38 F. 682 | U.S. Circuit Court for the Southern District of Iowa | 1889
Lead Opinion
Upon the rendition of the interlocutory decree in this cause the same was sent to the master for the .purpose of ascertaining what number of the bonds described in the mortgage known as the “Income and Equipment Mortgage” were held by parties entitled to prove up the same as valid claims under said mortgage, and also of ascertaining and stating the amount necessary to be paid in order to redeem the property from the lien of the first deeds of trust thereon, represented by Frederick Taylor, trustee. The master has returned an exhaustive report upon these matters, and counsel for the parties in interest having respectively excepted to portions of the report of the master ,o the case is before the court upon these exceptions.
Upon the issue of the amount of bonds entitled to be proved up as valid in the hands of the present holders several questions arise, and will be considered in their order. Fourteen hundred of the bonds áre presented by Lawrence Turnure, who claims to be the owner thereof by purchase from the Lackawanna Iron & Coal Company. The master finds that these bonds were never issued on behalf of or for the benefit of the Burlington, Cedar Rapids & Minnesota Railway Company; that when they passed into the hands of the Lackawanna Company they had not been signed by the trustee, and that the subsequent indorsement thereof did not impart validity thereto. The evidence fails to show that the present holder is an innocent purchaser for value, and there is no ground, therefore, for holding these bonds to be valid or enforceable.
The master further reports that there was a series of these bonds, 428 in number, delivered to Henry Clews & Co. under such circumstances that, as between Clews &.Co. and the railway company, they are not enforceable, being without consideration. Of these bonds 81 are now presented for allowance by Henry Clews, and the master finds that they are entitled to recognition on the ground that the Burlington, Cedar Rapids & Northern Railway Company is not in a position to question the validity of these bonds; and this upon the theory that the present company is but a purchaser at the foreclosure sale, and is not interested in the question of the amount due upon the income mortgage, which stands as a second mortgage upon the property. In support of this view the case of Graham v. Railroad Co., 102 U. S. 148, is cited. In that cause Graham, having a judgment against the La Crosse & Milwaukee Railway Company, sought to set aside a conveyance made of certain realty by the corporation to some of its officers, on the ground that the transfer was for an inadequate sum, and made in fraud of the rights of stockholders and creditors of the company. The evidence showed that Graham was not a creditor of the company when the transfer was made, nor had he any title to or interest in the realty itself. The court held that he was not in a position to assail the transfer. He had no title in the realty. He was not a creditor when the transfer was made, and could not, therefore, claim' that it had been made to defraud him. It appeared that the officers of the company to whom the property had been conveyed had paid its then fair value. The company had acquiesced' in the conveyance, and was not then questioning it. Under these circumstances the court held
But, aside from these considerations, there is another and sufficient ground upon which the court may hear and determine the question of the validity or invalidity of the bonds sought to be recovered upon in this proceeding. The holders thereof are invoking the aid of a court of equity to grant them relief. On the ground that the holders of the bonds are buna fide creditors of the Burlington, Cedar Bapids & Minnesota Railroad Company, and that there is justly due them certain sums evidenced by the bonds held by them, the court is asked to grant a decree compelling the present company.to come to an accounting, and either to pay what is due upon the second mortgage, or to submit to a redemption of the property; the effect of which will be a tearing up of the present system, and a separation of the main line and the branches thereof, to the manifest detriment of many parlies whoso interests were created in the belief that the ownership of the present company was absolute. To successfully invoke the aid of the court after the lapse of so many years, and when so many other interests bave become attached to the property, the parties seeking the equitable aid of the court must have substantial merit in tbeir cause, and must come before the court with clean hands. The complainants in the present cross-bill are asserting the right to redeem the property notwithstanding the sale had under the foreclosure of the prior mortgages, on the ground that the income mortgage was, when such sale took place, a second lien on the property, and that the decree did not cut off the lien then existing, and the consequent right of redemption. If, as has been already held in the interlocutory decree, the right of redemption still exists, it is the right that was in existence when the decree foreclosing the prior mortgages was entered. Whatever bonds were then valid claims under the income and equipment mortgage had reserved to them the right of redemption; that is to say, being then claims enforceable under the income mortgage, the lien of that mortgage protected them. That mortgage, however, was a lien only to the amount of the bonds then valid and enforceable thereunder; and, when the present company took the title of the property under the foreclosure sale, it was subject to a right of redemption in favor only of such bonds as were then, through the income mortgage, liens uj>on the property. For these
It seems that the question had, arisen whether the decree of October 30, 1875, and the .sale had thereon, had cut off the lien of the income mortgage, and barred the right of redemption thereunder. An examination of the record was had, and the conclusion was reached that the decree did not foreclose the income mortgage, but reserved for future adjudication the question of the rights and priorities of the holders of the securities covered by such mortgage. Acting upon this conclusion, inquiry was made for the purpose of finding the whereabouts of such bonds, and purchasing the same at as low rates as possible. Quite a number were bought from the then holders at figures ranging from 3 to 20 per cent, of the amount apparently due thereon. There can be no question made, under the evidence, of the fact that these purchases were made with the sole view to enforcing'the rights supposed to be conferred by the income and equipment mortgage, and the lien created thereby. The Burlington, Cedar Rapids & Minnesota Railroad Company was then wholly insolvent, and had, to the knowledge of these parties, been out of the possession of the railroad for years. Nothing could be realized from that company. The only possibility of enforcing payment of the bonds was through the supposed lien of the income mortgage and the resulting equity of redemption. The parties purchasing these bonds bought the same, as they had a right to do, as a matter of speculation, and for the purpose of enforcing the rights created by the income mortgage. Under such circumstances, they are chargeable with knowledge of the provisions of the mortgage which they now rely upon as the foundation of their rights. They also knew what w;as disclosed upon the record of the foreclosure proceedings. By the terms of the mortgage it was provided that if the interest remained in default for six months after the demand of payment, the principal of the debt became due and de-mandable, and the cross-bill then upon the record, and filed by the trustee representing the bondholders, averred that the principal of the bonds had been declared due by reason of the failure to pay the interest according to the terms of the mortgage. , The bonds, when purchased, had attached thereto unpaid coupons in amounts nearly equal to the face of the bond, and the price paid therefor was very small. As between the mortgagor and the trustee, long before these purchases were made, the bonds, principal and interest, had been declared due, and there was then pending a cross-bill, brought by the trustee, seeking a decree for the
The master finds that the 1,400 bonds claimed to be owned by Lawrence Turnure, the428 bonds issued to Henry Clews & Co., and the 100 issued to the Muscatine Western Construction Company, were illegal and void when issued; the facts regarding each issue being fully set forth in his report. There has been nothing adduced in the argument on the exceptions justifying us in setting aside these findings. Unless, therefore, it appear that these bonds, or some of them, have passed into the hands of bona fide holders under circumstances defeating the right to plead such invalidity, it follows that no recovery can be had thereon. As already stated, the master finds that the bonds presented by Lawrence Turnure were void. It not appearing that he is a bona fide holder thereof, nor that he bought from one occupying that position, the bonds must be hold invalid in his hands. The evidence justifies the holding that Henry Clews, Walker, Ely, Martelle, and William Green, administrator of George Green’s estate, are not bona fide holders of the bonds presented by them, and are not entitled to relief in this action. The master also reports that, touching the bonds hold by W. B. Tucker, S. L. Dows, W. G. and L. W. McAllister, administrators, and O. S. Dawson, no evidence was adduced showing that these parties had paid value for the bonds held by them. This being so, no recovery can be had thereon. Touching the 50 bonds owned by Newell D. Clark of Ohio, and the 50 bonds owned by the First National Bank of Garretsville, Ohio, the master finds that the bonds were purchased by these parties from Clews & Co. in good faith, and that they passed to the purchasers unaffected by any defense existing against them in the hands of Clews & Co. In this finding we concur.
It further appears that in 1878 these parties joined as complainants in a proceeding brought by one M. C. McArthur to enforce the right of redemption of the Pacific Division. This proceeding was originally brought in the state court, but was removed to the United States court. The complainants therein set up that they were the owners of certain of the bonds covered by the so-called “income and Equipment Mortgage,”
The Union Bank of Cedar Rapids holds sixty-six of the bonds, invalid in their inception, as collateral security to a judgment obtained against the Burlington, Cedar Rapids & Minnesota Railway Company in name of S. M. Nickerson, and also holds one bond as collateral security on debt due from C. B. Rowley, and four bonds as owner by purchase from one W; H. Clark. As to the judgment held by the bank, it is found by the master that it is based upon notes executed from time to time to the bank by the Burlington, Cedar Rapids & Minnesota Railroad Company, which! were usurious, and that the payments already made would far more than-extinguish the indebtedness for the sums actually loaned, with 6 per cent, interest thereon. The master, however, holds that the right to plead usury is personal to the original debtor, and that, as the railroad company did not interpose the defense when sued upon the notes, it is.not now open to the present defendant to assert that the debt due the bank has been paid. There is no question that, under the decisions of the supreme court of Iowa, the general rule is well settled that the right to plead ustiry as a defense to a suit upon a contract is confined to the party to the contract, or one in privity with him. Thus, in Hollingsworth v. Swickard, 10 Iowa, 385, it was held that where A. had entered into a usurious contract for the loan of money with B., and had executed his note therefor, secured by a mortgage on realty, and had then sold the realty, subject to the mortgage, to C., the latter could notset up the
Six bonds are presented by A. B. Cummins, who purchased them from the assignee in bankruptcy of one B. F. Flenneker. The latter had taken the bonds as security from Henry Clews & Co., and it does not appear that he was then chargeable with notice of the invalidity of the bonds. As Flenneker could, under these circumstances, have enforced payment from the Burlington, Cedar Bapids & Minnesota Bailroad Company, the present holder can enforce the same, having succeeded to such right.
Twelve of the bonds now held by J. F. Dillon were purchased of Bos-coe Conkling, who received them as security from Henry Clews & Co. Conkling’s title has not been successfully impeached, and it inures to the benefit of the present holder. The other bonds held by Dillon were invalid in the hands of the prior holders, and must be held to remain so, notwithstanding the transfer to the present owner.
The 56 bonds presented by Hubbard & Clark were originally held by Henry Clews & Co., and passed into the hands of the assignees in bankruptcy. In their hands the bonds were invalid. Through a broker, whose name is not disclosed, these bonds were transferred to the parties now holding them. It does not appear that such broker held the bonds by good title, and therefore it does not appear that these bonds were ever held by any one entitled to enforce payment thereof.
The bonds presented by R. E. Sears were received by him from D. W. C. Rowley, in whose hands they were not enforceable, after the amended cross-bill was filed, and long after the bonds had been declared due and dishonored. They were received as collateral security, and the evidence fails to disclose any ground upon which Sears can be held to be an innocent holder for value thereof.
The bond presented by H. W. Morse was received by him as a stockholder in the Muscatine Western Construction Company, and the bond in his hands is liable to all defenses existing on behalf of the Burlington, Cedar Rapids & Minnesota Company; and the same is true as regards the two bonds presented by L. G. Stein.
The 10 bonds held by S. Jones & Co., and the 15 held by the National Bank of Pulaski, Tenn., were received by these parties in 1874 from Henry Clews & Co. for value, and they stand as innocent holders thereof, and are entitled to enforce the same.
We find, therefore, of the bonds presented for recognition as enforceable under the income and equipment mortgage, that there are in all 59 that are sustainable as valid bonds under the evidences adduced in this case, of which the Union Bank holds 5, J, F. Dillon 12, T. M. Davis 11, A. B. Cummins 6, Jones & Co. 10, and the National Bank of Pulaski, Tenn., 15.
The record shows that the trustee representing the bondholders had, as authorized by the terms of the mortgage, declared the principal of the debt evidenced by the bonds to be due, and had filed a cross-bill for the collection thereof, the same being filed October 30, 1875, and the amended cross-bill now before the court is a continuation of the proceeding then begun. Having elected to declare the entire debt then due, the rule of computation to be followed in ascertaining the amount now due is to ascertain the total sum due upon the bonds and the coupons that had matured up to the date named, to-wit, October 30, 1875, the overdue coupons bearing the legal rate of interest from their maturity. Having thus found the total sum due upon each bond at that date, this sum bears interest at the contract rate from that date up to the time of the entry of the final decree.
A number of exceptions have been taken to the finding of the master on the question of the amount to be paid in case redemption is made from the lien of the prior mortgages. It is naturally to be expected that any method of stating the account can be excepted to, and serious difficulties be pointed out. From the very nature of the case, and the utter impossibility of separating by any exact rule the earnings and expenditures strictly belonging to the main line, as distinguished from the several branches or extensions, any method of stating the account must be more or less arbitrary, and the best that can be done is to adopt
Dissenting Opinion
(dissenting.) At a prior term of this court it was held in this cause, in substance, that by the proceedings in the original foreclosure suits based upon the first mortgages executed by the Burlington, Cedar Rapids & Minnesota Railway Company, and the decree rendered October 30, *1875, the second mortgage, known as the “Income and Equipment Mortgage,” had not been foreclosed, nor had the rights of the parties holding bonds secured thereby been finally adjudicated, and, therefore, that it was still open to such parties upon the present cross-bill to establish the amounts due to them upon the bonds secured by such second mortgage, and to enter a decree foreclosing the mortgage; and upon the assumption that the property included in the prior mortgage was of such a nature that the second mortgagees had an undoubted right of redemption therein, which equity would continue until it was barred by proper decree, and in view of the fact that the decree of October 30, 1875, did not purport to foreclose the second mortgage, but reserved for future ad-' judication the issues arising on the cross-bill, it was held that, as incident to the right to now enter a decree foreclosing such second mortgage, there existed the right to redeem the property which had been sold- under the decree of October 30, 1875, and which had passed into the possession of the Burlington, Cedar Rapids & Northern Railroad Company; and in the opinion so holding I concurred. Upon the entry of the interlocutory decree the cause was sent to the master, and upen the exceptions to his report counsel have fully argued the case, not only upon the special matters arising upon the master’s report, but also upon the question whether the bondholders under the income and equipment mortgage have a right of redemption upon which to base their claim to. call the present owners of the property to an account therefor. In reconsidering this question, in the light cast thereon by the arguments of counsel, I have reached the conclusion that in the original opinion filed in the cause we were in error in holding that the right of redemption still existed in behalf the holders of the bonds secured by the income and equipment mortgage. It is unquestionably true that in the prior proceedings the income and equipment mortgage has not been foreclosed; but the question whether the right of redemption still exists in behalf of the bondholders thereunder does not depend upon the fact of the foreclosure of that mortgage, but upon the effect of the decree foreclosing the prior mortgages, and the sales had in pursuance thereof. In other words, the question is, what title passed to the purchaser at the foreclosure sales had under the decree of October 30, 1875? and in deciding this question regard must be had to the terms of the decree, the parties bound thereby, and the nature of the property to be sold, all of which matters must be considered in determining whether the property, when it was conveyed to the purchaser at the foreclosure sale, was still subject to the lien of the income and equipment mortgage, thus giving a foundation for the right of redemption now sought to be asserted, or whether it passed to the purchaser free from all liens or equities held by the parties to the suit, except such as were specially reserved in the decree?
The relief sought by the amended cross-bill is based upon the theory
So far the case has been viewed upon the assumption that the property was of such a nature that there existed relative thereto the same rights of redemption that pertain to ordinary realty. The property, however, included in the foreclosure sale, and now sought to be redeemed, was a line of railway, its franchises and appurtenances, consisting of a combination of realty and personalty, which, from its public uses and peculiar nature, require to be sold as an entirety. In ordering a judicial sale of a railway and its appurtenances a court is compelled to have regard to the peéuliar character of the property, and cannot ordinarily treat it' as composed of items of realty and personalty, separable from each other, and salable under the distinct rules that usually govern sales of such differing classes of property. Thus, in Hammock v. Trust Co., 105 U. S. 77, the supreme court held that the provisions of the statute of Illinois governing the sale oí realty on judicial process, and securing to the debtor, and also to judgment creditors, the right of redemption, were not applicable to sales of a railway and its appurtenances, for the reason that, if the same were held applicable, then the personalty and the franchise would have to be sold without redemption, while the realty would be subject to redemption, which -would result in the practical destruction of the value of the whole; and-upon considerations of public policy as well as of private right the court reached the conclusion that the real estate, franchises, rolling stock, and other property of a railroad corporation, mortgaged as an entirety, may be sold as an entirety, under the decree of a court of equity, without any right of redemption in the mortgagor or in judgment creditors as to such real estate.'-' The reasoning of the court in that case demonstrates the fact that a decree for a sale subject to a right of redemption of the realty, or in fact of the whole property, would be deemed by that court an improvident and improper decree. Under the provisions of the statutes of Iowa, if it should be held that the property of a railway company, in cases of mortgage foreclosures, was resolvable into its primary elements of realty and personalty, the purchaser at the sale would be entitled to the immediate possession of the personalty, but the railway company would be entitled to the possession of the realty until the expiration of the year of redemption. During that period neither the purchaser nor the railway company could operate the road, as neither would have in possession the necessary means to that end-. These considerations show the wisdom of the conclusion reached by the supreme court, that the rules ordinarily governing judicial sales of real and personal property cannot be applied without modification to foreclosure sales of railways, and that it is the duty of the court, when decreeing a foreclosure, to provide for a sale, as an entirety, of the property covered by the mortgage,-so that
Having in mind, then, the peculiar character of the property with which the court was dealing when the decree of October 30, 1875, was entered, what is the construction to be placed thereon? There was then before the court, as parties complainant in the suits, the trustees in the several mortgages sought to be foreclosed, and as defendants, inter alios, the Burlington, Cedar Rapids & Minnesota Railway Company, the grantor in such several mortgages, and the Farmers’ Loan & Trust Company, the trustee in the income and equipment mortgage. This trustee had answered complainants’ bill, and had also filed a cross-bill. Leaving the cross-bill unnoticed for the present, the issues were those arising on the bill, and the answers of the railway company and the Farmers’ Loan & Trust Company as the trustee representing the interests of those holding bonds covered by the second mortgage, otherwise called the “Income and Equipment Mortgage.” The final decree shows that the railway company withdrew its answer, having no just defense to the first mortgages sought to be foreclosed. On the part of the Farmers’ Loan & Trust Company its answer admitted the execution of the mortgages declared on; admitted the priority of the lien thereof on the first, second, and third divisions of the railway; but averred that the lien of the income mortgage was superior upon certain named engines and cars. The issues tendered in the answer did not affect the question of the right of sale, nor of the mode of sale, but were confined to the matter of priority of lien, a matter which could be disposed of after the sale was had, when the court was called upon to make distribution of the proceeds of the sale. These being the issues upon the bills for the foreclosure of the first mortgages, the court granted the decree'of October 30,1875, finding that the railway company was in default; that the first mortgages should be foreclosed; that the property should be sold; and expressly directing that the sales should be without redemption or appraisement. This decree certainly bound the parties who were then before the court; and, as already stated, the trustee in the income and equipment mortgage was a party defendant to these suits, and was bound by the decree. When, therefore, the sales took place under the provisions of this decree, the purchaser thereat had a right to rely upon this decree as the source of his rights and title. As already shown, the court had the right to order the property to be sold as an entirety, without redemption. The decree provides that it should be so sold. The purchaser at the sales received an absolute conveyance of the property under the order of the court confirming the sale, and certainly it does not now lie in the mouth of the Farmers’ Loan & Trust Company, of of the present trustee appointed in its place, to question the absolute title thus conveyed to the purchaser at such sales, unless it can be shown that there, was upon the record an express reservation of the right of redemption of such a character as to charge the purchaser with knowledge thereof.
The question at issue, i. e., whether the property purchased at the foreclosure sales, and now in possession of the Burlington, Cedar Rapids & Northern Railway Company, passed to that company burdened with an equitable right of redemption in favor of the bondholders secured by the income and equipment mortgage, is to be determined by a consideration of the effect of the decree based upon the prior mortgages, unaffected by the question whether there was or was not entered a decree foreclosing the income mortgage. No set form of words is necessary to be used to cut off or bar a right of redemption. Admitting, for the sake of the argument, that the parties in interest had the same rights and equities in the property that they would have had in case the property had been an ordinary farm, and that the state rule governs the case, to-wit, that the parties have a statutory and equitable right of redemption in the property, what is the effect of the decree as rendered? As the trustee in the income mortgage was made a party defendant to the bill as well as the mortgagor, tbe decree is binding upon the bondholders under the income mortgage. The decree of October 80,1875, finds the amounts due upon the prior mortgages, orders the same to be paid by a fixed future day; in default thereof orders a sale of the property, the same to be without appraisement and without redemption; and directs the execution of a conveyance absolute to be made to the purchaser at such sales. If the decree had provided that from and after the date of the sale had pursuant to its terms all equity and right of redemption on behalf of the defendants should be absolutely barred and foreclosed, would there be any doubt as to the meaning of the decree? Such a decree, under the rule of the supreme court of Iowa, would have left to the parties defendant the statutory right of redemption from the sale, but would have effectually barred the equitable right. The decree, as entered, declares exactly the same thing, in providing that unless the parties make redemption before the sale the property shall be sold without redemption, and the purchaser shall take an absolute title. The terms of the decree cannot be fulfilled and still leave existing an equitable right of redemption on behalf of any of the defendants thereto. If it can be successfully claimed that this decree does not bar the equitable right of redemption on behalf of the income mortgage, would it not equally follow that the same right of equitable redemption exists in favor of the mortgagor, the Burlington, Cedar Rapids & Minnesota Railway Company? If the terms of the decree are sufficient to bar the rights and equities of the mortgagor, are
In whatever light the case may be viewed, it thus appears that when the amended cross-bill was filed there did not exist in behalf of the income mortgage bondholders any equitable right to redeem the property sold under the decree of October 30, 1875. If they ever possessed a statutory right of redemption from such sales, this had been terminated by the failure to exercise it within the statutory period. Moreover, it is well settled that courts of equity, independently of the provisions of the statute of limitations, should refuse aid to those who have unreasonably delayed in invoking its assistance. Richards v. Mackall, 124 U. S. 183, 8 Sup. Ct. Rep. 437; Parker v. Dacres, supra. This is a principle especially applicable to cases like the present, wherein the parties now s'eek-ing the aid of the court have remained quiet for years, knowing that the