Iowa-Wisconsin Bridge Co. v. Phoenix Finance Corp.

• Citation: 25 A.2d 383,41 Del. 527
• Court: United States State Supreme Court of Delaware
• Decision Date: 18 March 1942
• Parties: IOWA-WISCONSIN BRIDGE COMPANY, a corporation of the State of Delaware, Defendant Below, Plaintiff in Error, v. PHOENIX FINANCE CORPORATION, a corporation of the State of Delaware, Plaintiff Below, Defendant in Error

25 A.2d 383

41 Del. 527

IOWA-WISCONSIN BRIDGE COMPANY, a corporation of the State of Delaware, Defendant Below, Plaintiff in Error, v. PHOENIX FINANCE CORPORATION, a corporation of the State of Delaware, Plaintiff Below, Defendant in Error

Supreme Court of Delaware

March 18, 1942

Supreme Court, January Term, 1941.

Writ of error to the Superior Court for New Castle County.

The judgment is reversed, with the direction that judgment be entered for the defendant.

Daniel F. Wolcott, Fred A. Ontjes (of Mason City, Iowa), and William C. Green (of St. Paul, Minnesota) for plaintiff in error.

James R. Morford and Marvel and Morford for defendant in error.

HARRINGTON Ch., LAYTON, C. J., RICHARDS and TERRY, J. J., sitting.

OPINION

LAYTON, Chief Justice:

The plaintiff in error will be referred to as the Bridge Company the defendant in error as Phoenix.

Phoenix sued in the court below to recover the amounts alleged to be due on two promissory notes made and delivered to it by the Bridge Company, one in the sum of $ 2,000, the other for $ 3,125, with interest from their respective dates.

The sole defense relied on was res adjudicata; and in support of that plea there was introduced in evidence the record of a proceeding in the United States Circuit Court of Appeals for the Eighth Circuit entitled, First Trust and Savings Bank and A. H. Schubert, as Trustees, and Phoenix Finance Corporation, appellants, v. Iowa-Wisconsin Bridge Company, a Corporation, Defendant, and Fayette D. Kendrick (and others) Interveners, Appellees, 98 F.2d 416. Appeal from the District Court of the United States for the Northern District of Iowa, Bechtel Trust Co. v. Iowa-Wisconsin Bridge Co., 19 F.Supp. 127.

The record disclosed a proceeding in equity instituted by Bechtel Trust Company (later First Trust and Savings Bank) and Schubert in the District Court of the United States for the Northern District of Iowa, for the foreclosure of a mortgage or trust deed given by the Bridge Company to the complainants as trustees to secure an issue of bonds, the most of which were held by Phoenix Finance System, Inc., predecessor of Phoenix. The defendant in the court below contended that in the proceeding in the Federal District Court the two notes sued on had been found to be without consideration, and invalid; and that the decree of that court, affirmed by the Circuit Court of Appeals, was entitled to full faith and credit under Article 4, Section 1 of the Constitution of the United States. The plaintiff insisted that it was only a formal party to the proceeding; and that, therefore, its rights in respect of the consideration given and received for the notes for which bonds of the Bridge Company had been issued to it could not have been lawfully determined; and further, that if it was, in fact, a necessary party to the proceeding, it being a Delaware corporation, as was the Bridge Company, its joinder as a necessary party destroyed the diversity of citizenship on which the jurisdiction of the Federal District Court rested; and, therefore, the pretended adjudication of its rights in respect of the two notes was void.

The cause was heard by the court, trial by Jury having been waived. It was held that the proceedings in the Federal District Court and the decree there rendered did not constitute a valid defense to the action under the plea of res adjudicata. The reasoning of the court was this: In a suit to foreclose a mortgage securing an issue of bonds, the trustee represents all bondholders in all things relating to their common or individual interest in the trust property, or in the bonds; but the trustee cannot, by implication, be held to represent the bondholders beyond the terms of the instrument under which, alone, he has his origin or existence. In the proceeding in the Federal Court, the sole matters related to the bonds as collateral and not to the antecedent debt, and the trustees did not represent the bondholders in respect of the validity of the debt for the security of which the bonds were issued. To adjudicate adversely the rights of the bondholders in respect of the debt underlying the bonds, the bondholders were necessary parties; Phoenix was held to be a formal party only, and it was necessary so to hold, for otherwise the court would have been without jurisdiction, diversity of citizenship having been destroyed. Accordingly, there was no adjudication of the invalidity of the notes sued on. Judgment was rendered in favor of the plaintiff; and this writ of error followed.

The record of the proceedings in the Federal Courts is long. Some of the facts are recited in the opinion of the court below, 1 Terry (40 Del.) 500, 14 A.2d 386. They are given at great length in the opinion of the Federal District Court (19 F.Supp. 127), and at less length in the opinion of the Circuit Court of Appeals (98 F.2d 416), and in another opinion of that court in another phase of the controversy. (8 Cir.), 115 F.2d 1. Such portions of the mortgage indenture, pleadings and findings of fact will be stated here as are necessary to explain the reasons for our disagreement with the conclusions of the learned court below.

The Bridge Company, a Delaware corporation, owns a toll bridge across the Mississippi River between the States of Iowa and Wisconsin. In 1932, it executed and delivered to Bechtel Trust Company, an Iowa corporation, and A. H. Schubert, a citizen of Wisconsin, as trustees, a mortgage or deed of trust, covering substantially all of its property, including the bridge, to secure a bond issue in the amount of $ 200,000. Later First Trust and Savings Bank, an Iowa corporation, was substituted as trustee for Bechtel Trust Company. The bonds made express reference to the mortgage indenture for a description of the property mortgaged, the nature and extent of the security created, "and the rights of the holders of said bonds in respect of such security." Under the terms of the indenture, the Bridge Company covenanted, inter alia, to pay all taxes and assessments; to keep its property in thorough repair; to have fire insurance policies so drawn that losses thereunder should be made payable to the trustees; that it would not suffer preferential liens to be created; and in the event of failure to comply with these or any other covenant, the trustees were authorized to advance or expend money to protect the property. The trustees were required to declare all the bonds to be in default, and to be due and payable immediately, in the event of certain defaults in the payment of the principal of or interest on any bond, upon the written request of holders of one-fourth in amount of all of the bonds secured by the indenture; and in case of such defaults, the trustees were empowered to enter on the mortgaged premises, and to manage and control the property; or to sell the property; or, upon request of the holders of bonds in the specified amount, the trustees were required to "proceed to protect and enforce their rights and the rights of the bondholders under this Indenture by a suit or suits in equity, or at law, whether * * * for any foreclosure hereunder, or for the enforcement of any other appropriate, legal or equitable remedy, as the trustees, being advised by counsel learned in the law, shall deem most effectual * * *". Specifically, no holder of any bond or coupon was permitted to institute any suit or proceeding for foreclosure, or for any other remedy, except upon notice of the defaults, request by the holders of the bonds in the specified amount, and subsequent refusal of the trustees to act, or unreasonable delay on their part. It was provided that, "in case of such defaults, and upon the demand of the trustees, the company would pay to them for the benefit of the bondholders the whole amount due and payable on the bonds; and for failure so to pay forthwith, the trustees in their own names and as trustees of an express trust would be entitled to recover judgment for the whole amount so due and unpaid * * * either before or after or during the pendency of any proceeding for the enforcement of the lien of the indenture * * *; and in case of a sale of the mortgaged property, and of the application of the proceeds * * * to the payment of the debt, the trustees in their own names and as trustees of an express trust would be entitled to enforce payment of and to receive the amount upon any and all bonds issued and outstanding for the benefit of the holders thereof, and would be entitled to recover judgment for any portion of the debt remaining unpaid, with interest."

Defaults having been declared, at the demand of Phoenix, and through lawyers selected and paid by it, the Trustees filed their bill of complaint in the Federal District Court to foreclose the mortgage. Inter alia, it was alleged "that all of the bonds had been issued for a good and valuable consideration, and were outstanding in the hands of divers owners and holders for value." The bill prayed that an account be taken of the bonds secured by the mortgage, "and of the amount due on said bonds for principal and interest, or otherwise"; that the defendant company be decreed to pay to the complainants the amount found to be due on such accounting; and in default of payment, that the mortgaged property be sold. There were also prayers for a deficiency judgment, and for the appointment of a receiver.

The defendant's answer, in substance, alleged that from and after November, 1930, and until July, 1933, one J. A Thompson and others in association with him had dominant control both of Phoenix Finance System, Inc., and the Bridge Company; that during the time there had been numerous transactions between the two companies; that the interests of a number of the directors of the Bridge Company...