Long Island Loan & Trust Co. v. Columbus, C. & I.C. Ry. Co.

• Decision Date: 28 January 1895
• Docket Number: 8,867.
• Citation: 65 F. 455
• Parties: LONG ISLAND LOAN & TRUST CO. v. COLUMBUS, C.&I.C. RY. CO. et al.
• Court: United States Circuit Court, District of Indiana

65 F. 455

LONG ISLAND LOAN & TRUST CO. v. COLUMBUS, C.&I.C. RY. CO. et al.

No. 8,867.

United States Circuit Court, D. Indiana.

January 28, 1895

Kittredge Wilby & Simmons, for complainant.

Lawrence Maxwell, Watson, Burr & Livesay, and S. O. Pickens, for defendants.

BAKER District Judge.

On or about the 1st day of November, 1864, pursuant to a resolution of its board of directors, the Columbus & Indianapolis Central Railway Company made and authorized to be issued its certain series of bonds, numbered consecutively from 1 to 1,000, inclusive, for $1,000 each, payable on the 1st day of November, 1904, with 7 per cent. interest thereon, payable semiannually, evidenced by coupons annexed thereto. All of these bonds were duly signed by its president, and attested by its secretary, and sealed with its corporate seal. In the body of each bond was contained a provision in these words:

'This bond shall not become obligatory until it shall have been authenticated by a certificate annexed to it, duly signed by the trustee.'

Each bond contains on its face, immediately below the signatures of the president and secretary, the following certificate:

'I hereby certify that this bond is one of the series of bonds described in and secured by the deed of trust or mortgage above mentioned.

'(Signed)

A. Parkhurst, Trustee.'

At the same time the railway company executed a trust deed or mortgage to secure the bonds to Archibald Parkhurst, trustee, which was duly recorded in each county in the states of Ohio and Indiana into or through which the railway ran. On the 11th day of September, 1867, the Columbus & Indianapolis Central Railway Company was consolidated with other railroads, and became the Columbus & Indiana Central Railway Company. On the 1st of February, 1868, the Columbus & Indiana Central Railway Company was consolidated with other railroads, and became the Columbus, Chicago & Indiana Central Railway Company. The Pittsburgh, Cincinnati, Chicago & St. Louis Railway Company, one of the respondents, has become, by proper conveyances, possessed, by lease for a long term of years, of all the property, rights, and franchises of the Columbus, Chicago & Indiana Central Railway Company during such term. Benjamin E. Smith was the president of the Columbus & Indianapolis Central Railway Company from 1864 until, by consolidation, it became the Columbus & Indiana Central Railway Company, of which last-named company he became and remained president until by consolidation it became the Columbus, Chicago & Indiana Central Railway Company, and he became and remained the president of the last-named company until 1883. After the bonds had been completed, they were taken, shortly after their date, by Smith, president, and Moodie, secretary, of the company, to Philadelphia, and thence to New York, where they remained in the possession of Smith and Parkhurst. Smith and Parkhurst were authorized to sell these bonds, or to exchange them for bonds of a prior issue. Prior to 1870 (how long Mr. Parkhurst cannot remember) all the bonds not previously sold or exchanged went into the exclusive possession of Smith. In November or December, 1875, Smith borrowed for his own use, of a firm of brokers in Philadelphia, a considerable sum of money, executing his own notes therefor, and putting up 99 of these bonds as collateral security for his notes. Among the bonds so pledged were the 36 now held by the complainant. These bonds, it appears, had never been issued until so pledged by Smith. The complainant purchased the bonds in controversy in the open market for full value, before maturity, and he is an innocent purchaser for value, unless the fact that he knew that default had been made in the payment of the interest coupons falling due May 1, 1875, and November 1, 1875, impairs his right to be so regarded. These bonds, completed as perfect obligations, with the qualities of negotiable paper, payable to bearer, were at all times in the possession of Smith, Parkhurst, or Moodie, who had authority from the company to issue them when sold or exchanged for the use of the company. The bonds in question were actually issued in 1875, by Smith, for his own use, to the Philadelphia firm of brokers, and came by sale in the open market, in due course of business, into the complainant's hands.

Counsel for the respondents state the question for decision thus:

'When a party executes a negotiable instrument, complete in form, and retains it with the intention of future use and delivery, but before such use or delivery, and without any present intention to deliver it for any purpose, it is gotten from his possession by force, crime, or fraud, and passes into the hands of an innocent purchaser before due, is the maker estopped as against the innocent purchaser from denying its validity?'

The question thus stated is elaborately argued, with the citation of many authorities, to show that the bona fide holder of such negotiable paper would not be entitled to protection. It is unnecessary to consider the question thus stated, because it does not state the question for decision with accuracy. The true question for decision is this: When a railroad company has made its negotiable bonds, perfect in form, payable to bearer, and has caused them to be certified by the trustee, to evidence that they have become obligatory, and has placed them in the possession of its president, with authority to sell or exchange them for the benefit of the company alone, can it defeat the title of an innocent purchaser for value and before maturity by averring and proving that its president has fraudulently pledged or sold such negotiable bonds for his own private use, without its knowledge or consent, after such railroad company had become consolidated with other railroad companies? And does the fact that such negotiable bonds have two unpaid interest coupons past due annexed to each bond impair the transferee's right to be deemed a bona fide purchaser?

A purchaser of negotiable railroad bonds in good faith and for their full market value may be a bona fide holder, although some of the interest coupons attached thereto are past due and unpaid at the time of purchase. Morgan v. U.S., 113 U.S. 476, 5 Sup.Ct. 588; Thompson v. Perrine, 106 U.S. 589, 1 Sup.Ct. 564, 568; Railroad Co. v. Sprague, 103 U.S. 756; Cromwell v. County of Sac, 96 U.S. 51; Bank v. Kirby, 108 Mass. 497; McLane v. Railroad Co., 66 Cal. 606, 6 P. 748; State v. Cobb, 64 Ala. 127; Boss v. Hewitt, 15 Wis. 260.

In Bank v. Kirby, 108 Mass. 497, 501, the court say:

'We are referred to no case in which it has been held that failure to pay interest, standing alone, is to be regarded sufficient in law to throw such discredit upon the principal security upon which it is due as to subject the holder to the full extent of the security to antecedent equities.'

'To hold otherwise,' the supreme court said in Cromwell v. County of Sac, 96 U.S. 51, 58, 'would throw discredit upon a large class of securities issued by municipal and private corporations, having years to run, with interest payable annually or semiannually.'

The doctrine was reaffirmed in Railroad Co. v. Sprague, 103 U.S. 756, and in Morgan v. U.S., 112 U.S. 476, 5 Sup.Ct. 588.

But, where it appears that the interest on the bond is overdue and unpaid, this is held in some cases, and I think erroneously, to be a circumstance of suspicion sufficient to put a purchaser on his guard, and to impair his title. First Nat. Bank of St. Paul v. Commissioners of Scott Co., 14 Minn. 77 (Gil. 59); Parsons v. Jackson, 99 U.S. 434; Morton v. Railroad Co., 79 Ala. 590. The better doctrine, however, seems to be that suspicion of defect of title, or the knowledge of circumstances which would excite suspicion in the mind of a prudent man, or gross negligence on the part of the buyer, will not affect his title. Nothing short of bad faith on the part of the purchaser of negotiable bonds passing by delivery, and which are fair upon their face, will destroy their validity; and the burden of proof lies upon the person who assails the title of the party in possession. Murray v. Lardner, 2 Wall. 110; Railroad Co. v. Lewis, 33 Pa.St. 33; Railroad Co. v. Cowdrey, 11 Wall. 459; Spence v. Railroad Co., 79 Ala. 576; Goodman v. Simmonds, 20 How. 343.

The fact that...