Chamberlain v. Connecticut Central Railroad

Loomis, J. This is a complaint in the name of the state treasurer against the Connecticut Central Railroad Company for the foreclosure of a mortgage executed by the latter upon all their estate, present and prospective, to secure an intended issue of bonds, which were afterwards in fact issued to the amount of $825,000, payable in 1895, or at the election of the holder at any earlier time after six months default on the interest coupons annexed to the bonds. The interest was paid to October 1st, 1878, and coupons to the amount of $186,500 have since matured, and are in default, unless the defence set up is true and sufficient. Ordinarily the contention in such an action is reduced to narrow limits and can easily be determined, but here the proceedings are much more complicated. The New York & New England Railroad Company, which, during the pendency of the action, was upon application of the plaintiff made a co-defendant-, are the owners and holders of all the bonds and coupons constituting the mortgage debt, and this suit was instituted by the plaintiff — 483 — as treasurer of the state, by request of the New York & New England Railroad Company for their sole benefit; and the latter, since June 1st, 1880, have had exclusive possession of all the property mortgaged, under an agreement contained in a lease, reserving no rent but stipulating that the net income derived from the use of the property should be applied to the payment of the identical coupons which in this suit are alleged to be due and unpaid. Upon these facts the Connecticut Central Railroad Company insist that the real plaintiff in the suit is the New York & New England Railroad Company, and upon tins assumption the answer and cross-complaint, as contained in the record, were filed, which in substance contain the single defense, that the New York & New England Railroad Company is bound to render an account in this action of its receipts and expenses while in possession since June 1st, 1880, and that on a fair and just accounting it would appear that the net earnings of the property have been enough to pay, and in equity have paid, all the defaulted coupons upon which the complaint for foreclosure is based. On demurrer to the answer and cross-complaint the trial court rendered judgment for the plaintiff and passed an absolute decree of foreclosure. The main question presented by the appeal for review in this court, is, whether the defense referred to was sufficient. We think it was, and that the technical objections upon which the demurrer was based ought not to prevail. The objections seem to assume that the proposed defense could not be entertained without improperly shifting both the parties and the issues in the suit. But reference to the well-settled principles of equity, applicable to the subject matter, will show that these objections have no foundation. It is true that the mortgage sought to be foreclosed was to the treasurer of the state, (as a mere trustee,) yet in effect it was a contract between the Connecticut Central Railroad Company and the holders of the bonds, and in equity the case stands precisely as it would had the present bond — 484 — holders been named in the deed as mortgagees. Jones on Railroad Securities, § 68; Butler v. Rahm, 46 Md., 541. It is difficult to conceive how the New York & Hew England Railroad Company could have been regarded as a stranger to the suit, in view especially of the distinct admission contained in the pleadings, that it owns, and has owned sioce June 1, 1880, all the bonds and coupons secured by the mortgage, and that the suit was brought by its request and for its benefit. But it is said that these bonds and coupons were negotiable and that the state treasurer as trustee must account to one bond-holder to-day, and to another to-morrow, in case of a transfer. This is true, and it is easy to suppose a very complicated case, but such is not this case, because the bonds have not been negotiated and there is no divided interest or ownership. The fundamental doctrine of equity is, that the owner of the debt is the real mortgagee; the debt is the principal thing; the conveyance is a mere incident; it therefore follows that an assignment of the debt carries the security along with it and that an extinguishment of the debt is an equitable determination of the estate conveyed. These principles are equally applicable whether the debt is represented by negotiable or non-negotiable securities. We conclude, therefore, that in the case at bar there was no objection to the defense on account of the parties; the d¿fense was aimed at the real and only party in interest, and so far was legitimate. But it is said that an issue was presented foreign to the matter of the complaint. The matter in question was, whether a foreclosure ought or ought not to take place. It ought not to take place if there was no debt due. This the defendant attempted to show by offering to prove that all the matured coupons had been paid. The mode of payment was immaterial, whether in cash, or in rents and profits received by the owners of the mortgage debt and agreed to be applied in payment of it. The accounting prayed for was in aid of the defense, and — 485 — was based on a duty incumbent upon tbe New York & New England Railroad Company under the circumstances to render it. The doctrine is elementary that a mortgagee in possession, whether acquired by actual entry or by attornment of the tenants, will be subject, not only to the equity of redemption, but to the duty of applying the rents and profits in discharge of the debt, and rendering an account of then.' receipt and application. Saunders v. Frost, 5 Pick., 260; Moore v. Gable, 1 Johns. Ch., 385. And an equitable mortgagee is as liable to account as a legal mortgagee. Brayton v. Jones, 5 Wis., 117. An assignee of the mortgagee in possession stands in the place of his assignor in respect to the account. 2 Jones on Mortgages, § 1118. But it is further said, that in this case the New York and New England Railroad Company were in possession under a lease from the defendant, and upon this fact a threefold objection is based, namely—that the lease is a separate and independent contract; that it-covers property not included in the mortgage ; and that it provides for an arbitration in case of difference, and no arbitration has been had or asked for. If we may adopt somewhat the manner of a pleader, our general reply would be that the first two parts of the objection are not true in any such sense as the argument for the plaintiff assumes, and that the last is insufficient. The contract of lease, instead of being entirely independent, has an intimate connection with the subject matter of the suit, in that it provides for the application of the net income of the leased property first of all to pay the coupons claimed to be in default. .- The lease, too, took effect June 1st, 1880, and that is also the alleged date of the purchase of the bonds in question. The latter by their terms all become due in 1895-—the same year the lease is to terminate. This is quite suggestive that the purchase of the bonds and the taking of the lease were parts of one and the same scheme. But we do not rely upon this last suggestion to show that the lease is not a separate contract in such a sense as the demurrer assumes. — 486 — The case may well stand on this proposition, that if the possession and use of mortgaged premises by the owner of the mortgage debt without any agreement at all respecting the matter, imperatively demands an accounting and the application of rents and profits to the payment of the debt, the duty surely can be no less on the party who has agreed to do that very thing. Then, as to the point that the lease covers more property than the mortgage, it has much less truth than the first. The leasehold estate and the mortgage estate are substantially identical. The mortgage conveyed all lands, franchises, “ materials, privileges, appurtenances and property, real and personal, which now belongs to or hereafter may be acquired by said company.” The difficulty of conveying anything more than this by any subsequent lease is quite apparent without further argument. The color of a foundation which this point has to rest upon is the paragraph in the lease which reads “ together with any right it ” (the defendant) “ has or may hereafter acquire to use in any manner ” certain terminal facilities and connecting roads which are named. The language is that of a mere quit-claim; no rights are described as existing, and if they did exist the sweeping language of the mortgage would seem broad enough to include them. There may have been some remnant of a lease or license for the defendant to use the connecting roads referred to, but whatever may be the right referred to, it furnishes no obstacle at all to accounting, for the lease expressly provides for deducting from the gross earnings of the entire line operated solely on account of the Connecticut Central, whatever is paid on account of those connections and advantages, and there can be no uncertainty, on that account, in ascertaining the net income to be applied on the mortgage debt. It may be well here to add that the directions contained in the lease respecting the mode of ascertaining the amount, if any, to be applied on the mortgage, should be followed. Another objection attempted to be drawn from the lease is, that as it provides for arbitration in case of a difference — 487 — between the parties, the defendant is restricted to that remedy alone. But the Hew York & Hew England Railroad Company, having caused this suit to be instituted for their sole benefit, is in no position to make such an objection if it was otherwise good, for having invoked the jurisdiction of a court of equity to pass upon their allegations, they cannot limit that jurisdiction till it has determined all the equities between the parties relative to the subject matter. Moreover, it seems to be well settled that an agreement to submit to arbitration will not be held valid, either in law or equity, when its effect is to oust the court of jurisdiction. Wood v. Humphrey, 114 Mass., 185; Tobey v. County of Bristol, 3 Story, 300; Thompson v. Chamock, 8 T. R., 139; Jones v. St. John’s College, L. R., 6 Q. B., 115; Russell on Arbitration, 61-63, and cases there cited. Our reasoning has brought us to the conclusion that it is the duty of the Hew York & Hew England Railroad Company to account in this action, and that the defense founded upon the anticipated results of such accounting is one the defendant mortgagor should be allowed to make. The further objection, that the account demanded is in some of its details unreasonable, and that no railroad company’s books contain such items, we do not deem it necessary to pass upon. There is nothing on record to show whether this point is well founded or not, and in the brief of counsel it is stated in the most general terms without argument. We think therefore it is better to leave the details to the trial court, that can act upon fuller information and argument. It is quite obvious that the details will depend much upon what the plaintiffs are willing to disclose. If they refuse or neglect to give, as the answer and cross-complaint allege, an account of the actual freight, tolls and income of the Connecticut Central Railroad Company, and insist on pro-rating all such items with what they receive for the same things upon the entire mileage of their own road, then many of the details asked for would become both reasonable and necessary. We observe near the conclusion of the cross-complaint and in one place in the answer — 488 — that the demand for special details referred to is subject to a qualification in these words—“ So far forth as the same may be necessary to show that the New York & New England Railroad Company * * * have received, previous to the commencement of this suit, sufficient moneys belonging to the Connecticut Central Railroad Company to pay said alleged over-due interest, over and above all other lawful charges against the same.” Applying this qualification to all the details asked for, there is surely nothing unreasonable in the account demanded, There was error in the judgment complained of, and a new trial is ordered. In this dpinion the other judges concurred.