Powell v. Maryland Trust Co., 4865.

Decision Date06 January 1942
Docket NumberNo. 4865.,4865.
Citation125 F.2d 260
PartiesPOWELL et al. v. MARYLAND TRUST CO.
CourtU.S. Court of Appeals — Fourth Circuit

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W. R. C. Cocke, of Norfolk, Va. (Harold J. Gallagher, of New York City, and Geo. V. Credle, Jr., of Norfolk, Va., on the brief), for receivers of Seaboard Air Line Ry. Co.

Irwin L. Tappen, of New York City (Baird, White & Lanning, of Norfolk, Va., Humes, Buck, Smith & Stowell and Albridge C. Smith, all of New York City, and George M. Lanning, of Norfolk, Va., on the brief), for appellants and cross-appellees New York Trust Co., and another.

William A. Graham and Carlyle Barton, both of Baltimore, Md. (Theodore Garnett, of Norfolk, Va., and Edward Duffy, of Baltimore, Md., on the brief), for appellee and cross-appellant.

Before PARKER, SOPER, and DOBIE, Circuit Judges.

PARKER, Circuit Judge.

These are appeals in a three-sided controversy which has arisen in the receivership of the Seaboard Air Line Railway Company, with relation to a stock dividend and certain cash dividends on stock owned by the Seaboard in the Richmond-Washington Company and pledged with the predecessor of the Maryland Trust Company, as trustee. This stock, 4,450 shares in amount, was pledged in 1901 by the corporation to whose rights the Seaboard succeeded with the Continental Trust Company, predecessor of the Maryland Trust Company, as trustee under a first mortgage executed to secure a bond issue. On October 18, 1930 a 50% stock dividend was declared on this stock; and on October 31, 1930, certificates for 2,225 shares were delivered to the Seaboard as the stock dividend on its shares. On December 23, 1930, receivers were appointed for the Seaboard, and the certificates representing the stock dividend passed into their possession. The receivers collected cash dividends on the original shares of stock up to January 4, 1932, and on the stock dividend shares up to the time of the decree of the court below.

The Maryland Trust Company, the trustee under the first mortgage, claims both the stock dividend and the total of the cash dividends by virtue of the rights vested in it by the pledge of the original shares of stock under the first mortgage. The receivers deny the right of the first mortgage trustee to either the stock dividend or the cash dividends, claim a lien on both under the order appointing receivers and also under the orders authorizing issuance of receivers' certificates and assert that any rights of the first mortgage trustee have been lost by waiver and estoppel. The New York Trust Company joins the receivers in denying the right of the first mortgage trustee to the shares of stock represented by the stock dividend and also to the cash dividends paid thereon, but claims for itself these shares of stock and cash dividends under the terms of a refunding mortgage executed by the Seaboard.

The controversy was referred by the court below to the late J. E. Heath, as special master, who in an able and comprehensive report found for the first mortgage trustee both as to the stock dividend and the total of the cash dividends claimed. This report was affirmed by the judge in all respects, except as to a cash dividend of $20,025 paid December 31, 1930, which he held to belong to the receivers. From this decree all parties have appealed; and in the view which we take of the case four questions are presented for our determination, viz.: (1) Did the stock dividend on the Richmond-Washington stock belong to the first mortgage trustee? (2) Was the first mortgage trustee entitled to the cash dividends mentioned, including the $20,025 paid December 31, 1930? (3) Were the receivers vested with a lien upon either the stock dividend or the cash dividends by the order appointing receivers or the orders authorizing issuance of receivers' certificates? (4) Have the rights of the first mortgage trustee with respect either to the stock or the cash dividends been lost by waiver or estoppel? We think that the first two of these questions should be answered in the affirmative and the last two in the negative. We shall consider them separately and in the order named. The answers to the first two questions render it unnecessary to consider a number of subsidiary questions arising in connection with the contentions of the New York Trust Company.

1. The Stock Dividend.

The Seaboard Air Line was one of six railroads which owned in equal shares the stock of the Richmond-Washington Company, a holding company which owned the Richmond Fredericksburg & Potomac Railroad, over which the trains of the Seaboard are operated between Richmond and Washington. It originally held 4,450 shares of this Richmond-Washington stock, which in the year 1901 it pledged with the Continental Trust Company, predecessor of the Maryland Trust Company, as trustee under a first mortgage to secure a bond issue. The stock is not expressly mentioned in the mortgage, which provides, however, for the pledging of stocks, bonds and other property to the trustee to be held subject to the terms of the mortgage. Section 1 of article III of the mortgage contains the following provision: "Unless (a) the `Railroad Company' shall be in default in the payment of some interest upon any of the bonds secured by this indenture, or on any of said outstanding divisional bonds (other than bonds held by the `Trustee' hereunder), and such default shall have continued for a period of six months; or unless (b) the `Railroad Company' shall be in default in the due and punctual payment of the principal of any bond secured hereby, or of any of said outstanding divisional bonds hereinbefore mentioned; or unless (c) the `Railroad Company' shall be in default in the payment of any tax, assessment or other governmental charge lawfully imposed or levied upon any part of the property and premises hereby mortgaged, or the income and profits thereof, and such default shall have continued for a period of six months, after written notice thereof from the `Trustee,' or from the holders of five per cent in amount of the bonds secured hereby; or unless (d) the `Railroad Company' shall be in default in the due performance and observance of any covenant or condition of this indenture, and such default shall have continued beyond the period of grace, if any, herein provided for, in respect of such default, and the `Trustee' shall have entered, or shall have elected to enter, into possession under the power of entry hereinafter conferred; or unless (e) the `Railroad Company' voluntarily shall have surrendered to the `Trustee' possession of the mortgaged premises as hereinafter authorized — the `Trustee' (except with the assent of the `Railroad Company') shall not collect or be entitled to collect the interest of any of the bonds or claims or indebtedness now or hereafter pledged with or assigned to the `Trustee' under this indenture, and the `Railroad Company' shall be entitled to receive all interest paid or dividends declared in respect of any bonds or stocks transferred to or pledged with the `Trustee' pursuant to any of the provisions of this indenture, * * *."

On September 18, 1930 the Board of Directors of the Richmond-Washington Company voted a stock dividend of 50%, payable in stock October 31, 1930; and on the last named date certificates evidencing 2,225 shares of the capital stock of the company were delivered to the Seaboard as stock dividend on the 4,450 shares which it held and which it had pledged with the first mortgage trustee. Receivers were appointed for the Seaboard on December 23, 1930, and these certificates, of which the first mortgage trustee had no notice or knowledge until some time later, passed into their possession. The evidence shows that the earnings of the Richmond-Washington Company which justified the declaration of the stock dividend accrued subsequent to the pledge of the stock with the first mortgage trustee. It shows, also, what is to be expected in such cases, that immediately following the stock dividend the total book value of the original shares plus the shares issued as stock dividend was precisely the same as the book value of the original shares immediately prior to the dividend. The book value of each of the shares of stock immediately prior to the stock dividend was $263.75, immediately after the dividend, $175.83.

The mortgage was delivered to the first mortgage trustee and accepted by it in Baltimore, Md., and the shares of stock which were pledged were delivered to it there; and there is no serious question but that the law of Maryland is the law properly applicable in determining the rights of the parties with respect to the stock dividend.

In the absence of the provision of the mortgage quoted above, there could be no question but that the shares of stock issued as stock dividend would go to the first mortgage trustee, as pledgee of the original shares of stock, to be held by it under the terms of the pledge. Gemmell v. Davis, 75 Md. 543, 23 A. 1032, 32 Am. St. Rep. 412; Railroad Credit Corp. v. Hawkins, 4 Cir., 80 F.2d 818; Jones on Collateral Securities, 3d Ed., sec. 298. The question involved, therefore, is the interpretation of the word "dividends" as contained in the provision under which "dividends" were reserved to the Seaboard, i.e. was the reservation to the Seaboard of the right to "dividends" until default under the mortgage intended to reserve to it the right to stock dividends? We think the answer to this must be in the negative, both because a contrary interpretation would be unreasonable in the light of surrounding circumstances, and because, even in the absence of such circumstances, a stock dividend is not ordinarily included in the term "dividends" as contained in a contract relating to dividends, in the absence of a clear indication that it was intended that they should be so included.

It must be remembered that the Richmond-Washington stock pledged by the Seaboard with...

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