Appeal of Reed

• Decision Date: 29 October 1888
• Docket Number: 167
• Citation: 122 Pa. 565,16 A. 100
• Parties: APPEAL OF W. W. REED. v. WEST. PENN. & S.C.R. CO. FIDELITY INS., T. & S.D. CO.
• Court: Pennsylvania Supreme Court

16 A. 100

122 Pa. 565

APPEAL OF W. W. REED.

FIDELITY INS., T. & S.D. CO. v. WEST. PENN. & S.C.R. CO.

No. 167

Supreme Court of Pennsylvania

October 29, 1888

Argued October 9, 1888

FROM THE DECREE OF THE COURT OF COMMON PLEAS OF MERCER COUNTY, IN EQUITY.

No. 167 October Term 1888, Sup. Ct.; court below, No. 3 January Term 1887, C.P. in Equity.

On November 6, 1886, The Fidelity Insurance, Trust and Safe Deposit Company, trustee, filed a bill in equity against The West. Penn. & Shenango Connecting Railroad Company and W. W Reed. The bill averred that the W.P. & S.C.R. Co. was in the hands of a receiver, under a decree of the Circuit Court of the United States for the Northern District of Pennsylvania and that leave of said court had been obtained to institute the suit; that said railroad company had duly executed and delivered to the plaintiff a certain mortgage of its property and franchises, in trust to secure its bonds issued and in the hands of purchasers, which said mortgage was the first lien upon all the property therein described, and that the mortgagor had made default in the payment of interest upon its bonds; that W. W. Reed claimed a large balance to be due him for work and labor done and materials furnished for said railroad under a contract with the company, for which balance he claimed a lien upon the property and franchises of the company prior to the lien of the mortgage to the plaintiff but without lawful right so to claim. For these and other grounds averred in the bill, the plaintiff prayed that its said mortgage should be declared the first lien upon the property and franchises therein described, for the benefit of the bondholders, and that the amount due thereon should be ascertained, and that in default of payment of the amount due, the mortgaged property and franchises should be sold free and clear of all liens, etc.

Separate answers on the part of the defendant company and W. W. Reed, being filed and issue joined, on March 7, 1887, Mr. Q. A. Gordon was appointed examiner and master.

One of the facts controverted before the master was as to the date when the construction contract of the defendant company with W. W. Reed was made. This contract was in writing and was dated August 15, 1882, though not executed that day but early in the following month. Negotiations were had between Mr. Reed and the president and certain directors of the road, and on July 7th, 1882, Mr. Reed submitted a written proposition to construct the road upon terms which corresponded nearly with the written contract made when the president and two of the directors again met Mr. Reed on August 15th; but whether the contract was fully agreed upon verbally, on July 7th, when Mr. Reed's proposition was made, or not until August 15th, when the paper was signed, at all events Mr. Reed did no work under it until after the latter date. This question of fact, therefore, as well as the others in issue were found by the master in his report filed on June 26, 1888, to be as follows:

1. The railroad company, defendant in this case, was incorporated by virtue of the railroad laws of Pennsylvania, on or about April 28, 1881, under the name of the Connoquenessing Valley Railroad Company, which name was afterward, by a decree of the Court of Common Pleas of Butler county, dated July 11, 1882, changed to the West. Penn. and Shenango Connecting Railroad Company.

2. The railroad of said corporation extends, from the junction of the Western Pennsylvania Railroad, in the town of Butler, Pa., to Coalsville Junction on the line of the Shenango & Allegheny Railroad. The said railroad is all within the county of Butler, Pa., and the length of its main line is about twenty-one miles, and of its sidings about two miles.

3. The principal office of said railroad company is located in the town of Greenville, Mercer county, Pa.

4. The capital stock of said railroad company consists of ten thousand shares of the par value of fifty dollars each, making a total of $500,000. All of the capital stock was subscribed, but no part of it was paid up, except what the law required to be paid at the time of the incorporation of the company, viz.: about $12,000; the balance was held by the various subscribers in trust for the corporation.

5. At a meeting of the stockholders of the railroad company, held on February 28, 1882, a resolution was passed authorizing the board of directors to issue bonds of the corporation to the amount of $400,000, and to secure the same by a first mortgage on the railroad and other property, franchises and appurtenances, of the said railroad company, for the purpose of raising money to aid in the construction and equipment of its railroad. In pursuance of this authority, the board of directors caused to be executed the mortgage involved in this suit, a copy of which is annexed to the bill. The said mortgage covers the railroad and all other property of said railroad company, together with its revenues, rights, privileges and franchises, and is made to the Fidelity Insurance, Trust and Safe Deposit Company, trustee, in the sum of $400,000, to secure four hundred coupon bonds of said railroad company, of $1,000 each, bearing interest at the rate of six per cent. per annum, the interest payable semi-annually on the first of January and July of each year, and the principal in thirty years from the date of the mortgage. The mortgage is dated July 1, 1882; it was, however, executed on July 12, 1882, and was recorded in the office of the recorder of deeds, of Butler county, on July 18, 1882. The bonds bear the same date as the mortgage.

6. B. K. Jamieson & Co., bankers of Philadelphia, were employed by the railroad company as its agents or brokers, to negotiate the sale of the bonds, and the trustee with whom the bonds had been deposited was directed by the railroad company to deliver them to said brokers as they would make sale of them, and deposit with said trustee the proceeds of such sales. Under this arrangement all of the said bonds were sold and delivered to the purchasers, on different dates between July 15, 1882, and July 19, 1883.

7. All of these bonds are still outstanding, and there is now due and unpaid on the same the principal sum, viz.: $400,000 and interest thereon from January 1, 1885.

8. At the time of the execution and recording of the mortgage, the railroad company had no railroad, and no contract for the construction of any had yet been entered into.

9. On August 15, 1882, W. W. Reed entered into a contract with the said railroad company for the construction of its railroad. This contract is in writing, and a copy of the same is annexed to the bill. By its terms the consideration to be paid to Reed for the construction of the railroad is made to consist partly in cash and partly in the capital stock of the railroad company. J. T. Blair, A. H. Steele, and Thomas P. Fowler are parties to this contract, but only for the purpose of transferring to Reed the stock, which nearly all stood in their names on the books of the corporation. Although this contract provides for the transfer to Reed of the entire capital stock of the railroad company, this was simply a device intended by the parties as a means of making said stock "paid-up stock." It was not meant that Reed should retain the stock as his own property. When it was subsequently transferred to him by the making out of certificates therefor in his name, he immediately indorsed the certificates in blank and returned them to Blair and Steele. The real consideration which Reed was to receive for constructing the railroad was the cash payments stated in the contract.

10. Reed commenced the work of constructing the railroad under his contract some time during the latter part of August, 1882, and pursued the same continuously until it was completed, which was about September 10, 1883.

11. The railroad company having failed to pay in full the cash payments due Reed for the construction of the railroad under the contract, he brought suit for the balance remaining unpaid thereon, in the Court of Common Pleas of Butler county, on April 5, 1884; and on April 22, 1883, recovered a judgment against said railroad company for $67,079.79. This judgment still remains due and unpaid. The record shows an assignment of the judgment by Reed, the plaintiff therein, to Charles Crocker, dated December 22, 1885.

Upon the foregoing facts, the master concluded as matter of law that the debt evidenced by the judgment of Mr. Reed was of the specific nature contemplated by the resolution of 1843, but it did not follow that the plaintiff's mortgage was subordinate to it. Only such mortgages are invalid as against a contractor's claim, as are subsequent thereto, in point of time: Fox v. Seal, 22 Wall. 424; Pittsb. etc. Ry. Co. v. Marshall, 85 Pa. 187; McBroom's App., 44 Pa. 92; and the proper date to which to refer the liability of the company for the balance due Reed was August 15, 1882, the date the obligation was assumed, although the work was not to be done until afterward.

The master further held that, as the bill was filed, not to determine by a decree made in advance of the sale, what claims would be liens upon the fund arising therefrom and the order of their priority, but to determine whether the proposed sale would be utterly void as against Mr. Reed's judgment, and leave the mortgaged premises subject to its payment in the hands of the purchaser, it was unnecessary to decide upon the position taken on behalf of Mr. Reed that, as against his claim as contractor, the mortgage could date only from the sales of the bonds, ruling however that, in order to save his judgment from the effect of the proposed sale, it was incumbent upon Mr. Reed to show that the whole mortgage was subsequent...