First National Fire Insurance v. Salisbury

Soule, J, The instrument under which the defendants hold a conditional title to the railroad with its appurtenances of the Boston, Barre and Gardner Railroad Corporation, is a mortgage which provides that the mortgagor shall retain possession of the mortgaged property till, and for six months after, default in the payment of any of the bonds secured by it, or interest thereon, and that thereafter the defendants, at the written request of one half in amount of the holders of the bonds, are authorized and required to proceed to sell the mortgaged property, and apply the net proceeds of the sale to payment of the bonds in full, or ratably if the proceeds are insufficient for payment in full. These provisions do not abridge the rights of the defendants' as mortgagees, except in those particulars in which they are inconsistent with those rights. In the absence of any stipulation [310] that a mortgagor may retain possession of the mortgaged property, a mortgagee has the right to take possession at any time; and so far as the mortgage to the defendants provides otherwise, it abridges their rights as mortgagees. But the provision as to a sale of the property is in addition to the rights ordinarily in a mortgagee, and not inconsistent therewith, so that the rights of the defendants under this mortgage with reference to possession and management of the property, and for foreclosure of the mortgage after default in payment of interest has continued for six months, are precisely what they would have been if the provisions referred to had not been contained in the instrument, with the ■ additional right and duty, on the request in writing of half in amount of the bondholders, to sell the property and distribute the proceeds. Shaw v. Norfolk County Railroad, 5 Gray, 162. Haven v. Adams, 4 Allen, 80. Haven v. Grand Junction Railroad, 12 Allen, 337. As the defendants hold the mortgage not to secure a debt due to themselves, but as trustees for the holders of the bonds of the mortgagor, their duties are regulated by the general rules of law which affect all trustees, and whenever 'they fail to perform them, either through wilfulness, indifference or error of judgment, the bondholders who are aggrieved by their conduct may obtain relief in this court sitting as a court of equity. This is clear under the general provisions of the statutes giving this court jurisdiction on equity; Gen. Sts. c. 113, § 2; and under the special provisions relating to jurisdiction in equity of all cases arising out of railroad mortgages. Gen. Sts. c. 63, § 128. Among the duties of the defendants as trustees, are these: They must act in good faith for the best interests of the bondholders; they must take care that the property is not wasted nor depreciated; they must see that its income is not improperly diverted from the payment of interest on the mortgage debt as it accrues; and in case of a manifest purpose on the part of the mortgagor to waste or destroy the property, or not to apply the income to payment of interest, to the injury of the bondholders, it is their duty to enter and take possession of the property, and manage it for the security of the cestuis que trust. Perry on Trusts, § 749. Applying these principles to the case before us, it is clear that the bill states a case which calls for the interference of a court [311] of equity. The plaintiffs are holders of- bonds secured by the mortgage. They have no means of enforcing their rights in the mortgaged property, except through the action of the defendants. They allege that the mortgagor has been in default in the matter of the payment of interest for more than six months, and that it has signified a purpose not to pay interest on their bonds, unless they will accept payment at a less rate than the bonds call for; that the property with the rolling stock of the mortgagor produces an income sufficient, after paying the running expenses, to pay the overdue interest on the bonds, and to pay the accruing interest; that the mortgagor applies the earnings to pay its unsecured debts, and to uses which do not benefit the plaintiffs, and that there is danger that, if this course continues, the mortgage debt will grow by the accumulation of interest to such amount that the mortgage will be inadequate security for its payment. The demurrer admits the truth of these allegations, and, of course, does not set up a state of facts by way of explanation which justifies the inaction of the defendants. On these facts it is the right of the plaintiffs that the defendants take possession of the property for the purpose of foreclosure, and manage it, and apply the net earnings to payment of the interest on the bonds. There is no force in the objection that this may render it necessary for the parties in interest to go into litigation to ascertain what property the first mortgage covers, and what it does not cover, in order to settle the rights of the bondholders under the second mortgage, as distinguished from the bondholders under the first mortgage. The rights of the plaintiffs are the same that they would be if the second mortgage had not been made, and there is no reason why they should not enjoy those rights in the fact that the mortgagor has done something, since their rights attached to the property, which will render litigation necessary to define, limit and enforce them. Nor are the rights of the plaintiffs' to be affected by the fact that, if the bill is sustained, and the defendants are required to take possession of the mortgaged road and manage it, a great burden of labor and a great responsibility moral and financial will be imposed on the defendants, in that they will be personally liable for all injuries done and debts incurred to others in managing the property. This burden [312] and responsibility are incident to the trust which they assumed in taking the mortgage, and it is not for them to say that the oestuis que trust must suffer, because it is inconvenient, disagreeable or burdensome for them to do their duty as trustees. Perry on Trusts, § 763. The bondholders under the second mortgage are not necessary parties to the bill. It would be probably impossible to ascertain the names and residences of them all, and their interests are fully represented by the trustees to whom the second mortgage runs, the defendants already in the case. These trustees have no interest adverse to those bondholders, and there can be no other representative of them so fit as the trustees who hold the mortgage security in trust for them all. Shaw v. Norfolk County Railroad, above cited. As the bill states a case which calls for and entitles the plaintiffs to relief in equity, and as all necessary persons are made parties to it, the demurrer is not well taken. The defendants are trustees for all the bondholders, and the bill is brought by about one sixth of them in amount. It looks to a foreclosure of the mortgage and a closing up of the trust. All the parties interested are entitled to be heard if they desire it, and are proper, if not necessary, parties to the proceedings. The petition of the majority of the bondholders, who were not originally made parties, that they be permitted to come in and be joined as plaintiffs, is the only means which they could adopt to make themselves parties, and to put them into the proper position for insisting on and maintaining their rights. It must therefore be granted. As to the consequences of their becoming parties, we are not called on now to decide. Demurrer overruled, and petition of bondholders granted.