1. A railroad company executed, March 10, 1869, to a trustee, by
way of security for its bonds payable thirty years thereafter, a
first mortgage upon its road, and stipulated that if
"default should be made in the payment of any half-year's
interest on any of them, and the coupon for such interest be
presented and its payment demanded, and such default continue six
months after such demand without the consent of the holder of such
coupon or bond, then and thereupon the principal of all of the
bonds thereby secured should be and become immediately due and
payable, anything in the bonds to the contrary notwithstanding, and
the trustee might so declare the same, and notify the company
thereof, and, upon the written request of the holders of a majority
of the bonds then outstanding, should proceed to collect both
principal and interest of all such bonds outstanding by foreclosure
and Bale of said property, or otherwise, as therein provided."
Claiming that there had been a default for more than six months
after a demand for the payment of the coupons due in 1873, the
trustee declared the principal of the bonds to be due, and notified
the company thereof. He then, without obtaining the written request
of a majority of the holders of the bonds outstanding, brought suit
praying for a decree for a sum equal to the entire amount of the
bonds and interest due thereon, and for the
Page 106 U. S. 48
foreclosure and sale of the mortgaged property.
Held
that if there had been such default, he was not entitled to the
decree.
2. Where by the stipulations of the mortgage it is a security
for the payment of the interest as it semi-annually accrues, as
well as of the principal, the trustee, on the nonpayment of either,
or, on his failure to act, any bondholder, may, to enforce the
security, bring suit, and if it results in a sale of the mortgaged
premises as an entirety which is confirmed by the court, the
purchaser takes an absolute title to them as against the parties to
the suit or their privies, and the proceeds of the sale will be
applied first to the arrears of interest, then to the mortgage
debt, then to the junior encumbrances, according to their
respective priority of lien, and the surplus, if any, will be paid
to the mortgagor.
3. In such a suit, the decree should declare the fact, nature,
and extent of the default which constitutes the breach of the
condition of the mortgage, and the amount then due, and a
substantial error in that regard will, on appeal, vitiate the
subsequent proceedings. A reasonable time for payment should be
allowed, and, on such payment within the prescribed period, further
proceedings will be suspended until another default occurs. At any
time prior to the confirmation of the sale under the decree, the
mortgagor, by bringing into court the amount then due, and costs,
will be allowed to redeem.
Howell v. Western Railroad
Company, 94 U. S. 463,
touching the form of the decree where moneys payable by
installments are secured by mortgage, cited and approved.
4. An appeal may lie from a decree in an equity cause,
notwithstanding it is merely in execution of a prior decree in the
same suit, for the purpose of correcting errors which originate in
it; but when such decrees are dependent upon the decree, to execute
which they were rendered, they are vacated by its reversal, in
which case, the appeal which brings them into review will be
dismissed for want of a subject matter on which to operate.
5. A decree
in personam for the amount remaining due
upon a mortgage debt, after the execution of a decree of
foreclosure and sale, is of this description, but when rendered in
favor of other parties than the complainant,
it will be reversed for the same error that required the
reversal of the decree of foreclosure and sale.
The facts are stated in the opinion of the Court.
MR. JUSTICE MATTHEWS delivered the opinion of the Court.
These appeals bring into review decrees in the same suit. The
bill was filed by Fosdick and Fish, as mortgagees in trust for
holders of bonds, for the foreclosure of a mortgage, given by the
Chicago, Danville, and Vincennes Railroad Company
Page 106 U. S. 49
upon its railroad, and for a sale of the mortgaged premises. A
decree in accordance with the prayer of the bill was rendered, and
under it a sale was had and confirmed by the court. From these
decrees respectively the present appeals are prosecuted.
The bonds, amounting to $2,500,000 in all, secured by the
mortgage in question, were dated March 10, 1869, and payable April
1, 1909, with interest at the rate of seven percent
per
annum, payable semiannually on the first day of April and
October of each year, on the delivery of annexed interest warrants
in the city of New York, at such place as might be designated by
the company, by advertisement published in that city. The mortgage
bears even date with them, and, after reciting the resolutions of
the board of directors which authorize the issue of the bonds and
the execution of the mortgage, conveys to Fosdick and Fish, as
trustees, and to their successors and assigns, the road of the
company, extending from its terminus, in Chicago, southerly through
certain named counties to Danville, and thence southeasterly to a
point on the state line of Indiana, connecting at that point with
the Evansville, Terre Haute, and Chicago Railroad, being in length
about one hundred and fifty miles, "including all the property
between said terminal points, which said party of the first part
now has and possesses, or may hereafter acquire," &c.
The conditions and trusts, upon which the conveyance is made,
are expressed in a series of articles, nine in number, of which it
is important to notice only the following:
The fifth article provides in substance that in case default
shall be made in the payment of any interest, or of the principal
of any of said bonds, without the consent of the holder, the
company shall, within six months thereafter, the same default still
continuing, on demand of the trustees, surrender to them possession
of the road and mortgaged property; the trustees operating the same
shall apply the net profits and income to the payment of the
interest so in default until such default shall have been
satisfied, when the mortgaged premises shall be surrendered to the
mortgagor; but it is provided that no such demand for possession
shall be made by the trustees until they shall have been required
to take such possession by the holders
Page 106 U. S. 50
of at least one-half of all of the said issue of bonds then
unpaid and outstanding.
The sixth article provides further, that in case default shall
be made and shall continue as aforesaid, it shall be lawful for the
trustees, after entry into possession, taken as above authorized,
or other entry, or without entry, to sell and dispose of, to the
highest bidder, the mortgaged premises, as an entirety, at public
auction, in Chicago, at such time as they may appoint, first having
demanded of the mortgagor payment of all money then in default, and
having given sixty days' notice of the time and place of sale, by
advertisement, as specified; and to convey the same, when sold, to
the purchaser, on payment of the purchase money, in fee simple,
which conveyance, it is declared, shall be a perpetual bar, in law
and equity, against the title of the mortgagor, or any other person
claiming under it. The net proceeds of such sale are to be applied
by the trustees to the payment of the interest on the bonds then
outstanding,
pro rata, until all such interest shall be
paid, and afterwards to the payment of the principal, and any
surplus, to the mortgagor, the payments to be made on the bonds,
whether the same shall then have become due or not.
By the seventh article, it is provided that at any sale of the
mortgaged premises, made under the power contained in the deed or
by judicial authority, the trustees may become purchasers of the
same in behalf of the bondholders, at a price, in case the sale is
of the whole property as an entirety, not exceeding the whole
amount of said bonds and interest then outstanding.
The eighth article is as follows:
"8th. If default be made by the party of the first part in the
payment of any half-year's interest on any of said bonds, and the
warrant or coupon for such interest shall have been presented, and
its payment demanded, and such default shall have continued six
months after such demand, without the consent of the holder of such
coupon or bond, then and thereupon the principal of all of the said
bonds hereby secured shall be and become immediately due and
payable, anything in such bonds to the contrary notwithstanding;
and the said party of the second part may so declare the same, and
notify the party of the first part thereof, and upon the
written
Page 106 U. S. 51
request of the holders of a majority of the said bonds then
outstanding, shall proceed to collect both principal and interest
of all such bonds outstanding, by foreclosure and sale of said
property, or otherwise, as herein provided:"
It is averred in the amended bill of Fosdick and Fish that all
the bonds described in the mortgage had been issued and were
outstanding.
It is also alleged that on March 4, 1872, the Chicago, Danville,
and Vincennes Railroad Company became consolidated into one
corporation, by the same name, with the Rossville and Indiana
Railroad Company; and on March 9, 1872, a further consolidation was
effected, by the same name, with the Western Railroad Company, an
Indiana corporation, whereby the consolidated company was empowered
to build and operate a railroad, from the state line in Warren
County, to Brazil, in Indiana; and that on March 12, 1872, the
consolidated company, to raise means wherewith to construct its
Indiana Division, issued its bonds to the amount of $1,500,000,
bearing interest at the rate of seven percent
per annum,
and payable forty years after date; to secure which, on the same
day, it executed a mortgage to Fosdick and Fish, the complainants,
covering its Indiana Division, and a branch road extending from a
point three miles south from Covington to the Village of Newburg,
being about eighty miles in all. All the bonds secured by this
mortgage were issued.
It is further alleged that, as further security for both these
issues of bonds, the company, on April 24, 1872, executed another
mortgage to the complainants conveying the Indiana Division as
security for the first issue of bonds on the Illinois Division and
conveying the Illinois Division as security for the bonds issued
originally on the Indiana Division. The company made a subsequent
consolidation on May 6, 1872, under the same name, with the Attica
and Terre Haute Railroad Company.
The road as built in Illinois extends from Dalton about twenty
miles south of Chicago to Danville, about one hundred and eight
miles, with a branch from Bismark in Vermilion County to the east
line of the State of Illinois, about seven miles. It obtains an
entrance into Chicago over the roads of other companies. The
company has constructed, in Indiana,
Page 106 U. S. 52
its line from a point where the Bismark branch intersects the
state line, a distance of eighteen miles, and has done a large
proportion of the work required to carry its road to Brazil.
It is further alleged that the company paid all coupons on both
classes of bonds maturing on and prior to April 1, 1873, but
that
"none of the coupons maturing since that time, or any part
thereof, have ever been paid, but the said company, though often
requested, has never paid the same, but so to do has made
default."
Shortly after the first default on Oct. 1, 1873, to-wit, on Nov.
11, 1873, the company issued a circular to the holders of its
bonds, proposing to fund the coupons maturing from Oct. 1, 1873, to
April 1, 1875, in convertible seven percent bonds, to be issued for
that purpose, the coupons to be deposited with Fosdick, one of the
complainants, as a trustee, to be held by him until Oct. 1, 1876,
when they were to be cancelled, but in case of nonpayment of any
coupons becoming due up to Oct. 1, 1876, the coupons deposited with
the trustee were to be returned to the original owners, and the
second mortgage or convertible bonds surrendered to the
company.
In response to this proposition, coupons to a considerable
amount were deposited with the trustee and convertible bonds
received in exchange.
Soon after, on Nov. 20, 1873, another proposition was submitted
to the bondholders, to exchange these four coupons for certificates
of indebtedness payable in five years from Feb. 1, 1874, with
interest payable semiannually, the coupons to be held by the
trustee until after that date, when they were to be cancelled; but
in case of nonpayment of, the interest or principal of the
certificates, or of the coupons on the first mortgage bonds,
between Oct. 1, 1875, and Feb. 1, 1879, both inclusive, then the
coupons were to be returned by the trustee to their owners, upon
surrender of their certificates, with their original rights
unimpaired.
It is alleged that the holders of $2,801,000 of both classes of
bonds accepted one or the other of these propositions, and
deposited their coupons accordingly.
To secure the convertible bonds referred to in the first
proposition, a mortgage was executed by the company, of which
Page 106 U. S. 53
James W. Elwell was trustee, to the amount of $1,000,000,
payable, with interest semiannually at the rate of seven percent
per annum, on Feb. 1, 1893, covering the entire line and
both divisions of the railroad. It is alleged in the bill that all
these bonds, except about $5,000, have been issued.
It is charged that the company failed to pay all the coupons
upon the certificates of indebtedness due Feb. 22, 1875, and that
it has not paid any that fell due Aug. 1, 1875. It is also charged
that the company has never paid any of the coupons upon any of the
$4,000,000 of bonds, which were not funded and which matured
subsequent to Oct. 1, 1873, amounting to $1,199,000, and that the
coupons thereon are overdue and remain unpaid, the owners thereof
never having consented to such default, and it is alleged that the
company is wholly insolvent.
It is further shown that on June 12, 1875, the railroad company
made a further issue of bonds to the amount of $1,000,000, due Jan.
12, 1877, and to secure the same executed a chattel mortgage to R.
Biddle Roberts, upon its rolling stock, engines, cars, tools, and
equipment; but it is charged that the same was not executed,
acknowledged, and recorded as required by law, and is, therefore,
null and void; but that, if valid, it is subject to each of the
three mortgages of prior date. About $936,000 of these bonds, it is
averred, are held as collateral to debts due by the company, the
remainder not having been issued.
It is claimed also that by reason of its insolvency, the company
will not be able to pay the certificates of indebtedness issued by
it, or the interest thereon, and that in consequence of its failure
to pay the interest thereon already accrued, the owners of the
unpaid coupons of the $4,000,000 of bonds are entitled to rescind
the funding arrangement, and to demand and enforce payment of the
coupons funded as aforesaid.
It is further alleged that,
"by reason of the default of said company in the payment of the
coupons due Oct. 1, 1873, and subsequent thereto, which have never
been funded, the principal of all of the said bonds has, by the
terms end conditions of the mortgage securing the same, become due
and payable, and all of the said Illinois Division bonds and of the
said Indiana Division bonds were, by the terms and conditions
of
Page 106 U. S. 54
the mortgage securing the same, and in consequence of the
defaults aforesaid, due and payable prior to the commencement of
this suit. Your orators further allege that, of the said Illinois
Division bonds, $698,000 thereof have never been funded by the
holders thereof, and the holders thereof have never in any way
consented to the continuance of the default in the payment of
interest thereon. Your orators allege that they have been requested
by the holders of a majority of said Illinois Division, and also by
the holders of a large number of the said Indiana bonds, to proceed
to collect the principal and interest of said bonds by foreclosure
and sale of all of the railroad, franchises, property, and
appurtenances of said company within the State of Illinois."
It is also alleged that the Indiana Division of the road is
wholly insufficient to secure the payment of the Indiana Division
bonds, and that, while the Illinois Division is more than
sufficient to secure the payment of the Illinois Division bonds in
full, it is not sufficient in addition to pay in full the whole of
the Indiana Division bonds.
The original bill was filed Feb. 27, 1875, and made no party
defendant except the company. It contained the following averments,
which are not found in the amended bill:
"Your orators further show to your Honors that they have been
required by the holders of more than one-half of the twenty-five
hundred bonds to demand possession of the said railroad property,
franchises, and appurtenances of and from the said railroad
company, and have made such demand in pursuance of said
requirement, but that said railroad company has not delivered the
possession thereof to your orators, but so to do have wholly
neglected and refused."
"Your orators further show unto your Honors that they are
informed and believe, and therefore charge the fact to be, that at
least ninety percent of the said coupons which matured upon said
bonds on the first day of October, 1873, have been duly presented
for payment to the said railroad company, and payment thereof
demanded from said company, and that the same have never been paid,
nor any part thereof; and that the holders of six hundred and
ninety-eight of said bonds have never in any way consented to the
continuance of said default,
Page 106 U. S. 55
and that, in consequence of the continuance of said default,
without the consent of said holders of said six hundred and
ninety-eight bonds, the principal and interest of all of the said
bonds have become due and payable, and that your orators, as
trustees as aforesaid, under and by virtue of the provisions of
said mortgage, and the authority therein conferred upon them, have
declared the principal of all of said bonds to be due and payable,
and have notified the said railroad company thereof."
On May 17, 1875, James W. Elwell, acting trustee in the mortgage
of Dec. 16, 1872, appeared and filed a cross-bill, setting out the
terms of the mortgage, the issue of the bonds secured thereby, and
alleging that, while the interest upon about $160,000 of the bonds
had been paid by the company, that upon the remainder was wholly
unpaid. The cross-bill proceeds to set out the particulars of the
agreements alleged to have been entered into between the railroad
company and the holders of its first mortgage bonds, and continues
with the following averments:
"And your orator therefore avers that said corporation is not in
default in the payment of interest upon its said first mortgage
bonds to the amount of one million eight hundred and two thousand
dollars, but on the contrary your orator avers that said company
has adjusted and settled with the holders of said bonds to the
amount as above stated, and received an extension of payment of all
such interest coupons now past due and that will mature prior to
the first day of October, 1875."
"Your orator states that said corporation has paid to the
holders of said certificates of indebtedness all interest coupons
attached to said certificates as the same matured, and in
accordance with the terms thereof, which had been presented before
the appointment of the receiver, as hereinafter stated."
"And your orator represents, upon information and belief, that
the holders of the balance of said issue of twenty-five hundred
bonds have acquiesced in said extension of payment of interest and
excused such default, and have not demanded the payment of their
interest coupons nor attempted to enforce the collection of the
same."
"And your orator further states that notwithstanding said
Page 106 U. S. 56
agreement of the holders of said first mortgage bonds to extend
the payment of said interest warrants as hereinbefore stated, and
the payment of the interest at maturity by said company upon said
certificates of indebtedness, yet your orator is informed and
believes, and so charges the fact to be, that by reason of divers
persons claiming and pretending to be in the interest of a part of
said first mortgage bondholders combining and confederating to
wrong and injure your orator and the holders of said second or
convertible mortgage bonds and other creditors of said corporation,
said company was by the action of the Circuit Court of Will County,
in said State of Illinois, on the 22d of February last past,
wrongfully and unlawfully dispossessed of all its property so
conveyed to your orator by said deed of trust; that all of said
property, together with the rights, privileges, and franchises of
said company, were on said 22d of February wrongfully and
fraudulently taken from the custody and control of said company,
and without the knowledge or consent of said corporation, your
orator, or of the defendants herein, placed in the charge and under
the custody of strangers to said company, and to each of said deeds
of trust; that said parties still wrongfully retain the possession
of said property and control the revenue and income thereof,
thereby preventing said company and your orator from providing
funds for the payment of the interest warrants to mature upon the
bonds secured by said trust deed so made to your orator, thereby
endangering such property and materially depreciating the value of
such securities."
"Your orator further states that he is advised and believes and
charges the fact to be that the property conveyed to the
defendants, Fosdick and Fish, by the trust deed so made to them,
greatly exceeds in value the amount of bonds so issued under their
said deed of trust; and that the net income or revenue derived from
a proper and economical use of said property is, and will continue
to be, more than sufficient to pay all of the interest warrants as
they may become due and payable on all the bonds issued under the
said deed of trust."
"And your orator further states upon information and belief that
certain holders of bonds issued under the deed of trust so made to
the defendants, Fosdick and Fish, trustees as aforesaid,
Page 106 U. S. 57
whose names your orator will furnish if required by this
honorable court, have resolved and determined to demand and require
of them that they shall without delay declare the principal of all
of their said bonds presently due and payable, and that they shall
prosecute said action to a speedy decree of foreclosure of said
trust mortgage, and shall enforce sale of all the property and
franchises of said railroad company under said decree, thereby
rendering the security of the bonds issued under the deed to your
orator utterly valueless."
"And your orator avers that such action will be grossly unjust
and inequitable towards the
cestuis que trust of your
orator and other creditors of said company, especially as about
eighty percent of all of said bondholders have extended the payment
of their said interest warrants as hereinbefore stated, and waived
and excused the default of said company in the payment of said
interest."
"And your orator further represents, upon information and
belief, that none of the holders of the bonds issued under the said
trust deed executed to the defendants, except a very inconsiderable
number thereof, have presented to and demanded of said railroad
company payment of any of the past-due interest warrants or coupons
of said bonds, as required by the eighth article or condition of
said trust deed, and, therefore, your orator says that the said
trustees, Fosdick and Fish, have no authority under said trust deed
to proceed to collect the principal of said bonds by foreclosure
and sale or otherwise."
The amended bill of Fosdick and Fish, of which an abstract has
already been given, was filed Sept. 14, 1875. Its prayer for relief
is that the said Chicago, Danville, and Vincennes Railroad Company,
and the said James W. Elwell, whose appearance has already been
entered in this cause as parties defendant thereto, may be required
to answer this, your orators', amended bill, but without oath,
which is hereby expressly waived, and that the said R. Riddle
Roberts may be made party defendant hereto, and summoned to answer
this, your orators', bill, but without oath, which is hereby
expressly waived; and that the receiver heretofore appointed upon
the prayer of the original bill in this otiose may still hold the
said railroad, its equipment and appurtenances, and operate the
same under the order and
Page 106 U. S. 58
direction of this honorable court, and that an account be taken
of the amount due by the said railroad company upon the said
Illinois Division bonds, and upon the said Indiana Division bonds
separately, and that the said railroad company be ordered to pay
the amount so found due upon said bonds, severally, within a short
time, to be limited by this honorable court, and that upon default
thereof the said Illinois Division of the said railroad, together
with all of the franchises, equipment, and appurtenances thereof,
may be sold by the master in chancery of this court, for the
payment first of the said 2,500 Illinois Division bonds, and
secondly of the 1,500 Indiana Division bonds, which are the first
and second liens upon the said Illinois Division of said railroad,
its equipments, franchise, and property, as hereinbefore set forth,
or for such other and further relief as to your Honors shall seem
meet, and to equity shall appertain.
On Oct. 23, 1875, the Chicago, Danville, and Vincennes Railroad
Company filed a demurrer to so much of the amended bill of Fosdick
and Fish as charges that it will be impossible for said company to
fulfill the conditions of the funding agreements, and that the
holders of said certificates have the right to rescind said
agreements, and to so much of said amended bill as charges that the
principal of said bonds has become due and payable.
On the same day it also filed an answer, containing, among
others, the following averments:
"Said respondent says that on the twenty-second day of February,
A. D. 1875, one Stephen Osgood, without any notice whatever to this
respondent, upon his
ex parte application to the judge of
the Circuit Court of Will County, in the said State of Illinois,
wrongfully and fraudulently procured the appointment of receivers
of all the property, assets, and income of the said respondent
within the State of Illinois, and that such receivers forcibly took
possession of the offices and all the property of said respondent
on said twenty-second day of February, and by the aid of writs of
assistance and other process issued by said court, or the judge
thereof, held the possession of all said property of this
respondent, its earnings and income, until the first day of June,
1875, at which time said receivers were removed by the order of
this honorable court, and a receiver of
Page 106 U. S. 59
all such property appointed under the prayer of the complainants
in the said original bill of complaint contained."
"And this respondent says that on said twenty-second day of
February, it was not in default in the payment of any of said
certificate warrants that matured February 1, 1875; that all of
said warrants were paid as presented to this respondent prior to
said twenty-second day of February, and that such balance of
$3,167.77 was not paid for the reason that the action of said state
court had deprived this respondent of the power to meet such
payments. But the said respondent denies that the said corporation
was, on said first day of February, 1875, insolvent and unable to
meet the payment of said certificate warrants, as charged in said
amended bill of complaint, but, on the contrary, avers and charges
that at all times after the maturity of said interest, and until
said twenty-second day of February, said respondent had the
pecuniary ability and was ready and willing to pay all such
interest, and did in fact pay all such interest warrants when
presented."
"And the said respondent further says and charges the fact to be
that the net earnings of said company, during the year 1874, and
the months of January, February, April, and May, of the present
year, were more than sufficient to pay all the interest accruing
upon the bonds issued under the trust deed to the complainants, and
also the interest upon said certificates of indebtedness, and upon
all other mortgage bonds that had been negotiated and sold by said
respondent."
"And the said respondent says that the said company is not in
default in the payment of any certificate interest coupons, after
proper demand and that therefore none of the holders of said
certificates are lawfully entitled to the return from the said
Fosdick, special trustee as aforesaid, of the bond interest
warrants so funded and deposited with the said Fosdick."
"Your respondent admits that the contracts for fending said
interest warrants are substantially set forth in said complainant's
amended bill, and that the holders of about four-fifths of the said
4,000 first mortgage bonds then, and about three-fourths of all now
outstanding, entered into said agreement, and so funded their said
interest warrants."
"
* * * *"
Page 106 U. S. 60
"Your respondent further answering, says that it has no
knowledge, information, or belief of the number of said
bondholders, under said deeds of trust, that have made demand upon
said complainants that they should execute their said trust; but
respondent says that said company is not, and was not at the
commencement of this action, in default to one-half of such
interest, and therefore respondent says that said bondholders had
no right to make such demand, and neither were the complainants nor
respondent required to accede to such demands, by the terms of said
trust deed."
"And the said respondent, further answering, says that it has no
means of knowledge of the percent of the holders of said interest
warrants that matured October 1st, 1873, that presented such
warrants to the company and demanded payment thereof; but
respondent says, if it is true, as charged, that at least ninety
percent made such demand, at least eighty percent of the entire
number afterwards waived such payment, and consented to an
extension thereof, as hereinbefore stated, and that as to such
eighty percent said company is in no default whatever."
"And as to the holders of said six hundred and ninety-eight of
said bonds who did not fund their interest, the said respondent
says, upon information and belief, and so charges, that a large
majority thereof have consented to such default in the payment of
said interest, and have assented to such extension; that many of
the holders of such bonds have expressed to the officers of said
company their assent to such extension, and promised and agreed
(but not in writing) that they would in no manner interfere with,
or by their adverse action defeat, the plans of said company for
the extension of payment of said interest."
"And respondent further says that it has no knowledge that any
holder of said bonds ever elected to declare the principal due on
account of a default of said company, with the exception of the
said Osgood, who only claimed to hold nine of said bonds. And as to
the said Osgood, the respondent says that to the best of its
knowledge and belief, the said Osgood never has, nor has any one at
his request, ever demanded of said company or of any of its
officers or agents, payment of any
Page 106 U. S. 61
of the coupons attached to any of the nine bonds of which he
claims to be the owner, and that the only notice the respondent has
ever had that the said Osgood had so elected, or that be demanded
payment of either principal or interest, was derived from his said
bill of complaint filed in said Circuit Court of Will County, as
aforesaid, on said twenty-second day of February. And the said
respondent further avers that on the twenty-third day of February,
1875, the said defendant offered and tendered the attorney of
record of said Osgood, in open court, in said county of Will, full
payment, principal and interest, of all the bonds held by the said
Osgood, which was refused by said attorney. And that respondent at
the same time offered to deposit in court the full amount of said
principal and interest upon condition that said receivers should be
discharged, and said property restored to said respondent, which
offer was refused."
On Jan. 6, 1876, a petition was filed by Stephen Osgood, who had
commenced the original proceeding in the State court on Feb. 22,
1875, and seven others, claiming to be holders of bonds and coupons
secured by the mortgages to Fosdick and Fish, in which they recite
the previous proceedings in respect to the bill filed by the
latter, and allege, among other things, that on Oct. 1, 1873, the
railroad company had made default in the payment of interest on its
bonds, and that large numbers of coupons maturing on that day were
presented at the office of the corporation in the city of New York,
payment thereof duly demanded and refused. It also rehearses the
funding arrangements, and charges that as they were based on false
and fraudulent statements of the company, the owners of the bonds,
who funded their coupons, on the faith thereof, are entitled to
rescind the agreement and to enforce their claims against the
company; that Osgood had never fended his coupons; that demand was
made at the office of said corporation in New York, in December,
1874, for the payment of sundry coupons due April 1, 1874, which
were never funded or agreed to be so, and that payment thereof was
refused; that the said presentment and nonpayment were duly
evidenced by a public instrument of protest by a notary public in
and for said county and city of New York, and that the said coupons
still
Page 106 U. S. 62
remain unpaid. More than six months having expired since the
demand of payment of said coupons in October, 1873, and the default
thereon, and more than six months having also expired since the
demand of payment of such coupons in December, 1874, and the
default thereupon, the petitioners claim that by the conditions of
said conveyances the said principal of all and singular the said
bonds has also become due, and that there is now due and owing by
the said corporation the full sum of $4,700,000 upon said first
mortgage indebtedness.
The petition prays for an account of the sums due on account of
the said bonds, and that the mortgaged property be sold to satisfy
the same, &c.
An answer was filed by R. Biddle Roberts, setting up his rights
as trustee under the chattel mortgage; and James W. Elwell also
answers the amended bill, repeating substantially the allegations
of his cross-bill. Fosdick and Fish filed an answer to the
cross-bill of Elwell on March 10, 1876, and filed general
replications to all the answers to their amended bill. Their answer
to the cross-bill contains the following averments:
"These respondents, further answering, upon information and
belief, admit that certain holders of bonds under the deed of trust
to these respondents have determined to demand and require of these
respondents that they shall without delay declare the principal of
all of said bonds presently due and payable, and will insist that
these respondents proceed to prosecute their original bill in this
behalf to speedy foreclosure and procure the sale of the property
and franchises of said railroad company to satisfy said bonds."
"These respondents, further answering, say that they are also
informed and believe, and therefore charge the fact to be that
other holders of said bonds are in favor of and propose to demand
that no such foreclosure and sale shall be had for the present, but
what number of bondholders are in the one class or in the other
these respondents are not advised and cannot state, but in that
regard they say that they will endeavor to faithfully perform all
their duties as trustees in this behalf and submit all such
questions as may arise to the determination of this honorable
count. "
Page 106 U. S. 63
"Further answering, respondents say that they are not advised,
and cannot state, what precise number the holders of past-due
coupons of bonds issued under the trust deed to these respondents
have presented for payment, but they allege that it is immaterial
whether one or more of said coupons have been so presented; that
inasmuch as the said coupons have not been paid, and a large amount
thereof as hereinbefore stated have long since become due and
payable, and these respondents have been by some of the holders of
said coupons called upon as trustees to foreclose the said
mortgage, they are thereby vested with full authority to proceed to
such foreclosure."
An exhibit is filed with the amended bill, being a declaration,
signed by Fosdick and Fish, as trustees, which, after reciting the
issue of the bonds of March 10, 1869, and the mortgage given to
them to secure the payment of the same, and the provision thereof,
that the principal should become due, in case of the specified
default in the payment of interest, continues as follows:
"And whereas default has been made by said company in the
payment of the half-year's interest on all of said bonds which fell
due on the first day of October, A. D. 1873."
"And whereas the coupons for such interest have been presented
and payment demanded, and whereas such default has continued for
more than six months after such demand, and whereas the holders of
said bonds have never consented thereto, and in consequence thereof
the principal of all of the said bonds has become due and
payable:"
"Now, therefore, the said Chicago, Danville, and Vincennes
Railroad Company are hereby notified that we, William R. Fosdick
and James D. Fish, as trustees as aforesaid, and under and by
virtue of the provisions of said trust deed and the authority
conferred upon us thereby, do hereby declare the principal of all
of said bonds to be due and payable."
Service of this declaration and notice upon the railroad company
is acknowledged to have been made Feb. 26, 1875.
Upon the issues thus made by the pleadings, an order of
reference was made to a master to take testimony, and report the
same with his findings, and a large amount of evidence taken before
him is contained in the record.
Page 106 U. S. 64
On June 24, 1876, the master filed his report. In it, he
reported among other findings that on Oct. 1, 1873, the said
corporation did not pay any of the interest falling due on that day
on the issue of bonds dated March 10, 1869, or upon the issue dated
March 12, 1872; nor has the said corporation paid any of the
subsequent installments on any of said $4,000,000 bonds falling due
at either of the following-named days April 1, 1874, Oct. 1, 1874,
April 1, 1875, Oct. 1, 1875, and April 1, 1876; and that demand was
duly made for the payment of divers of such coupons on Oct. 1,
1873, and one of such coupons was protested for such nonpayment
more than six months prior to the institution of this action, or
the written notice of such trustees declaring the principal of such
bonds to be due and payable, and there is consequently now due to
the divers holders of bonds dated March 10, 1869, the sum of
$3,505,500. This sum includes the principal of the bonds of the
issue of March 10, 1869, the several coupons thereon of the dates
mentioned, with interest to July 1, 1876, and the additional sum of
$389,500, being twelve and one-half percent premium on the nominal
amount due for payment in gold, according to the stipulation in the
bonds and mortgage to that effect.
The master further reported that, as to all matters relating to
the funding scheme, referred to in the pleadings, and the effect of
the surrender of the funded coupons, and of the failure of the
company to pay the coupons due Oct. 1, 1875, he was not required to
examine or report upon, and therefore made no finding, nor as to
any allegations of fraud set up in the pleadings, no testimony
having been taken before or submitted to him upon either
matter.
The railroad company filed exceptions to this report, of which
the sixth is as follows:
"For that whereas the said master has decided, and in his said
report stated, that on the twelfth day of October, 1873, said
company did not pay any of its interest falling due on that day;
that demand was duly made, and that one of said coupons was duly
protested for such nonpayment more than six months prior to the
institution of this action, and to the date of the written notice
of the trustees, and therefore the
Page 106 U. S. 65
said master assumes, and so decides, that the principal and
interest of all of said bonds has become due, when the fact is, as
shown by the proof offered by the complainants and intervening
petitioners, that no coupon was protested until the nineteenth day
of December, A.D. 1874, less than three months prior to the date of
said notice and the commencement of this action, and there is no
proof that there was ever any other demand upon said company for
the payment of said coupons."
On the hearing, a decree was rendered, in which, among other
findings, it is declared:
That the railroad company had paid all the coupons on the bonds
both on the Illinois and Indiana Divisions which fell due April 1,
1873, and that none of the coupons which had matured since that
date had been paid;
That under the two proposals of the company for funding, there
had been deposited coupons due Oct. 1, 1873, to April 1, 1875,
inclusive, on all the $2,500,000 of Illinois Division bonds except
$698,500 thereof, which coupons still remained in the hands of
Fosdick, as trustee under the agreements; that the semiannual
interest upon the convertible bonds and certificates of
indebtedness, issued in exchange therefor, which fell due Aug. 1,
1874, was paid in full, and that the installment of interest
thereon, which became due Feb. 1, 1875, was duly paid by said
company upon all of the same which were presented for payment,
which was the great bulk thereof, and that no interest has been
paid on any part of the same since that time;
That no payment of interest had been made upon the $698,500 of
Illinois Division bonds, which had not been funded, since payment
of the coupon due April 1, 1873.
The decree then recites as follows:
"That heretofore, and on the twenty-sixth day of February, A.D.
1875, the said complainants, as trustees under the said mortgage or
trust deed to them, dated March 10, 1869, did declare the principal
of the said twenty-five hundred Illinois Division bonds to be due
and payable by reason of the default of said railroad company in
the payment of certain of the coupons of said bonds which fell due
October 1, 1873, payment of which had been duly demanded,
Page 106 U. S. 66
and the continuance of such default for more than six months
after such demand."
The decree then proceeds to declare that there is due and owing
from the railroad company to the complainants, as trustees under
the mortgage deed of March 10, 1869, the several sums of $87,500 in
gold coin, for the coupons on the $2,500,000 of bonds secured
thereby, falling due respectively semiannually from Oct. 1, 1873,
to Oct. 1, 1876, inclusive, less the payments made on account of
the four coupons on the convertible bonds and certificates of
indebtedness, with interest on said sums at the rate of six percent
per annum, and, as the decree reads:
"In the further sum of two million five hundred thousand dollars
in gold coin, for the principal of the said Illinois Division bonds
so declared to be due as aforesaid, together with interest thereon
from and after the first day of October, A.D. 1876, at the rate of
seven percent
per annum in gold."
It was then
"Ordered, adjudged, and decreed that the said defendant, the
Chicago, Danville, and Vincennes Railroad Company, pay, or cause to
be paid, to the said complainants as trustees, for the holders of
the said Illinois Division bonds and coupons, the said several sums
of money, with interest thereon, as hereinbefore found to be due
and owing, within twenty (20) days from and after the entry of this
decree, and in default thereof, that all of the said railroad,
premises, property, and franchises described in the said trust
deed, dated March 10, A.D. 1869, and hereinbefore described as the
Illinois Division of said railroad, &c., and all the right,
title, interest, and equity of redemption of the said Chicago,
Danville, and Vincennes Railroad Company therein, shall be sold as
an entirety by Henry W. Bishop, the master in chancery of this
court, at public auction, to the highest and best bidder for cash
therefor, payable as hereinafter provided, at the west door of the
Republic Life Insurance Company Building, in the City of Chicago,
in the State of Illinois, after having first given notice of the
time and place and terms of sale, and a description of the property
to be sold, by advertisement thereof in some public newspaper
published in the City of Chicago for the space of thirty days prior
to such day of sale."
The decree also contains the usual declaration that a
conveyance
Page 106 U. S. 67
of the title to the property sold, after confirmation of the
sale, shall be a perpetual bar, in law and equity, against every
claim of the railroad company, or other person claiming under
it.
Under this decree, a sale was had and reported to the court, and
confirmed by a subsequent decree, of the mortgaged property to F.
W. Huidekoper, T. W. Shannon, and J. M. Benison, for $1,450,000,
and the purchase money having been paid, $8362,500 in cash, and by
the surrender of $2,328,000 of the Illinois Division bonds, with
the coupons and certificates of indebtedness or convertible bonds
thereto attached and belonging, a conveyance of the title to the
mortgaged property was made to the purchasers.
It is assigned for error upon the decree of foreclosure and
sale,
First, that the court below required from the
mortgagor, payment of the principal of the debt secured by the
mortgage, as then due, and on nonpayment thereof, within twenty
days, that the mortgaged property should be sold; and
Second, that it decreed foreclosure and sale on this
condition, without proof of the written request of the holders of
the majority of the bonds.
It is undeniable that at the date of the filing of the bill,
which was Feb. 27, 1875, the defendant, the Chicago, Danville, and
Vincennes Railroad Company, was in default for nonpayment of the
coupons on $698,500 of the issue of $2,500,000 of the Illinois
Division bonds, which matured Oct. 1, 1873. The holders of that
amount of these bonds did not fund their coupons, and none of them
were paid. This failure on the part of the mortgagor constituted a
breach of one of the conditions of the mortgage, and continuing for
six months, entitled the trustees under the fifth article to take
possession of the mortgaged premises, on being so required by the
holders of not less than one-half the outstanding bonds, and
collect the net income, until the default should have been
satisfied; or, to sell the mortgaged premises under the power
conferred by the sixth article of the conditions. In the latter
event, the mortgaged premises would be sold as an entirety, free
from the encumbrance of the mortgage, and the proceeds of the sale
applied,
Page 106 U. S. 68
first, to the payment of the amount due and in arrears, and then
to the mortgage debt, not then due, and any surplus to the
mortgagor. But inasmuch as by the terms of the first article the
conveyance is declared to be for the purpose of securing the
payment of the interest as well as the principal of the bonds, and
by the fourth article, the mortgagor's right of possession
terminates upon a default in the payment of interest as well as
principal, on any of the bonds, we are of opinion that,
independently of the provisions of the other articles, the
trustees, or on their failure to do so, any bondholder, on
nonpayment of any installment of interest on any bond, might file a
bill for the enforcement of the security, by the foreclosure of the
mortgage and sale of the mortgaged property. This right belongs to
each bondholder separately, and its exercise is not dependent upon
the cooperation or consent of any others, or of the trustees. It is
properly and strictly enforceable by and in the name of the latter,
but if necessary may be prosecuted without and even against them.
It follows from the nature of the security, and arises upon its
face, unless restrained by its terms. And in case the proceeding
results finally in a sale of the mortgaged premises, the sale is
made free from the equity of redemption of the mortgagor, and all
holders of junior encumbrances, if made parties to the snit, and is
of the whole premises, when necessary to the payment of the amount
due, or when the property is not properly divisible; it conveys a
clear and absolute title, as against all parties to the suit or
their privies, and the proceeds of the sale are distributed after
payment of the amount due, for nonpayment of which the sale was
ordered, in satisfaction of the unpaid debt remaining, whether due
or not.
Olcott v.
Bynum, 17 Wall. 44;
Burrowes v. Molloy, 2
Jo. & Lat. 521. This doctrine is stated by this Court in
Howell v. Western Railroad Company, 94 U. S.
463,
94 U. S. 466,
where an authoritative rule of practice in such cases is
prescribed. "We are of opinion, then," said the Court, speaking by
MR. JUSTICE MILLER,
"that there is due from the railroad company to plaintiff the
amount of his overdue and unpaid coupons. For this sum, whatever it
may be, he has a right to a decree
nisi, according to the
chancery practice -- a decree which will ascertain the sum so due
and give the company
Page 106 U. S. 69
a reasonable time to pay it, say ninety days or six months, or
until the next term of the court, in the discretion of that court.
If this sum is not paid, the court must then order a sale of the
mortgaged property, with a foreclosure of all rights subordinate to
the mortgage, with directions to bring the purchase money into
court. If the case proceeds thus far, the plaintiff will have a
lien on the money thus paid into court, not only for his overdue
coupons, but for his principal debt, and it must be provided for in
the order distributing the proceeds of the sale. If, however, the
company shall pay the sum found due in the decree
nisi, no
further proceeding can be had until another default of interest or
of the principal."
The decree
nisi, mentioned in this extract, like that
in a suit against an infant, in which a day is given him to show
cause against it, after he attains full age, and like that, where
the bill is ordered to be taken
pro confesso, is
preliminary in its nature, requiring a further order to complete
it. According to the practice of the English chancery, a decree of
this nature in a foreclosure suit, after directing an account to be
taken of the principal and interest due to the complainant upon the
mortgage, orders, that upon the defendant's paying the amount
ascertained and certified or found to be due, within six months, at
such time and place as are appointed, the complainant shall
reconvey the mortgaged premises, but that in default of such
payment, the defendant shall thenceforth be absolutely debarred and
foreclosed of his equity of redemption. It is necessary, however,
for the complainant, in order to complete his title, to procure a
final order confirming it; otherwise the decree of foreclosure will
not be pleadable. This order of confirmation is procured on proof
to the court of nonpayment according to the terms of the decree. 2
Daniell, Ch.Pr. 997. The time usually allowed by the decree to pay
the mortgage debt, whether on a bill to redeem or to foreclose, was
six months. But that was not regarded as an absolutely fixed
period, but might be varied so as to be reasonable, according to
the discretion of the court and the particular circumstances of the
case. The courts, however, were very liberal in cases of
foreclosure, in extending and enlarging, from time to time, this
period of redemption, though not in cases of bills to redeem,
Page 106 U. S. 70
where the mortgagor came into court professing his readiness to
pay the amount due, when ascertained, nor in cases of sales, where
the mortgagor was not subjected to the severe and absolute
forfeiture of his right.
Perine v. Dunn, 4 Johns. (N.Y.)
Ch. 140;
Harkins v. Forsyth, 11 Leigh (Va.) 294.
Where, according to the English practice, a sale, instead of
foreclosure, was ordered, the form of the decree was the same,
directing the sale, in the event of a default being made in payment
of the amount found due, within the usual time of six months, or
within a shorter period, or even immediately, if by consent, or
where it was considered to be for the benefit of all parties. 2
Daniell, Ch.Pr. 1266.
In the early practice in Kentucky, the preliminary decree,
finding the amount due and giving day for payment, was
interlocutory merely and separate from the subsequent decree,
finding the default in not performing the former decree and
directing a sale in consequence thereof.
Downing v.
Palmateer, 1 Mon. (Ky.) 64;
Oldham v. Halley, 2 J. J.
Marsh. (Ky.) 113;
Hanks v. Greenwade, 5
id. 250;
Champlin v. Foster, 7 B.Mon. (Ky.) 104. The ground of this
practice seems to have been that the mortgagor had the right to
have the record show that he had failed to pay according to the
decree
nisi before a sale of his property was ordered. But
there seems to us to be no sufficient reason why, as it was
according to the English practice, and generally in this country,
all these matters may not be embraced in a single decree. What is
indispensable in such a decree is that there should be declared the
fact, nature, and extent of the default which constituted the
breach of the condition of the mortgage, and which justified the
complainant in filing his bill to foreclose it, and the amount due
on account thereof, which, with any further sums subsequently
accruing and having become due, according to the terms of the
security, the mortgagor is required to pay, within a reasonable
time, to be fixed by the court, and which, if not paid, a sale of
the mortgaged premises is directed.
Woodard v.
Fitzpatrick, 2
id. 61.
This is that final decree of foreclosure and sale, which
determines and fixes the rights of the parties and from which, on
that account, an appeal lies.
Ray v. Law, 3
Cranch 179;
Page 106 U. S. 71
Whiting v. Bank of the United
States, 13 Pet. 6;
Forgay v.
Conrad, 6 How. 201;
Railroad
Company v. Swasey, 23 Wall. 405.
But as in cases of strict foreclosure, so in cases of sale, the
equity of the mortgagor as against the mortgagee is not exhausted
until sale actually confirmed, for if at any time prior, he should
bring into court, for the mortgagee, the amount of the debt,
interest and costs, he will be allowed to redeem.
It is the deed made to the purchaser actually transferring the
title of the parties to the suit that terminates the mortgagor's
equity of redemption.
Brine v. Insurance Company,
96 U. S. 627.
It is obvious that the finding of the amount due, for nonpayment
of which, according to the terms of the decree, the mortgaged
property is ordered to be sold, is the foundation of the right of
the mortgagee further to proceed, and a substantial error in that
finding must on appeal vitiate all subsequent proceedings. Unlike a
calculable error in the amount of a personal judgment which may be
cured by a remittitur, it is otherwise incurable, for as it is an
illegal exaction, made as a condition for preserving the rights of
the mortgagor in his estate, and if executed depriving him
wrongfully of them, it propagates itself through all subsequent
stages of the cause. The right to redeem is a favorite equity, and
will not be taken away except upon a strict compliance with the
steps necessary to divest it.
Bigler v.
Waller, 14 Wall. 297;
Shillaber v.
Robinson, 97 U. S. 68. In
Clark v.
Reyburn, 8 Wall. 318, a decree of strict
foreclosure, which contained no finding either of the fact or
amount of the alleged indebtedness and gave no time within which to
pay or redeem was reversed on these grounds although the bill was
taken
pro confesso as to the parties having the entire
beneficial interest and contained an averment of the precise amount
of the mortgage debt then due. The same consequences undoubtedly
would have followed if it had been a decree of foreclosure and sale
instead of a strict foreclosure, and the error is as vital where a
larger amount than is actually due is ordered to be paid as where
there is a failure to find what amount is due.
It becomes, then, of the first importance to ascertain
whether
Page 106 U. S. 72
the decree of foreclosure and sale in the present case, found
due and required to be paid, as the condition of exercising the
right to redeem, a larger sum than was then due.
The errors alleged in the amount are two. The first is that
there was declared to be payable $252,220, the amount of the
several coupons maturing from Oct. 1, 1873, to April 1, 1875, both
inclusive, the payment of which, it is claimed, as to all the bonds
of the Illinois Division, except $698,500 thereof, had been, by the
funding agreements, extended until Feb. 1, 1879. The second is that
the principal sum of $2,500,000 of these bonds, contrary to the
agreement between the parties, was also declared to be due and
payable. The appellants insist that the only indebtedness of the
railroad company to the bondholders, represented by the
complainants at the time of the filing of their bill, was the
past-due interest on six hundred and ninety-nine bonds, the
interest warrants of which had not been funded, amounting to about
the sum of $147,000.
It appears from a statement in the record, admitted to be
correct, that there had been deposited and exchanged for
convertible bonds the four coupons maturing on and from Oct. 1,
1873, to April 1, 1875, on $271,500 of the Illinois Division bonds,
and that by the terms of the agreement under which that exchange
was effected, dated Nov. 11, 1873, it was not to be binding unless
assented to in writing by a majority in interest of the
bondholders. In point of fact, such majority did not assent to it,
but under the second proposition, dated Nov. 20, 1873, the four
corresponding coupons on $1,530,000 of the bonds, were deposited
and exchanged for certificates of indebtedness.
It appears further that the railroad company paid the accruing
interest on the convertible bonds and certificates of indebtedness,
issued under these arrangements, which became due prior to the
filing of the bill, except $3,167.77, which was not presented. The
default in respect to the coupons surrendered was, by the terms of
the funding agreements, waived as long as the interest upon the
securities substituted for them was perpetually paid, so that at
the date of the filing of the bill, there was no subsisting default
in the payment of interest except upon the $698,500 of bonds which
had not been funded.
Page 106 U. S. 73
The master finds -- and his report in that respect is the
predicate of the decree -- that divers coupons falling due Oct. 1,
1873, were presented on that day, and that payment thereof was
demanded and refused, and that one of such coupons was protested
for such nonpayment more than six months prior to the institution
of the suit, and the written declaration of the trustees, that the
principal of the bonds had thereby become due.
There are some statements in the answers and in the testimony of
some of the witnesses that coupons due Oct. 1, 1873, were presented
for payment and were not paid, but there is no proof of the fact as
to any particular coupon identified for that purpose, and we have
carefully searched the record in vain for any evidence whatever
that any coupon, not afterwards funded, was presented and payment
thereof refused. The master himself does not report any such. It is
entirely consistent with his finding and with the evidence on which
it professes to be founded that the payment of every coupon falling
due Oct. 1, 1873, presented for payment on or after that day, and
payment whereof was refused, was extended by the subsequent
agreements to fund them. The intervening petition of Osgood and
others, if it be considered as a pleading whereby they were allowed
to become co-complainants, does not allege that any one of the
coupons held by them was presented for payment. It is averred that
large numbers of the coupons maturing on Oct. 1, 1873, were
presented, and payment thereof was demanded and refused on that
day, but the allegation that any such coupon was held by either of
the petitioners seems to have been studiously avoided, and stress
is laid on averments of fraudulent misrepresentations which induced
bondholders to fund their coupons, in support of which the master
reported that no testimony was offered, and upon the insolvency of
the company, which is entirely immaterial upon the question of an
actual default. It is averred in the petition that coupons were
presented and payment demanded in December, 1874, which had become
due the previous April, and the master so reports as to one; but
the only evidence that appears in the record is an admission of the
railroad company in its sixth exception to the master's report,
where it is accompanied by the statement
Page 106 U. S. 74
that such demand and refusal was less than six months before the
filing of the bill, and could not, therefore, have been the
foundation of the declaration that the principal of the mortgage
debt had become payable, which in fact was not predicated upon that
default, but rested solely on the nonpayment of the coupons due
Oct. 1, 1873.
There is nothing in the record to show that any one of the
bondholders, who had funded his coupons, claimed the right to
rescind the funding agreements, or that any step to do so had been
taken or authorized.
It is true that after the filing of the bill and the appointment
of a receiver, the company ceased to pay interest upon its
securities. That was but the natural consequence of the litigation,
and in taking a decree for foreclosure and sale, it might have been
in strict accordance with the equitable rights of bondholders who
had funded their coupons to have rescinded the funding agreements
as incapable of execution. But the legal effect of this would have
been merely to find as the true amount of the mortgage debt then
due, necessary to be paid to avoid a sale, the whole amount of
interest unpaid on all the coupons. It would not, however, have put
the company in default as to the funded coupons from the beginning,
nor deprived it of the benefit of the waiver of that default
arising from the fact of funding. It would have cancelled the
arrangement only as and from the date of the decree itself, without
impairing its antecedent effect by retroaction. It is true that
where a mortgage has been given to secure a debt payable in
installments and a bill has been filed for foreclosure and sale
upon a default as to one, the decree may require payment of all
installments then due, though maturing since the institution of the
suit; but that principle does not suffice to bring the case of the
appellees within the meaning of the eighth article of the
conditions of the mortgage so as to justify the decree requiring
payment of the principal of the debt as presently due. For by the
terms of that provision, the entire debt does not become absolutely
due on the default of the company continued for six months, without
the consent of the holder, to pay an interest coupon, but only at
the election of the trustees, as declared by them and notified to
the mortgagor.
Page 106 U. S. 75
And the forfeiture of the time of payment to be established in a
given case must stand or fall upon the fact of such declaration and
notice, as it may be justified or not by the circumstances existing
when they were made. It cannot be supported by subsequent
occurrences. It follows, therefore, that the claim in support of
the finding that the whole debt had become due must rest
exclusively upon the alleged default of Oct. 1, 1873, and that, as
we have seen, is not sufficient.
It does not affect this conclusion that by the terms of the
sixth article of the conditions of the mortgage, it is provided
that upon the exercise of the power thereby conferred, resulting in
a sale of the mortgaged premises, for a single default in the
payment of interest (it may be one coupon merely), the property is
to be sold as an entirety, and free of the encumbrance of the
mortgage, so as to pass all the title both of mortgagor and
mortgagee, and that the proceeds of the sale are to be applied,
after payment of overdue interest, to the payment of the principal
of the debt, though not yet due. This provision does not, either in
terms or in effect, make the whole debt due before the stipulated
day of payment. It is simply the application to the case of a sale
by the trustees under the power, of the practice of courts of
equity in cases of judicial sales upon foreclosure. In either case,
the right of the mortgagee to redeem, and thus prevent the sale, is
preserved on payment not of the unmatured principal sum of the
debt, but merely of the interest then actually due and in arrears
-- the very right which, by the decree now in question, was denied.
If authority is needed on such a proposition, it will be found in
Holden v. Gilbert, 7 Paige (N.Y.) 208, and
Olcott v.
Bynum, 17 Wall. 44.
This right cannot be regarded as other than important and
valuable. Its denial in the present case was a substantial and
serious wrong. This is manifest from the bare statement that the
decree required payment, within twenty days, of $2,500,000, which
we find was not due, as a condition of preventing the sale of
property, which, it is admitted, was worth more than this debt and
which, according to the testimony in the case, was earning more
than enough to pay the current interest on this mortgage. The
receiver states the net earnings for the
Page 106 U. S. 76
year 1874 at $330,615.75, and adds, speaking July 31, 1875, that
"the present year, like the preceding, is of almost unexampled
depression in most branches of business upon which the consumption
of coal depends" the transportation of which was the main traffic
of the road, and adds that he believes, on the reasons he states,
that "it is practicable, in a year of fair prosperity, to increase
the earnings from fifty to eighty percent over those of 1874." Upon
such a showing, it is immaterial to say that the railroad company
was commercially insolvent, not being able to pay all its
obligations as they matured, for the fact, if admitted, would not
affect its legal or equitable rights, much less be allowed to
deprive its other creditors, junior encumbrancers, and lienholders,
of their right to prevent a sale and sacrifice of the property by
paying the comparatively small amount of the interest, justly due,
upon the first mortgage bonds, and thus preserving their own
estates and interests as well as those of the mortgagor.
The second assignment of error which we have noted is, in our
opinion, also well founded.
The eighth article of the conditions of the mortgage, which
relates to this subject, contains the provision that after the
principal of the bonds has been declared by the trustees to have
become due by reason of the default therein described, and the
mortgagor notified thereof, the trustees,
"upon the written request of the holders of a majority of the
said bonds then outstanding, shall proceed to collect both
principal and interest of all such bonds outstanding, by
foreclosure and sale of said property, or otherwise, as herein
provided."
It is contended on behalf of the appellees that without the last
clause, the trustees have the sole right to act, according to their
discretion and upon their own motion, in declaring the principal
sum due on account of the default, and that upon such declaration
and notice by the trustees, the whole sum becomes due irrevocably
for all the purposes of the mortgage, so that thereafter the
trustees, at their option, may file a bill for foreclosure and sale
or may intervene in case such a bill is filed by any bondholder,
and thereupon the amount decreed mast be the amount thus declared
to be, and hence actually due, and that the office of the clause in
reference to the
Page 106 U. S. 77
written request of a majority of the bondholders is merely to
make the obligation of the trustees imperative instead of
optional.
We cannot agree to that construction of the provision. The
whole article must be taken together. It is in fact a unit, and
is directed to a single end. And the nature of the provision and
the character of its object must be taken into consideration as
furnishing the rule of its interpretation. It is an agreement which
the parties were at liberty to make. There is nothing in it illegal
or contrary to public policy. And while it is in the nature of a
forfeiture, it is one against which, when it has taken place
according to the fair meaning of the parties, courts of equity will
not relieve. It was so held in
Noyes v. Clark, 7 Paige
(N.Y.), 179;
Noonan v. Lee,
2 Black 499;
Olcott v.
Bynum, 17 Wall. 44.
The stipulation nevertheless is in the nature of a penalty, and
may be regarded as
stricti juris, to be construed fairly
and reasonably, according to the meaning of the parties, but
leaning if need be in any case of ambiguity in favor of the debtor.
And the construction, in the present instance at least, which
favors him does not discriminate against the bondholders as a
class, but rather between the interests of the whole number,
represented by the trustees and controlled by a majority and those
of a single creditor or a minority associated in the like case
pursuing their remedy as individuals. For while, as we have seen,
one or any number of bondholders may prosecute a bill to foreclose
the mortgage upon default as to payment of a single coupon, or the
trustees may intervene on behalf of all for the same purpose
because the failure to pay a single installment of interest is made
a breach of the condition of the mortgage, yet it is apparent that
one purpose, at least, of the clause in question was to protect the
bondholders as a class against the views of individuals and
combinations of individuals, being a minority, pursuing separate
interests.
In declaring the principal sum due before the date fired by the
credit, upon a default in the payment of interest, the trustee is
acting for the whole number of bondholders, and the provision that
subjects his action in enforcing the stipulation
Page 106 U. S. 78
to the wishes of a majority is meant, as we think, for the
protection of the class. Many cases may be mentioned to illustrate
the importance in their interests of such a control, rather than to
put it in the power of one or a minority to require all to accept
what the majority might consider to be a premature and less
valuable satisfaction for their existing security. The larger
number might think it to their advantage even to defer the
collection of their overdue interest, mach less not to anticipate
the payment of the principal even when the security was ample to
meet both, for they might esteem the ultimate investment higher
than present payment. While they could not and ought not to prevent
others, even a single individual, from exacting the promptest
payment of what is due and may be important as current income, by
legal process, they may nevertheless rightfully object to an
anticipation of payment that may in their opinion prove to be a
sacrifice. And this becomes especially important when the present
value of the security is insufficient to prepay the encumbrance,
but contains the solid promise of future indemnity as an
investment. It is that interest, we think, that dictated the clause
in question and can be satisfied only by the construction which
secures to the majority of the bondholders the right to veto the
proceeding of the trustees.
Indeed, the other construction contended for, which gives to the
majority only the right to make the obligation of the trustees to
proceed imperative, renders it nugatory. For upon that supposition,
the debt having become fully due by the declaration and notice of
the trustees, for all the purposes of the mortgage, if they should
delay or refuse to file a bill for foreclosure and sale, it would
still be in the power of a single bondholder to proceed for himself
and associates directly for the same object, and to procure the
same relief.
It is therefore our opinion that even had the trustees
rightfully declared the principal sum of the mortgage debt due and
given the proper notice thereof, nevertheless, the foundation for
proceeding to foreclose for that cause, and of the decree requiring
payment of that amount, would fail, without proof that the bill had
been filed for that purpose, upon the written request of the
holders of a majority of the bonds then outstanding.
Page 106 U. S. 79
It is not disputed that no such proof is to be found in this
record.
Other errors than those already discussed have been assigned
upon both appeals, which, as in the further progress of the cause
they may not arise again, we have not considered and do not
therefore pass upon.
For the reasons already given, both decrees will be reversed,
and the cause remanded with instructions to proceed in conformity
with this opinion.
So ordered.
MR. CHIEF JUSTICE WAITE, with whom concurred MR. JUSTICE HARLAN,
dissenting.
I am unable to agree to the judgment in this case. In my
opinion, default had been made in the payment of the interest on
some of the bonds within the meaning of the eighth clause of the
mortgage. The company having given notice that the coupons due Oct.
1, 1873, would not be paid if presented, no presentation was
necessary in order to create the default. This notice was a waiver
of a presentation in form. Couponholders were in effect told it was
useless to make a demand, because if made it would not be met.
Confessedly this default as to the coupons on $698,000 of the bonds
continued more than six months. Holders of bonds to this amount
declined to enter into the scheme for extension. They kept their
coupons, hoping some plan might be devised for payment, but
retaining all their rights under the mortgage if their hopes were
not realized.
This default having happened and having continued more than six
months without the consent of the holders of the coupons, by the
express terms of the eighth clause, the principal of all the bonds
secured by the mortgage became immediately due and payable. If
after that the holders of a majority of the outstanding bonds had
requested the trustees in writing to foreclose the mortgage, it
would have become the imperative duty of the trustees to institute
the necessary proceedings for that purpose. But if no such request
was made, it seems to me that the trustees were not precluded from
commencing such proceedings on their own motion in case the safety
of the trust
Page 106 U. S. 80
made it necessary. It is possible, if a majority of the
bondholders had, in an appropriate way, interfered to prevent the
trustees from going on, some relief might have been afforded them;
but when all came in and availed themselves of what had been done,
the corporation was in no position to defend, because a request had
not been formally made in advance. As to the corporation, the
principal of the bonds became due and payable when a default
occurred which continued the requisite length of time. Whether a
foreclosure should be had because of the default rested alone with
the bondholders and trustees. The provision in the mortgage for the
written request was, as it seems to me, not for the protection of
the company, but the bondholders. If the bondholders are satisfied
with what the trustees have done, the corporation is in no
condition to complain.
That the trustees were justified in commencing proceedings on
their own motions seems to me clear. Some of the bondholders,
having coupons and bonds, as to which default had been made, began
a suit for foreclosure in a state court, and secured the
appointment of a receiver. The company was very much embarrassed
financially, and, so long as the receivership continued, could do
nothing to extricate itself from its difficulties. It was a
necessity, therefore, for the trustees to interfere. When they did,
the company did not relieve itself from the consequences of its
default in the payment of coupons on the $698,000 of bonds. All the
bondholders seem to have been satisfied with what was done, and
they united with the trustees in pressing the foreclosure.
Under these circumstances, in my opinion, the court properly
treated the principal of all the bonds as due, and decreed
accordingly.
These cases were decided at the last term, before the
appointment of MR. JUSTICE GRAY and MR. JUSTICE BLATCHFORD. A
petition for a rehearing in the second case was then filed. They
took no part in the subsequent action of the court.
MR. JUSTICE MATTHEWS delivered the opinion of the Court.
Since the announcement of our former opinion, the appellees,
having filed a petition for rehearing, have suggested that the
Page 106 U. S. 81
decree brought up by the appeal in the second case is not what
it is recited to be in the prayer for appeal in the Circuit Court
--
viz. the decree confirming the sale of the mortgaged
property under that of foreclosure and sale -- but one rendered
subsequently thereto and merely in execution of it, and that it is
therefore not the subject of an appeal, and claim that the present
appeal should be dismissed for want of jurisdiction.
The appeal prayed for and allowed in the circuit court is
recited in the petition therefor filed March 26, 1879, to be as
follows:
"From the decree entered April 12, 1877, confirming the report
of the sale of the property of the defendant railroad company."
"From the decree of April 16, 1877, ordering the delivery of the
deed and possession of the property to the purchasers, Frederick W.
Huidekoper, Thomas W. Shannon, and John M. Dennison."
"From the decree entered in said cause on the nineteenth day of
November, 1877, in favor of Frederick W. Huidekoper, Thomas W.
Shannon, and John M. Dennison, and against the said Chicago,
Danville, acid Vincennes Railroad Company, for the sum of
$1,808,646.46."
The two decrees last named, of April 16, 1877, and of Nov. 19,
1877, do not appear in the record.
An examination of the terms of the decree of April 12, 1877,
shows that it is a decree, confirming the report of the master,
upon a petition of the purchasers, Huidekoper, Shannon, and
Dennison, asking that their bid may be satisfied by a surrender of
bonds and coupons without further cash payment, and, upon that
surrender, for a conveyance of the title to the property, and to be
let into possession. What prior action of the court, upon a report
of the sale, had taken place the transcript of the record before us
does not disclose.
Counsel for the appellees state that there was in fact a prior
decree confirming the sale rendered on Feb. 26, 1877, from which no
appeal was perfected, and produce in support of their statement
what is called a supplemental transcript of the record, containing
such a decree. This, however, we cannot at present consider or act
upon further than to say that in view of the
Page 106 U. S. 82
suggestions made, and to enable the parties to present whatever
questions arise upon the record as it is now before us, or upon a
complete record, when supplied, upon the appeal prayed for and
perfected on March 26, 1879, the application for a rehearing is
granted, and the decree of this Court rendered at the present term,
so far only as it reverses any of the decrees embraced in this
appeal, is to that extent and for that purpose set aside.
MR. JUSTICE MATTHEWS delivered the opinion of the Court.
This appeal, heard during the last term with that from the
decree of foreclosure and sale in the same case, was taken from
three decrees rendered after the sale had taken place. Huidekoper,
Shannon, and Dennison, the purchasers of the mortgaged property
sold under the decree of foreclosure, who are appellees in this
appeal, were not parties to the former appeal. All the decrees
appealed from, including those now in question, were included in
the order of reversal made at the former hearing; but on a petition
for rehearing it was called to the attention of the court that the
transcript of the record was imperfect and incomplete, the decree
confirming the sale having been omitted, and that the petition for
the present appeal contained a misrecital that the decree entered
April 12, 1877, was the decree "confirming the report of the sale
of the property of the defendant railroad company." The order of
reversal was therefore set aside as to the decrees embraced in the
present appeal, and a rehearing granted. The cause, on that
rehearing, has now been heard at the present term upon the whole
record, as amended and perfected.
From that it now appears that on Feb. 17, 1877, the master filed
his report of the sale, and the purchasers, their petition for its
confirmation, and for other relief; and it was on that day, on
motion of the complainants' solicitors, ordered that the
Page 106 U. S. 83
report and sale be confirmed unless objections thereto should be
filed on or before the Friday next following, for which day it was
set for hearing. And exceptions having been in the meantime filed
by one Slaughter, on February 26, 1877, the court overruled the
exceptions, and, as the order reads, "does in all things confirm
the sale" to the purchasers. From this decree an appeal was prayed
by Slaughter, but was not perfected or prosecuted. The petition of
the purchasers, filed February 17, 1877, in which they also asked
for the immediate discharge and payment of their bid, had been
referred to the master, whose report subsequently filed was
confirmed by the decretal order of April 12, 1877, by which he was
directed, on the surrender to him of 2,328 first mortgage Illinois
Division bonds of the defendant railroad company, to execute and
deliver to the purchasers a deed of the property sold, and
thereupon the receiver was directed to let them into possession. On
April 16, 1877, the master having reported the execution of the
decree of April 12 by the delivery of the deed and the acceptance
of the bonds, a further decree was entered approving and confirming
the same. These are the two decrees first named in the prayer for
the present appeal.
It is now contended by the appellees that these decrees are
merely orders in execution of the previous decrees of the court,
are therefore not final in the sense necessary to authorize an
appeal, and that consequently, as to them the present appeal must
be dismissed for want of jurisdiction.
But according to the rule sanctioned and adopted in
Forgay v.
Conrad, 6 How. 201, and
Blossom v. Railroad
Co., 1 Wall. 657, an appeal will lie from such
decrees according to the nature of their subject matter and the
rights of the parties affected.
In the present case, the decree of April 12, 1877, in effect
distributes the proceeds of the sale upon the basis of the finding
and declaration in the decree for foreclosure that the principal of
the bonds had become overdue, for it authorized the purchasers, to
the extent of the proportion in which the bid, if treated as cash,
would, when applied, extinguish the bonds held by them, to use
their bonds as cash in payment of their bid. It is manifest that a
substantial error, to the prejudice of one
Page 106 U. S. 84
of the parties, may originate in a decree distributing the
proceeds of a sale under a decree of foreclosure, and no question
can be successfully raised against the right to appeal from such a
decree. We cannot, therefore, dismiss the present appeal upon the
ground alleged.
It is then urged by the appellees that the decrees in question,
having simply followed the directions of previous decrees,
originated no error, and that the only alternative is to affirm
them. But the decrees involved in this appeal now under
consideration are dependent upon the decree of foreclosure and
sale, and the latter having been reversed, the decrees in question
are left without support, and fall of themselves, by reason of that
reversal, vitiated by the common error. As they are already
annulled by operation of law, the subject matter of the appeal is
withdrawn, and the appeal itself must be dismissed for lack of
anything on which it can operate.
The other decree involved in this appeal was entered November
19, 1877, and is a personal judgment in favor of Huidekoper,
Shannon, and Denison as trustees for themselves and other
bondholders for the deficiency arising from the excess of the
amount found due by the decree of foreclosure and sale, over the
credit, given of the proceeds of the sale of the mortgaged
property. This deficiency is ascertained to be $1,823,573.84, and
execution is awarded therefor, against the railroad company, in
favor of the above-named parties.
It would seem that the reasons given for dismissing the appeal
as to the other decrees apply with equal force to the one now under
consideration, and such, we think, would be the rule in ordinary
cases, for the existence and amount of the deficiency must usually
be dependent on the findings of the decree of foreclosure and sale
as to the amount due and the extent to which that may have been
reduced by the proceeds of the sale. But the present judgment is
not in the customary form. Instead of finding the amount due to the
complainants in whose behalf the sale was decreed, the judgment is
rendered in favor of Huidekoper, Shannon, and Denison as trustees
for the bondholders. They claim not to have been parties to the
suit at the time the decree of foreclosure and sale was rendered,
and as we do not consider it proper to investigate or pass upon
Page 106 U. S. 85
that claim in the present proceeding, we entertain the appeal,
as to the deficiency decree, and reverse it for the error which
required the reversal of the decree of foreclosure and sale.
The argument of the present appeal on both sides seems to have
been influenced by the consideration that it possibly involved a
present adjudication of the effect its determination might have
upon the rights of the purchasers at the sale and the present title
of the property sold. But no question of that character is
involved. Whether the purchasers were parties to the litigation,
either by name upon the record or in interest and by
representation, so as to be affected by the error in the proceeding
for which the decrees have been reversed, or whether they or their
assigns are protected by the principle and policy that uphold the
titles of
bona fide purchasers without notice at judicial
sales, and any other that may be mooted touching the point, are
questions which do not arise upon the present appeal, and are left
for further consideration in case they should be presented in a
subsequent stage of this or by virtue of proceedings in some other
suit.
For the reasons announced, it is therefore ordered that the
appeal from the decrees of April 12, 1877, and of April 16, 1877,
respectively, be dismissed upon the ground that the decrees were
vacated by the reversal of the prior decree of foreclosure and
sale, rendered December 5, 1876, and that the decree entered
November 19, 1877, in favor of Frederick W. Huidekoper, Thomas W.
Shannon, and John M. Denison trustees, be reversed, and that the
cause be remanded with directions to proceed therein as may be just
and equitable.
The appellants are entitled to their costs on this appeal.