Columbia Finance & Trust Co. v. Kentucky Union Ry. Co.

• Decision Date: 05 February 1894
• Docket Number: 128.
• Citation: 60 F. 794
• Parties: COLUMBIA FINANCE & TRUST CO. v. KENTUCKY UNION RY. Co. et al.
• Court: U.S. Court of Appeals — Sixth Circuit

60 F. 794

COLUMBIA FINANCE & TRUST CO. v. KENTUCKY UNION RY. Co. et al.

No. 128.

United States Court of Appeals, Sixth Circuit.

February 5, 1894

St John Boyle, for appellant.

Olin Rives & Mortgomery, Butler, Stillman & Hubbard, and Humphrey & Davie, for J. Kennedy Todd & Co. and Central Trust Company.

William Lindsay, for Passenger & Belt Railway Company.

Before TAFT and LURTON, Circuit Judges, and RICKS, District Judge.

LURTON Circuit Judge (after stating the facts).

1. The first error assigned is in rejecting the amended answer tendered by the Columbia Finance & Trust Company on the 20th day of December, 1892, and in proceeding with the cause without requiring the Kentucky Union Land Company to be made a party thereto. It appears from this answer that the Kentucky Union Land Company guarantied the payment of the principal and interest of the first mortgage bonds, which guaranty was indorsed thereon that this guaranty was made under authority of the charter of the Kentucky Union Railway Company. It further appears that when the coupons of this issue of bonds became due on January 1, 1891, the land company and the railway company jointly borrowed on their notes $60,000, from J. Kennedy Todd & Co., and with the money paid that series of coupons. The insistence of the appellant is that the Kentucky Union Land Company became by said payments entitled to a lien upon the railroad to secure the payment of this sum of $60,000, which was used for the payment of coupons, and that it was error to proceed without bringing that company before the court, that its lien might be established and enforced.

The unquestioned general rule as to parties in chancery is that all parties who are interested in the controversy should be made parties to the cause in order that there may be an end of litigation. If the Kentucky Union Land Company, by the payment alleged to have been made by it, as guarantor, became thereby entitled to a lien upon the property of the railway company, through subrogation, then it would have been a proper party, as it would have been interested in the property proceeded against. It would, however, in no sense be an indispensable party, because it would not have been directly affected by a decree enforcing the liens held by the holders of the first and second mortgage bonds. The distinction between a person directly interested in a controversy and directly affected by the decree, and one only indirectly affected by the decree, is well stated by Mr. Justice Bradley in the case of Williams v. Bankhead, 19 Wall. 571. We do not think that the Kentucky Union Land Company was an indispensable, or even a proper, party. It had made, at most, but a partial payment on account of its liability as guarantor. The rights of the creditor in the mortgaged property had not been extinguished by a payment of the whole debt. The payment of the whole debt for which the surety is liable is essential to subrogation. If the surety, upon making a partial payment, became entitled to subrogation pro tanto, and thereby became entitled to the position of an assignee of the property to the extent of such payment, it would operate to place such surety upon a footing of equality with the holders of the unpaid part of the debt, and, in case the property was insufficient to pay the remainder of the debt for which the guarantor was bound, the loss would logically fall proportionately upon the creditor and upon the surety. Such a result would be grossly inequitable. Yet this is in effect the result of the contention urged. The equity of subrogation does not arise from the mere obligation to pay; it springs alone from payment. The liability of the surety for the remainder of the debt continued as well after as before such payment, and until the entire debt is paid the surety has no such equity as will entitle him to the active aid of a court of equity. Sheld. Subr. § 127; Hollingsworth v. Floyd, 2 Har. & G. 91; Insurance Co. v. Dorsey, 3 Md. Ch. 334.

The creditors' right in the mortgage must be entirely divested before the surety can be substituted by operation of law, and allowed to stand in the shoes of a creditor. Magee v. Leggett, 48 Miss. 139; Bank v. Benedict, 15 Conn. 437; Gannet v. Blodget, 39 N.H. 152; Harlan v. Sweeny, 1 Lea, 682; Gilliam v. Esselman, 5 Sneed, 86; Kyner v. Kyner, 6 Watts, 221. The provision in the charter of the Kentucky Railway Company upon which appellants insist that they have a statutory right of subrogation was in these words:

'And, in order to enable said company to guaranty the punctual payment of the interest and principal of such bonds, it is hereby expressly declared that the guarantors of such bonds shall be entitled to all the benefits of such mortgage or deed of trust made to secure such bonds to the same beneficial extent that the holders of said bonds may be entitled.'

This is no more than a general declaration of the principles of subrogation. There is nothing in this provision which can be reasonably construed as placing the guarantor upon an equal footing with a creditor secured by a mortgage as a result of every partial payment. The case of Railroad Co. v. Schutte, 103 U.S. 141, is not controlling. The charter provisions there considered are altogether unlike the provision contained in the charter of the Kentucky Union Railway Company.

2. The second error assigned is that 'the court erred in adjudging that the right, title, and interest acquired by the Kentucky Union Railway Company, under the contract lease of the Passenger & Belt Railroad, was included or covered by the mortgage to the Central Trust Company.' The property embraced by the contract referred to consisted of about five miles of belt railroad around the city of Lexington, Ky., and certain interests in lands adjacent to the right of way and belonging to the Belt Railroad. It clearly appears that the Kentucky Union Railway Company constructed its line to the boundary of the city of Lexington in such way as that it had no entrance into the city and no terminal facilities, and no connection with other railway lines entering that city. Its main line terminated at the boundary of the city in view of a purpose to obtain connection with other lines and terminal facilities by means of a contract with the Belt Railroad. This line gave to the Kentucky Union Railway Company connection with several other railway lines entering Lexington, and afforded it terminal facilities in the city. The contract of lease was made after the mortgage to the Central Trust Company, and was, indeed, completed under direction of the circuit court after appointment of receivers; that court being of opinion that it was necessary as a means of affording connection with other lines, and proper terminal facilities. That this leasehold passed as after-acquired property by the express terms of the mortgage to the Central Trust Company we have no doubt. The provision in that mortgage describing the property covered by it is as follows:

'All and singular its line of railroad, built and to be built, beginning at a point in Lexington, Fayette county, Kentucky; thence through Fayette and Clark counties to Kentucky Union Junction, on the line of the Elizabethtown, Lexington & Big Sandy Railroad; thence to Clay City; thence via Three Forks Jackson, in Breathitt county, being a distance of about one hundred miles. And also the lands, real estate, telegraph lines, railroad tracks, side tracks, bridges, viaducts, buildings, depots, station houses, car houses, engine houses, shops, warehouses, turntables, water stations, fences, structures, erections, fixtures, and appurtenances, and all other things of whatever kind belonging or in any wise appertaining, or which have been or may be acquired or provided for use upon or in connection with said railroad, and all the lands acquired, or that shall hereafter be acquired, destined for warehouses and other structures for railroad uses at either terminus, as well as along the line of said railroad; and also all locomotives, engines, cars, and other rolling stock, equipment, machinery, instruments, tools, implements, furniture, and other chattels now or hereafter belonging to or appertaining to said railroad, and all property, both real and personal, of every kind and description, which shall hereafter be acquired for use on said railroad; and all the corporate rights, privileges, franchises, and immunities, and all things in action, contracts, claims, and demands of the said party of the first part, whether now owned or hereafter acquired in connection or relating to the said railroad; together with all and singular the tenements and appurtenances thereunto belonging, and the reversions, remainders, tolls, incomes, rents, issues, and profits thereof; and also all estate, right, title, and interest whatsoever at law, as well as in equity, of said party of the first part, of, in, and to the same, saving and excepting subscriptions of cash or securities and lands not to be used in the operation of said railroad or in connection therewith.'

The terms covering after-acquired property are abundantly sufficient to embrace this lease contract. Trust Co. v. Kneeland, 138 U.S. 416, 11 S.Ct. 357; Railroad Co. v. Hamilton, 134 U.S. 297, 10 S.Ct. 546; Branch v. Jesup, 106 U.S. 468, 1 S.Ct. 495.

3. The third error assigned is as to the decree ordering a sale of the interest of the Kentucky Union Railway Company acquired and held by it under the contract of lease of the property of the Passenger & Belt Railway. By the decree it was ordered that 'all right, title, and interest shall pass to and be vested in the purchaser under this decree; subject, however to all the terms, conditions, and limitations set forth in said contract of lease, as ratified by ...