Dunham v. Cincinnati Peru Railway Company/Opinion of the Court

'The lien of the bondholders, in no legal or equitable sense, can be considered as paramount to that of the contractors. It was the contractor's labor and money which constructed the things mortgaged, and not the means of the company, so far as regards the balance due.'. . .. 'In this view, so long as the bridges remained in the possession of the contractors, the lien of the bondholders did not attach. But this right of possession by the contractors was surrendered for the special mortgage given. . . .. Had the contractors delivered the possession of the bridge to the company without a mortgage, the lien of the bondholders would have attached.'

II. But suppose the company had the legal title to the land. This would not defeat the lien. A chattel attached to land with the consent of the owner of the land, will remain the property of the person placing it there, as in the erection of houses on another's land. So of the erection of a fence, though under an agreement by parol: held valid against a purchaser of the land, though without notice. So of a paper-making machine. So of salt kettles. So of iron rails laid in the track, under an agreement it should not become the property of the company until paid for: held, that the iron was not covered by a subsequent mortgage.

It is said that the assent of the trustee or bondholders to Walker's contract with the company was necessary to make it valid against them. The answer is, that if such assent was necessary, the court will presume it, under the circumstances presented in the case. The construction of the road was the primary object of the organization of the company. It was the purpose for which the bonds were sold, and the agreement was made with Walker. The bondholders and stockholders were the only persons personally interested in making the road. The road being the only security which the bondholders had for the payment of the bonds, they were more deeply interested in the construction than the stockholders. The right of way or right to the land, afforded them no security. The construction of the road was under the control and management of the company, who alone had to provide the means for its construction, and who alone, in its construction, represented the interest of every one concerned. The company was the agent or minister of the trustee, bondholders and stockholders, in the construction; and it was their duty to employ all available resources over which they were competent to exercise control, to prosecute it to completion. This authority may fairly be held to extend to everything which was necessary to the further construction of the road, and which was in no sense prejudicial to the interest of the bondholders.

2. The decree gives priority to overdue coupons. This is right. A clause of the mortgage provides that in 'no case shall the principal of any bond be considered due until twenty years after its date.'

Mr. Otto, who also filed a brief for Mr. Niles, contra:

1. The mortgage is, in substance and effect, a conveyance of the road as an entire thing. Subsequently acquired property annexed thereto became, by such accession, an inseparable part of the original subject of the mortgage.

Repeated adjudications have affirmed, on general principles, the validity of such a mortgage by a railroad company against subsequent creditors and incumbrancers with notice. Pennock v. Coe, in this court, may be said to be in point. The mortgage was executed in pursuance of a power conferred upon the company, and its validity is not drawn in question by the pleadings.

It is not alleged that the complainant consented to the arrangement in regard to the road for which the contract with Walker provided. That contract was later in date than the mortgage. Walker had full notice of the latter. His title to the possession of the mortgaged property or to the proceeds of the sale thereof cannot, therefore, be enforced so as to displace the prior and paramount lien of the mortgage, or to impair or postpone any of the rights or equities created thereby or arising therefrom.

Counsel on the other side insist that the consent of the complainant should be presumed, if such consent be necessary to the maintenance of Walker's contract. But the court will not presume that a party, whose rights were secured by a valid mortgage duly recorded, consented to waive them, nor that a fact existed, where there is no averment thereof in the record. If Walker relied upon such consent, he should have alleged and proved it.

The doctrine that fixtures attached to the soil at the time of the execution of a mortgage or subsequently acquired, will pass by it, is not controverted on the other side, but its applicability to this case is denied upon the assumption that the company had but a right of way and no title to the land. That assumption, if supported by the facts, would not affect the complainant's rights, but the mortgage does convey, in express terms, 'their road built and to be built in the State of Indiana, including the right of way, and the land occupied thereby, together, &c., &c.' The court will presume that the company had the property which it mortgaged, and Walker's answer does not set up the company's non-ownership of the land, in avoidance of the mortgage.

Neither of the two cases cited on the other side are authorities in this court. We think that the case from Georgia went in a large degree on the construction of a local statute. The one decided by McLean, J., is more in point; but it is a circuit case, and of course not binding here. As the case was never published by that judge during his lifetime, being now brought out from his MSS., it would seem that he was not absolutely sure, on reflection, how correctly he had decided it. Pennock v. Coe, as we have already said, is an authority, being in this court.

2. The decree of the court below gives precedence in payment to the past due coupons, over the principal of the bonds. This was in violation of a clear provision of the mortgage, in case a default be made in the payment of the principal or interest.

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 pretence, 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 et al. v. Coe (23 Howard, 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. The Mayor of N. Y. (2 Seld. 179); Seymour v. ''Can. and 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.

DECREE ACCORDINGLY.

Mr. Justice DAVIS dissented.