Simmons v. Taylor

• Citation: 38 F. 682
• Parties: SIMMONS v. TAYLOR et al.
• Decision Date: 15 May 1889
• Court: U.S. District Court — Southern District of Iowa

38 F. 682

SIMMONS v. TAYLOR et al.

United States Circuit Court, S.D. Iowa, Central Division.

May 15, 1889

Hubbard & Clark and Abbott Bros., for complainant.

Thos F. Withrow and Thos. S. Wright, for defendants.

Before BREWER, LOVE, and SHIRAS, J.J.

PER CURIAM.

Upon the rendition of the interlocutory decree in this cause the same was sent to the master for the purpose of ascertaining what number of the bonds described in the mortgage known as the 'Income and Equipment Mortgage' were held by parties entitled to prove up the same as valid claims under said mortgage, and also of ascertaining and stating the amount necessary to be paid in order to redeem the property from the lien of the first deeds of trust thereon represented by Frederick Taylor trustee. The master has returned an exhaustive report upon these matters, and counsel for the parties in interest having respectively excepted to portions of the report of the master, the case is before the court upon these exceptions.

Upon the issue of the amount of bonds entitled to be proved up as valid in the hands of the present holders several questions arise, and will be considered in their order. Fourteen hundred of the bonds are presented by Lawrence Turnure, who claims to be the owner thereof by purchase from the Lackawanna Iron & Coal Company. The master finds that these bonds were never issued on behalf of or for the benefit of the Burlington, Cedar Rapids & Minnesota Railway Company that when they passed into the hands of the Lackawanna Company they had not been signed by the trustee, and that the subsequent indorsement thereof did not impart validity thereto. The evidence fails to show that the present holder is an innocent purchaser for value, and there is no ground, therefore, for holding these bonds to be valid or enforceable.

The master further reports that there was a series of these bonds, 428 in number, delivered to Henry Clews & Co. under such circumstances that, as between Clews & Co. and the railway company, they are not enforceable, being without consideration. Of these bonds 81 are now presented for allowance by Henry Clews, and the master finds that they are entitled to recognition on the ground that the Burlington, Cedar Rapids & Northern Railway Company is not in a position to question the validity of these bonds; and this upon the theory that the present company is but a purchaser at the foreclosure sale, and is not interested in the question of the amount due upon the income mortgage, which stands as a second mortgage upon the property. In support of this view the case of Graham v. Railroad Co., 102 U.S. 148, is cited. In that cause Graham, having a judgment against the La Crosse & Milwaukee Railway Company, sought to set aside a conveyance made of certain realty by the corporation to some of its officers, on the ground that the transfer was for an inadequate sum, and made in fraud of the rights of stockholders and creditors of the company. The evidence showed that Graham was not a creditor of the company when the transfer was made, nor had he any title to or interest in the realty itself. The court held that he was not in a position to assail the transfer. He had no title in the realty. He was not a creditor when the transfer was made, and could not, therefore, claim that it had been made to defraud him. It appeared that the officers of the company to whom the property had been conveyed had paid its then fair value. The company had acquiesced in the conveyance, and was not then questioning it. Under these circumstances the court held that Graham, as a subsequent creditor, could not attack the previous conveyance. The difference between that case and the one at bar is marked. The present railway company derives its title from the sale had upon the foreclosure of the first mortgage. It not only has a title in the property in question, but the source thereof was in existence when the transaction with Clews & Co. took place. Moreover, this court has already held that, under the peculiar facts of this case, the present company must be held to have succeeded to the redemption right of the original mortgagor, and is entitled to perfect its title to the property by paying off the amount due upon the income and equipment mortgage. It has a direct interest in the question of the amount due upon the latter mortgage; and, having such interest, it is entitled to present and be heard upon all objections that can be fairly made to the validity of the bonds sought to be recovered upon, under the provisions of the income mortgage.

But, aside from these considerations, there is another and sufficient ground upon which the court may hear and determine the question of the validity or invalidity of the bonds sought to be recovered upon in this proceeding. The holders thereof are invoking the aid of a court of equity to grant them relief. On the ground that the holders of the bonds are bona fide creditors of the Burlington, Cedar Rapids & Minnesota Railroad Company, and that there is justly due them certain sums evidenced by the bonds held by them, the court is asked to grant a decree compelling the present company to come to an accounting, and either to pay what is due upon the second mortgage, or to submit to a redemption of the property; the effect of which will be a tearing up of the present system, and a separation of the main line and the branches thereof, to the manifest detriment of many parties whose interests were created in the belief that the ownership of the present company was absolute. To successfully invoke the aid of the court after the lapse of so many years, and when so many other interests have become attached to the property, the parties seeking the equitable aid of the court must have substantial merit in their cause, and must come before the court with clean hands. The complainants in the present cross-bill are asserting the right to redeem the property notwithstanding the sale had under the foreclose of the prior mortgages, on the ground that the income mortgage was, when such sale took place, a second lien on the property, and that the decree did not cut off the lien then existing, and the consequent right of redemption. If, as has been already held in the interlocutory decree, the right of redemption still exists, it is the right that was in existence when the decree foreclosing the prior mortgages was entered. Whatever bonds were then valid claims under the income and equipment mortgage had reserved to them the right of redemption; that is to say, being then claims enforceable under the income mortgage, the lien only to the amount protected them. That mortgage, however, was a lien only to the amount of the bonds then valid and enforceable thereunder; and, when the present company took the title of the property under the foreclosure sale, it was subject to a right of redemption in favor only of such bonds as were then, through the income mortgage, liens upon the property. For these reasons it must be held that the question of the validity of the bonds sought to be proved up as existing liens under the income mortgage is open to investigation in this proceeding. In determining the fact of the validity of the several bonds sought to be proved up, the well-established rule is applicable that, 'if fraud or illegality in the inception of negotiable paper is shown, an indorsee, before he can recover, must prove that he is an holder for value. The mere possession of the paper, under such circumstances, is not enough. ' Smith v. Sac Co., 11 Wall. 139; Stewart v. Lansing, 104 U.S. 505. A large portion of the bonds now presented were purchased by the present holders in the years 1881, 1884, 1885, and 1886.

It seems that the question had arisen whether the decree of October 30, 1875, and the sale had thereon, had cut off the lien of the income mortgage, and barred the right of redemption thereunder. An examination of the record was had and the conclusion was reached that the decree did not foreclose the income mortgage, but reserved for future adjudication the question of the rights and priorities of the holders of the securities covered by such mortgage. Acting upon this conclusion, inquiry was made for the purpose of finding the whereabouts of such bonds, and purchasing the same at as low rates as possible. Quite a number were bought from the then holders at figures ranging from 3 to 20 per cent. of the amount apparently due thereon. There can be no question made, under the evidence, of the fact that these purchases were made with the sole view to enforcing the rights supposed to be conferred by the income and equipment mortgage, and the lien created thereby. The Burlington, Cedar Rapids & Minnesota Railroad Company was then wholly insolvent, and had, to the knowledge of these parties, been out of the possession of the railroad for years. Nothing could be realized from that company. The only possibility of enforcing payment of the bonds was through the supposed lien of the income mortgage and the resulting equity of redemption. The parties purchasing these bonds bought the same, as they had a right to do, as a matter or speculation, and for the purpose of enforcing the rights created by the income mortgage. Under such circumstances, they are chargeable with knowledge of the provisions of the mortgage which they now rely upon as the foundation of their rights. They also knew what was disclosed upon the record of the foreclosure proceedings. By the terms of the mortgage it was provided that if the interest remained in default for six months after the demand of payment, the principal of the debt became due and demandable, and the cross-bill then upon the record, and filed by the trustee representing the bondholders, averred that the principal of the...