McElrath v. Pittsburg & Steubenville Railroad

The opinion of the court was delivered, May 13th 1867, by Agnew, J. — This is a bill for a decree of foreclosure of a corporation mortgage, brought in this court under the Act of 11th April 1862, § 1, declaring that the Supreme Court shall have and exercise all the powers and jurisdictions of a Court of Chancery in — 204 — all cases of mortgages given by corporations. The mortgage in this case being dated on the 1st of August 1856, it is supposed this law violates the provision in the Constitution of the United States forbidding the obligation to be impaired. We perceive no such collision. The remedy provided in the mortgage for non-payment of interest is permissive, not exclusive. It is made lawful for the trustee, at the request of the holders of one-fourth in amount of the bonds secured by the mortgage, to enter and use the road, and receive the tolls and income as the means of paying the interest; but there is nothing taking away remedies for default at law or equity. On the contrary, it is expressly provided that nothing contained in the mortgage shall prevent or preclude proceedings at law or equity for the benefit of the holders of the loan. Independently of this, the Act of 1862 is merely remedial for a breach of covenant. A party in default has no ground of complaint that the legislature has given an additional remedy for his own violation of the contract. The chief objection to the proceeding made by the defendants is, that the bonds delivered by them under their construction contract to the Western Transportation Company do not justly bear interest from the date of the mortgage, and that the over-due coupons either were or ought to have been cut off before they were handed over by Mr. Thomson, the trustee appointed to receive and pay them over. Perhaps the most simple and natural answer to the objection is, that as to those cut off it is in the power of the defendants to produce and have them credited; and as to those not detached, the delivery to the trustee under the terms of the contract is primá, facie evidence of its rightfulness. But it is a more satisfactory reply that the delivery in that condition was according to the terms of the contract and the intention of the parties, and carried with it the right to negotiate them as thus delivered with the coupons on. In the agreement of June 3d 1856, between the Steubenville Railroad Company and the Western Transportation Company, it is expressly provided that the former shall issue, transfer, assign and pay over to the president of the Pennsylvania Railroad Company, as trustee for the latter, all the coupon first-mortgage bonds of the former to the amount of $1,000,000, which shall be made payable in twenty-five years from the date, and shall bear interest from the date. It is provided also that the transportation company shall place in the hands of the same trustee an amount of their stock equal to $500,000, and the trustee shall in lieu thereof transfer, assign and set over to them $300,000 of the first-mortgage bonds of the Steubenville Railroad Company. It is further provided that on the examination of the chief engineer of the Pennsylvania Railroad Company, and his report that twenty or more continuous miles of the railroad are graded and ready for the track, the trustee shall have power to surrender the stock so — 205 — deposited, and to deliver to the transportation company a further amount of the bonds sufficient fully to iron the road, retaining, however, until the track is completed, full control and ownership over the iron for and on behalf of the railroad company. The trustee finally is authorized to deliver over all the remaining first-mortgage bonds, and the income, bonds and stock additionally provided for the fulfilment of the contract, on the report of the same chief engineer that a locomotive has been run over the road from the Monongahela river at Pittsburg to the Ohio at Steuben-ville. It is not alleged in the answer of the Steubenville Railroad Company that Mr. Thomson, the trustee, transferred and paid over the bonds placed in his hands contrary to the terms of the contract, or to any notice from the railroad company not to deliver them; nor is it alleged that he was required to cut off the overdue coupons and withhold them. It is not averred that any notice was given by the railroad company to him or to the transportation company of any claim or right of the railroad company to retain the coupons for a failure to build the road in time. On the contrary, it is admitted in the answer that the transportation company has, in pursuance of said contract and lease, gone on and finished said road, and is now actually operating said road as a thoroughfare ; that under and by virtue of said Acts of Assembly, and agreements in pursuance thereof, the said road and appertenances, and the franchises pertaining thereto, and the possession thereof, are vested in the Western Transportation Company. The answer also admits that the Steubenville Railroad Company not only were to execute and deliver, but did execute and deliver unto and for the use of the Western Transportation Company the mortgages and bonds set forth in the bill. The proof shows that a large part of the work had been done by the former contractors, and that the delivery of the bonds by the trustee to the transportation company did not begin until they had been at work about a year under their contract. The facts of the case then are these : The transportation company was entitled by the contract to the interest on the bonds from their date. The railroad company accordingly delivered the bonds to the trustee without detaching the over-due coupons. The transportation company has built and finished the road, and is in possession operating it under the lease. The trustee, from time to time, delivered to them the bonds and coupons placed in his hands for the payment of the work done by them without any notice or objection by the railroad company to the contrary. The transportation company have negotiated the bonds to third parties, as they had a right to do, in the absence of notice or complaint. The railroad company had provided for its own security by a deposit of stock in the hands of the trustee to the extent of $300,000 of bonds, and by provid'ng for a report of a disinterested person as to the progress of the — 206 — work before the delivery of the remainder, besides having in the hands of the trustee a further deposit of income, bonds and stock to be paid over upon the finishing of the work. In this state of facts it is clear the consideration of the first-mortgage bonds has not failed.- The railroad company have received performance of the construction contract, and have a finished road in the hands of their lessees. The present claim is therefore simply for damages for the delay, and rests upon a distinct covenant to perform without unnecessary delay, modified and extended by subsequent agreement. The bonds having been legitimately handed over as a payment under the contract, carried with them their contract incident, to wit, the interest from date. This being done by the act and agreement of the parties through their trustee, this title passed to the holder of the bonds when negotiated, and it cannot be said that the holder of the bond, with its undetached coupons, is put upon notice of a defence as to the delay, because some of the coupons happened to be over-due. The very purpose and intent of such bonds is to set them afloat in the market as the means of raising money to build the road. The railroad company having by their own agreement and act sent them into the current, and received a substantial consideration 'in the construction of their road, are estopped from setting up a claim for damages against the holders because of the delay in the work. It is unnecessary to invoke in this case the principles of the commercial law as to negotiable paper in protection of the holder, or to destroy that protection on the ground of an implied notice growing out of some of the coupons being over-due. The case rests on its own facts, and the trustee in the mortgage is therefore entitled to a decree for the payment of the over-due interest for the benefit of the bondholders. The next matter for consideration is the claim of Manfull & Nicholson, the first contractors, for the balance unpaid to them. The view we take of the evidence renders it unnecessary to decide whether, under the resolution of January 21st 1843 (Purd. 1861, p. 60), it is to be treated as a lien, or a debt protected from the operation of an invalid mortgage. It seems to us upon the evidence to have no valid right to postpone the mortgage, whatever may be its title to payment as between the claimants and the Pittsburg and Steubenville Railroad Company. The contract of 1852, between Manfull, Nicholson & Co. and the railroad company, had come to a stand in its execution. The company began to fail in the sources of its supply of money to build the road. On the 14th of December 1855 a settlement took place between Manfull & Nicholson and a committee of the railroad company. The total amount of work done was then $647,748.99, upon which there was unpaid a cash balance of $34,792.55, and the sum of — 207 — $18,910.31, for retained percentage, payable in first-mortgage bonds ■which the committee recommended to be paid. At that time, the $800,000 mortgage of January 1st 1855 was the only first mortgage. Manfull & Nicholson received nineteen $1000 bonds issued under this mortgage. In order to obtain the means of finishing the road the railroad company entered into a contract with King & Thompson for its construction. This arrangement consisted of a series of agreements, beginning on the 10th of May 1856 and concluded the 30th of July 1856, followed by sundry modifications by resolutions of the railroad company under a power reserved in the contract. These resolutions were dated September 1st, September 27th, September 29th and October 9th 1856. It was not until the meeting of October 9th 1856 the final order was made for the issuing of the two mortgages of August 1st 1856. They were accordingly acknowledged the next day, October 10th. In the first one of the series of agreements between the railroad company and King & Thompson, dated May 10th 1856, it was covenanted by the company that their railroad and property were free and clear of all encumbrances, and that the company should issue mortgage-bonds to the amount of $1,500,000 to build the road. In the second agreement, dated June 18th 1856, it was agreed that the $800,000 mortgage should be removed, and the bonds issued under it taken up and cancelled. In the third of the series of July 29th 1856 it was provided that the mortgage-bonds contracted for should be divided into one mortgage for $1,000,000 and another for $500,000. It thus appears that the negotiations between the railroad company and King & Thompson were not finished to enable them to usher in their two mortgages until the 10th of October 1856. In the mean time a settlement between the railroad company and Manfull & Nicholson was necessary to enable the company to complete its arrangements with King & Thompson. On the 13th of August 1856 Manfull & Nicholson, having a stock debt against the company of $83,818.24, which they were unable to carry, proposed an exchange of $12,500 of stock for cash, which, with a bill for extra work submitted by Mitchell, they declared, if accepted, should be considered as a final settlement. The proposition was not accepted, but after sundry modifications on the next day, August 14th, they closed with the railroad company, and signed a paper attached to their contract, in which they “ relinquished and abandoned their contract in consideration of the resolutions passed by the board on the 13th and 14th of August, the terms of which they accepted and closed.” One of these resolutions required that the sum it ordered to be paid to them should be in full of all claims under their contract, and that they abandon and relinquish the same; another provided that they should return the nineteen bonds they — 208 — held under the $800,000 mortgage, and use their efforts to procure the balance. On the 29th of August 1856, but fifteen days after the settlement, Manfull & Nicholson contracted with King & Thompson for the construction and finishing of the twenty-nine sections of the railroad, excepting No. 2 and parts of 3 and 24. This construction contract, it will be observed, was entered into by King & Thompson with Manfull & Nicholson before the railroad company had yet cleared the way for the issue of the mortgages dated August 1st, but not acknowledged until October 10th. Now in this connection we are to take the testimony of Mr. Von Bonnhorst, the secretary of the railroad company, that the making of the contract between the company and King.& Thompson was known to Manfull & Nicholson, and that they made no objection, and that they knew the appropriation of the bonds to be issued under the mortgage made by the contract between the company and King & Thompson, and that the nineteen bonds held by Manfull & Nicholson were afterwards returned by them to King & Thompson, who exchanged them for the new mortgage-bonds. In the settlement of August 14th it also appeared that all the work done by Manfull & Nicholson, after the settlement of 14th December 1855, a period of eight months, amounted only to the sum of $30,377.77. From these facts it very clearly appears that Manfull & Nicholson had ceased to work upon the road, and that the negotiations between the railroad company and King & Thompson were going on not only with the knowledge of Manfull & Nicholson, but with their assent, as the only apparent means of prosecuting the work which they were to complete under their contract with King & Thompson, and that without their co-operation the contract between the company and King & Thompson could not be consummated. That contract required the road 'and property of the company to be cleared of all encumbrances. Their contract for construction and the $800,000 mortgage were encumbrances to be put out of the way. Hence the terms of their settlement of 14th August 1856 required them to relinquish and abandon the contract, and to return the nineteen bonds in their hands-; and to assist getting up the others. In the light of these facts the writing signed by Manfull & Nicholson of the 14th of August, appears clearly to be an abandonment of all claims under their contract, and with it a relinquishment of any lien they had upon the road as contractors under the resolution of 1843. Their encumbrance upon the road was removed by their own act and assent in order to let in the mortgages of August 1st 1856, and as the means of carrying out the contract of the company with King & Thompson, and of King & Thompson with themselves. The plaintiff excepts to the report of the master, on the ground that he omitted to incorporate into the form of a decree submitted — 209 — by him a provision ordering the trustee in the mortgage to sell the estate and title of the Steubenville Railroad Company in that portion of the railroad situate in the state of West Virginia. Without deciding what estate would pass by the trustee’s sale under the mortgage, we are of opinion that we can, by our decree operating upon the trustee himself, authorize and compel him to sell and convey whatever interest of the railroad company will pass under the terms of the mortgage. As it is the desire of all the parties expressed in the argument that in the event of a decree of sale being made, the sale should pass all possible titles and interest of the railroad company in the whole extent of the road, we will direct that the master’s report shall be so amended. Let a decree be drawn and entered in this case in the form reported by the master, inserting ninety in the blank left for the number of the days in the 3d section, and adding to the 4th section the following words: “ And that such order shall contain an authority and direction to the said Thomas McElrath, the trustee, to sell and convey all the estate, right, title, interest, claim and demand of the said the Pitts-burg and Steubenville Railroad Company, of and in that portion of the railroad operated and run by the said company, through their lessees, in the state of West Virginia, between the boundary line of the state of Pennsylvania, at the easterly end, and the river Ohio at the westerly end, which passed to him under and by force of the terms and intent of the said mortgage mentioned in the first section of this decree.” And it is further ordered that the costs in this case be paid by the Pittsburg and Steubenville Railroad Company.