1. Prior mortgagees are not necessary parties to the bill of a
junior mortgagee which seeks only the foreclosure or the sale of
the equity of redemption.
2. Neither the mortgagor nor his assignee in bankruptcy can
object to the order in which the priority of valid and subsisting
liens on the mortgaged premises is fixed by the decree of
foreclosure.
3. The subsequent bankruptcy of the pledgeor of a negotiable
instrument does not deprive the pledgees of their right to dispose
of it upon his default.
4. An objection that leave was not given to file the bill of
foreclosure -- the mortgaged premises being at the time in the
possession of a receiver appointed in a former suit in the same
court -- if, under any circumstances, available, will not be
sustained if made a year and a half after the bill was filed and
when the party objecting had in the meantime appeared, answered it,
and cross-examined the witnesses of the complainant.
The case is fully stated in the opinion of the Court.
MR. JUSTICE STRONG delivered the opinion of the Court.
There are no less than twenty-seven assignments of error in this
case, but the subjects of real controversy are few. The bill is an
ordinary one for the foreclosure of a junior mortgage covering the
canal and franchises of the Lake Superior Ship Canal, Railroad
& Iron Company, and covering also two separate bodies of land,
each containing two hundred thousand acres. The mortgage was given
expressly subject to two prior
Page 94 U. S. 735
mortgages, one, dated July 1, 1865, upon the canal and one of
the bodies of land, and the other, dated July 1, 1868, upon the
canal and the other body of two hundred thousand acres of land.
Each of these prior mortgages was made to secure the payment of the
company's bonds of even date therewith, amounting to the sum of
$500,000, and all the bonds were issued, and they are now
outstanding. The first of these prior mortgages is known as the
Sutherland mortgage. Default having been made in the payment of
interest upon the bonds secured by that, John L. Sutherland, the
trustee, filed his bill to foreclose it, making all the subsequent
mortgagees parties; and they all appeared. In that case, Isaac H.
Knox was appointed receiver of all the property covered by the
several mortgages, and subsequently, in order to obtain the money
necessary for completing the canal by order of the court, he was
authorized to create, issue, and sell certificates of indebtedness
to the amount of $500,000, to be secured by a mortgage, which he
was empowered to make, covering all the property, and which was to
be prior in right to all other mortgages. Pursuant to this
authority, the receiver did issue and sell such certificates, and
for their security executed the mortgage directed by the court.
These certificates are now all outstanding.
Such was the condition of affairs when the present bill was
filed. But the company having afterwards gone into bankruptcy, a
supplemental bill was exhibited making the assignees in bankruptcy
parties defendant, and they appeared and made defense, and they are
the only parties appellant.
It is now contended on their behalf that the bill cannot be
sustained, because the prior mortgagees were not made parties. This
position cannot be sustained. It is undoubtedly true there are
cases to be found in which it was ruled that prior encumbrancers
were necessary parties to a bill for the foreclosure of a junior
mortgage, but in most of these cases, the circumstances were
peculiar. Where the effort of the junior mortgagee is to obtain a
sale of the entire property or estate, and not merely of the equity
of redemption, there is reason for making the prior encumbrancers
parties, for they have an immediate interest in the decree. And so,
when there is substantial
Page 94 U. S. 736
doubt respecting the amount of the debts due prior lien
creditors, there is obvious propriety in making them parties, that
the amount of the charge remaining on the land after the sale may
be determined, and that purchasers at the sale may be advised of
what they are purchasing. But the case in hand has no such
peculiarities. The prior mortgages were not due when this bill was
filed, and without the consent of those mortgagees, nothing more
than the equity of redemption could be sold under any decree made
in the case, or under the decree which was sought. Nor is there any
doubt entertainable respecting the amount due under the prior
mortgages. Indeed, the company is estopped by the provisions of its
mortgage, of which the complainant is trustee, from asserting that
the entire amount of the two $500,000 mortgages, and of the
receiver's mortgage, was not outstanding when the present mortgage
was made. The full indebtedness was acknowledged by making the
junior mortgage expressly subject to it, and as there is no
evidence that any portion of it has been paid, it is not admissible
for the mortgagors or their assignees in bankruptcy to deny it now.
Bronson v. LaCrosse &
Milwaukee Railroad Co., 2 Wall. 283.
Apart from the exceptional cases, we understand the general rule
to be that in a suit by a junior mortgagee to foreclose a mortgage,
prior mortgagees are not necessary parties. So it has been held in
England in
Rose v. Page, 2 Sim. 471;
Richards v.
Cooper, 5 Beav. 304;
Delabere v. Norwood, 3 Swanst.
144.
Such also is the rule asserted in this country, where the bill
of a junior mortgagee, as in this case, seeks only a foreclosure or
sale of the equity of redemption. Edwards on Parties, p. 91, and
cases cited;
Gihon v. Bellville, 3 Halst. (N.J.) Ch. 531;
Williamson v. Probasco, 4
id. 571.
The subject has been under consideration by this court in
Hagan v.
Walker, 14 How. 37, in which it was shown that it
is not necessary in all cases to make a prior mortgagee a party.
And it is not easy to see why it should be in any case, when the
decree asked cannot injure or affect him. In
Payne
v. Hook, 7 Wall. 432, it was said, "It can never be
indispensable to make defendants of those against whom nothing is
alleged, and from whom no relief is asked."
See also French
v.
Page 94 U. S. 737
Shoemaker, 14 Wall. 315. We think this is the correct
rule. It is certainly consonant with reason, and we see nothing in
the present case that justifies a departure from it. We hold
therefore that the bill is not defective for want of proper
parties.
The appellants next contend that the decree is erroneous because
the mortgagors were declared bankrupt after the bill was filed and
before the decree was entered, and it is urged that the bankrupt
court had absolute and exclusive jurisdiction, and was entitled to
the entire administration of the bankrupts' property. That this
objection is without merit was shown in
Marshall
v. Knox, 16 Wall. 551, and
Eyster v. Gaff,
91 U. S. 521, to
which we need only refer.
A further objection insisted upon is that while the property was
in the charge of a receiver appointed in the suit brought by
Sutherland to foreclose the first mortgage, and therefore, as it is
said, was
in custodia legis, this bill was filed without
leave of the court. If there could, under any circumstances be any
force in this objection, there is none now. Both suits were brought
in the same court; these appellants appeared, answered, and
cross-examined witnesses, and made no allegation that the suit had
been brought without leave until about a year and a half
afterwards. It was then too late. They must be held to have
acquiesced and, if not, leave of the court to commence and
prosecute the suit must be presumed after the orders made to
facilitate its progress.
The only remaining assignments of error that require particular
notice relate to the ascertainment of the liens on the property of
the company anterior to the mortgage now in suit, to the
determination of their relative priority, and to the adjudication
of the amount of the debt for the payment of which that mortgage is
a security. The court decreed not only that the two five hundred
thousand dollar mortgages, one dated July 1, 1865, and the other
dated July 1, 1868, are liens for the full amounts specified in
them, and prior in right to the complainants' mortgage, but that
the lien of the mortgage given by the receiver appointed in the
suit of Sutherland against the company, in pursuance of the
direction of the court in that case, is also a prior lien to the
extent of the certificates issued by the receiver; namely, to the
extent of $500,000 and interest. This portion
Page 94 U. S. 738
of the decree, it is now insisted, was erroneous. But if the
receiver's certificates, issued by order of the court which had the
property in charge, are liens at all, what have the appellants, who
stand in the place of the company, to do with the order of priority
of liens? What difference does it make to them whether the
certificates be paid before any other liens are discharged, or
after all the debts secured by any mortgage shall have been
satisfied? The assignees can get nothing until all the liens on the
assigned property have been removed. If the circuit court has made
a mistake in determining in what order the encumbrances are
entitled to payment, that is a matter for the consideration of the
encumbrancers, in which neither the company nor the appellants have
any interest. We do not understand the appellants to contend that
the entire sum of $500,000, for which the receiver's certificates
were issued, is not due, or that the receiver was not authorized to
make the issue and secure it by mortgage, as he did. This is
admitted in the pleadings, and there is positive proof of it in the
record. It would be superfluous to spend much time in considering
the power of the court to confer the authority upon its receiver
that it attempted to confer. As a court of equity, having the
mortgaged property in charge, it was its plain duty to preserve it
not only for the benefit of the lien creditors, but also for the
benefit of the company whose possession the court had displaced.
Under the provisions of the acts of Congress granting the lands
covered by the mortgages, the lands reverted to the United States
unless the ship canal should be finished within a fixed period, and
that period was passing away when the order was granted to the
receiver to raise money for completing the canal by the issue of
certificates secured by his mortgage. The canal was unfinished, and
there were in the receiver's hands no funds to finish it. Hence
there was a necessity for making the order which the court made --
a necessity attending the administration of the trust the court had
undertaken. The order was necessary alike for the lien creditors
and for the mortgagors. Whether the action of the court could make
the receiver's mortgage superior in right to the mortgages which
existed when it was made it is needless to inquire. None of the
creditors secured by those other mortgages objected to the order
when it was
Page 94 U. S. 739
made, though they were all then in court. None of them object to
its lien or its priority now. And we think the appellants, either
as representatives of their assignors, or of general creditors,
cannot be heard to object. Beyond doubt, they would not be entitled
to a return of the property discharged from liability for the
receiver's certificates remaining unpaid, even if all the other
mortgages were satisfied. As against them the certificates are
certainly charges upon the property, and they have, therefore, no
right to complain of the decree, which gives the certificates
priority to other liens.
That all the bonds secured by the first two mortgages are
outstanding and due is, we think, an established fact. We have
observed that the mortgage upon which the present suit has been
brought was made subject expressly to those two prior mortgages. In
it the mortgagors recited that the company did, simultaneously with
those mortgages, "execute, issue, negotiate, and sell" all the
bonds covered thereby, and declared that they were an outstanding
and subsisting lien. How can these appellants, who stand in the
shoes of the mortgagors, be heard to deny these recitals? Yet if
they can, we find no evidence that all those bonds are not now a
subsisting debt of the company to the full extent of the sums named
in them. There is some proof that when the company became bankrupt
(Aug. 28, 1872), some of the bonds were held as collaterals for
loans made to the company smaller in amount than the bonds pledged.
But the bonds were subsequently sold by the pledgees, and the
present holders hold them by absolute right. The position that the
pledgees could not sell the pledge after the adjudication in
bankruptcy is quite untenable. It is sustained by nothing in the
Bankrupt Act. The bonds were negotiable instruments. They passed by
delivery, and even were there no expressed stipulation in the
contracts of pledge, that the pledgee might sell on default of the
pledgeor, such a right is presumable from the nature of the
transaction. Certainly the Bankrupt Act has taken away no right
from a pledgee secured to him by his contract.
In regard to the bonds covered by the McCarter mortgage, which
is the one now in suit, we find no error in the decree of which the
appellants can complain. Most of those bonds,
Page 94 U. S. 740
though at first issued as collaterals for loans made to the
mortgagors, have been sold, and they are now owned by the
purchasers. There are some, it is true, that are still held in
pledge, but the pledgees have a clear right to use them, either by
sale or by collection, until the full amount of the debts due from
the mortgagors is satisfied. We cannot close our eyes to the patent
fact that the entire property mortgaged is insufficient to pay the
debts with which it is encumbered. The holders of the bonds covered
by the Union Trust Company will obtain nothing, and none of the
bondholders under the McCarter mortgage will obtain full payment.
At least such is the strong probability. If therefore the holders
of the McCarter bonds who hold them as collaterals are allowed to
hold them only for the sums for which they have been pledged, the
bonds may, and probably will, prove an insufficient security for
the debts actually due from the obligors to the holders. They will
prove insufficient unless the mortgaged property shall bring at the
sale enough to pay in full all the bonds held by purchasers, and
also all the debts for which the pledged bonds are held. If the
sale produces less, there must be a ratable abatement. On the other
hand, if the pledgees are allowed to prove the bonds held by them
for their full face, these appellants are not injured. If, at the
sale, the mortgaged property shall bring more than sufficient to
pay the debts for which the bonds are held in hypothecation, the
proceeds of the sale will be under the control of the circuit
court, and it will taken care that a proper distribution is made.
And if this were not so, the pledgees would hold any excess they
might receive in trust for other encumbrancers, or for the
appellants. The only persons, if any, who can possibly be
injuriously affected by the decree which was made are the absolute
owners of the McCarter bonds, and they acquiesce in it. It is not
for those who are not injured to complain.
Of the only other assignment of error which requires notice, it
is sufficient to say that in view of the circumstances of the case,
a sale in bulk is the only possible mode of sale which will enable
purchasers to buy with confidence. And a sale by parcels, though
ordinarily the proper mode, cannot be made with any hope of justice
to the creditors.
Decree affirmed.