Fidelity Etc. Co. v. West. Penn. Etc. R. Co.

• Decision Date: 05 January 1891
• Docket Number: 126
• Citation: 21 A. 21,138 Pa. 494
• Parties: FIDELITY ETC. CO. v. WEST. PENN. ETC. R. CO. ET AL
• Court: Pennsylvania Supreme Court

21 A. 21

138 Pa. 494

FIDELITY ETC. CO. v. WEST. PENN. ETC. R. CO. ET AL

No. 126

Supreme Court of Pennsylvania

January 5, 1891

Argued October 14, 1890

APPEAL BY FIRST N. BANK ET AL. FROM THE COURT OF COMMON PLEAS OF MERCER COUNTY.

No. 126 October Term 1890, 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 filed a bill in equity against the West Penn. & Shenango Connecting Railroad Company and W. W. Reed to enforce a mortgage upon the railroad, franchises, etc., of the defendant company, given to the plaintiff as trustee for the holders of certain bonds issued by said railroad company to secure the payment of said bonds.

The cause was so proceeded in that on July 14, 1888, the court entered a decree adjudging the mortgage to be a first lien upon the property embraced therein, and directing that in default of the payment by the railroad company to said trustee, within thirty days from the date of the decree, of the amount of the mortgage debt, to wit $400,000, with interest from January 1, 1885, the said railroad, franchises, etc., be exposed to sale by public outcry and sold clear of encumbrances, and the proceeds of such sale distributed as should be afterwards directed by the court. W. W. Reed, one of the defendants, who claimed to have a contractor's lien superior to said mortgage, under the resolution of January 21, 1843, P.L. 367, thereupon appealed from said decree to the Supreme Court. On October 29, 1888, the decree was affirmed and the appeal dismissed: Reed's App., 122 Pa. 565.

On November 22, 1888, the defendant company having failed to make payment of any part of the sum mentioned in the decree of July 14, 1888, the court below made a supplemental decree directing the mortgaged property to be sold, prescribing the terms of sale, and appointing the plaintiff company commissioner to make such sale. A sale of said property to Samuel B. Dick and others, a committee of the bondholders, for $125,000, having been made and confirmed, the court, on March 4, 1889, appointed Mr. Q. A. Gordon master, to settle and adjust the account of the Fidelity company, with respect to the sale so made by it and the proceeds thereof.

A number of claimants of the proceeds of the sale appeared before the master, who found the facts relating to the respective claims, so made, in substance as follows:

1. The holders of the bonds, to secure which the mortgage in suit was made, claimed priority of payment over all other claimants. The mortgage was dated July 12, 1882, and recorded on July 18, 1882. The bonds amounted, as found by the decree of sale, to $400,000, with interest from January 1, 1885. The capital stock of the railroad company was $500,000. This stock was all subscribed, but only $12,000 of it was paid up. The mortgage was made in the sum of $400,000 and bonds issued to that amount. These bonds were all sold in the market at Philadelphia to bona fide purchasers, at their par value, soon after they were issued.

2. The Pennsylvania Railroad Company, as the holder of certain interest coupons to the amount of $12,930, cut from said railroad bonds, claimed to participate in the distribution under the mortgage. On February 3, 1888, prior to the decree of sale, the court, by consent of all parties interested, made an order placing this claimant upon the record as a party defendant in the cause, but providing that the master before whom the case was then pending might report upon the testimony then before him, without prejudice to the right of the Pennsylvania company to come in and establish its claim upon distribution of the proceeds of sale.

Of the coupons held by said claimant, $12,000 were those which matured on January 1, 1884, and the remainder, $930, were a part of those which matured July 1, 1884. In form, these coupons were as follows:

"WARRANT FOR THIRTY DOLLARS.

"The West. Penn. & Shenango Connecting Railroad Company interest warrant on bond, for $30; payable at the office of the Fidelity Insurance, Trust and Safe-Deposit Company, Philadelphia, Pa., on the first day of January, 1884.

"I. D. STINSON, Sec'y & Treas."

"No. $30.

The coupons falling due January 1, 1884, amounting to $12,000, were presented at the office of the Fidelity company, at Philadelphia, by the holders of the bonds, and were duly paid in the regular course of business, by the said Fidelity company. The money with which said coupons were paid, was not the money of the West. Penn. & Shenango Connecting Railroad Co., but was furnished by the Pennsylvania Railroad company to the Fidelity company, at the request of the West. Penn. & Shenango Connecting Railroad Company, for the purpose of purchasing said coupons. When these coupons were paid by the Fidelity company, to the bondholders, the latter had no notice that said coupons were being purchased for the Pennsvlvania. Railroad Company. The coupons held by the Pennsylvania Railroad Company, which matured July 1, 1884, amounting to $930, were paid by the Fidelity company, between the dates of July 1, 1884, and July 21, 1884.

3. The holders of certain notes upon which the West. Penn. & Shenango Connecting Railroad Company was liable as maker or indorser, claimed payment thereof out of the fund, adversely to the mortgage, and attacked the validity of the latter, as made in violation of law. These claims were as follows: First N. Bank of Conneautville, $5,000, with interest from March 13, 1884; Second N. Bank of Erie, $11,073.17 with interest from September 11, 1886; Erie County Savings Bank, $5,000, with interest from March 17, 1884; First N. Bank of Greenville, $3,000, with interest from October 8, 1887; Merchants' N. Bank of Meadville, $5,000, with interest from March 30, 1884, and $3,000, with interest from April 30, 1884. Before the sale was made in this case, viz.: On December 12, 1888, the First N. Bank of Greenville, the Second N. Bank of Erie, the First N. Bank of Conneautville and the Erie County Savings Bank, filed bills in equity against the Fidelity company, trustee, asking for injunctions to restrain the sale and also for leave to intervene in this suit and defend against the mortgage. Upon these bills the court made an order refusing the injunctions, but without prejudice to the rights of said banks, on the distribution of the proceeds of the sale.

4. The estate of Charles Crocker, deceased, holder of a certain judgment in the Court of Common Pleas of Butler county, Pennsylvania, against the West. Penn. & Shenango Connecting Railroad Company, for $67,079.79, with interest from April 22, 1884, also attacked the validity of the mortgage. This judgment was obtained April 22, 1884, by W. W. Reed, against the said railroad company, on two certificates of indebtedness given by said railroad company to said Reed, one for $38,164.52 and the other for $28,000. It was stated in the latter certificate that the railroad company had given Reed notes to the amount of it, and that payment of the notes should be a payment of this certificate. These notes have not been paid. The notes presented for allowance in this distribution by the several banks hereinbefore named, were those same notes or renewals thereof. Reed was still liable on some of these notes, at least as indorser or otherwise. Out of the proceeds of one of the original notes, when negotiated, the railroad company received $2,136.67. The judgment presented was assigned to Charles Crocker by Reed, on December 22, 1885.

The master upon the facts so found, reported his conclusions of law, in substance as follows:

1. The mortgage in question was made in violation of law, or, more properly speaking, without authority of law. The provisions of § 7, art. XVI. of the constitution, prohibiting fictitious increase of corporate indebtedness, has no application, as the mortgage bonds were all sold at par for money received. Nor does the act of March 13, 1873, P.L. 45, apply, as the limitations therein contained relate to such mortgages only as have no other authority for their creation than that act; and the mortgage in question, having been given, as appears upon its face, to raise money for the construction and equipment of the mortgagor's railroad, was authorized by § 8, act of April 4, 1868, P.L. 62, the authority of the company to mortgage being limited, however, to double the amount of capital actually paid in at the time of the mortgage; and this mortgage, being given for an amount in excess thereof, was unauthorized and void, though the bonds might be valid as unsecured claims; citing: Jones on Railroad Sec., §§ 1, 3, 312, 313, 641; Pittsb. etc. R. Co. v. Railroad Co., 81* Pa. 104; Phil. etc. R. Co. v. Stichter, 11 W.N. 325; Phila. etc. R. Co. v. Lewis, 33 Pa. 33; Louisiana v. Wood, 102 U.S. 294; Rainsburg Bor. v. Fyan, 127 Pa. 74; Railroad Co. v. Howard, 7 Wall. 392.

2. The railroad company itself cannot set up the defence of ultra vires against this mortgage: Wright v. Pipe Line Co., 101 Pa. 204; Oil Creek etc. R. Co. v. Transportation Co., 83 Pa. 160; Railway Co. v. McCarthy, 96 U.S. 258; Wood's Railway Law, § 172; Jones v. Guaranty Co., 101 U.S. 622; Morawetz on Priv. Corp., §§ 610-615, 689; Thomas v. Railroad Co., 101 U.S. 71; Jones on Railroad Sec., § 23; Bissell v. Railroad Co., 22 N.Y. 258; Monument N. Bank v. Globe Works, 101 Mass. 57; Ossipee Mfg. Co. v. Canney, 54 N.H. 295; Galveston R. Co. v. Cowdrey, 11 Wall. 459. Millerstown Bor. v. Frederick, 114 Pa. 435, is easily distinguishable, as the municipal bonds involved in that case were issued in the attempt to exercise a power expressly prohibited by the constitution and by statute.

3. As the railroad company itself cannot question the validity of its mortgage, neither can its...