Opinion of the Court.

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est in maintaining and enforcing the restriction which cannot be affected by such a judgment or decree. This Court has said in dealing with a like situation: "It necessarily follows that, as a transfer of the allotted lands contrary to the inhibition of Congress would be a violation of the governmental rights of the United States arising from its obligation to a dependent people, no stipulations, contracts, or judgments rendered in suits to which the Government is a stranger, can affect its interest. The authority of the United States to enforce the restraint lawfully created cannot be impaired by any action without its consent." Bowling and Miami Improvement Co. v. United States, 233 U. S. 528, 534. And that ruling has been recognized and given effect in other cases. Privett v. United States, 256 U. S. 201, 204; Sunderland v. United States, 266 U. S. 226, 232.

But, as it appears that for many years the United States has employed and paid a special attorney to represent the Pueblo Indians and look after their interests, our answer is made with the qualification that, if the decree was rendered in a suit begun and prosecuted by the special attorney so employed and paid, we think the United States is as effectually concluded as if it were a party to the suit. Souffront v. Compagnie des Sucreries, 217 U. S. 475, 486; Lovejoy v. Murray, 3 Wall. 1, 18; Claflin v. Fletcher, 7 Fed. 851, 852; Maloy v. Duden, 86 Fed. 402, 404; James v. Germania Iron Co., 107 Fed. 597, 613.

Coming to the second question, we eliminate so much of it as refers to a possible disregard of a survey made by the United States, for that would have no bearing on the court's jurisdiction or the binding effect of the judgment or decree, but would present only a question of whether error was committed in the course of exercising jurisdiction. With that eliminated, our answer to the question is that the state court had jurisdiction to entertain the suit and proceed to judgment or decree. Whether the

outcome would be conclusive on the United States is sufficiently shown by our answer to the first question.

Questions answered as stated in this opinion.

KANSAS CITY TERMINAL RAILWAY COMPANY ET AL. v. CENTRAL UNION TRUST COMPANY OF NEW YORK ET AL.

ON CERTIFICATE FROM THE CIRCUIT COURT OF APPEALS FOR THE EIGHTH CIRCUIT.

No. 265. Argued April 23, 1926.—Decided June 1, 1926.

1. Where the property of a railroad corporation, to be sold under foreclosure, is so great as to render coöperation between bondholders and stockholders essential in order to secure a bidder and prevent undue sacrifice of their interests, they may enter into a fair and open reorganization arrangement to that end. P. 453. 2. But such arrangements are invalid if they recognize and preserve the interests of stockholders at the expense of the prior rights of the secured or unsecured creditors of the corporation. Nor. Pac. Ry. v. Boyd, 228 U. S. 482. Id.

3. A plan of reorganization, to bind the unsecured creditor, must "give precedence to," i. e., recognize the superior importance of, the creditor's claim over any interest of the stockholder in the old company. P. 455.

4. Subject to the qualifications that the primary right of unsecured creditors to the assets of the insolvent corporation, remaining after lienholders are satisfied, must be adequately protected, and that to each one of them must be given such opportunity as the circumstances permit to secure the full enjoyment of this preference, a plan of reorganization which offers them securities of the same grade as those offered the stockholders, but greater in amount, will be fair, and bind the unsecured creditors, if, in the opinion of the court, it tenders to such creditors all that could be reasonably expected under all the existing circumstances. P. 455. 5. Where the same grade of securities is offered both to unsecured creditors and to stockholders, the difference being that the stockholders are called upon to pay an assessment, or a relatively greater assessment than that asked of creditors, it may never

Argument for Appellants.

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theless be fair and binding, if the court is of the opinion that it tenders them all that could reasonably be expected under all the existing circumstances; but the prior rights of creditors, as above pointed out, must be recognized; and assessments, whenever demanded, must be adjusted to the purpose of according to the creditor his full right of priority against the corporate assets, as far as possible in the existing circumstances. P. 456.

RESPONSE to questions certified by the Circuit Court of Appeals on an appeal from a decree of the District Court in a railway foreclosure suit. See 294 Fed. 32.

Mr. Samuel W. Sawyer, with whom Messrs. Edward J. White, N. H. Loomis, Bruce Scott, and Gardiner Lathrop were on the brief, for appellants.

The ultimate question is whether the general creditor is entitled to retain in the new corporation his priority over the old stockholder, or must be content with what the chancellor may find to be "fair" treatment; whether his rights and status are to be determined according to a definite principle, or according to the personal conceptions of individual judges.

The case of Northern Pacific Ry. Co. v. Boyd, 228 U. S. 482, recognizes the practical necessity of permitting stockholders to participate in a railroad re-organization, provided the unsecured creditors are also permitted to participate, and provided the priority of creditors over stockholders is not impaired. The court says that the creditor's interest "can be preserved by the issuance on equitable terms of income bonds or preferred stock." While the court does not say that the method suggested is the only method, it is implied that either the method suggested or some substantial equivalent is essential. This Court, moreover, in Louisville Trust Co. v. Louisville Ry. Co., 174 U. S. 674, which preceded the Boyd Case, plainly indicated that, if any interest of the mortgagor is preserved after foreclosure, the "prior rights" of general creditors must necessarily be secured and preserved and

445

Argument for Appellants.

any arrangements of the parties by which the subordinate rights and interests of the stockholders are attempted to be secured at the expense of the prior rights of either class of creditors, comes within judicial denunciation."

The suggestion of the court in the Boyd Case that general creditors need not be paid in cash is really a relaxation of the general principle of equity that the property of a corporation in the hands of a voluntary transferee, or of the mortgagor purchasing at its own sale, is still subject to all claims existing against it before the transfer. This indulgence to the reorganizer grows out of the practical impossibility of selling railroad properties for cash, the public interest in their successful financing and operation, and the practical need of securing co-operation, instead of conflict, between the bondholder and the stockholder. It is analogous to the judicial rules regarding preferential claims for operating expenses and the issuance of receiver's certificates to insure continued operation of railroads. Like them, it must not be extended beyond the reason for its existence, nor be allowed to degenerate into a mere phrase to be applied according to the individual whim of the chancellor. The Boyd Case emphatically declared that the question whether any provision must be made for the creditor must be determined by a "fixed principle." Equally, the question what provision must be made for the creditor must be determined by a fixed principle. The only fixed principle which is consonant with the spirit of the Boyd Case is suggested by the language of that case-the issuance of securities to the general creditor which will preserve the normal relation between him and the stockholder of the old company. It is difficult, if not impossible, to formulate any other fixed principle which is not purely arbitrary. This principle has the advantage of enabling re-organization managers to know what they can do and creditors to know what their rights are.

Argument for Appellants.

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It is thoroughly practical. It was successfully applied as early as 1882 in the Toledo, Peoria and Warsaw reorganization (9 Fed. 738) and has aided two of the largest and most successful railroad reorganizations of recent years-the Missouri Pacific (280 Fed. 38) and the Rock Island (284 Fed. 945).

The only offers to creditors which have been upheld by any of the Circuit Courts of Appeals since the Boyd Case upon direct attack are the offers in the Missouri Pacific Case and the Rock Island Case, both of which gave the creditor preferred stock to the full amount of his claim.

These conclusions require negative answers to the questions certified.

See Northern Pacific Ry. Co. v. Boyd, 228 U. S. 482; Kansas City Sou. Ry. Co. v. Guardian Trust Co., 240 U. S. 166; Pierce v. United States, 255 U. S. 398; C. R. I. & P. R. Co. v. Howard, 7 Wall. 392; Louisville Trust Co. v. Louisville R. Co., 174 U. S. 674; Canada Sou. Ry Co. v. Gebhard, 109 U. S. 527; Hancock v. Toledo R. Co., 9 Fed. 738; Paton v. Nor. Pac. Ry. Co., 85 Fed. 838; Georgia Ry. Co. v. Paul, 93 Fed. 878; Farmers L. & T. Co. v. M. I. & N. Ry. Co., 21 Fed. 264; C. R. & C. R. Co. v. Evans, 66 Fed. 809; St. Louis Trust Co. v. Des Moines Ry. Co., 101 Fed. 632; Farmers L. & T. Co. v. Louisville Ry. Co., 103 Fed. 110; Wenger v. Chicago R. Co., 114 Fed. 34; Central R. Co. v. Farmers L. & T. Co., 114 Fed. 263; Keech v. Stowe-Fuller Co., 205 Fed. 887; Western Union Co. v. U. S. & Mexican Trust Co., 221 Fed. 545; Howard v. Maxwell Motor Co., 269 Fed. 292; Walsh Timber Co. v. Missouri Pac. Ry. Co., 280 Fed. 38; Phipps v. C. R. I. & P. Ry. Co., 284 Fed. 945, 261 U. S. 611, 262 U. S. 762; Mountain States Power Co. v. Jordan Lumber Co., 293 Fed. 502; St. Louis, S. F. Ry. Co. v. McElvain, 253 Fed. 123; North Amer. Co. v. St. Louis & S. F. R. Co., 288 Fed. 612; Guaranty Trust Co. v. Missouri Pac. Ry.