Reynolds v. Manhattan Trust Co.

Decision Date15 November 1897
Docket Number667.
Citation83 F. 593
PartiesREYNOLDS et al. v. MANHATTAN TRUST CO. et al.
CourtU.S. Court of Appeals — Eighth Circuit

F. M Hall and G. M. Lambertson (J. W. Deweese on the brief), for appellants.

John L Webster (Craig L. Wright on the brief), for appellees.

Before SANBORN and THAYER, Circuit Judges.

SANBORN Circuit Judge.

This case presents a contest for priority between a mortgage and mechanics' liens upon a railroad. The mortgage was made on July 1, 1889, and was recorded in November of that year but no bonds were issued under it until April 10, 1890. The mechanics' liens were based on two construction contracts, one of which was made on April 18, 1889, and work under it was completed on October 1, 1889; while the other was made on December 14, 1889, work under it was commenced at about that time, and was continued until about June 27, 1890 when it was completed. The appellee the Nebraska & Western Railway Company was the mortgagor, and the appellee the Manhattan Trust Company was the trustee to whom the railway company gave this mortgage to secure bonds to the amount of $2,583,400 which were to be issued under it. The appellants are the members of a partnership styled E. P. Reynolds & Co., which built the railroad covered by the mortgage under the two contracts which have been mentioned. On December 18, 1890, the trust company exhibited its bill for the foreclosure of the mortgage. On June 30, 1891, a decree of foreclosure was rendered. A sale was made under this decree, which was confirmed on October 30, 1891. Reynolds & Co. had not been parties to this suit, and on November 2, 1891, they filed a cross bill in it to establish mechanics' liens for $37,400, which they claimed to be due upon their first construction contract, and for $13,600, which they claimed to be due upon their second construction contract. They sought by this cross bill to charge the moneys in the hands of the court which were the proceeds of the foreclosure sale with a first lien in their favor. Their claim was contested by the trust company and the railway company, by answers which they filed to the cross bill; and bonds were given to secure the payment of the amounts of these liens in case they should be adjudged to be superior to that of the mortgage. The court dismissed the claim for the lien for the balance due under the first contract upon the face of the pleadings, and referred the questions of fact and law which arose under the claim for the balance under the second contract to Mr. William A. Redick, who reported the facts in detail, and found that the appellants had a lien upon the proceeds of the sale superior in equity to that of the bondholders under the mortgage. The trust company filed exceptions to this report, which were sustained by the circuit court, and a decree was entered which dismissed the cross bill. The appeal challenges this decree.

The facts out of which this controversy arises are these: The mortgage by its terms, covered the railroad, the franchises, and all the after-acquired property of the mortgagor, but the railroad was constructed by Reynolds & Co. under their contracts after the mortgage was made and recorded. On March 15, 1889, the railway company made a contract with the Wyoming Pacific Improvement Company for the construction of its railroad. The substance of that agreement was that the improvement company would construct the railroad, and the railway company would pay for the construction $20,000 in cash and $20,000 in its first mortgage bonds for every mile of railroad that the improvement company built. On April 18, 1889, Reynolds & Co. made a contract with the improvement company, to the effect that they would build about 80 miles of this railroad, and that the improvement company would pay them therefor in cash, on monthly estimates of the engineer. They finished the performance of this contract on October 1, 1889. Their final estimate was settled by crediting them with $37,400 upon the amount which they owed to the improvement company upon a subscription which they had made for $68,000 of its stock, and by paying them a balance of about $5,000 in cash. Thereupon, on October 8, 1889, they gave to the improvement company a receipt in full for their claim against it under this first contract. The subscription which has been mentioned was made by Reynolds & Co. on April 20, 1889. By the terms of the subscription contract, Reynolds & Co. agreed to pay to the Manhattan Trust Company, for the use of the improvement company, $68,000 in certain installments; and the improvement company agreed that, when these payments were completed, it would deliver to them first mortgage bonds of the railway company to the amount of $34,000 on or before April 20, 1891, or as soon thereafter as issued, and negotiable certificates for stock of the improvement company to the amount of $37,400. They had paid several installments upon this subscription contract in cash, and, after the credit of the $37,400 which they had earned by the construction of the 80 miles of railroad under the first contract, they still owed the improvement company on the subscription contract $13,600 on December 14, 1889. On that day they made a second contract with the improvement company for the construction of an additional 46 miles of the railroad, and immediately entered upon its performance. This contract contained an agreement of the improvement company to pay for the construction in cash on monthly estimates, and a promise that the $13,600 owing on the subscription contract should not be declared in default, until the completion of, and the final settlement under, the construction contract. When this second construction contract was made, the mortgage had been made and recorded, but no bonds had been issued under it. On February 1, 1890, while Reynolds & Co. were engaged in the performance of this contract, the Manhattan Trust Company and five other parties agreed to loan to the improvement company, and to pay over to the trust company, $1,050,000 for the purpose of purchasing the right of way and paying for the construction of the railroad which Reynolds & Co. were building. This promise was made on the express condition that the money loaned should be collected from the lenders and disbursed by the trust company for that purpose, and that all the bonds issued or to be issued by the railway company should be pledged with the trust company to secure the repayment of the money so loaned. On the same day, and as a part of the same transaction, the railway company, the improvement company, and the trust company made a written agreement, by which all the bonds to be issued under the mortgage were pledged with the trust company to secure the repayment of the money to be advanced under the agreement for the loan; and by this agreement the trust company was authorized to sell these bonds at public or private sale in case of a default by the improvement company in the repayment of the loan when due. Between April 9, 1890, and August 31, 1890, $1,050,000 was loaned to the improvement company under these agreements, and $450,000 more, and all the bonds, except bonds to the amount of $9,980, were issued and delivered to the trust company as collateral security for these loans. The bonds to the amount of $9,98 were issued on September 18, 1890, and delivered to the trust company for the same purpose, and no additional moneys were advanced by the lenders on account of this issue. In December, 1890, the improvement company procured another loan of $270,000 through the trust company, for which it pledged some of these railway bonds to the amount of $675,000, and it used the proceeds of this loan to repay a part of the first loan. The improvement company failed to pay these loans when they fell due, and the bonds were sold under the pledges in May and June, 1891, for 10 and 15 per cent. of their par value. A large portion, and perhaps all of these bonds, were purchased for the pledgees. If any of them were purchased for any other parties, the record does not disclose for whom.

When Reynolds & Co. completed their second contract, in June 1890, their final estimate was $66,173.97. They consented that the $13,600 which they still owed to the improvement company, by the terms of their subscription contract, should be charged against this estimate, accepted the balance of the estimate in cash, and gave to the improvement company a receipt in full for all claims arising under their second construction contract. When this fact came to the attention of the trust company, on July 7, 1890, that company credited the $13,600 on the subscription certificate of Reynolds & Co., and issued to them two certificates,-- one to the effect that they were entitled to receive on May 1, 1891, or as soon thereafter as they should be issued, mortgage bonds of the railway company to the amount of $34,000; and another that they were entitled to stock of the improvement company to the amount of $37,400. These certificates were subsequently assigned by J. H. Reynolds, one of the members of the firm of Reynolds & Co., for the firm, and were thereafter subdivided into several certificates of like character; but none of the bonds of the railway company and none of the stock of the improvement company has ever been tendered or delivered to Reynolds & Co., or to any member of the firm, on account of their subscription and its payment. On August 29, 1891, Reynolds & Co. filed, in the proper offices in the counties through which the railroad extended, accounts and affidavits of the materials they had furnished and the labor they had performed under these two construction contracts, and claimed liens upon the railroad for the balances of $37,400 and $13,600 which they claimed to be due...

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    ...to the security provided by law, unless the rights of third persons intervene before he gives the required notice." In Reynolds v. Manhattan Trust Co., 83 F. 593, the that the contractor had performed the labor and received no compensation therefor renders that case parallel to the one at b......
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    ... ... perfected within the time limited by statute (Reynolds v ... Manhattan Trust Co., 83 F. 593, 27 C.C.A. 620)." ... In this ... jurisdiction it ... ...
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