110 Ky. 33 | Ky. Ct. App. | 1901
Opinion of the court by
Reversing.
For convenience, we will rail the Southern Division oí the Cumberland & Ohio Railroad Company “C. & O.” and th'e Louisville & Nashville Railroad Company “L. & N.” The C. & O., a corporation, was authorized to construct a line of railway from Lebanon, in Marion county, to Greensburg, in Green county. It began the construction of the road, and did a considerable amount of grading, and bought some material necessary in its 'construction. Being -without means to complete the road, it began to negotiate with the L. & N. to finish -the construction of its line between the points named. . The negotiations resulted in an agreement by which the L. & N. undertook the completion of the road. It was supposed that $300,000 would be required for that purpose. On September 2, 1878, the O. & O. executed a lease on its line of road to the L. & N., to run for a period of twenty-five years. At the time this was done, the parties regarded that it was necessary that the bonds of the G. & O. should be executed payable to the L. & N., amounting in the aggregate to.
The provisions of the lease relating thereto read as follows: “Third. The party of the first part agrees and binds itself to execute its bonds, in such denominations as it deems best, for $300,000 in the aggregate, payable to the order of the party of the second part, and to execute and deliver to it a mortgage securing the payment Oif said bonds and interest upon said railroad between Lebanon and Greensburg, constructed, and to be constructed, together with all its other property acquired and now owned, and to be acquired for the purpose of said road, with its rights, franchises and privileges. Said bonds are to bear date 2d day of September, 1878, payable in twenty years after date, and to bear seven per centum interest, payable semi-annuallv. Fourth. Said bonds are to be delivered to the party of the second part [L. & N.], to be .held as security for the payment to it of the sums expended by it in the construction of said railroad, and before offered for sale the party of the second1 part is to indorse and guaranty their payment, and, whenever the parties may be able to sell said bonds in the market at ninety cents on the dollar, a sufficient number and amount thereof shall be sold at that price as will- reimburse the party of the second part its expenditures in the construction and- completion of said railroad; but if, after reimbursing the party of the second part, there shall remain any of the said bonds unsold, they are to be delivered to the party of the first part and canceled. But if the party should not be able to sell said bonds at the price stated on or be
To enable the parties- to carry out the provisions- of the lease and their contract with reference to the completion of the railroad and the execution of bonds, a trust was created, and the plaintiff, H. B. Phillips and N. S. Ray, now deceased, were elected by the parties to act in that capacity, and the mortgage which was executed by the 0. & O. was to them as trustees. The provisions of the mortgage which we deem necessary to quote read as follows: “(4) That -the party of the first part will pay, in lawful money of the United States, or in the bonds aforesaid, to said parties of the second part or their said successors, -on the 2d day of September in the year 1881, six thousand dollars, and the same sum for t-he next year thereafter, nine thousand dollars annually for the next three years, twelve thousand dollars annually for the three years next immediately succeeding the last-named period of three years, and eighteen thousand dollars annually for the next three years, twenty-four thousand dollars annually for the succeeding three years, thirty thousand dollars annually for the succeeding two years, and thirty-nine thousand dollars for the next year, being the date of the maturity of the bonds, as the sinking fund for the discharge of the said -bonds at maturity, on the bonds so paid to the parties of the second part as a sinking fund shall be cancelled by the said trustees; and said trustees and said company shall- keep separate registers of the canceled bonds, at all times open to the inspection of the holders of said bonds and the stockholders of the
On the day following the maturity of the bonds, his co-trustee, N. S. Ray, having died, the appellant, Phillips, as surviving trustee, instituted this action. In the’ peti lion as amended the facts with reference to the execution of the lease and mortgage and as to his powers thereunder are averred. It is also averred that the bonds
The L. & N. filed a special and general demurrer to the petition as amended, and also filed an additional demurrer to it on the ground that there was a suit pending in the Taylor Circuit Court by the C. & O. against the L. & N. in which it sought the same relief as sought in this
It is insisted by appellees (1) that, as the L. & N. is the sole beneficiary of the trust, it has the right to control the trustee; (2) that the trustee could institute a foreclosure proceeding only on the request of a majority of the bond.holders, and that the trustee represents only the bondholders.
1. It is proper to state what relation the lease and mortgage sustain to each other, in determining the rights of the parties thereunder. They were prepared about the same time, and in the lease it was agreed that the mortgage should be executed by the C. & O. to secure the bonds. They were about the same subject-matter, and the lease refers to the mortgage. The rule is 'that when two instrumnts are executed as part of the same transaction and agreement, whether at the same time or different times, they most be construed together. In 5 Lawson, Rights, Rem. & Prac., section 2315, the rule is thus stated: . . Where two or more instruments are executed at
2. In order to determine whether the contract between the parties created an express trust, and imposed active duties upon the trustees, we will state some of the duties they were required to perform; (a) The contract required the creation of a sinking fund, to be paid to the trustees at the time and in amounts specified in the mortgage; and, when paid to them, they were to apply it to the redemption of the bonds, (b) They were to cancel the bonds when redeemed, and the net earnings under the lease were to be received by them and applied to the cancellation of the bonds, (c) As it was their duty to receive and apply the sinking fund and the net proceeds arising from the lease to the bonds, it follows, as the sinking fund was not created and the net earnings accounted for, that it became their duty to settle the trust, and thus ascertain the' amount, if anything, that was due the L. & N. on account of the bonds which it held, (d) It was made their duty on the maturity of the bonds to forthwith institute an action to enforce the mortgage, which necessarily involved the ascertainment of the amount due under its terms. It seems to us that very important duties devolved upon these trustees, — duties which were
3. It is urged that the trustees do not represent any one except the bondholders. To this proposition we do not agree. The trustees were selected, presumably, with reference to their capacity and responsibility. Both the C. & O. and L. & N. recognized that the engagement into which they' entered could be best done by' creating the trust and appointing trustees. They recognized that they could not to advantage- deal with each other, but through the trustees named. They imposed certain duties and responsibilities u-pon them, requiring them to look after the issuing of the bonds, to receive certain money to be applied to their payment, and see- that the net earnings under the lease were properly applied, and to do which involved a settlement pf the accounts growing out of the operation of the road for twenty years under the lease,. In Bridge Co. v. Douglass, 12 Bush, 721, in passing upon thé question as to the relationship which the trustees sustained to the debtors and creditors, the court said: “They represent the debtors -as well .as the creditors, and in the institution -and prosecution of the actions resulting in the judgment appealed from they discharged duties imposed on them as the agents of the parties in interest, including the railroad company.”
-1. The general doctrine is that, when there is a default in the payment of bonds secured by a mortgage, it becomes the duty of the trustees to protect the bondholders and to do -whatever seems proper to secure their interest. In section 285, Short, Ry. Bonds, it is said: “From the usual terms of mortgages it follows that, unless the safety of the security is threatened by the- mortgagor or by attacks from' without, or there has been a default in
One of the grounds of demurrer was that a suit was pending in the Taylor Circuit Court, wherein the C. & O. was plaintiff and the L. & N. a defendant, the object of which was identical with the purposes of this action;' it being averred in that action that the net earnings have not been accounted for by the L. & N., and they are probably sufficient to pay all the bonds which it holds. It was filed on February 9, 1898, and on the following day a demurrer was filed in this action, based upon the pendency of that action. It was filed 'several months after this proceeding was instituted; and it certainly can not be seriously contended that, after the Marion Circuit Court had obtained jurisdiction of the parties, it could be ousted of it by reason of the fact that some of the parties to the action instituted another action in a different county for a like purpose. It might bre here remarked that the filing of that petition shows that an action should be- maintained for -a settlement of the matters here involved. It sustains the position of appellee that there should be an adjudication as to the status of accounts-, etc.
- It is earnestly urged that, if this proceeding is all-owed to be maintained, it will put the C. & 0. or L. & N. to great expense in the matter of fees to the trustee and his attorney. That certainly is no argument against the sufficiency of the petition, or in favor, of the right of the appellee to maintain its plea in abatement. The parties
The argument of counsel for .appellee, L. & N., is predicated largely upon erroneous, assumptions. It is contended that the mortgage does not authorize the trustees to collect or sue for the net earnings'. The lease and mortgage, construed together, expressly authorize the trustees to collect the net earnings, and direct how they shall be applied. By this contract the net earnings from the operation of the road are to be applied first to the payment of the interest on the bonds, next to the establishment « of a sinking fund, and then one-third of the remainder was to be retained by the L. & N., and the other two-thirds was to be paid' to the C. & 0. However, there is a proviso in the fifth clause of the lease to the effect that, if the proceeds of the bonds should not be sufficient to re
Again, counsel for appellee, L. & N., in addition to their contention that the trustee- asks relief beyond the scope of his authority, assume the petition is insufficient because it failed to show any request by a majority in interest of the bondholders to institute the action. This assumption is made in the face- of the plain language of the mortgage, which requires the action to be forthwith instituted by the trustees upon default in, the payment of the bonds at maturity.
Counsel for appellee, L. & N., falls into another error when he s-ays-,%n referring to the lease, “that Mr. Phillips was not a party to that instrument. His selection as trustee under the mortgage was not authorized or even contemplated when the lease was made. There was no need of a trustee. The parties dealt directly with
Our conclusion is that Phillips, as surviving trustee, is entitled to maintain this action; that the demurrers filed 'by the defendants to the petition should be overruled;
Russell Branch of the Case.
S. A. Russell presents his petition, and asks to be made a .party to the action, averring that he is- the holder of a large amount of stock in the C. & O.; that it is joining with the L. & N. in trying to assist the latter to acquire all the property belonging to the company; that it refuses to assert a claim against the L. & N. for net earnings under the lease; that, if they were ascertained, it would more than pay off the bonds which the L. & N. holds, etc. In addition to that it is' averred that Phillips, surviving trustee, has no right to prosecute this suit, and is not •entitled to expenses and fees for prosecuting the same, basing this claim upon the provisions .of the lease and mortgage. In so far as he questions the right of Phillips, as surviving trustee, to. maintain an action, his position is identical with that of L. & N. He avers substantially the same facts with reference to the net earnings, etc., a-s are averred by the trustee. There is no averment that Phillips is< not capable of prosecuting this case to a proper •determination, nor that he is not in good faith seeking to • compel the L. & N. to account for the net earnings. If Phillips had refused to institute this suit, wherein exactly the same relief is sought which Russell seeks against the L. & N., the averment which he makes in his petition might have been sufficient to have enabled him to prosecute a
The judgment is reversed on original appeal, and affirmed on cross appeal of Russell, and remanded for proceedings consistent with this opinion.