Dunham v. Cincinnati Peru Railway Company

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, and 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 $1000 each, payable in twenty years from date, and bearing interest not exceeding seven per cent. 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 defence 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 $1000 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 defence.

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.

Messrs. Major and Black for Walker and Ludlow:

1. The question is, whether Walker-having made the road by the expenditure of his own means, without which expenditure the road was worthless to the company and the bondholders, and made it under a written agreement with the company that he should retain possession of the road, and apply its earnings to the liquidation of the debt due him, until such debt was paid; and having never surrendered possession to the company-holds a prior lien upon it, and is entitled in equity to a priority in the distribution of the proceeds on sale of it? We think that he is.

I. Railroad mortgages made to secure the payment of bonds which are sold for the purpose of obtaining means with which to construct the road, are different from mortgages on land, to secure money borrowed. In the latter the security is in esse, and belongs to the party making the mortgage; in the former, the road, which is the only security, is not in existence and does not belong to the mortgagor, but on the faith that the company will in future construct it, the bonds are purchased.

There is no evidence that this company owned the soil. No deed is shown. The presumption is against ownership. It is contrary to the policy of the law to allow railroad companies to acquire any greater interest in the land than a right of way. A grant of a right of way confers no right to the soil. It is but an incorporeal hereditament; a right issuing out of the soil, not a right to or in it. It has been decided in Louisiana, that a railway is not an 'immovable,' by nature or destination, if the soil over which it passes belongs to another, and that the rails do not become immovable by being laid down. In an article given to one of our periodicals by Mr. Theron Metcalf, always one of the best lawyers, as now one of the eminent judges of our country, he says, in reference to that case, 'As the company has no right of soil to the land embraced by the railroad, but a mere easement, a mortgage by the company cannot pass the right of soil, and consequently timber and iron, afterwards acquired and laid down upon the road, cannot be considered as passing by the mortgage merely because of their being fixed to the soil.'

It is a general rule that nothing can be mortgaged that is not in esse, and that does not at the time of making the mortgage belong to the mortgagor.

But equity, it is said, will attach the lien of the mortgage to the subsequent superstructure, when by the terms of the mortgage it is stipulated that the mortgage shall cover it. Still, this result will not attach until the company shall have acquired title to such superstructure; and this title the company cannot acquire so long as the person who made the superstructure keeps possession thereof, unless the company pays to that person the amount due for the work. Especially is this true where, by agreement between the company and such person, he is to keep possession of the road and its earnings until the company should pay him all it might owe him. Now, decided cases show that the company could not acquire any right to the road until Walker was first paid all that was owing to him by the company. In a Georgia case, Collins v. The Central Bank, certain contractors had constructed a part of the railroad, and the company made them a mortgage thereon to secure to them payment for the work. A bank, which was the holder of bills issued by the company to contractors who built the road, claimed a priority in the proceeds of the road, under a law which authorized the issue of those bills by the company, and created the same a lien on the road built by the company. It was held that the contractors had a prior lien on that part of the road which they had built. The court says:

'Nor was the company entitled to the part of the road made by the contractors, until payment was made therefor. It was competent for the company to stipulate, by express agreement, that the contractors should have a lien on that part of the road which they contracted to build, to the extent of the work furnished, until payment was made by the company. This lien, until payment for the work and materials furnished, does not at all conflict with the lien created by the statute on that part of the road built by the company; nor would the company have been entitled to that portion of the road built by the contractors above Griffin until payment made to them therefor. Certainly the billholders, who are the creditors of the company, cannot be considered as standing, at least in a court of equity, in a better condition than the company under whom they claim. If the company could not appropriate the road built by the contractors, to their own use and benefit, until payment for the work and materials, on what principle is it, the billholders, claiming under and through the company, can justly claim in a court of equity to have exclusively appropriated to their benefit the proceeds of the sale of such portion of the road and materials?'

Thatcher, Burt & Co. v. Coe, in the Federal court for Ohio, is to the same effect. T., B. & Co. built a bridge for a railroad company upon piers and abutments made by the company, without any agreement whatsoever as to lien or security of any kind. When the bridge was completed, T., B. & Co., fearing that the company would not be able to pay them the balance due, refused to give up possession of the bridge to the company until they were paid the balance due them, or a mortgage made to them on the bridge to secure the payment. The company made the mortgage to T., B. & Co., who thereupon gave up the bridge to the company. Coe, the trustee of the first mortgage bondholders, claimed the proceeds of the road in preference to the claims of T., B. & Co. under that mortgage. McLean, J., held that T., B. & Co. were entitled to a priority. In his opinion in the case, that judge, replying to an objection that the company had no power to give the mortgage, says:

'The company had the power to make the contract for the bridge on such terms as they believed would best advance the interest of all concerned. This discretion was necessarily exercised by the company in the entire construction and equipment of the road. It was a trust vested in them, and could be exercised by no other power. But it is said the company could do no act to the prejudice of the bondholders represented by the complainant. This assumes that the act done impairs the security of the bondholders. This is not true, either in fact or in law.

'The contractors were not bound to perform the work and deliver it to the railroad company, unless the stipulated compensation was paid or secured to be paid. This they have a right to demand, under the circumstances, and a sense of justice and law induced the railroad company to give the security required. This was not under the mechanic's law, but the common law, which authorizes every man to retain possession of his own work, where no contract has otherwise provided, until he is paid for it, or the payment secured.

'The deed of trust secured to the holders the right of way and the road when constructed with all its equipments. But the equipments, the iron, and the structure of the road, had to be procured by the company with the means under their control, as the best interests of the road required. If its funds were exhausted, and the company could not procure labor or materials on credit, must the enterprise be abandoned? And if these things could not be procured but by giving a pledge of the work and materials, so as to put the road in operation and enable it to pay an income, has not the company the power to do it? They take nothing from the bondholders, but on the contrary greatly benefit them by adding to the value and productiveness of the road.'

McLean, J., further held that T., B. & Co., by keeping the bridge in their possession, preserved a lien on it for their compensation.