Fidelity & Columbia Trust Co. v. Louisville Ry. Co.

• Decision Date: 23 April 1935
• Parties: FIDELITY & COLUMBIA TRUST CO. et al. v. LOUISVILLE RY. CO.
• Court: Kentucky Court of Appeals

81 S.W.2d 896

258 Ky. 817

FIDELITY & COLUMBIA TRUST CO. et al. v. LOUISVILLE RY. CO.

Court of Appeals of Kentucky

April 23, 1935

Appeal from Circuit Court, Jefferson County, Common Pleas Branch Second Division.

Action under Declaratory Judgment Act by the Louisville Railway Company against the Fidelity & Columbia Trust Company trustee, etc., and others. From a judgment for plaintiff defendants appeal.

Affirmed.

Richard Priest Dietzman, Squire R. Ogden, and F. M. Sackett, all of Louisville, for appellants.

John E. Tarrant, of Louisville, for appellee.

REES Justice.

This action was brought under the Declaratory Judgment Act (Civ. Code Prac. §§ 639a--1 to 639a--12) by the Louisville Railway Company to test the validity of a proposed refinancing plan whereby it will pay at maturity, on July 1, 1935, $1,000,000 of its first mortgage bonds and, with the consent of the owners, extend the maturity of the remaining $2,000,000 of those bonds to January 1, 1940.

The railway company has outstanding three classes of bonds, referred to in the record as first mortgage bonds, second mortgage bonds, and general mortgage bonds. On July 1, 1890, it issued $6,000,000 of 5 per cent. bonds secured by a mortgage upon all of its property. This indebtedness matured July 1, 1930, when the railway company retired $3,000,000 of the bonds and secured an extension of the maturity of the remainder of first mortgage bonds to July 1, 1935, at an interest rate of 6 1/2 per cent. per annum, payable semiannually. There are now outstanding first mortgage bonds in the aggregate principal amount of $3,000,000. On March 1, 1900, the railway company issued $2,000,000 of second mortgage 4 1/2 per cent. bonds secured by a second mortgage of that date. All of these bonds which mature March 1, 1940, are now outstanding. On February 1, 1910, the railway company executed a mortgage to secure the payment of an issue of 5 per cent. forty-year bonds. The amount authorized was $20,000,000 and the amount of these bonds referred to in the record as general mortgage bonds now issued and outstanding is $7,170,000.

Under the proposed plan of refinancing, the railway company, on or before July 1, 1935, will retire and cancel $1,000,000 of the first mortgage bonds, and, with the consent of the owners, the maturity date of the remaining $2,000,000 of this issue of bonds will be extended to January 1, 1940, and the bonds will bear interest from July 1, 1935, at the rate of 5 1/4 per cent. per annum, payable semiannually. To secure the payment of the 1/4 per cent. additional interest obligation and other obligations assumed by the railway company, a supplemental mortgage has been executed.

The Fidelity & Columbia Trust Company is the trustee under the first mortgage and the Louisville Trust Company is the trustee under the second mortgage and the general mortgage. The railway company has entered into an agreement with the Louisville Trust Company whereby the trust company will, on July 1, 1935, purchase and deposit for extension first mortgage bonds sufficient in amount to cause $2,000,000 of such bonds to be deposited and extended provided that the amount necessary to be purchased by the trust company for such purposes does not exceed $500,000. The agreement further provides that the railway company will buy from the Louisville Trust Company the bonds purchased by the trust company under the agreement and pay for them by giving the trust company its notes bearing interest at the rate of 5 per cent. per annum payable semiannually in a principal sum equal to the face value of the bonds purchased and extended by the Louisville Trust Company. The bonds will be redelivered to the Louisville Trust Company as collateral security for the payment of the notes. The supplemental mortgage provides that when the debt to the Louisville Trust Company has been paid and the extended first mortgage bonds have been returned to the railway company, they shall be held in the treasury of the railway company as existing first mortgage bonds which may be sold from time to time to raise funds when it shall acquire additional rolling stock, equipment, or property necessary for its operation, and that such additional property shall be subject to the lien of the mortgages securing the extended first mortgage bonds. Holders of the various classes of bonds are parties to this action in representative capacities.

In the prayer of its petition the railway company asked for a declaration of the rights of the parties in respect to the following questions: (1) Will the extension of the maturity of $2,000,000 of its first mortgage bonds instead of payment thereof when due enable the owners of second mortgage bonds or general mortgage bonds to precipitate such bonds or enforce the lien to secure their payment? (2) Will the purchase by the railway company from the Louisville Trust Company of first mortgage bonds, after their maturity has been extended, constitute an extinguishment of those bonds? and (3) Is the railway company an existing corporation? The circuit court answered questions 1 and 2 in the negative and question 3 in the affirmative. The trustees under the three mortgages and the bondholders have appealed.

The first question has heretofore been before this court in the case of Commonwealth Life Insurance Company v. Louisville Railway Company, 234 Ky. 802, 29 S.W.2d 552, 556, and the judgment of the circuit court is in accordance with the decision in that case. The first mortgage bonds matured on July 1, 1930, and before the maturity date the railway company adopted a refinancing plan whereby it was proposed to retire $3,000,000 of the bonds at maturity, and, with the consent of the owners of the remaining bonds, to extend their maturity date to July 1, 1935. The question whether the failure to pay at maturity all the bonds secured by the first mortgage would constitute a default under the terms of either of the subsequent mortgages was squarely presented in the Commonwealth Life Insurance Company Case. After quoting certain provisions of the third mortgage relating to default, the court, in its opinion, said:

"An agreement between a mortgagee and mortgagor for an extension of time for the payment of the indebtedness secured by the mortgage based on a valid consideration is binding between the parties and as against third parties whose rights are subordinate to those of the principal creditor. American Securities Co. v. Goldsberry, 69 Fla. 104, 67 So. 862, 1 A. L. R. 15. If the party to whom payment is due and who possesses the right to waive payment agrees to a postponement of the date of payment, there is no default in any real sense of the word. Arnot v. Union Salt Co., 186 N.Y. 501, 79 N.E. 719; DeGroot v. McCotter, 19 N. J. Eq. 531.

"Holders of subsequent securities take them subject to the rights of the parties with superior equities and one of those rights recognized by the law is the undoubted privilege of postponing payment. The mere extension of the time of payment of prior debts in no way impairs the security of subsequently secured creditors, and the right of the parties holding prior liens to make extensions is one of the conditions to which a holder of subsequent securities is necessarily subject. First National Bank v. Citizens' State Bank, 11 Wyo. 32, 70 P. 726, 100 Am. St. Rep. 925. In the case of Willett v. Johnson, 84 Ky. 411, 1 S.W. 674, 8 Ky. Law Rep. 398, to which reference was made at the oral argument, it was held that a contract between a mortgagor and the mortgagee, extending the time of payment of mortgage debts, coupled with a compounding of interest, could not be enforced so as to prejudice the junior lienholders; but the prior lien lost none of its validity, except to the extent of the compound interest. The principle upon which that case is predicated is respected in the proposed plan by subordinating any lien for the additional interest allowed on the extended indebtedness to the lien of the junior mortgages. Since the amendment to the Civil Code of Practice (section

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