Mercantile Trust Co. v. Baltimore & O. R.

TAFT, Circuit Judge (after stating the facts). The intervening bondholders here are the creditors of the Sandusky Company. As part of the rental for its property, the Sandusky Company has secured from the Central Ohio and the Baltimore & Ohio Companies an agreement to pay the interest due upon the bonds of the intervening petitioners. As between the three railroad companies, with reference to the obligation to pay the interest on petitioners-’ bonds, the Sandusky Company is only a surety. The Central Ohio company and the Baltimore & Ohio Company are principals. The Sandusky Company, which is the debtor of the intervening petitioners, has therefore the security of the -obligations under a lease made by the Baltimore & Ohio Company and the Central Ohio Company to pay the interest due to the intervening petitioners. In equity, a creditor may have the benefit of any obligation or se [725] curity given by the principal to the surety for the payment of the debt; and it is held by the supreme court of the United States in the case of Keller v. Ashford, 133 U. S. 610, 10 Sup. Ct. 494, that this principle applies in favor of the creditors, even where there is no privity of contract between the creditor and the principal, and where the surety is the sole debtor of the creditor. Mr. Justice Gray, who delivered the opinion of the court in that case, said: “In short, If one person agrees with another to be primarily liable for a debt due from that oilier to a third person, so that, as between the parties to the agreement, the first is the principal and the second the surety, (he creditor of such surely is entitled, in equity, to be substituted in his place, for the purpose of compelling such principal to pay the debt.” In the case cited, which was in equity, the complainant, the holder of a note secured by a mortgage upon land in Washington, had tiled a bill against a grantee of the mortgagor to compel that grantee to pay the amount due on the note. The bill was based on a (danse in the deed to such grantee by which, as between hun and the mortgagor, he assumed payment of the mortgage. The land had been sold under a prior mortgage, and no surplus remained with which to pay the mortgage of the complainant It was held that in equity the complainant was entitled to subject to the payment of her claim against the mortgagor the obligation of the grantee of the mortgagor to him to pay her debt, treating it as a security held by the surety, who was the debtor of the complainant, for the payment by his principal of the debt. It seems to me that the present case comes clearly within the principle of Keller v. Ashford, and that the bondholders to whom it was provided, between the Bandusky Company and the Baltimore & Ohio Company, that the latter should pay their interest on the bonds of the iáandusky Company, may, in equity, compel the Baltimore & Ohio Company to pay that interest. The first objection to the sufficiency of this petition is that “the individua] bondholders, as such, have no right to interferí;, in any litigation concerning the property covered by-the mortgage securing their bonds, until the trustee either incapacitates himself from acting or refuses to act in their behalf.” To this objection it is sufficient to answer that the petitioners here are not seeking to foreclose the mortgage given to their trustee to secure the payment of the principal and interest of their bonds. They are only seeking to subject a security held by their debtor for the payment of the interest on the bonds which is not included in the mortgage. The Central Ohio Company and the Baltimore & Ohio Company did not agree to pay the rent to the trustee under the mortgage for the benefit of the bondholders, but ■only to pay it to the bondholders themselves. The rule of practice, therefore, which requires that, in a foreclosure of the mortgage, the trustee in whom is the legal title shall represent the creditors secured by the mortgage, has no application whatever to the present litigation. The next objection is “that neither the United Btates court for the district of Maryland, nor the courts acquiring ancillary juris [726] diction over the Baltimore & Ohio Railroad Company, in connection with said suit, had any power or authority to assume control over the Sandusky, Mansfield & Newark Railroad Company as against the mortgage of that railroad company.” To this objection the clear answer is that the petitioners do not seek to have the court exercise any power over the railroad covered by the mortgage given by the Sandusky Company. The petition shows that there is a fund in this court either of rental under the lease, or of compensation, accruing for the use and occupation of the railroad of the Sandusky Company, due from the receivers to some party in interest. The petitioners claim that they are that party in interest, and that they have the right to the fund, and ask that it be distributed to them. This court must make some order with respect to the distribution of the fund, and every claimant to that fund has a right to be heard in this court, upon due petition filed. The officers of this court are alleged to owe some one money on a certain account, and the petitioners claim that the money on that account is due to them. The decision by this court of the validity of the petitioners’ claim is certainly not an assertion of any jurisdiction over the fee of the Sandusky Company upon which it executed its mortgage. It is true that that mortgage covers rents and profits, but it is well settled, and, indeed, is urged upon the court by the counsel upholding the plea, that, until the mortgagee asserts its rights under the mortgage to the possession of the road by filing a bill of foreclosure, and by taking possession, either through its trustee or by receiver of the court, it has “no right to the earnings and profits. It follows, of course, therefore, that the mortgagee’s rights under the mortgage are not in the slightest degree affected by the present proceeding. The trustee under the mortgage has not, as yet, taken possession of the road or asserted its right to the possession of . the rents and profits. The proceeding in the Huron common pleas court is a proceeding by a stockholder, to which the mortgagee and the bondholders are not parties, and.it is doubtful whether, under such a petition, the receivers appointed can be said to take possession of the property and the profits for the benefit of the mortgagee. But, even if it be conceded that the receivers are in possession for the benefit of the mortgagee and all others as their interest may appear, this would still not prevent the petitioners from asserting the right which they do assert here. Their claim is that, as bondholders, they have an equitable right to subject the obligation which the Baltimore & Ohio Company and its receivers are under to pay rent to the satisfaction of their claims for interest, and that this lien does not grow out of the mortgage, but is acquired by virtue of the lease, and the terms thereof, against the Baltimore & Ohio Railroad Company. They are not claiming the rent as mortgagees out of possession, but they are claiming it under an agreement by the lessee with the lessor that the rent shall be paid directly to them, — ¿n agreement which they may in equity enforce against the lessee. It is an appropriation of the rent to their use, and the cases which may hold that the mortgagee may not take the [727] rents until he takes possession of the property have no application to the case of a specific agreement by which the rents are expressly appropriated each year during the pendency of the debt to the payment of the interest thereon. Finally, it is said “that after the receivers were appointed for the property covered by the mortgage, as indicated above, the receivers are the proper parties to assert any claim for rent due on the lease, if any is due, and that the bondholders, if aggrieved, must make their complaint to the court appointing the receivers, and seek their relief there; that, the common pleas court of Huron county having acquired jurisdiction over this property, no other court', with either co-ordinate or concurrent jurisdiction, can interfere with the management or control of it, or acquire jurisdiction of the subject-matter of investigation.” Enough has been said to answer this objection, but it is proper to point out a, little more fully its insufficiency. It is true that all persons interested in the property in the custody of the receivers of the Huron county common pleas court, if they desire any relief with respect thereto, must apply to that court, and have their equities in the property worked out, with the assistance of that court. The weakness of the contention in the present case, however, is that the subject-matter of dispute is a fund which is not in the possession of the Huron county common pleas court, but is in the possession of this court. It is true that the receivers of the Huron county common ideas court are given authority in their appointment to collect any amount which may be due from the receivers of the Baltimore & Ohio Railroad Company to them, but, in order to collect that amount, they must come to this court for relief, because the property which they seek is in this court, and not in the court of their appointment. The petitioners claim an interest, not in the prop-ern- in the custody of the Huron common pleas court, but in the fund in this court, and say that they are entitled in this application to the payment of interest on their bonds. The conclusion reached seems to be sustained by the decision of the court of appeals of the Second circuit in Bank v. Smith, 30 C. C. A. 133, 86 Fed. 398. It may be — I do not decide that question now — that, in order to grant the relief which the petitioners ask, namely, that of compelling the Baltimore & Ohio Company and the Central Ohio Company to pay the interest on their bonds to the extent of the rental due under the lease, or compensation due for use and occupation, of the Sandusky Railroad Company, the Sandusky Company and its receivers should be made parties to this proceeding. But the ground of the plea here under consideration is not that the petition does not make them necessary parties, but it is that, on the face of the petition, taken with the facts recited in the plea concerning the litigation of the Huron county common pleas court and the appointing of receivers there, this court has no jurisdiction of the controversy sought to be made by the petition. Upon that issue it seems to me that the plea is bad. Leave will be given to the petitioners to. make parties defendant to their [728] petition the Sandusky Company and the receivers appointed by the Huron common pleas court. As the lessees are receivers of a court, they cannot be brought in here as ^parties, except with the permission of the court appointing them. If that permission is withheld, it will then become a question whether they are such necessary parties as to prevent this court from proceeding to adjudicate who are entitled to the rental fund now in possession of its receivers. I cannot suppose that receivers in a state court •or the court appointing them will decline to permit them to be made parties to this proceeding when the purpose of their appointment was the collection of rent from the receivers of the Baltimore & Ohio Railroad Company appointed by this court. If, however, it is not deemed proper to allow them to become defendants to this petition, it may become a matter of serious consideration whether they can be granted leave to file a petition herein against the receivers of this court. The issue made on the plea of the Central Ohio Company to the petition is with the petitioners, the plea is overruled, and leave is given to answer. Leave is also given to the petitioners to make new parties.