Hollister v. Stewart
| Decision Date | 15 January 1889 |
| Citation | 111 N.Y. 644,19 N.E. 782 |
| Parties | HOLLISTER v. STEWART et al. |
| Court | New York Court of Appeals Court of Appeals |
Appeal from supreme court, general term, First department.
Action by William H. Hollister against John A. Stewart, Edwin H. Abbott, and the Wisconsin Central Railroad Company, to enforce plaintiff's rights as the holder of bonds secured by a mortgage, in which the two first named defendants are trustees, executed by the defendant company. From a judgment of the general term both sides appeal. A prior hearing was had in the court of appeals, but, the court being then equally divided, a rehearing was granted.
Wheeler H. Peckham, for plaintiff.
D. S. Wegg, for defendants.
The trustees to whom the first mortgage of the Wisconsin Central Railroad Company was given, and who by that instrument were charged with certain duties, and intrusted with important powers for the benefit and protection of the bondholders secured by its lien, have been adjudged unfaithful to their trust, and required to furnish indemnity for the past, and properly perform their duty in the future. Both sides appeal,-the trustees upon the ground that they have in no just sense or respect violated their duty, but have acted in all things within their powers, and wisely, for the interest of those whom they were bounds to protect; and the plaintiff, who holds bonds secured by the mortgage to the amount of $200,000, because the general term modified the judgment by relieving the trustees from personal liability, and from the command to prosecute the foreclosure of the mortgage, already commenced, to an ultimate sale and distribution.
To obtain a safe foundation for our judgment, it thus becomes necessary to examine fully the provisions of the mortgage, since the authority of the trustees has no other source, and their duty no other measure. That mortgage, given for something over $8,000,000, was executed by the company substantially for the purpose of obtaining the means with which to construct its road. The security covered not only the line, with its rolling stock and stations, and other and usual property, but also a valuable land grant, given by the general government to aid in the completion of the enterprise, and conditioned upon its progress towards that completion. All this property, by article 2 of the mortgage, is pledged to the payment of the interest and principal of the bonds, and it is made the duty of the trustees to apply the same ‘promptly to that purpose’ ‘in case of default in any such payment’ by the mortgagor. But this incumbrance, covering the land grant earned by the corporation, and intended to be utilized by sales as purchasers could be obtained, involved the necessity of an authority in the trustees to release the lands from the lien when the sales were effected. Accordingly, article 3 authorized the corporation, with the approval of the trustees, to contract for the sale of such lands for cash or on credit, and accept any of the bonds with their matured coupons at par in payment; but required that all the proceeds of every such sale, ‘whether in cash, bonds, coupons, or other securities,’ should be deposited with the trustees, and proper releases be given by them to the purchasers. The proceeds of the lands thus became substituted for the lands themselves, and continued subject to the mortgage lien. Out of these proceeds a sinking fund was established for the payment and redemption of the bonds. The trustees were directed to invest such proceeds in the first mortgage bonds of the company whenever they could be purchased at not exceeding par and accrued interest, but the trustees were not to hold the bonds and coupons which thus came into their hands as living obligations against the company, for, whether obtained by purchase with the proceeds of sales, or taken as cash in payment for the lands, for the trustees were required to cancel them every three months, and surrender them to the company as paid. In other words, the authority was to pay the bonds out of proceeds, but not to buy and hold them against the obligors, or mortgage such proceeds for other purposes. As to any proceeds which could not be so appropriated because bonds could not be obtained at par, further provisions were made for their investment, specifying the classes of securities, and reserving some choice and discretion in that respect to the company. By article 4 additional strength and protection was given to the sinking fund through a provision relieving it from the payment of interest on the bonds during the progress of construction except in one emergency. That interest was to be paid by the company, and none of the land proceeds were at any time to ‘be appropriated to the payment of interest on said bonds' unless the treasury of the company should be first exhausted. In that event the sinking fund was permitted to pay accrued interest; not, as we have said, to buy or secure coupons, but to pay and discharge them; and since in so doing the land fund would be bearing the burden contracted to be borne by the company, such reimbursement as seemed reasonably possible was ordered to be made. For all such payments of interest made out of the sinking fund in the prescribed emergency the company was to give to the trustees income bonds to be first paid out of earnings before any dividend to stockholders. These bonds were to draw interest at 4 per cent., and were to ‘be redeemed by other bonds of the company bearing the same rate of interest in gold, and secured by a second mortgage,’ if the company should determine to issue such bonds.
The mortgage then regulated the duties of the trustees in case of default. If such default in the payment of interest continued for six months, the whole principal became due at the option of the trustees, and they were authorized to enter upon and sell the granted lands at public auction; to enter upon and take possession of the railroad and its rolling stock; to operate and manage the line, and apply any surplus over expenses and necessary repairs and improvements to the payment of interest upon the first mortgage bonds ‘in the order in which such interest shall have become or shall become due, ratably to the persons entitled to such interest;’ but if the default should continue for a year, then the trustees were authorized to sell the whole of the property, or so much as might be necessary, and apply the net proceeds ‘to the payment of the principal of such of the aforesaid bonds as may be at that time unpaid, whether or not the same shall have previously become due, and of the interest which shall at that time have accrued on the said principal and be unpaid without discrimination or preference, but ratably to the aggregate amount of such unpaid principal and accrued and unpaid interest.’ Article 13 required the company to execute such further deeds and assurances as might be needed, and to furnish a full inventory of all the movable property of the company. Article 16, about which there is serious dispute over its scope and meaning, deals again with the emergency of a default, and makes it the duty of the trustees to exercise their power of entry or power of sale, or both, or take appropriate legal proceedings to enforce the mortgage in the manner following: If the default is in the payment of interest or principal of the bonds, the upon the requisition of the ‘holders of not less than twenty-five per cent. of the aggregate amount of said bonds,’ accompanied by a proper indemnification by the persons making the same against the costs and expenses to be incurred. But the instrument proceeds: ‘If the default be in the omission of any act or thing required by article twelfth of these presents for the further assuring of the title of the trustees to any property or franchises now possessed or hereafter acquired, or in any provisions herein contained to be performed or kept by said company, then and in either of such cases the requisition shall be as aforesaid; but it shall be within the discretion of the trustees to enforce or waive the rights of the bondholders by reason of such default, subject to the power hereby declared of a majority in interest of the holders of said bonds, by requisition in writing, or by a vote at a meeting duly held, to instruct the said trustees to waive such default, or to enforce their rights by reason thereof, provided that no action of the said trustees or bondholders, or both, in waiving such default or otherwise, shall extend to or be taken to effect any subsequent default, or to impair the rights resulting therefrom.’ It is substantially conceded, as, indeed, is quite apparent, that the word ‘effect’ should be read ‘affect,’ and that the reference to article 12 should be to article 13, which contains the provisions for further assurance which are referred to and which identify the article intended. It is now said on behalf of the trustees that this provision gave them a discretion to waive a default in the payment of interest or principal of the bonds, subject only to be controlled by the requisition or vote of a majority in interest of the bondholders. We do not accede to that construction. Provision had just been made in a preceding paragraph for the emergency of a default in principal or interest, which imposed the duty of proceeding upon the default on the requisition of 25 per cent. in interest of the bondholders. That gives no discretion to the trustees, but imposes an imperative duty. The following subdivision, entirely different in its terms, relates to another and distinct default, less serious in its consequences, and not of such vital importance, as to which a discretion was given which might be controlled by a majority in interest. By its very language it relates to a default in the covenants for further assurance in article 13; and its added words, ‘or in any provisions herein contained to be...
To continue reading
Request your trial
-
Sherman v. International Life Insurance Company of St. Louis
...Jackson Co. v. Gardner Inv. Co., 200 F. 113; Ervin v. Oregon Railroad, 27 F. 625; Utley v. Donaldson, 94 U.S. 29, 24 L.Ed. 54; Hollister v. Stewart, 111 N.Y. 644; Railroad v. Gebhardt, 109 U.S. 527, 27 Law Ed. 1020; Gilfillan v. Union Canal Co., 109 U.S. 401, 27 L.Ed. 977; Windsor v. McVeig......
-
Marblegate Asset Mgmt., LLC v. Educ. Mgmt. Fin. Corp., Docket No. 15–2124–cv(L), 15–2141–cv(CON)
...of their lien, and so enabling a new corporation to make its own mortgages in its own way." App'x 3146 (quoting Hollister v. Stewart, 111 N.Y. 644, 659, 19 N.E. 782 (1889) ).7 Our sense that Douglas's testimony was narrowly focused is further supported by his reference to State negotiabilit......
-
Case v. Los Angeles Lumber Products Co
...their consents which had been given to the original plan, on receiving copies of the proposed modification. 27 Cf. Hollister v. Stewart, 111 N.Y. 644, 19 N.E. 782, where the court struck down a voluntary reorganization which attempted to bind minority bondholders. The court said 'Unless rai......
-
Schroeder v. Berlin Arcade Real Estate Co.
...Elliott on Railroads, vol. 2, § 656; Duncan v. Mobile, etc., R. Co., 2 Woods (U. S. C. C.) 542, Fed. Cas. No. 4137; Hollister v. Stewart, 111 N. Y. 644, 19 N. E. 782; Col. & So. R. Co. v. Blair, 214 N. Y. 497, 108 N. E. 840, Ann. Cas. 1916D, 1177. “A trustee has no authority to waive defaul......