Rhinelander v. Farmers' Loan & Trust Co.

• Citation: 172 N.Y. 519,65 N.E. 499
• Court: New York Court of Appeals
• Decision Date: 09 December 1902
• Parties: RHINELANDER v. FARMERS' LOAN & TRUST CO. FLEISHER v. SAME.

172 N.Y. 519

65 N.E. 499

RHINELANDER

v.FARMERS' LOAN & TRUST CO.

FLEISHER

v.SAME.

Court of Appeals of New York.

Dec. 9, 1902.

Appeal from supreme court, appellate division, First department.

Actions by Frederic W. Rhinelander against the Farmers' Loan & Trust Company, and by Benjamin W. Fleisher against the same defendant. From orders of the appellate division (69 N. Y. Supp. 437, 1144) affirming judgments entered sustaining demurrers to the replies of plaintiff and dismissing the complaint, plaintiffs appeal. Affirmed.

Martin, O'Brien, and Vann, JJ., dissenting.

Silas W. Pettit, Thomas N. Rhinelander, and Francis C. Huntington, for appellants.

John E. Parsons and David McClure, for respondent.

BARTLETT, J.

The actions are brought by bondholders, as the cestuis que trustent in a railroad mortgage, against the defendant, as the trustee therein, to hold the defendant liable for its affirmative act of certifying, issuing, and delivering bonds, to be sold to the plaintiffs, or whoever might become the purchaser thereof, as first mortgage land grant bonds, secured by mortgage on the land grant described therein, contrary to and in violation of the covenants of the mortgage. The plaintiff Rhinelander is the holder of 20 bonds of the Oregon Pacific Railroad Company, purchased in the year 1887, and the plaintiff Fleisher is the holder of 5 bonds purchased in the year 1889.

Two questions are presented on this appeal: (1) Do the complaints set forth a cause of action? (2) Are these actions brought upon a sealed instrument, and barred only by the 20-year statute of limitations, or upon an implied covenant or obligation, springing from a breach of duty on the part of the trustee, not found in specific terms in the mortgage, and barred by the 10-year statute of limitations?

On the 1st day of October, 1880, the Oregon Pacific Railroad Company executed its first mortgage, land grant, sinking fund, gold bonds, for $15,000,000, par value, being 15,000 bonds, of $1,000 each, due October 1, 1900, the payment of which was secured by a mortgage executed by said Oregon Pacific Railroad Company, as party of the first part, the defendant, the Farmers' Loan & Trust Company, as party of the second part, and the Willamette Valley & Coast Railroad Company, as party of the third part. The bonds state upon their face that they are ‘limited in issue to $25,000 per mile of the said railroad.’ They also state that they are secured by a mortgage or deed of trust, signed by the Oregon Pacific Railroad Company jointly with the Willamette Valley & Coast Railroad Company, to the Farmers' Loan & Trust Company as trustee for the holders of the said bonds, conveying the property and franchises of the said two railroad companies, including land grants and all other real estate owned or to be owned by them. The complaint alleges, among other things, that the Oregon Pacific Railroad Company was incorporated under the laws of the state of Oregon about September 14, 1880, with authority to construct and operate a line of railroad from Yaquina Bay, Benton county, Or., to Boise City, in the state of Idaho, and to construct and operate the line of railroad of the Willamette Valley & Coast Railroad Company; also to issue the bonds secured by the mortgage, to which reference has already been made. It is further alleged that the Willamette Valley & Coast Railroad Company was incorporated under the laws of the state of Oregon in July, 1874, with authority to construct and operate a line of railroad from Corvalis, in Benton county, Or., to the tide water on Yaquina Bay, in the same county and state, and by acts of the legislature of the state of Oregon there was granted to said railroad company all the tide and marsh lands situate in said county of Benton, and the right to take from the lands of the state, adjacent to the line of said road, timber, stone, water, and other materials necessary to its construction, with other rights that need not be specifically stated; that the Willamette Valley & Coast Railroad Company, at the time its franchise and property were conveyed to the Oregon Pacific Railroad Company, possessed the right to become the owner, by payment of $600,000 of all the shares of the capital stock of the Willamette Valley & Cascade Mountain Wagon Road Company, an Oregon corporation, and also the grant of land known in this case as the land grant of the said wagon road company, amounting to 850,000 acres, the same being a right of selection from twice that number of acres of land located within the limit of six miles on either side of the route of the said wagon road company, which stocks and lands were subject, before the title thereto could be acquired by the said the Willamette Valley & Coast Railroad Company, to the payment of said sum of $600,000.

The questions presented by this litigation involve the construction of the fourth and fifth subdivisions of the mortgage, which read as follows:

‘Fourth. That the party of the first part shall and will, and it hereby covenants and agrees to, apply the net proceeds arising from the sale of the bonds secured by this indenture in the first place to the liquidation and discharge of the herein-mentioned incumbrance, amounting to six hundred thousand dollars, or thereabouts, now existing upon the land grant known as the grant of the Willamette Valley and Cascade Mountain Wagon Road Company, and subsequently to the building, grading, and otherwise constructing the line of the said railroad, as the same may have been or may be surveyed and laid out, and for the full and complete furnishing and equipping of the said railroad, and the purchasing and procuring of locomotives, engines, cars, and other proper equipment and rolling stock, and other proper and suitable appurtenances for the said railroad, and for erection of depots, station houses, and such other buildings as may be suitable and proper for the same, and also for the purchasing, furnishing, equipping, and operating of such steamships, steamers, barges, ferryboats, and other water craft as may be suitable and proper for the carrying out of the purposes for which the party of the first part was incorporated, or any of them, and also for such other and further purposes as may enable the party of the first part of engage in the other enterprises and purposes for which it has been so incorporated, and, further, that the proceeds of the first issue of the said bonds, to the extent of three million two hundred and fifty thousand dollars of principal, shall be applied in the first place to the satisfaction of the said incumbrance, and to the building, constructing, and equipping of the first one hundred and thirty miles of the said railroad from the ocean eastward in case of surplus to the acquiring of necessary water craft.

‘Fifth. That the party of the first part shall and will, and it hereby covenants and agrees, after the said bonds shall have been duly executed by and on behalf of the party of the first part, to, deposit the same with the party of the second part, to be certified and issued from time to time as the same may be sold or otherwise disposed of, and the said trustees may certify and issue any of said bonds at any time on the request of the party of the first part, or of its president, in writing, and the net proceeds which may be realized on the sale of the said bonds shall be paid over to and remain in the hands of the said trustee for the purposes above enumerated, and shall be paid out only on the written order or request of the executive committee of the board of directors of the party of the first part, or of a majority of the said committee, in which order or request the president or acting president of the party of the first part shall in all cases join, and all such orders and requests shall include a written statement or memorandum declaring the purpose or purposes for which the proceeds of the said bonds so ordered to be paid over are to be appropriated or used: provided, however, that in case the party of the first part shall desire to apply any of the said bonds for the purposes of its incorporation, without converting the same into money, then and in that case it shall furnish the said trustee with a like written order or request of the said executive committee, or of a majority thereof, in which the said president or acting president shall join, which shall include a written statement or memorandum declaring the purpose or purposes for which the said bonds are to be appropriated or used, and in such case the said trustee shall certify, issue, and deliver the said bonds. It shall be the duty of the president and secretary of the party of the first part to furnish the said trustee with a written certificate, under the seal of the said corporation, of the names and residences of the persons constituting such executive committee, which certificate shall be conclusive evidence for the said trustee of the fact that the persons so named constitute and compose such executive committee, until it shall be notified in like manner of the appointment of other persons in their room and stead. Nothing herein contained shall be so construed as requiring the said trustee to inquire into the application of the funds or of the bonds which it may deliver over on the receipt of such orders or requests as aforesaid.’

We come, then, to the consideration of the controlling question,-whether the complaints state a cause of action, and, if so, whether the action is brought upon the mortgage, as a sealed instrument, or for a breach of the implied duty or obligation springing from the relation of trustee and cestui que trust.

A careful study of the provisions of the mortgage satisfies us that the defendant is in breach of no affirmative covenant made by it and contained therein. The covenants recited in the fourth and fifth subdivisions of the mortgage are those of the Oregon Pacific Railroad Company as mortgagor. In brief, the...