Shellenberger v. Altoona & Philipsburg Connecting Railroad

Opinion by Mr. Justice Potter, On June 1, 1893, the Altoona and Philipsburg Connecting Railroad Company executed and delivered to the Union Trust Company of Philadelphia, trustee, a mortgage upon all of its property and franchises to secure bonds of the company in the [422] sum of $400,000, said bonds being of the par value of $1,000 each. The trustee certified 330 of the bonds of which 299 were delivered to the president of the railroad company, Samuel P. Langdon. One of these bonds was sold to W. L. Shellenberger, four to W. S. Lee, two to S. J. Westley, one to W. J. Heinsling, five to John Loudon and two to William Loudon, in all fifteen. Two hundred and seven of the bonds were pledged as collateral for a loan to George Philler of Philadelphia and were sold by him, after due notice, to O. L. Schoonover, Charles S. Avery, John G. Platt, James A. Pass-more, and C. H. Rowland. Thirty-four bonds were pledged to Levis & Company and sold by them at public sale, when they were purchased by the same parties, making their total bolding 241 bonds. The trustee held thirty-one bonds as security for certain advances and liability incurred on account of the railroad company, and the balance of the bonds apparently were not negotiated. On August 20, 1903, the holders of the fifteen bonds filed a bill in equity against the railroad company, the Union Trust Company, the Pittsburg, Johnstown, Ebensbui'g and Eastern Railroad Company, the New York and Pittsburg Central Railroad, lessees of the Altoona, etc., Company, and Samuel P. Langdon, alleging default in the payment of interest on the bonds and the insolvency of the company, and praying for a decree of foreclosure and the appointment of a receiver for the railroad. On September 13, 1903, the court appointed a receiver, but this decree was appealed from and superseded. On December 17, 1903, upon its own petition, the Union Trust Company, trustee, was permitted to withdraw the answer it had filed and to intervene as a party plaintiff. Defense to the bill was made in behalf of the railroad company upon three grounds : (1) that the bill was multifarious; (2) that under the Act of May 7, 1887, P. D- 94:, sec. 3, the issue of bonds was void and of no effect and therefore neither the bondholders nor the trustee had any standing to maintain this action; and (3) that the holders of these bonds had purchased them with full knowledge of the fact that they had been illegally issued and were only pledged as collateral and had paid for them a sum much less than the face value. The court below held that the bill was not multifarious and [423] even if it had been, the objection should have been raised by demurrer before answer bled, citing Persch v. Quiggle, 57 Pa. 247. This forms the subject of the first assignment of error, but appellants do not press it in their argument. Many of the assignments of error are not in accordance with our rules, and are open to the objection suggested by the appellees. But the appellants have met these objections in part at least by filing additional assignments, and among these are a sufficient number to properly raise the questions of importance in this appeal. Upon the second ground of defense it was contended that under sec. 3, of the act of 1887, the bonds were void because at the time of their issue the amount subscribed for capital stock had not been fully paid. The fact of the nonpayment of the stock was conceded, but the court held that the railroad company, having received the benefit of the sale of the bonds, could not defend against its contract on the ground of ultra vires. Citing Reed’s App., 122 Pa. 565, and Fidelity Ins., etc., Co. v. R. R. Co., 138 Pa. 494. This was undoubtedly true to the extent to which the railroad company actually received the proceeds of the bonds. But it was shown that- 207 bonds held by O. L. Shoonover et al., were purchased from George Philler for $62,250, and the thirty-four from Levis & Company for $10,300. Defendant offered to show that at the time of the purchase of these bonds, the purchasers were stockholders of the railroad company and had full knowledge of the fact that the bonds were illegally issued and also that the parties from whom they purchased were not absolute owners of the bonds, but that the company held an equity of redemption in them. The court excluded the testimony, which is the subject of a number of the assignments of error. In the final decree of the court below, the purchasers named above were adjudged to be bona fide holders of the bonds for their face value, $256,000, with accrued interest, $116,850, making a total of $372,850 due upon the mortgage. We think the trial court was mistaken in the position it took in this respect. If the defendant could show that these bondholders were not bona fide holders for value, it was entitled to do so. “ The presumption is, that holders of negotiable railway bonds are bona fide holders for value, but if fraud in the [424] inception of the bonds is shown, the holder, to be entitled to protection as a bona fide holder, must show that he is such; his mere possession of the bonds is. insufficient: ” 23 Am. & Eng. Ency. of Law, 838. “ The doctrine which validates securities within the apparent powers of the corporation, but improperly and therefore illegally issued, applies only in favor of bona fide holders for value. A person who takes such a security with knowledge that the conditions on which alone the security was authorized were not fulfilled, is not protected, and in his hands the security is invalid; though the imperfection is in some matter relating to the internal affairs of the corporation, which would be unavailable against a bona fide holder of the same security:” Hackensack Water Co. v. DeKay, 36 N. J. Eq. 548, where an elaborate discussion of the authorities is to be found. In the present case, the court below quotes from the syllabus in Gibson v. Lenhart, 101 Pa. 522, that “ the transferee of a coupon bond is presumed to be a bona fide holder for value.” But the language of Justice Sterrett in the opinion in that case is (pp. 527,528) : “ The last taker is presumed to be a bona fide holder for value and may maintain his possession against everybody until the contrary be successfully established by those who undertake to assail his possession.” The rule to be applied in such cases has been thus stated in the federal courts. The question of the validity of railroad bonds is to be determined by the well-established rule that “ if fraud or illegality in the inception of negotiable paper is shown, an indorsee, before he can recover, must prove that he is a holder for value. The mere possession of the paper under such circumstances is not enough:” Simmons v. Taylor, 38 Fed. Repr. 682. We are of opinion that the testimony tending to show that the present holders were not bona fide holders for value without notice, should have been admitted; and, if it be established that they were not such, then the amount of the recovery should be limited to the actual amount expended in the purchase of the bonds, with interest thereon. The equity of this course will be especially manifest, if the proof sustains the averments of the answer, that the holders of these bonds purchased them with knowledge of the irregularity of the issue, and that they [425] had only been pledged as collateral, and that the sum paid for them was substantially the amount required for their redemption. The assignments of error numbered 114, 115,118,119, 120 and 121, are sustained. The decree of the court below is reversed, and the costs of this appeal are to be paid by the appellees. And it is ordered that the record be remitted to the court below for further proceedings in accordance with this opinion.