United States Mortgage & Trust Co. v. Chicago & AR Co.

• Decision Date: 02 May 1930
• Docket Number: No. 4263.,4263.
• Citation: 40 F.2d 386
• Parties: UNITED STATES MORTGAGE & TRUST CO. et al. v. CHICAGO & A. R. CO. et al.
• Court: U.S. Court of Appeals — Seventh Circuit

40 F.2d 386 (1930)

UNITED STATES MORTGAGE & TRUST CO. et al. v. CHICAGO & A. R. CO. et al.

No. 4263.

Circuit Court of Appeals, Seventh Circuit.

May 2, 1930.

William Greenough, of New York City, for appellants.

Edward H. Blanc, of New York City, and Bruce Johnstone, of Chicago, Ill., for appellees.

Before ALSCHULER, EVANS, and SPARKS, Circuit Judges.

ALSCHULER, Circuit Judge.

The appeal is from a decree of foreclosure of three mortgages given upon property of appellee the Chicago & Alton Railroad Company. To designate parties and interests necessary to be referred to, we employ the nomenclature of the decree.

Appellee the Chicago & Alton Railroad Company (called consolidated company) is a consolidation of two railroads, one, the Chicago & Alton Railroad Company (called old railroad company), and the other the Chicago & Alton Railway Company (called old railway company). These are Illinois corporations; the old railroad company having been incorporated in 1861, and the old railway company in 1900. The consolidation was made under an Act of the state of Illinois approved and in force March 26, 1872. Articles of consolidation were filed March 14, 1906.

In September, 1899, the old railroad company gave a mortgage upon its property to secure a bond issue known as 3 per cent. refunding 50-year gold bonds (called refunding mortgage bonds), which mortgage, with two supplemental mortgages dated September 30, 1904, and March 16, 1905, respectively, are collectively called refunding mortgage, under which bonds have been issued and are outstanding to the amount of $45,350,000. The decree does not foreclose the refunding mortgage; the foreclosure being subject to that mortgage to the extent to which it attaches.

April 1, 1900, the old railway company authorized an issue of not exceeding $22,000,000 of 3½ per cent. bonds, to be secured by its mortgage to appellee Farmers' Loan & Trust Company, as trustee. The bonds were issued and sold and are outstanding in the hands of numerous holders. Among the property conveyed by the mortgagor as security for these bonds was nearly all of the outstanding preferred and common stock of the old railroad company, which the old railway company had acquired, and a lease to the old railway company of April 3, 1900, for a term of 99 years from that date, made by the old railroad company, of all the latter's property. This mortgage is called first lien mortgage, under which designation there is also included in the decree a certain supplement thereto of June 19, 1906, to which reference will hereinafter be made.

In 1910 the consolidated company issued its bonds to the amount of $6,817,000, secured by its mortgage to appellants, as trustees, called improvement mortgage. These bonds were not sold, but the consolidated company pledged them as further security under a mortgage which it gave in 1912 to appellants as trustees, to secure an issue of its 6 per cent. bonds, amounting to $16,834,000, which mortgage is called general mortgage.

Bills to foreclose the first lien mortgage, the improvement mortgage, and the general mortgage, respectively, were filed, and were consolidated with a creditors bill whereunder a receiver had been appointed for the consolidated company; and the causes so consolidated are the subject-matter of the decree, of which the trustees under the improvement and the general mortgages are alone complaining.

Since the consolidation of the railroads there has been large increase in the rolling stock and other equipment of the consolidated company, and a small accession to the trackage. Upon this subsequently acquired property a first lien is claimed under the first lien mortgage by virtue of the mortgage itself, the articles of consolidation, and the supplement of June 19, 1906. The trustees under the improvement and general mortgages contest this claim of the first lien mortgage, and assert that they have the superior lien upon the after-acquired property.

As between these parties, the decree awarded the prior lien thereon to the first lien mortgage.

We have not been favored with an opinion by the District Court save as its views on the issues may be inferred from its overruling the exceptions to and its approval of the special master's voluminous report and from the decree.

Besides his report, the special master filed what he termed a "memorandum," presenting quite elaborate discussion of his views on the questions involved. Neither side accedes to all the reasons which he advanced for all his conclusions, and much of the very ample briefs revolves about the alleged soundness or unsoundness of the special master's discussion.

The first lien mortgage, as originally given, made abundant provision for including the mortgagor's after-acquired property. In the special master's memorandum it was concluded that by the consolidation the force of this after-acquired property clause was expended; and the master reported (section 10, art. XII) that the after-acquired property clauses of the first lien mortgage did not survive the consolidation. The memorandum cites the opinion of this court in Metropolitan Trust Co., etc., v. C. & E. I. R. Co. et al., 253 F. 868, 871, where there was quoted with approval the statement in appellant's brief in that case that "ordinarily on the consolidation of two corporations the lien of the mortgage of the constituent does not spread to the property contributed by the other constituent, or to the after-acquired property of the consolidated company." The correctness of this is not disputed. Practically the same language was employed in the recent case of Guaranty Trust Co., etc., v. M. & St. L. R. Co. (C. C. A.) 36 F.(2d) 747.

The conclusion in the memorandum, and the finding in the report, sustaining the lien of the first lien mortgage on the after-acquired property, are based wholly on the supplemental mortgage of June 19, 1906, made by the consolidated company to the Farmers' Loan & Trust Company, as trustee. The supplemental mortgage recites the consolidation of the companies, and refers to various provisions of the original first lien mortgage, attaching a copy of that mortgage and of the articles of consolidation, which are made part of the supplemental mortgage. It then recites that, for the purpose of carrying out the intent of the original first lien mortgage and the articles of consolidation, and for other good and valuable considerations, the consolidated company, pursuant to a resolution of its board of directors, conveys to the trustee all its property, for the purposes set forth in the original first lien mortgage and the articles of consolidation; the consolidated company agreeing to perform all the obligations of the original mortgage and of the articles of consolidation. The property described is, with some exceptions, all that which belonged to both the constituent companies, and all branches and additions, etc., "now held or acquired or hereafter held or acquired for use in connection with said railroads or the business thereof"; and all franchises, etc.; engines, freight, passenger, and other cars and rolling stock; tools, implements, materials, and personal property "now owned or hereafter acquired by the Railroad Company for the purposes of said railroads." The language is broad and inclusive. The supplemental mortgage was duly executed, delivered, and recorded shortly after its date.

The property described in the original first lien mortgage and in this supplemental mortgage is substantially the same, and the original first lien mortgage conveying as it did after-acquired property, why does not this supplemental mortgage likewise convey it? Appellants urge against such conclusion, (1) the supplemental mortgage does not appear to have had the approval of two-thirds of the stockholders of the consolidated company, and is therefore void; (2) it is void for want of consideration.

As to the first, there is invoked chapter 114, par. 20, Revised Statutes of Illinois 1905, to the effect that concurrence of holders of two-thirds in amount of the stock shall be necessary to the validity of any railroad mortgage, which concurrence must be manifested by a certificate thereof filed in the recorder's office of each county in which the railroad runs. To this contention appellee trustee responds that the supplemental mortgage is not a mortgage in the sense that an original mortgage would be, but that it was made pursuant to those clauses in the original mortgage whereunder the mortgagor agrees to execute all instruments and assurances as may from time to time be necessary to invest the trustee with the security contemplated by the original first lien mortgage, and that the supplemental mortgage is but such a deed or act of further assurance as contemplated by the original first lien mortgage, and as carried forward by the articles of consolidation by the two railroads, and that the consent of the stockholders was not, under such circumstances, necessary to be obtained.

The supplement, made long prior to the improvement and general mortgages, did not operate as an original conveyance, but was in further assurance of that lien which the original first lien mortgage and the articles of consolidation contemplated, and for which the first lien mortgage definitely provided, and was well understood by all then concerned. This being so, the sufficient authorization of the original first lien mortgage, as well as the articles of consolidation, was a sufficient authorization of this supplemental mortgage. While there appears no formal authorization by stockholders as specified in the statute, it is evident from the record (and the special master so found) that, at least indirectly, more than two-thirds of the stockholders did approve or ratify the supplement.

Appellee trustee further contends that the statutory requirement of the consent of two-thirds of the stockholders to the giving of a railroad mortgage is for the protection of...