"Pacific Railroad Debts." John T. Doyle, 1896.

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THE PACIFIC RAILROAD DEBTS. LETTER TO A SENATOR. Hon. JOHN A. SHERMAK, U. S. Senator, DKAR SIR: The public importance of the question will, I trust, be a sufficient apology for my 'publicly addressing you, on the subject of the pending proposals to extend the time of payment of the Pacific railroad debts, and inviting your earnest attention to the matter. For many considerations affecting it I refer to a memorial addressed to Congress by the "Committee of Fifty," appointed by the monster meeting held at Metropolitan Temple, San Francisco, on December 7th, 1895, of which a copy is herewith presented. Additional ones now urged refer mainly to the Central Pacific road, with which I am more familiar, hut I believe that most of them will be found applicable to the case of the Union Pacific, although upon facts differing more or less in detail. The Act of March 3rd, 1887 (Statutes Vol. 24, p. 488), provides that whenever, in the opinion of the President it shall be " necessary for the protection of the interest and the preservation of the security of the United States " the Secretary of the Treasury and the Attorney-General, under direction of the President, shall take steps dscribed in the fourth section of said act; and among others " steps to foreclose any mortg f (fen or liens fif the United States on any 'ra'ilrond •property.''1 As the Attorney-General would have authority, under his general powers to take proceedings for the collection of moneys due tlie United States, this enactment must be understood as a special direction to the President, to determine personally the time to act in the case of these railroad debts, as well as an expression of the judgment of Congress that foreclosure of the liens is the proper course, whenever the executive shall decide that the time for action has come. As that Congress gave much attention to this whole subject of the Pacific roads, its judgment, expressed in legislation, should .command corresponding respect. No public interests demand any further legislation, now, nor has any been urged by the executive, except a law to simplify and expedite legal proceedings, by conferring complete jurisdiction on theJJ- S. Court of the District of Columbia. The time for action has evidently come, for the debt is due and the security is inadequate, and it does not admit of doubt that this is the unly proper and business-like course to pursue; for, independent of iill moral and political objections to condoning such gros-- oftrn.-'es as those here involved, there is another mortgage on flip road, the holder-; of [ 62] which'claim priority over the Government lien. This priority has been hitherto generally assumed .without inquiry, but this was in ignorance of material facts recently brought to light. Those facts are of record and incontestible, and their importance cannot be denied. The amount involved (about one-fourth of the whole Central Pacific debt) is too serious to be lightly dealt with. This claim of priority must therefore be judicially determined; .justice to the United States and especially to the people of this Coast demands it, and this can only be done in a foreclosure suit. Such a suit too is the only way of securing the whole road with its necessary appurtenances towards satisfying the debt. And all these appurtenances must be kept with, and belong to the road, or the latter itself becomes useless. A railroad cannot be operated without terminal grounds, ferryboats where needed, bridges, rollingstock and like instrumentalities. Many million dollars in value, of such property will therefore undoubtedly be lost to the public if Congress undertakes to deal with this question without previous judicial ascertainment of the extent and particulars of it, belonging to each of the companies, and justly subject to the Government lien. Here are some notable examples of what I refer to: The Union Pacific road possesses terminals in Omaha, Kansas City, Ogden and other cities on its route, of great value; those above named alone are estimated in the report of the Pacific Railroad Commission at fifteen million, three hundred thousand dollars. The company claims that they are not subject to the Government lien. A contrary opinion is expressed by others, and the question is an open one; it is judicial in character and can only be determined by a suit wherein the lien is asserted and foreclosure sought. Similarly the State of California donated thirty acres in the heart of the city of San Francisco to the Western (now Central) Pacific road, expressly/or terminal uses, and the area has since been enlarged more than fifty per cent. by the closing of intersecting streets. As the Central Pacific road has no other terminals in San. Francisco, this property is indispensable to the future use and value of the road. Claimed in foreclosure proceedings it would doubtless be held to be an appurtenance of the road, incapable of severance from it. But if the case be disposed of by an Act of Congress, the contrary will almost as surely be the result; for the gentlemen who control and manage the Central Pacific have put a mortgage on these terminal grounds, under which they had issued at their last annual report (March 31,1895) bonds to the amount of $12,283,000; and while it is quite safe to say that these bonds have never got into innocent hands, and that the transaction cannot stand for a moment if properly brought before a court, yet if Congress extends time for payment of the debt, it will go unchallenged until mere lapse of time will put it beyond the reach of legal redress Meantime the bondholders, who are of course one or other of the numerous companies these people form, lose nothing, for they are getting interest on their bonds. For this fraud, foreclosure is the only remedy; an Act of Congress cannot reach it, for no Act of Congress can determine tlie title of land in California, or the rightful or fraudulent chanicter of a conveyance. Here ^o^f111^88 termina1 grounds of the two roads alone, are at least ^7,UUU,000 worth of property, to lie either saved to the public uy foreclosure, or lost by refunding. What conscientious man, charged with the responsibilities of legislation, can feel warranted in voting for a law which waives, without judicial inquiry, public rights of such magnitude? [ 63 ] There are, without doubt, many other cases of accretions to the mortgaged premises, which foreclosuee would bring to light and secure, and which would be lost by refunding. We have for example public record of a Central Pacific mortgage, dated April 1st, 1889, covering a number of station grounds and the like, commonly supposed to be appurtenances of the road, but which this document suggests are claimed by the managers to be distinct properties; and the instrument indicates that in preparation for the worst they have seasonably mortgaged them —to themselves. What further instances of this kind the Union Pacific road may afford, I am uninformed, but in connection with the Central Pacific I direct attention to such things as the ownership of the ferry between iSan Francisco and Oakland, and that at Benicia, across the straits of Carquines; I observe that the former of these is for certain purposes accounted in the reports and public acts of the company as a part of the road; yet we do not find in such reports any account of the large revenues of the ferry, and it would be an amazing and unprecedented thing, if a property of such value were not found to stand in the names of the managers or one of their convenient corporations. I believe that the company's title to it and to much other valuable property, and the validity of the government lien would be established in foreclosure proceedings. Then there are the engines and rolling stock belonging to the road, to be considered; they should all be identified, inventoried and earmarked in any settlement. A little paint has often heretofore changed the apparent ownership of an engine or car and may easily do so again. Nothing is more frequent here than to see engines and cars marked " C. P. "R. R." running over roads other than the Central Pacific. Has Congress or any of its Committees any inventory of this movable property or any statement of its whereabouts? In view of all the considerations affecting the question I respectfully submit that the only safe and prudent way to deal with this problem is that which any business man would adopt in similar case, viz.: first-ascertain all the facts of the case authentically; learn distinctly what are your rights, and what can be secured by legal proceedings, before entering into any treaty of compromise; make sure too that the facts of the case cannot be changed while settlement is under discussion. If you are taking property, look to the title, and see that it is properly described and comes to you unincumbered. All this is the more essential where the conclusion reached is to take the form of legislation, which will remain effective, even though the consideration on which it was based proves false or fails. Here you are taking the facts on trust and assuming, most unwarrantably, that you know them all. You do not. If Congress undertakes to take title to, or security on this Central Pacific road, without previous judicial ascertainment and adjudication of the details of property and its title, it will probably get a road without terminals, ferrry accommodations, or adequate stations or rolling stock; a skeleton road; what has been epigramatically described as " two streaks of rust and a right of way."* * It is not generally known that the railroad business carried on by these parties, for the past twenty years, has been done not for the legitimate profits of transportation, but for those derived from the issuance and sale of railroad bonds. Every piece of property any of the roads becomes possessed of, is straightway mortgaged, for all it will possibly bear, and the bonds talien by the managers themselves, under r 64 ] It seems to be forgotten in Washington, yet the incident is worth remembering that only last year the English stockholders of the road sent Sir Rivers Wilson to California to enquire into the companies affairs and learn why their accustomed dividends had been entirely stopped, &c. Sir Rivers, after concluding his investigations returned home and obtained the consent of his constituents to a compromise-it was all reported in the English papers—by which they were to get a dividend of one per cent. per annum for the next three years. As the capital stock of the company is $67,275,500, the payment of these three dividends will call for $2,018,265, and they cannot be lawfully made save out of actual profits. How then are these dividends to be arranged? The company is confessedly insolvent; that is the ground for its plea fora Congressional extention of time. It is behind hand many millions on payments past due and urgent, on which foreclosure may be commenced to-morrow. Are these to be deferred to pay the dividends bargained for, or are the latter to be made up by private parties interested in preventing exposure? We cannot answer these questions; but we may feel assured that the transaction is not, for it cannot be an honest one. The most probable conjecture seems to be that the money is to be paid by parties interested, to buy their present peace, and that the payment is distributed over three years, and put in the shape of dividends to enable the present holders to sell out their shares to the unwary public. Practically the U. S. Congress is asked to pass an act to facilitate this very honorable stock jobbing operation. Attention has been elsewhere called to the fact that the charter of the Central Pacific Company will expire in about twenty years. The honest people of this State have long looked forward to that period in the hope to see it then liquidated, and an end at last, put to its vicious and odious methods of business. If Congress grants it an extention of the time to pay its debt, beyond the expiration of its charter, what consequences will follow? A distinguished lawyer in San Francisco has the now familiar disguise of a construction company. The interest is punctually paid (or receipted for) by themselves to themselves, until by the aid of stock board manipulations the ownership of the securities is gradually transferred to the public, in search of investments. The mortgages iire usually so arranged as to present the semblance of a substantial security, and yet to afford no real one to the holder, because,the thing mortgaged is wholly incomplete and unserviceable, without some other property which is mortgaged to other parties for other debts. The Southern Pacific Company as geuerallesyee can put all the separate parcels to profitable use, but the mortgagees when they come to foreclose and own the security will lind they have got but one leg of a pair of tougs, the other leg of which is retained by the S. P- 001'""18 P^1181" mode of dealing is fairly illustrated by the -uortgage of the Central Facihc railroad to secure one set of bonds, and the terminal grounds, indispensable to its utility, to secure another, while the connecting ferry is a separate property belonging to neither. Similarly the lirst mortgage of the Southern Pacific railroad (April 1, 1875.) nominally covers a single road leading from Sau Francisco to the Colorado river. Passengers and freight sent overland via the Southern Pacific road are supposed to pass over the mortgaged line and no other; but this is a delusion; for wnen tne mortgage was, made, the road was under construction and it was built in Plorn v'u ^r^^cllou of 75 miles or so, connecting the truck through the Santa mn.ilif^ w! bafc thl'o\\S^ ^e valley of the Sau Joaquin (a very difficult piece of i-Hinc iT T0^ ^ ^P6"31^ to construct} has never beeu built, and the building of Ih^oir^011^011^. .^^"gei-f and freight by the S, P. road are dependant on SftnF111-0^^'01^ (i3an ^•q1"" Vil^y division) and other roads for access to mTna^c i T bonds of thia issue ^"S alt ^eu shoved off to the public, the pSiB?065"^^0 ^se\ auy motive for building the connecting link across the boiidsSr ^ dl"thoe-^' ^^"'•tgiige (Sep, 15,°1893) coveuniit ?o issue no more oS^nde^ \? t0- ^P'^'ii^quivrtleut to 11 covenant never to complete the original road described in that mortgage. These are specimen .aaos. [ 65 ] expressed the opinion that the debt may he lost, the promise to pay nt a period beyond its charter life, being ^firnri.rcK. Perhaps he is right; hnt for my part I should he more apprehensive that the enactment would be successfully claimed as a k Federal franchise^ and a Congressional extension of corporate powers, which would entirely subtract it from the jurisdiction, and control of the State, under whose laws it came into existence and within whose limits its business is carried on. This is too serious an encroachment on conceded State rights, and too dangerous a precedent to he lightly hazarded. It is worthy of note, too, that none of these refunding bills come before Congress with any official sanction. They are not asked by the executive, to whose hands Congress has committed the business, nor are they even petitioned for by the companies concerned: they are all promoted by private suggestion, or by the solicitation of persons whose private interests are affected; these are controllers of rival railroad lines, and persons who, having wrongfully misappropriated the assets and means of the subsidized roads, are interested in the condonation of their frauds, which all extension and refunding schemes necessarily involve. Mr. Huntington, the most conspicuous promoter of refunding, has publicly stated that he does not own more than one hundred shares of Central Pacific stock; his interest in the question is, notoriously, as one of the original directors, who divided between themselves the assets of the company, and as the head of the Southern Pacific, which afterwards took away its trade and reduced it to its present fallen and bankrupt condition. Nor do these people even approach Congress with any formal statement of what they propose to do, or pretend they are able to do, in the way of discharging their obligations; they commit themselves to nothing whatever; they write nothing, sign nothing: their communications are made orally, to committees or individual members, in private conversations; so that when they shall have secured the desired. legislative condonation for the past, they may violate every promise to the public, made or intimated, and members whose votes they have won by such means will have nothing to show on which to justify their action. Legislation so promoted is always dangerous and objectionable, and generally vicious; to such we are indebted for all the mistakes and errors hitherto committed in railroad legislation, whether by Congress or by our State Legislature. It is the constant resort of those who propose to profit by the imprudence, credulity or good nature of members of the legislative body, whose confidence they abuse. It is time that such methods of dealing with great public interests, and taking the words of interested railroad managers as a basis for legislation, should cease. And as the means at the command of Congress for ascertaining facts are quite imperfect, and (what is equally important in such cases as the present) as it is powerless to prevent, by injunction or Us pendens, a change of conditions pending legislation, judicial ascertainment of facts and custody of the property involved are essential prerequisites to intelligent or safe action. This can only be had by foreclosure. It must not be forgotten that these bond aided roads have been so utterly stripped of all their available assets—bonds, subsidies, cash subscriptions, lands—that unless these misappropriations are restored and the managers compelled to turn over to the companies, property equitably belonging to them, they will have no means from which to pay the government debts except their power to earn money by trans- [ 66 ] porfcation. And as -their monopoly of overland transporation has Ceased, the money must come from local freights in California. This is demonstrated in the report of Governor Patterson of the U. S. Railway Commission, and frankly admitted by Governor Stanford himself in his letter of December 19th, 1889, to Senator Frye. (Sen. report No. 293, 51st Congress, 1st session, p. 76) wherein he says, " If the Government is to be paid, it must be chiefly out of the earnings of the local roads in California" This would be a cruel injustice to the poor people of this State who have already suffered so much from the exactions of this company, and it seems to me that if Congress is decided not to press for an immediate restoration of sequestered assets it were better by far to forgive the debt, and thus throw its loss on the whole country, than under the name of an extension of time for payment to saddle it on the people of this State. As to an attempt to extend the time of payment and at the same time proceed against the delinquent managers for restoration of misappropriated assets, it will prove a mere delusion; the plaintiff in such an action must have a position wherein he represents the rights of a creditor whose debt is due and unpaid, and the stockholders whose property has been fradulenLly misappropriated by the directors of the company. Such would be the position of a receiver appointed in a foreclosure suit with instructions to get in all the assets of the company legal and equitable, for the purpose of paying debts. Foreclosure is objected to by some persons because it is associated in their minds, with Government ownership and operation of the roads. But there is no necessary connection between the two ideas; on the contrary Congressional settlement of the case is the most likely course to lead right up to State ownership. For it is morally certain that the Central Pacific road can never earn the amount proposed to be charged on it, and the result must be that when the condonation of past offences has been secured, the managers will abandon it to the Government. The great object of foreclosure is to ascertain with judicial certainty and accuracy the details necessary to be known, before Congress can act intelligently; to rescue what can be rescued from fraudulent alienation, and to secure the property against further incumbrance or change while that body is deliberating. The order and the priority of the liens; what specific property each of them covers; and what means of collection the law affords outside the mortgage, i. e., who is liable for the deficiency; must all be ascertained by authority before anything else. This done, the terms of sale will be in order, and Congress may then wisely interpose and define them. Its action will naturally be affected by the order of priority of the liens, and the ascertained earning capacity of the road, when operated by an impartial receiver. Purchase at the sale should be open to all the world, not as contemplated by these refunding schemes, confined to its present managers. There need be no fear of want of bidders, if people know what is included in the sale. If the holders of the so-called (( first mortgage bonds" are declared entitled to preference over the lien of the United States, the Government will pay them off under the act of 1887, and be yubrogatecl to their rights. But if their lien proves subordinate to that of the Government, they will have to combine and buy the road for their own protection, or lose their money: and there will be other competitors. Each of these results is widely different from and vastly preferable to any refunding of the debt, L '•" J which, if effective, saddles it upon the people of this State,* and perpetuates the control of the property in the hands of those who have had it from the beginning, and who are responsible for all the disgraceful past. They first impoverished the company by misappropriating its assets to their own gain; then by the use of its credit they built a rival road, to be its most formidable competitor in business and finally rented it to themselves under a flimsy corporate disguise, for ninety years ahead, on tern-is which render it the mere satelite and handmaiden of that competitor. Such a history ought to disqualify them from bidding on the property, instead of entitling them to an exclusive right to purchase it. It is probable that most members of Congress who are considering this question are unaware of important facts which should be known and which there are easy means of verifying. Is it for example known to them that the great Central Pacific Railroad Company is no longer a living organization? That it has abdicated and abandoned its functions as a carrier and never, turns a wheel or carries a passenger or a pound of freight, and that the great bulk of its stock is held by people who fear to avow their ownership lest they be held responsible for its debts? Such however is the fact. The original owners have, with one exception, sold out their holdings to persons residing abroad, who withhold their shares from transfer, and decline to register their ownership lest they be made responsible for the debts; the managers keep control of the organization by the use of proxies taken years ago from those in whose names the shares then stood. The road is leased to the Southern Pacific for three or four generations ahead and that concern pays ten thousand dollars per year rent, enpressly to enable the great Central Pacific Company to keep up its corporate organization—i. e. pay salaries, keep an office, and maintain a semblance of animation, sufficient to avoid a forfeiture of its charter for non user! In present hands it is not only a bankrupt, but a fraudulent bankrupt, for it has alienated all its means to its own directors in fraud of its creditors. This is the concern with which committees of Congress condescend to treat and accept assurances from, through self-appointed agents, as if it were a living organization, and its statements and promises of any value! The lease referred to went into effect January 1st, 1894; and is printed in the annual report of the Southern Pacific Company for the year 1893, at pages 103 and 104. Senator Sherman, the people of California have faith in you and trust you; predisposed to this by their affectionate admiration for your brother the General, who roughed it here with us in early days, and whom they proudly reckon as one of themselves, they have been "The report of the Pacific Railway Commisyiou (Vol. X, p. 87, shows that the net earnmga of the Central Pacific road, over all operating expenses, taxes, interest on debts, and Government requiremeuts—absolute clear profits—were as follows: Down to December 31st, 1869-.......................... ............® 2,427,533.80 Thence to December 31st, J873....... .................... .......... 6,575,519.32 Thence to January 1st, 1884 ..... ., ............... .............. 52,536,916.99 In all ....$61,539,970.19 The capital stock is shown in the same report to have been entirely ficiiilous, and the whole of the $246,062,365 (the gross receipts from which tins residuum was derived, was wrung from the pioneers of the Pacific Coast and chiefly (rom the peo-pie of California, by excessive charges levied mainly on local traffic. Honestly applied it would have extinguished the whole government debt.