Commonwealth Life Ins. Co. v. Louisville Ry. Co.
| Decision Date | 17 June 1930 |
| Citation | 234 Ky. 802 |
| Parties | Commonwealth Life Insurance Company et al. v. Louisville Railway Company et al. |
| Court | United States State Supreme Court — District of Kentucky |
1. Street Railroads. — Suit to determine validity of plan of refinancing street railroad was properly brought by holders of several series of bonds fairly representative of respective classes.
2. Street Railroads. — It is not necessary to right of renewal of street railway bonds that it should be reserved in obligation to pay.
3. Mortgages. — No default under mortgage may be declared if debtor and creditor mutually agree on postponement of maturity date.
4. Mortgages. — When parties to mortgage contract agree on renewal, no third party has any right to object, in absence of contractual power giving such right.
5. Street Railroads. — Where refinancing plan of street railroad involves no default, trustees under mortgages may properly participate in carrying it into effect.
6. Street Railroads. — Postponement of maturity of part of first mortgage bonds of street railway held not to constitute "default" within meaning of third mortgage (Civil Code of Practice, sec. 694, Act 1916, c. 105).
The third mortgage provided for certain remedies in case of default in payment of principal of prior mortgage bonds "when and as the same, according to the terms thereof, shall mature." Where maturity of obligation has been extended, it is not "payable according to the terms thereof" until arrival of maturity date finally fixed. "Default," as applied to conditions in mortgage, refers to nonperformance by party bound without consent of parties entitled to performance and possessing right to postpone due date of payment.
7. Mortgages. — Mortgage is not discharged or lien affected by change in form of debt secured, or in form of evidence of it.
This is true so long as a novation is not executed or an agreement made that the change in form shall operate as a payment.
8. Mortgages. — Agreement between mortgagee and mortgagor for extension of time for payment based on a valid consideration is binding between parties and as against third parties whose rights are subordinate.
9. Mortgages. — Holders of subsequent securities take them subject to rights of parties with superior equities, including postponement of payment.
10. Street Railroads. — Street railway mortgages must be read together in light of surrounding circumstances, and given meaning manifested by terms.
Appeal from Jefferson Circuit Court
W. PRATT DALE for appellants.
JOHN C. DOOLAN, CHARLES W. MILNER, ROBERT F. VAUGHAN and ALFRED SELLIGMAN for appellees.
Affirming.
Forty years ago the Louisville Railway Company executed a first mortgage upon all of its property to secure a bonded indebtedness of $6,000,000, maturing July 1, 1930. Ten years later it executed a second mortgage upon the same property and in substantially similar terms to secure $2,000,000 of bonds due March 1, 1940. On February 1, 1910, a third mortgage was executed upon the same property to secure an authorized issue of bonds aggregating $20,000,000 due in forty years from date. It was contemplated that the first and second mortgages should be discharged from a part of the proceeds of the third mortgage bonds, and the latter instrument provided that $8,000,000 of the total issue thereby authorized should be reserved for the redemption of the bonds previously issued and outstanding. But this purpose was not accomplished, for the reason that the market price of the bonds was so low that the proceeds thereof, if sold, would not be sufficient to redeem the earlier bonds. Consequently the situation existing is that all three mortgages are in full force and effect, with $6,000,000 of the first issue outstanding and unpaid, $2,000,000 of the second series outstanding and unpaid, and about $6,500,000 of the third authorization issued, outstanding, and unpaid. No default has occurred in the payment of interest on any of the bonds, but the Louisville Railway Company will be unable to pay in full the bonds maturing July 1, 1930.
To prevent a default on the first mortgage debt, a definite plan of refinancing has been negotiated. It contemplates that the railway company will sell and convey free of lien to the Louisville Gas & Electric Company its power plant, transmission lines, and substations, for the sum of $3,000,000 cash, which will be applied by the trustee to the payment of one-half of the outstanding first mortgage bonds. The purchaser obligates itself to supply electric power to the Louisville Railway Company for the operation of its cars and it does not appear that the arrangement will impair the earnings of the street car company. The remaining $3,000,000 of the first mortgage bonds are not to be paid, but the date of maturity thereof will be postponed for five years. The interest rate will be increased 1 1/2 per cent. per annum, but any lien for the additional interest is subordinate to the liens of the second and third mortgages. In order to assure the consent of all the holders of the first mortgage bonds to the extension of the due date of the bonds, a syndicate of bankers and brokers has been organized to purchase and pay for any bonds held by persons or institutions unwilling to consent to the extension. A controversy arose respecting the legality of the plan of refinancing, and an action was filed by the Commonwealth Life Insurance Company and several individual holders of the second and third mortgage bonds against the street railway company and the trustees under the three mortgages to end the controversy and to determine the validity of the proposal.
The questions debated relate to the right of the trustees in the three mortgages to relinquish the liens of their respective mortgages upon the property to be sold; the power of the street car company, with the consent of the holders, to postpone for five years the maturity of the bonds which are not presently to be paid, without involving a precipitation of the bonds secured by the third mortgage; the right of the trustees in the three mortgages to join in the agreement with the syndicate of bankers and brokers to accomplish the purposes of the plan; and the definition of default as used in the third mortgage in connection with the execution of the renewal or extension of the maturity of one-half of the first mortgage bonds.
The circuit court decided that the plan was legal, and so declared by its judgment, from which the holders of the second and third mortgage bonds have prosecuted an appeal. The action was properly brought by holders of the several series of bonds fairly representative of the respective classes to which they belonged, and it is not questioned that the judgment in this case is binding on all parties concerned. Black v. Elkhorn Coal Corp., 233 Ky. 588, 26 S.W. (2d) 481.
The appellants do not contend that the trustees may not release the liens of the three mortgages on the property to be sold to the Louisville Gas & Electric Company. The several mortgages confer that power upon the trustee upon proper certification of the street railway company that the property is not necessary for the operation of the road and is being sold at its fair cash value, provided the proceeds of the sale, if improvements are not added, or other property purchased therewith, shall be applied to the retirement of bonds in the order of their priority. The provision has been observed in this instance, and the proceeds derived from the sale will be applied in retiring one-half the bonds secured by the first mortgage. The trustees, under such circumstances, are required to execute the releases requested.
The pivotal question raised is the right of the railway company, with the consent of the bondholders, to postpone for five years the maturity of the unpaid portion of the first mortgage bonds. If failure on July 1, 1930, to pay all of the bonds secured by the first mortgage would constitute a default under the terms of either of the subsequent mortgages, the plan could not be executed, since the consent of the holders of bonds under the second and third mortgages has not been obtained. The proposition requires an interpretation of the provisions of the various mortgages. The first mortgage contained a covenant for the punctual payment of semi-annnal interest on the bonds intended to be secured thereby "or any bonds that might be issued or accepted in lieu, renewal or substitution of the same respectively," and further obligated the mortgagor to pay the principal of the bonds whenever, according to the provisions thereof, they should become due and payable. Proceeding from an analysis of that provision of the mortgage, it is argued that the covenant to pay interest recognized the right of renewal or substitution, but that the covenant to pay the principal was absolute and unconditional. Such a separation of the covenants would appear to be impossible. It is not necessary, however, to the right of renewal that it should be reserved in the obligation. The liberty of contract of the parties, which is a fundamental right of freemen, is subject only to such limitations as may be imposed by the terms of the mortgage. No default under a mortgage may be declared if the debtor and creditor mutually agree upon a postponement of the maturity date when there is no provision of the instrument restricting the right of renewal. Neither the first nor the second mortgage contains any limitation on the right of the parties to the first mortgage to postpone the maturity of the debt. It is insisted, however, that the third mortgage contains an express and independent covenant on the part of the street railway company to pay off and discharge the bonds secured by the two prior mortgages...
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