Overview

After the Panic of 1837, the Locks & Canals machine shop had little work; it was to be sold or converted to a twist mill. The L&C treasurer, Patrick Tracy Jackson, strove to keep the shop busy pending sale or conversion. An 1841 plea to Jackson from Elihu Chauncey, president of the Philadelphia & Reading railroad, seemed salvation. Despite incomplete infrastructure, the P&R would begin operating in 1842. It urgently needed coal cars and locomotives to carry anthracite from Pennsylvania fields to Philadelphia. But its financial situation was dire, its debt in default, its assets being seized by sheriffs. It struggled to borrow. Its bridges suffered arson; its trains were derailed. Statutory completion deadlines loomed. Despite the risks, L&C built P&R cars and engines.There were conditions to award of the teased building contracts. Chauncey wanted L&C to make loans to the P&R. L&C had no interest in lending. Jackson sought P&R equity enabling participation in two infant industries: railroads and coal. Chauncey concocted a surreptitious scheme to acquire P&R stock from the Bank of the United States for sale to L&C, thereby diminishing the bank's power over the P&R.Nine months later, the P&R and L&C entered into the 1842 Running Gear Contract for running gear for wood jimmies. Developing a financial structure for the locomotives transaction consumed a year: the Engines Contract for locomotives and coal cars was signed in 1843. For the contracts, Jackson developed unique financial structures to protect L&C, as builder and financier, while allowing P&R use of the equipment for revenue generation. How could L&C sell equipment to, and ensure receipt and retention of payments from, an insolvent railroad (the P&R) that had not yet, or had only recently, commenced operations, during a severe economic depression or other adverse financial circumstances?The transaction went badly. Neither Jackson nor the P&R anticipated new iron coal cars or Baldwin's flexible beam truck: they rendered small L&C engines inadequate. Builders of large engines were paid; L&C received little. Payment defaults were continuous (for years), diminishing L&C's ability to sell the machine shop.This is a story of desperation, debt, and default: of balancing on the brink of bankruptcy. Jackson began with payment admonitions, eventually including favonian, then whetted, threats of resort to legal remedies. L&C acquired P&R stock and bonds and aligned with P&R stockholders and bond holders. His focus expanded beyond the equipment debt to the P&R's financial health, especially elimination of floating debt. In 1845, L&C and P&R bond holders initiated one of the first audits of managerial custodianship in U.S. corporate history. A Pennsylvania law was enacted allowing bond holders voting rights on a parity with stockholders.When further efforts at suasion and blandishment failed, Jackson sought legal advice from the eminent Philadelphia lawyer Horace Binney. Binney and Jackson developed an elegant four-step plan to take control of the trusts and debt under the Rolling Stock Contracts and neutralize the P&R. The plan derived from contract terms, threats of legal remedies (including personal liability for trustees), and extra-legal mechanisms. Within two months, L&C took control of the remedies relating to the P&R debt from the trustees, neutralized the P&R, and forced a P&R financial restructuring. Its value enhanced, L&C rid itself of the P&R debt. But more was needed.

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9781957948089

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Michael J.T. McMillen is a member of the Bar of the State of New York. He serves as a Partner in the international law firm of Curtis, Mallet-Prevost, Colt & Mosle LLP, an Adjunct Professor at the University of Pennsylvania Carey Law School, and a Lecturer-in-Law at the Columbia Law School. His legal practice is global and focuses on project, infrastructure, and equipment finance and Islamic finance.Michael obtained a Doctor of Medicine (M.D.) from the Albert Einstein College of Medicine, a Juris Doctor (J.D.) from the University of Wisconsin Law School, and a Bachelor of Business Administration (B.B.A.) from the University of Wisconsin - Madison.

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