U.S. Supreme Court Dunham v. Cincinnati, Peru &c.; Ry. Co., 68 U.S. 1 Wall. 254 254 (1863)
Dunham v. Cincinnati, Peru &c.; Railway Company
68 U.S. (1 Wall.) 254
APPEAL FROM A DECREE OF THE CIRCUIT COURT OF
THE UNITED STATES FOR THE DISTRICT OF INDIANA
1. A mortgage by a railway company of their "road, built and to be built" -- the company, at the date of their mortgage, having built a part of their road, but not built the residue -- has precedence, even as regards the unbuilt part of the claim of a contractor who, in the inability of the company to finish the road, had himself finished it under an agreement that he should retain possession of the road and apply its earnings to the liquidation of the debt due him, and who had never surrendered possession of the road to the company. DAVIS, J., dissenting.
2. Where a mortgage given by a railway company to secure a number of bonds provides that in case of a sale or other proceedings to coerce payment of interest or principal, all bonds and the interest accrued shall be a lien in common therewith, and the interest accrued thereon shall be equally due and payable, and entitled to a pro rata dividend of the proceeds of sale -- with this superadded declaration, however, to-wit, "but in no case shall the principal of any bond be considered as due until twenty years from the date thereof " (this being the term which the bonds on their faces had to run) -- it is error, after a sale under the mortgage, within the twenty years, to give precedence to the overdue interest warrants. The superadded clause will be interpreted only as excluding an inference that a bondholder might bring an action for the principal before it became due by its terms.
This was an appeal from a decree of the Circuit Court of the United States for the District of Indiana, made in a case
in which Dunham was complainant and the Cincinnati, Peru & Chicago Railway Company, with one Walker, a builder of the road, and Ludlow, his assignee, under the insolvent laws of the state, were defendants. The facts were these:
The appellant, Dunham, on the 18th of April, 1860, filed his bill in the court below to foreclose a mortgage given to him as trustee by the said railway company to secure the payment of certain bonds therein described. The respondent corporation was organized under a general law of the State of Indiana for the incorporation of railroad companies, * one section of which provides that
"Such company may from time to time borrow such sums of money as they may deem necessary for completing or operating their railroad, and issue and dispose of their bonds, for amount so borrowed, for such sums and such rate of interest as is allowed by the laws of the state where such contract is made, and mortgage their corporate property and franchises to secure the payment of any debt contracted by such company. "
They were authorized by their charter to construct a railroad from Laporte in that state, by the way of Plymouth &c.; to Marion in the same state. The whole length of the railroad, as contemplated, was about ninety-seven miles, and for the purpose of constructing, completing, and equipping the entire route the directors resolved to raise money by loans to an amount not exceeding $1,000,000, and to issue the bonds of the company, not exceeding one thousand in number, for the sum of $1,000 each, payable in twenty years from date, and bearing interest not exceeding seven percent per annum. They also decided to construct the road by sections, and with that view divided the route into four parts, designated and numbered as sections one, two, three, and four. Section one extended from Laporte to Plymouth, a distance of about twenty-eight and a half miles: this was the only one that was built, and is the one which constitutes the subject matter of the controversy in this suit. Intending
to construct the road in sections, they apportioned the loan and the bonds to be issued upon the several sections. Three hundred thousand dollars were apportioned to the first section, and the residue to the three other sections. Having arranged these preliminaries, they resolved to mortgage the road to secure the payment of the interest accruing on the bonds, and for the ultimate discharge of the principal. The complainant was appointed trustee for the purpose of such a conveyance, and on the 20th of February, 1855, a mortgage was made to him as such trustee, his successors and assigns, of the following property of the company -- that is to say, "their road built, and to be built, "
"including the right of way, and the land occupied thereby, together with the superstructures and tracks thereon, and all bridges, viaducts, culverts, fences, depot grounds and buildings thereon, and all other appurtenances belonging thereto, and all franchises, rights, and privileges of the company to the same. "
Pursuant to the previous determination of the company, the proper officers thereof, on the 1st of March following, issued the three hundred bonds apportioned to the first section of the road, and which had been duly set apart for its construction and equipment. They were the only bonds ever issued under the first mortgage. The allegation of the bill of complaint was that the interest warrants had not been paid, and that the railway company had failed to furnish any means whatever for that purpose as stipulated between the parties. The bill also alleged that the company, on the 26th of February, 1855, made to the complainant, as such trustee, another mortgage of their railroad, to secure the payment of bonds proposed by them to be issued for another sum, not exceeding $1,000,000, for the same purpose. An apportionment of that sum also was made upon the different sections of the road in the same manner as was done under the first mortgage, but none of the bonds were issued, except those apportioned to the first section. The railway company did not appear, and as to them the complainant took a decree pro confesso. The defendants, Walker and Ludlow, appeared and filed separate answers. The defense of Walker was that the company being wholly
unable to complete the road, he, the respondent, on the 28th of November, 1855, entered into an agreement with them to complete the first section and furnish all the materials, and that the company agreed to pay him the full value of the materials so furnished, and a reasonable compensation for his services; that as part of the arrangement, the company engaged to deliver to him, from time to time, ninety-nine of the first mortgage bonds, and two hundred and ninety-nine of the second mortgage bonds, at $400 for each $1,000 bond, and that he, the contractor, was to have and keep possession and control of that section of the road and its earnings until the company should make full payment to him of what they should owe him under that agreement. The answer then averred that he expended for materials and labor in completing the contract, $302,000, and that the company, on the 8th of April, 1858, confessed a judgment in his favor for the balance due him under the contract, amounting to $129,491 43/100, which, as he insisted, was entitled to a preference in payment from the earnings and income of the road, and from the proceeds of the sale of the same over the first mortgage bonds.
The stipulations of the contract purported to give to the contractor the absolute control of the first section of the road and its earnings, from its opening until the company should make full payment for its construction, and the contractor was to disburse its earnings --
1st. To pay the expenses of operating the road.
2d. To reimburse himself for all the money which he might advance.
3d. To pay the interest on the first and second mortgage bonds, and if there was any surplus, to apply the same to the other objects therein specified.
The answer of the other respondent, Ludlow, set up the same defense.
The mortgage of the complainants had been duly registered, March 9, 1855, more than eight months before the contract was made with Walker and Ludlow.
The court below rendered a decree directing that the road should be sold, and that the proceeds, after the payment of
costs, should be paid over to Ludlow, as assignee of the contractor, to the exclusion of the trustee, and in preference to the mortgage on which the suit was founded.
The decree also ordered that coupons past due on the bonds should take precedence over the principal of the bonds; the ground of the decree being a clause in the mortgage held by the complainant as trustee, in these words:
"In case of default in the payment of interest or principal of any bonds, and a sale or other proceedings to coerce the same, all bonds which shall then be a lien in common therewith, and the interest accrued thereon, shall be considered, and shall in fact be equally due and payable, and entitled to a pro rata dividend of the proceeds of said sale or other proceedings; but in no case shall the principal of any bond be considered due until twenty years from the date thereof. "
From this decree, Dunham, a creditor under the mortgagee, appealed, and now sought to reverse the decree.
MR. JUSTICE CLIFFORD, after stating the case, delivered the opinion of the Court:
1. Appellant contends that the proceeds of the sale of the road, after paying the costs of suit, should be ratably applied towards the payment of the first mortgage bonds and the overdue interest warrants under the same, instead of being applied, as directed in the decree, to the payment of the judgment in favor of the contractor and to the overdue interest warrants, to the exclusion of the principal of the bonds. Appellees insist that inasmuch as the contractor completed the road by the expenditure of his own means under a written agreement with the company, purporting to secure to him the possession of the road and its earnings, he has a right to retain the same, and that the proceeds of the sale should be applied to the liquidation of the indebtedness of the company to him until the same is fully discharged.
Possession of the road having been delivered by the company to the contractor for the purpose of completing the road, the respondents insist that he, the contractor, having never surrendered the possession, now holds a prior lien upon the road, and in equity is entitled to a priority in the distribution of the proceeds of the sale. Attempt is made
to sustain that proposition, chiefly upon two grounds. 1st. It is insisted that the mortgage to the complainant, as trustee for the benefit of the bondholders, does not hold any part of the road except what was built at the time the mortgage was executed and delivered. 2dly. They contend that a contractor, expending money and labor in building a railroad, as in this case, under an agreement with the company that he shall have the possession of the road until he is fully paid, thereby acquires a priority over an elder valid mortgage.
Neither of the propositions is based upon any peculiar circumstances in the case, nor are there any such disclosed in the evidence to take the case out of the general rules of law applicable to similar controversies respecting railroad transactions. Nothing of the kind is pretended, and it is obvious that the pretense, if set up, could not be sustained, as there is nothing in the circumstances to distinguish the case from the ordinary course of events in that department of business. Certain persons procured a charter for a railroad, and wanting means to complete it, decided to issue their bonds as a means of borrowing money, and mortgage their road to secure their payment. Railroads, it is believed, have frequently been built in that way, and if it be true that such a mortgage holds no part of the road except what was completed, it is quite time that the rule should be distinctly announced, that the consequences of further misapprehension upon the subject may be avoided. But we are not prepared to adopt any such rule or to admit that the proposition has any foundation whatever in the facts of this case. On the contrary, we hold it to be clear law that the complainant, as the trustee for the benefit of the bondholders, took "the road built and to be built," together with all the other matters and things specifically enumerated in the mortgage. Express authority was given to the company by the law of the state to borrow such sums of money as they might deem necessary for completing and operating their railroad, and to issue and dispose of their bonds for any amounts so borrowed. What they wanted was money to enable them to make the road, and the authority was expressly given to
authorize them to mortgage it for that purpose. Authorized as this mortgage was by express statute, the case is even stronger than that of Pennock v. Coe, 23 How. 128, where the rights of the parties depended upon the general rules of law.
Terms of the grant in that case were, "all present and future to be acquired property," and yet this Court held, in a controversy between the grantees of a first mortgage and the grantees of a second mortgage, that the first took the future acquired property, although the property itself was not in existence at the time the first mortgage was executed. While enforcing the rule there laid down, this Court said there are many cases in this country confirming the doctrine, and which have led to the practice extensively of giving that sort of security, especially in railroad and other similar great and important enterprises of the day. Several cases were cited by the Court on that occasion which fully support the position, and many more might be added, but it is unnecessary to refer to them, as the one cited is decisive of the point. 2 Story Eq.Jur. (8th ed), §§ 1040-1040 a .
2. Filing to sustain that position, the respondents, in the second place, rely upon the terms of the subsequent agreement made by the company with the contractor for the completion of the route. Counsel of respondents concede that the mortgage to the complainant was executed in due form of law, and the case also shows that it was duly recorded on the ninth day of March, 1855, more than eight months before the contract set up by the respondents was made. All of the bonds, except those subsequently delivered to the contractor, had long before that time been issued, and were in the hands of innocent holders. Contractor, under the circumstances, could acquire no greater interest in the road than was held by the company. He did not exact any formal conveyance, but if he had, and one had been executed and delivered, the rule would be the same. Registry of the first mortgage was notice to all the world of the lien of the complainant, and in that point of view the case does not even show a hardship upon the contractor, as he must have known when he accepted
the agreement that he took the road subject to the rights of the bondholders. Acting as he did with a full knowledge of all the circumstances, he has no right to complain if his agreement is less remunerative than it would have been if the bondholders had joined with the company in making the contract. No effort appears to have been made to induce them to become a party to the agreement, and it is now too late to remedy the oversight. Conceding the general rules of law to be as here laid down, still an attempt is made by the respondents to maintain that railroad mortgages made to secure the payment of bonds issued for the purpose of realizing means with which to construct the road, stand upon a different footing from the ordinary mortgages to which such general rules of law are usually applied.
Authorities are cited which seem to favor the supposed distinction, and the argument in support of it was enforced at the bar with great power of illustration, but suffice it to say, that in the view of this Court the argument is not sound, and we think that the weight of judicial determination is greatly the other way. Pierce v. Emery, 32 N.H. 484; Pennock v. Coe, 23 How. 130; Field v. Mayor of N.Y., 2 Seld. 179; Seymour v. Can. & Niag. Falls Railroad Company, 25 Barb. 286; Red. on Railways 578; Langton v. Horton, 1 Hare Ch.R. 549; Matter of Howe, 1 Paige 129; Winslow v. Mitchell, 2 Story C.C., 644; Domat 649, art. 5; 1 Pow. on Mort. 190; Noel v. Burley, 3 Simons 103.
Decree of circuit court not only gives precedence to the judgment of the contractor, but also to the past-due coupons or interest warrants over the principal of the bonds. Complainant objects to the decree in both particulars, and we think his objections are well founded. Terms of the mortgage are, that in case of default in payment of interest or principal of any bond, and a sale or other proceedings to coerce the same, all bonds which shall be a lien in common therewith, and the interest accrued thereon, shall be considered, and shall in fact be equally due and payable, and entitled to a pro rata dividend of the proceeds of said sale or other proceedings. Reference is made to another clause of
the mortgage, where it is said that in no case shall the principal of any bond be considered due until twenty years after its date; but it is quite obvious, we think, that the latter clause was inserted merely to exclude any possible inference that a bondholder under any circumstances might bring an action for the principal of a bond before it became due by its terms. Such was doubtless the intention of the provision, but it does not in any manner conflict with the suggestion already made, that in case of sale on account of default of payment of interest or principal, that all the bonds of the same class, and the interest accrued thereon, shall be entitled to a pro rata dividend of the proceeds.
The decree of the circuit court is therefore reversed, with costs, and the cause remanded for further proceedings in conformity with the opinion of this Court.
MR. JUSTICE DAVIS dissented.
* Act of May 11, 1852, § 19; 2 Revised Code, 409.