Central Trust Co. of New York v. Indiana & L. M. R. Co.

JENKINS, Circuit Judge, after the foregoing statement of the case, delivered the opinion of the court. Since the hearing in this court, the counsel for certain unnamed bondholders petitioned for leave to submit an argument upon the' question of the right of the Central Trust Company, trustee, to recover upon the guaranty in question; insisting that the appellant was trustee of the bondholders in respect of the mortgaged premises; that upon foreclosure of the mortgage, and distribution of the proceeds of sale, the functions of the trustee ceased, and it had no authority under the law or under the trust deed to maintain a suit at law,or in equity to recover a personal judgment or decree against the guarantor of the bonds. Upon consent of the appellant, the court permitted a brief to be filed urging that contention, and we have duly considered the argument presented. It may well be that, in the absence of apt stipulations in the trust deed, a trustee is without authority to enforce the collection of the bonds to any further extent than to subject the mortgaged property to sale, and to distribute the proceeds among the holders of the bonds, and that thereupon the functions of the trustee cease. This question was not suggested in the court below, and cannot rightly be presented for the first time in an appellate court. Railway Co. v. Henson, 19 U. S. App. 169, 7 C. C. A. 349, 58 Fed. 531; Bowser v. Mattler, 137 Ind. 649, 654, 35 N. E. 701, and 36 N. E. 714; Giraldin v. Howard, 103 Mo. 40, 15 S. W. 383; Davidson v. Morrison, 86 Ky. 397, 5 S. W. 871; Bank v. Gilpin, 105 Mo. 17, 16 S. W. 524; People v. Smith, 42 Mich. 138, 3 N. W. 302. A decree was sought in favor of the trustee for the deficiency and upon the guaranty. The appellant surely cannot complain, except of the refusal of the court below to [669] grant its prayer. It cannot here be heard to say that its application was rightly denied, but on other ground than that held by the court below. If the trustee acted without authority of the bondholders in seeking a decree for the deficiency, the latter may not be estopped by the decree, or by the adjudication below that the guaranty was invalid. As respects the trustee, it exhibited to the court proof that the reorganizing committee was authorized to take all necessary measures for the collection of these bonds; that all the bonds were deposited with the owners under the arrangement with the trust company, to be dealt with by it under the direction of the reorganizing committee. There is sufficient to show that that committee directed the filing of the bill, praying inter alia a personal judgment against the guarantor upon its guaranty, and actively participated in the prosecution of the suit. Being thus the holder of the bonds upon an express trust, the appellant could doubtless maintain a suit at law upon them. Against its own application Cor judgment upon them, it cannot be heard to object that a court of equity ought not to entertain, in connection with the foreclosure proceedings, the question of the liability of the guarantor. O’Brien v. Smith, 1 Black, 99; Law v. Parnell, 7 C. B. (N. S.) 282. It is only just to say that the trust company has raised none o'f these questions. A bondholder, not a party to the suit, if he be not estopped, in the absence of any pretense of bad faith on the part of the trustee, should not be heard in opposition to the action of the trustee. If he he estopped by the deposit of his bonds under the agreement for reorganization, he is bound by the action of the trustee. This brings us to the consideration of the main question upon its merits. It is the settled doctrine of the supreme court of the United states that: “A railroad corporation, unless authorized by its act of incorporation or by other statutes io do so, has no power to guaranty the bonds of another corporation: and such a guaranty, or any contract to give one, if not authorized by statute, is beyond the scope of the powers of the corporation, and strictly ultra vires, unlawful, and void, and incapable of being made good by ratification or estoppel.” Louisville, N. A. & C. R. Co. v. Louisville Trust Co., 174 U. S. 552, 507, 19 Sup. Ct 817. 43 L. E.d. 1081, and authorities cited. We must therefore look to the statutes of the state of Indiana to ascertain if power was conferred upon the Indianapolis. Company to make the guaranty in question. By an act of the legislature of, that state In force March 8, 1883, entitled “An act to authorize railroad corporations organized under the laws of the state of Indiana (o indorse and guarantee the bonds of any railroad company organized under the laws of any adjoining state” (Acts Ind. 1883, p. 182; 2 Burns’ Rev. St. Ind. 1894, §§ 5216-5218), it is provided that: “Sec 5216. (E. S. 1049.) Guaranty of Bonds of Another Company. — 1. That the board of directors of any railway company organized under and pursuant to the laws of the state of Indiana, whoso line of railway extends across the state in either direction, may, upon the petition, of the holders of a majority of the stock of such railway company, direct the execution by such railway company of an indorsement guaranteeing the payment of the principal and interest of the bonds of any railway company organized under or pursuant to the laws of any adjoining state, the construction of whose line or lines of [670] railway would be beneficial to the business or traffic of the railway so indorsing or guaranteeing such bonds. “Sec. 5217. (E. S. 1050.) Petition of Stockholders — 2. The petition of the stockholders specified in the preceding section of this act shall state the facts relied on to show the benefits accruing to the company indorsing or guaranteeing the bonds above mentioned. “Sec. 5218. (E. S. 1051.) Limitation. — 3. No railway company shall, under the provisions of this act, indorse or guarantee the bonds of any such railway company or companies as is above mentioned to an amount exceeding one-half of the par value of the stock of the railway company so indorsing or guaranteeing as authorized under this act.” We dismiss without consideration the provisions of the latter two sections, because, if those provisions were not complied with by the Indianapolis Company, it cannot urge its noncompliance to defeat the guaranty upon the bonds, as against bona fide holders of them without notice. Louisville, N. A. & C. R. Co. v. Louisville Trust Co., supra. The record here presents no evidence of such notice, and does exhibit long acquiescence on the part of the stockholders of the Indianapolis Company, with actual knowledge of the lease and guaranty. The question thus presented is whether the Indianapolis Company is within the class of railroad companies to which the statute is applicable. The power is conferred only upon a railroad company “whose line of railway extends across the state in either direction.” If the line of railway extending from the westerly line of the state near Terre Haute to Indianapolis is, within the true intent and meaning of the statute, to be deemed “the line of railway” of the Indianapolis Company, it manifestly cannot be said to have a line extending across the state in any direction;. for that terminates at Indianapolis, at about the center between the easterly and westerly boundaries of the state. The purpose of the act clearly was to enable those railroad companies whose lines extended from one boundary of the state to another to form trunk lines, or to procure an outlet into an adjoining state by running arrangements over lines directly or indirectly connecting with their own lines of railway, and to enable them, when necessary for that purpose, to guaranty the bonds of the company of such adjoining state. It is clear that the Indianapolis Company does not come within the contemplation of the law, if the statute includes only a company which owns absolutely a line of railway extending across the state. It is, however, urged that the Indianapolis Company is brought within the purview of the statute because of the connecting lines leased by it. The difficulty with this contention is that it appears to be settled by repeated decisions that there is in Indiana no law authorizing a railroad company of that state to lease the line of another railroad company either within or without the state. Board of Com'rs of Tippecanoe Co. v. Lafayette, M. & B. R. Co., 50 Ind. 85; Pennsylvania R. Co. v. St. Louis, A. & T. H. R. Co., 118 U. S. 290, 6 Sup. Ct. 1094, 30 L. Ed. 83, od rehearing, 118 U. S. 630, 7 Sup. Ct. 24, 30 L. Ed. 284; St. Louis, V. & T. H. E. Co. v. Terre Haute & I. R. Co., 145 U. S. 393, 12 Sup. Ct. 953, 36 L. Ed. 748. It follows, therefore, that the lease by the Indianapolis Company of the Terre Haute & Logansport Bailroad, by which a connection was made at Terre Haute with the line of the [671] Indianapolis Company, and at South Bend with the lint; of the Michigan Company, and also the lease in question with the Michigan Company, were ultra vires the Indianapolis Company, and are void. These leased lines cannot, therefore, be deemed part of the “line of railway” of the Indianapolis Company. It was consequently not a company whose “line of railway” extended across the state, and was not empowered to execute the guaranty in question. This guaranty expressed for its consideration an absolutely void agreement, incapable of ratification, and notice of which is imputed by the law to every holder of the bonds of the Michigan Company. It is competent for the Indianapolis Company to plead invalidity of the contract, and its own want of power to execute. We do not deem it essential to review the various provisions of the statute of Indiana applicable to the subject which have been called to our attention. They were all considered by the court in Pennsylvania R. Co. v. St. Louis, A. & T. H. R. Co., supra, and the power to lease was denied. The legislation of the state with respect to railways would seem to be sporadic and fragmentary, and not in consonance with a well-defined policy and a regulated system of control of railway corporations. The omission in the legislation of the state of the grant of power to take by lease appears to be inadvertent rather than intentional. We fail to discover any sound reason of public policy which, giving to railway corporations acquiring their property under decrees of courts (1 Burns’ Rev. St. Ind. 1894, § 5215) the right to purchase the lines of railway of other railroad companies, withholds that power from other railway companies whose lines have not been acquired through sale upon foreclosure. If a railroad company authorized to consolidate with another company can accomplish that purpose by purchase of the slock of the oilier company, as an incident to such consolidation (2 Burns’ Rev. St. Ind. 1894, § 5215; Hill v. Nisbet, 100 Ind. 341), it is not altogether apparent why a company generally authorized to extend its railway beyond the termini expressed in its charter or articles of organization (2 Burns’ Rev. St. Ind. 1894, § 5606), and to own and operate such extended lines, may not accomplish that object by permanent lease of connecting linos, and why the greater should not include the lesser power. But the question seems to be authoritatively settled. The supreme court of the United States has declared the law. We can but: follow and obey. The decree is affirmed. GROSSGUP, Circuit Judge, sat at the hearing, but. by reason of illness and absence, took no part in the decision.