Co. and Others, 19 Fed. Rep. 663 (1884).

59 Macon and Western Railroad Company v. Parker, 9 Ga. 377 (1851).

60 Redfield, A Practical Treatise Upon the Law of Railways, 576.

61 Ibid.

62 Covington Drawbridge Company and Richard M. Nebeker Appellants v. Alexander O. Shepherd and Others, 62 U.S. 112 (1858).

63 Ibid.

64 Barton v. Barbour, 104 U.S. 126 (1881).

65 See Canada Southern v. Gebhard, 109 U.S. 527. Carlos, Ann and Lewis, Frank, “The Creative Financing of an Unprofitable Enterprise: The Grand Trunk Railway of Canada, 1853–1881,” Explorations in Economic History (July 1995): 273–301CrossRefGoogle Scholar; and Currie, A. W., The Grand Trunk Railway of Canada (Toronto, 1957)Google Scholar examine the various arrangements of the Grand Trunk Railway. Lewis, Frank and MacKinnon, Mary, “Government Loan Guarantees and the Failure of the Canadian Northern Railway,” Journal of Economic History 47 (March 1987): 175–96CrossRefGoogle Scholar, examine the failure of the Canadian Northern Railway.

66 Justice Waite also wrote the opinion of the court in Munn v. Illinois, 94 U.S. 113 (1876), in which he declared that sic utere tuo ut alienum non laedes was the very essence of government.

67 Skiddy et al. v. Atlantic, M. & O. R. Co., 22 Fed. Rep. 274 (1879).

68 Ibid.

69 In his 1859 treatise, Isaac Redfield cited an opinion from Georgia, which explained, “The railway, like a complicated machine, consists of a great number of parts, the combined action of which is necessary to produce revenue.” Redfield, A Practical Treatise on the Law of Railways, 661.

70 See Meyer v. Johnston, 53 Ala. 237 (1875), quoted in Thacher, Thomas, “Some Tendencies of Modern Receiverships,” California Law Review 4 (1915): 32.CrossRefGoogle Scholar

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72 Union Trust Company v. Illinois Midland Railway Co.; Borg & Another v. Illinois Midland Railway Co.; Waring & Others v. Union Trust Company; Fletcher & Others v. Illinois Midland Railway Co., 117 U.S. 434 (1886).

73 Turner et al. v. Indianapolis, B. and W. Railway Co. et al., 24 Fed. Supp. 366 (1878); and Fosdick v. Schall 99 U.S. 235 (1879). See also Burnham v. Bowen, 111 U.S. 781 (1884), on the public's interest in the continued operation of railroads.

74 Central Trust Co. and Another v. Wabash, St. L. & P. RY. Co. and Others, 23 Fed. Rep. 863 (1885).

75 Thacher, “Some Tendencies,” 37.

76 See Smith, The Law of Receiverships, 5, 6, and 367, for a list of state statutes that empowered courts of equity to deal with the winding up of insolvent corporations.

77 See Seventh National Bank of Philadelphia et al. v. Shenandoah Iron Co., 35 Fed. Rep. 436 (1887), in which the court made this statement: “The position taken by counsel, that the claims for materials, supplies, and labor furnished the defendant company before the appointment of receivers have, under the general principles of equity, a preference given them over the lien of the mortgage bonds, cannot be sustained. This doctrine has never been applied to mining or manufacturing companies. It is, owing to the quasi public character of such companies, confined to railroad corporations.” On the distinction between railroads and other corporations, see Skeel, “An Evolutionary Theory of Corporate Law and Corporate Bankruptcy,” 1360. Hovenkamp, Herbert, “The Classical Corporation in American Legal Thought,” Georgetown Law Journal 76 (June 1988): 1593Google Scholar, examines the distinction between quasi-public corporations and private corporations made in other areas of the law (regulation and subsidies) in the nineteenth century.

78 See Farmers' Loan & Trust Co. v. Grape Creek Coal Co., 50 Fed. Rep. 481, where the court stated, “Instead of displacing mortgages and other liens on the property of private corporations and natural persons, it is the duty of the courts to uphold and enforce them against all subsequent encumbrances. It would be dangerous to extend the power which has recendy been exercised over railroad mortgages (sometimes with unwanted freedom), on account of their peculiar nature, to all mortgages.” See also Kneeland v. American Loan Co., 136 U.S. 89 (1890), for a similar statement from the Supreme Court.

79 See Fidelity Insurance Trust & Safe Deposit Co. v. Roanoke Iron Co., 68 Fed. 623 (1887); and Fidelity Insurance Trust & Safe Deposit Co. v. Shenandoah Iron Co., 42 Fed. Rep. 372 (1889).

80 Rosenberg, James, “Reorganization—The Next Step,” in, ed., Rosenberg, James, Corporate Reorganization and the Federal Court (New York, 1924), 93.Google Scholar

81 Finletter, Principles of Corporate Reorganization in Bankruptcy, 18.

82 Arthur Dewing, Finanaal Policy of Corporations, 1265.

83 New York Times, May 13, 1884, 5.

84 Ibid.

85 New York Times, May 29, 1884, 2.

86 See, for example, Bittlingmayer, George, “Antitrust and Business Activity: The First Quarter Century,” Business History Review 70 (Autumn 1996): 363–401.CrossRefGoogle Scholar Empirical studies dealing specifically with the effects of legal changes on credit markets include Shepard, Lawrence, “Personal Failures and the Bankruptcy Reform Act of 1978,” Journal of Law and Economics 27 (1984): 419–37CrossRefGoogle Scholar; Apilado, Vincent, Dauten, Joel J., and Smith, Douglas E., “Personal Bankruptcies,” Journal of Legal Studies 7 (1978): 371–92CrossRefGoogle Scholar; Boyes, William and Faith, Roger, “Some Effects of the Bankruptcy Reform Act of 1978,” Journal of Law and Economics 29 (April 1986): 139–149CrossRefGoogle Scholar; Domowitz, Ian and Eovaldi, Thomas, “The Impact of the Bankruptcy Reform Act of 1978 on Consumer Bankruptcy,” Journal of Law and Economics 36 (1993): 803–35CrossRefGoogle Scholar; Scott, Jonathan and Smith, Terence, “The Effect of the Bankruptcy Reform Act of 1978 on Small Business Loan Pricing,” Journal of Financial Economics 16 (May 1986): 119–40.CrossRefGoogle Scholar

87 Macaulay, Frederick R., Some Theoretical Problems Suggested by the Movement of Interest Rates, Bond Yields and Stock Prices in the United States Since 1856 (New York, 1938), A51–A59.Google Scholar

88 Lea Carry generously provided the data set on new issues that she had developed to examine regional interest-rate differences. For a more detailed discussion of the data, see Carry, Lea V., “Regional Interest Rate Premia in the American Railroad Bond Markets from 1876 to 1890,” Explorations in Economic History 33 (1996): 440.Google Scholar

89 Edelstein, Michael, The Rate of Return on U.K. Home and Foreign Investment, 1870-1913 (Ph.D. diss., Univ. of Pennsylvania. 1970).Google Scholar

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91 There were eighty-four receiverships established in 1884–85, in contrast to sixty for the five years from 1879 to 1883. Swain, “Economic Aspects of Railroad Receiverships,” 68.

92 Klein, The Life and Legend of Jay Gould, is the most notable attempt to present Gould as a builder rather than a wrecker of railroads.

93 Chamberlain, “New-Fashioned Receiverships.”

94 Martin, “Railroads and the Equity Receivership.”

95 Berk, Alternative Tracks.

96 Roy, Socializing Capital.

97 Calomiris and Ramirez, “Financing the American Corporation,” 150.

98 Novak, The People's Welfare.

99 Novak, Ibid., 42.

100 Canada Southern v. Gebhard, 109 U.S. 527.