Colorado & S. Ry. Co. v. Blair

• Decision Date: 13 April 1915
• Citation: 108 N.E. 840,214 N.Y. 497
• Parties: COLORADO & S. RY. CO. v. BLAIR et al.
• Court: New York Court of Appeals Court of Appeals

214 N.Y. 497

108 N.E. 840

COLORADO & S. RY. CO.

v.BLAIR et al.

Court of Appeals of New York.

April 13, 1915.

Appeal from Supreme Court, Appellate Division, First Department.

Action by the Colorado & Southern Railway Company against De Witt C. Blair and others, partners as Blair & Co., impleaded with others. From an order of the Appellate Division (163 App. Div. 698,148 N. Y. Supp. 671), reversing an interlocutory judgment of the Special Term, sustaining a demurrer to the complaint, said defendants, by permission, appeal. Order reversed, and judgment affirmed.

See, also, 164 App. Div. 940,149 N. Y. Supp. 1076.

F. W. M. Cutcheon, of New York City, for appellants.

A. C. Rearick, of New York City, for respondent.

MILLER, J.

This is an action for the specific performance of an agreement of purchase and sale of a so-called beneficial interest in one-half of the common and preferred stock of the Colorado Midland Railway Company owned by the plaintiff. Said interest was pledged by the plaintiff to the Central Trust Company, then trustee under a first mortgage, to secure an issue of bonds of which $19,402,000 have been issued and are outstanding. Subsequently it was assigned, subject to said prior mortgage, to said trust company as trustee under a refunding and extension mortgage, under which bonds to the amount of $30,803,900 are outstanding. The agreement of purchase and sale provided for the delivery to the defendants of said beneficial interest certificate upon its release--

‘from the lien of said mortgages, by proceedings effectual in law and equity to accomplish such release, so that said certificate and all of the rights evidenced thereby shall be free and clear of all incumbrance created or suffered by the Colorado & Southern Railway Company.’

After the agreement was made the plaintiff requested the trustees, one having been substituted under the first mortgage, to release the certificate, and upon their refusal brought an action in the Supreme Court to compel them to do so. The complaint in that action set forth the facts with respect to the plaintiff's ownership of said beneficial interest, its pledge as security under the two mortgages or trust deeds, the agreement of purchase and sale, the demand upon the trustees and their refusal to release, the condition of the Colorado Midland Railway Company showing that it was in the interest of the trust estate, and even necessary to prevent loss, to make the sale. It alleged with respect to both mortgages that by the acceptance of the trust the trustee ‘assumed toward the plaintiff, and all other persons interested in the trust, the duty of conserving the trust estate thereby vested in said trust company and of exercising at all times a sound discretion to prevent avoidable waste and dissipation thereof,’ and that the defendants were bound ‘in law and equity, to comply with said requests and to release and surrender said beneficial interest certificate,’ but that they had refused to do so--

‘upon the ground, as stated by said defendants, respectively, that neither the first mortgage nor the refunding and extension mortgage confers or recognizes any right or discretion in the trustees thereunder, respectively, to release or to surrender or to permit to be surrendered any stocks or evidences of interest in stocks subject to the lien of said mortgages and that they are respectively entitled to the judgment of a court of competent jurisdiction in the premises.’

The prayer for relief was that upon the payment to it of the purchase price the substituted trustee under the first mortgage release said certificate from the lien of the mortgage, and that the trustee under the refunding mortgage execute a like release upon the delivery to it of an assignment of the plaintiff's equity in said purchase price. The issues joined by the answers of the defendants in that action were referred to a referee who found the facts substantially as alleged and as conclusions of law, among other things:

‘That the requests made by the plaintiff for the release of said beneficial interest certificate from the liens of said respective mortgages were duly made in accordance with the terms and provisions of said respective mortgages with respect to the release of property therefrom. That the release of said beneficial interest certificate from the liens of said first mortgage and said refunding and extension mortgagewill be beneficial to, and is necessary for the proper preservation of, the trust estates thereunder respectively and to prevent waste thereof, and is desirable and essential for the protection and security of the holders of the first mortgage bonds and of the refunding and extension mortgage bonds of the plaintiff by said mortgages respectively secured.’

There was no prayer in the complaint for a construction of the mortgages or trust deeds, and the referee did not find as a conclusion of law that the trustees were authorized by the terms thereof to release said security. The judgment did not purport to construe the said instruments, but merely directed the trustees to give the releases in accordance with the prayer of the complaint. None of the bondholders were made parties to that suit, although some of the bonds under both mortgages were registered.

The important question in the case is whether the title tendered by the plaintiff is sufficient; and that depends on two questions: (1) Whether the trustees had authority to release said security; (2) whether the trustees represented the bondholders, so that the latter were bound by the judgment in the prior suit.

[1] The view expressly rejected by the trial court, and tacitly at least by the Appellate Division, that the trustees were authorized by the terms of the trust instrument to release said security, is earnestly pressed upon us. The most, however, claimed for the refunding mortgage is that its release provision is ambiguous and possibly suggests an inadvertent omission, but it is urged that that mortgage, being subject to the first, is also subject to the right of the trustee under the first mortgage to release the security. Without assenting in any way to that proposition, we may examine the terms of the first mortgage as being most favorable to the view which were are asked to take. The first mortgage provided:

‘Whenever there shall be furnished to the trustee a written request of the mortgagor,with a copy of a resolution of its board of directors approving such request, the trustee, from time to time, shall release from the lien and operation of this indenture, to persons designated by the mortgagor, any portion of the mortgaged premises appurtenant to any line of railroad subject to the lien hereof, or acquired or held, by the mortgagor for any purpose incidental to the operation thereon, which, in the judgment of the mortgagor, shall, at the time of such release, be no longer requisite for use for the purposes for which the same shall have been so acquired or used, or necessary or expedient to be retained for use in connection with the mortgaged premises, and likewise any parts of the tracks, sidings or roadway, which may have been thrown out of use and ceased to form part of the railroads operated by the mortgagor at the time of such release by reason of straightening or alteration of the line of road or other satisfactory cause.’

It is said that ‘mortgaged premises' are defined in another part of the instrument to mean ‘all and singular the premises and property hereby conveyed or intended so to be.’ The latter expression was used in a clause authorizing a receiver, upon being appointed on a default, to enter upon the mortgaged premises and operate the same pending a sale. One would hardly think of including stock within the term ‘mortgaged premises,’ and the context plainly shows that the draftsman of the release clause quoted had in mind physical property only. But, if there could otherwise be any doubt about that, it will be removed by the following provision expressly defining the authority of the trustee with respect to stock, viz:

‘The trustee may also exercise, in its discretion, in respect of any stock which may at any time be held by it under the provisions of this indenture, all rights of holders thereof, and may assent to any corporate act on the part of any company, stock of which it may so hold, and may at any time do what may be necessary for the purpose of maintaining or preserving the corporate existence of any such company, and may qualify persons to be chosen as directors thereof.’

The context here plainly shows that the phrase ‘rights of holders' was intended to mean rights of the kind enumerated, not the right to sell or release. The instrument contained express provisions for the sale and release of a line of railroad from Cheyenne to Orin Junction, with its branches and appurtenances, of the mortgagor's lines of telegraph or any part thereof, of machinery, equipment, implements, furniture, materials and supplies, which may have become unfit or undesirable for use, and for the cancellation, alteration, or substitution of leases, operating, traffic or other contracts or trackage rights. The only other provision for a sale of the mortgaged property was that for a sale by the trustee on a default, which was to be at public auction after giving specified notice thereof.

The beneficial interest certificate was acquired after the first mortgage was given; so of course it was not therein expressly provided for, although, as already noted, that instrument did contemplate that stock might be held under it. Said certificate was but the evidence of a stock interest, which was acquired before, and was expressly included in, the refunding mortgage. The provisions of that instrument are therefore important on the question of implied authority to release said security. The trustee was given authority upon prescribed conditions to release ‘any part of the mortgaged railways and lands,’ and it...