110 F. 70 | U.S. Circuit Court for the District of Northern California | 1901
This action was brought on June 17, 1896, by the complainant, a corporation of the state of New York, to foreclose a mortgage executed by the defendant California & Nevada Railroad Company, a California corporation, on the 10th day of April, 1884, to secure to the complainant the payment of certain first mortgage bonds of the defendant company to the extent of $5,000,000, of which 545 bonds have been issued, of the value of $1,000 each. The defendant railroad company filed no answer. On December 26, 1896, Charles H. Smith filed a bill of intervention, alleging that he was the owner of 304 of the bonds issued, and that 200 of the remaining bonds issued were illegal, invalid, and not a legal obligation of the defendant company, and could not be enforced as against its property. Answers to this bill of intervention were filed by the various defendants other than the California & Nevada Railroad Company, and the matter was referred to the master in
The objection that the intervener Charles H. Smith is not legally or equitably entitled to intervene in this action as against the other bondholders cannot be sustained. The principle that the trustee .named in the mortgage given to secure the payment of bonds is the .proper party to protect the interest of all the bondholders, and that individual bondholders will not be permitted to take part in the litigation, is not applicable to a controversy involving the validity of .bonds for the satisfaction of which the foreclosure proceedings are being conducted. An interventibn is permissible and proper in such a case, for the reason that the interests of the trustee and the intervening bondholder have ceased to be identical. Short, Ry. Bonds, 482. In Railroad Co. v. Cowdrey, 11 Wall. 459, 20 L. Ed. 199, the action was brought against the railroad company to foreclose first, second, and third mortgages to pay in due order the several outstanding bonds of the company. The trustees mentioned in the mortgages were dead, and the suit was brought by certain of the bondholders for themselves and for all other holders thereof who might .come in and contribute to the costs and expenses of the suit. It was objected that the complainants had no right to sue for themselves and in behalf of the several classes ,of bondholders under the different mortgages. In answer to this objection the supreme .court held that the antagonism of interests was not a sufficient objection, as the rights of all bondnoiders were protected by the opportunity given to all to intervene and contest the claim of any. .The court said:
“If any class of bondholders wish to pontest the proceedings of a prior mortgage, they have a perfect right to intervene in the suit and file a cross bill setting up the matter of objection. All bondholders, including the complainants themselves, have to establish their claims in the case before it is finally closed, and before a distribution of the assets can be made. And any ' bondholder proving his claim may contest the claim of any other bondholder.”
The same principle would have been applicable to the proceedings had the action been commenced by the trustees of the mortgage.
In Williams v. Morgan, 111 U. S. 684, 4 Sup. Ct. 638, 28 L. Ed. 559, this right of contest by intervention was sanctioned by the supreme court in a case where the holder of railroad bonds secured by a mortgage under foreclosure was held to have an interest in the amount of the trustee’s compensation which entitled him to intervene and contest it, and to appeal from an adverse decision. In Richardson v. Green, 133 U. S. 30, 10 Sup. Ct. 280, 33 L. Ed. 516, the controversy was concerning the validity and priority of certain •.claims. The action, as in the present case, was by a trustee against, a railroad company, to foreclose a mortgage given to secure the payment of certain bonds. The company made no defense, but numerous parties holding bonds secured by the mortgage, and others with claims ' of various kinds against the company, with leave of •court intervened 'in the case, and were allowed to prove their respective claims. The controversy resolved itself into a contest over
The defendants in intervention except to that portion of the report which finds that the 200 bonds were illegally issued and arc not valid obligations of the defendant railroad company, and to the special findings that those of the defendants in intervention holding certain of such bonds have not valid claims against the defendant railroad company. Their exceptions are based upon the ground that the evidence does not sustain the findings. The report'of the master is most comprehensive upon this point, and contains a complete analysis of the facts upon which his findings are made. His conclusion is that the terms of the mortgage, specifying that first mortgage bonds could only be issued for the purposes of building, constructing, completing, and equipping said railroad, and the acquirement of terminal facilities therefor, did not comprehend the use of such bonds for the payment of general expenses incident to the management of the road, officers’ salaries, or for services connected with the present litigation. The facts warranting this conclusion may be outlined as follows: The 200 bonds in question were issued by the defendant railroad company upon a contract for the construction and equipment of a certain number of miles of railroad, and were paid in advance of the work to be performed under said contract. The work was never completed, and the defendant railroad company offered to release the contracting company and cancel the contract, upon the return of the 200 bonds. It does not clearly appear that the bonds were actually returned. The contracting company had turned them over to several of the defendants in intervention in exchange for stock of the defendant company, and in some cases these persons had disposed of them to other parties. By the minutes of the company, however, it would appear that 183 of these bonds had been returned, and were voted to the various defendants in intervention now holding them, in payment of services as officers and for attorney’s fees. There is clearly some irregularity in these proceedings. But as the purpose for which these bonds were issued has never been accomplished, and as their ultimate disposition is not'shown to have been in accordance with the
Exception is also taken to the finding of the master that J. H. T. Watkinson is a bona fide'purchaser of ix of the 200 bonds declared to be illegally issued, and is entitled to be protected in such ownership. It appears from the evidence that these 11 bonds were a part of the number voted to J. J. Scrivner for services as an officer of the company, and were delivered by him to a real-estate agent for sale, and were by this agent sold to the defendant Watkinson; that he purchased them for a valuable consideration, and without notice ,of the illegality of their issuance. No bad faith is shown on the part of the defendant Watkinson, and his status as a bona fide purchaser is clearly established, as well as his right to protection as such purchaser, according to the rule obtaining in such cases. Murray v. Lardner, 2 Wall, 110, 17 L. Ed. 857; Cromwell v. County of Sac, 96 U. S. 51, 24 L. Ed. 681.
The defendant Mary E. Roberts excepts to the master’s report for the reason that it does not contain a finding that the proceeds of the first mortgage bonds of the defendant railroad company are impressed with a trust in the nature of a lien, or a lien in the nature of a trust to the use of the said Mary E. Roberts, by which she should receive the first benefit of the proceeds. It appears that Mary E. Roberts loaned or advanced to the predecessor of the defendant railroad company the sum of $5,000, receiving therefor the following writing: “To C. F. Burrell, Treasurer of the California and Nevada Railroad Company: Pay to Jno. T. Davis or order five thousand dollars; payable out of the proceeds of the sale of the first bonds sold of this company. E. M. Walker, President. E. A. Phelps, Secretary.” Upon its face it bears the following indorsement: “Accepted to be paid as herein specified. C. F. Burrell, Treasurerand upon the back of the instrument is indorsed: “Pay to the order of Mrs. Mary E. Roberts. Jno. T. Davis.” Thereafter, and before any payment was made to said Mary E'. Roberts, the defendant railroad company was formed, and the first corporation sold and transferred to the second company its entire road and properties;. the second company agreeing to assume all the outstanding obligations of the first' company. The second company thereafter executed, the mortgage to the complainant herein, under which the Donds in question were issued. Nearly two years after the execution- of this mortgage the said Mary E. Roberts commenced an action against the defendant company upon-the written instrument above set out, to recover the amount of her loan, with interest. A writ of attachment was issued and levied upon the whole property of said defendant railroad company, and has not yet been discharged. It is contended in- her behalf that her claim constitutes an equitable lien upon the property mortgaged, and takes priority in the marshaling of the assets over all of the bondholders. That such equitable right inheres in Mary E. Roberts against the defendant railroad company under the terms of the transfer to it by the first company is not denied by the master, but he maintains that the only question
Exception is also taken to the finding of the master that the inter-vener Charles H. Smith has not established his right to certain of the bonds in controversy. His bill of intervention is under oath, and alleges that the intervener is the owner and holder of 304 of the 545 bonds issued under the mortgage, and described in the bill of complaint as due and unpaid. The reference to the master on the 1st day of February, 1897, was “for the purpose of taking the evidence therein and reporting to the court which of the bonds involved in the said action and sued upon by the said complainant are legal and valid obligations of the said California & Nevada Railroad Company, and which of said bonds, if any, were illegally issued.” The pleadings having established the fact that the bonds issued under the mortgage were due and unpaid, it only remained for this court, as preliminary to a decree of foreclosure, to determine the issue, also raised by the pleadings, as to which of the bonds involved in the action were the legal and valid obligations of the mortgagor. The order of reference was, however, amended by an order of the court made and entered on the 5th day of March, 1900, enlarging the scope of the order of reference to “all matters and issues raised by the pleadings.” It appears that the answer of the defendants in intervention to the bill of intervention denied that the intervener Charles H. Smith is the owner or that he is entitled to the possession of the 304 bonds claimed by him in his bill, or that he is the owner or entitled to the possession of any portion of them. Upon this issue, and under the terms of the amended order of March 5, 1900, the master took testimony, over the objection of the intervener, relating to his ownership of the bonds in question. The intervener claimed that his possession of the bonds was sufficient for the purposes of the intervention, and offered no evidence in support of his claim of ownership of the bonds. The master is of the opinion that the mere possession of the bonds by the inter-vener, without the showing of any legal right thereto, is not sufficient to maintain his claim. The ownership having been put in issue, and some testimony having been introduced tending to show that the intervener was not the legal owner of the bonds, dt devolves