United States Fidelity & Guaranty Co. v. U.S. & Mexican Trust Co.

• Decision Date: 16 June 1916
• Docket Number: 4482.
• Citation: 234 F. 238
• Parties: UNITED STATES FIDELITY & GUARANTY CO. v. UNITED STATES & MEXICAN TRUST CO. et al.
• Court: U.S. Court of Appeals — Eighth Circuit

234 F. 238

UNITED STATES FIDELITY & GUARANTY CO. v. UNITED STATES & MEXICAN TRUST CO. et al.

No. 4482.

United States Court of Appeals, Eighth Circuit.

June 16, 1916

Syllabus by the Court.

Sureties on supersedeas bonds given at the request of the mortgagor to stay the collection of judgments on unsecured claims, who, by affirmance of the judgments, are compelled to pay, or become liable to pay, the claims, do not thereby secure any preference in equity over bondholders secured by a prior recorded mortgage on the property and income of the mortgagor.

The fact that liabilities or guaranties incurred, work done, or money or materials furnished at the request of the mortgagor preserve the mortgaged property, enhance the security of the mortgagees and keep the property operating, is no ground for displacing the prior lien of the mortgagees, because the record of the mortgage is full notice to all that such acts will ordinarily and naturally have that effect and will subject the enhanced value to the superior lien of the recorded mortgage.

Jean Madalene, of Wichita, Kan. (S. B. Amidon, of Wichita, Kan on the brief), for appellant.

Samuel W. Moore, of Kansas City, Mo. (Samuel Untermyer, of New York City, on the brief), for appellees.

Before SANBORN and SMITH, Circuit Judges, and REED, District Judge.

SANBORN Circuit Judge.

This is an appeal by the United States Fidelity & Guaranty Company surety on a supersedeas bond of the Kansas City, Mexico &amp Orient Railroad Company, from a decree of the District Court allowing its claim in proceedings to foreclose the prior mortgage on the property of the Railroad Company as a general demand, but denying it an equitable preference over the holders of the bonds secured by the mortgage. The mortgage securing the bonds covered the property, the after-acquired property, and the income of the Railroad Company. It was made and recorded about February 1, 1901. On December 6, 1912, in the suit to foreclose the mortgage, a prior receivership of the property of the Railroad Company was extended over the foreclosure suit. A decree of foreclosure was rendered on February 2, 1914, in which the court adjudged that the mortgage was a first lien upon the property and income of the Railroad Company to secure the payment of bonds issued thereunder to the amount of $24,538,000, and that the property be sold, and it was subsequently sold under the decree for $6,001,000 in this foreclosure suit. The Fidelity Company intervened, and prayed that the court would order its claim to be paid out of the proceeds of the sale of the property in preference to the claims of the bondholders secured by the mortgage.

Its claim arose in this way: One Madison, on June 19, 1911, recovered a judgment in one of the district courts of Kansas against the Railway Company, on account of a personal injury caused by the negligence of servants of the company, for $9,000 and costs, from which the Railway Company appealed. At the request of the Railway Company the Fidelity Company made and filed a supersedeas bond to stay the collection of the judgment, the judgment was subsequently affirmed, and the Fidelity Company paid the penalty of the bond, $10,247.05.

The first reason presented to this court for the reversal of the decree below is that the court failed to investigate, fix, and enforce the liability of the stockholders of the Railway Company to pay for their stock and to apply the payments that should thus be collected to a liquidation of the mortgage bonds. But the Fidelity Company presents this ground for relief for the first time in this court without pleading it in its intervening petition, or introducing any evidence below to sustain it, and without giving the trustee of the bondholders any notice of such a claim, or any opportunity to challenge it, or to produce evidence to defeat it in the court below. It is clearly too late to urge this contention for the first time now, and the consideration or maintenance of it by this court under these circumstances would be unjust and inequitable.

The second argument is that the judgment in Madison's personal injury suit was rendered on June 19, 1911; that at that time and when the supersedeas bond was given the Railway Company was in default in the payment of its interest on its bonds, and was insolvent; that the Fidelity Company had no knowledge of these facts; that if it had known them it would not have signed the bond, but that the holders of the bonds and coupons neither foreclosed their mortgage nor gave any notice of the financial conditions of the Railway Company to the Fidelity Company before it made its bond; and that in view of these facts they are estopped from maintaining the superior lien of their prior mortgage. The proof, however, leaves no doubt that there had been no default in the payment of the interest on the bonds when the supersedeas bond was given. All the coupons which were due, and which had been presented at their respective places of payment, had been paid. A small percentage of the bondholders had not yet presented their overdue coupons, and those were still unpaid. Nor would the facts, if they had existed, that the Railway Company was insolvent, that the bondholders knew of this insolvency and the Fidelity Company did not, that the bondholders did not inform that company of the insolvency, and that the Fidelity Company would not have made the bond if it had been aware of the insolvency, have estopped the bondholders from enforcing the superiority of their mortgage lien. If their lien had been a secret one, there might have been some basis for a claim of an estoppel; but their mortgage was of record, and had been of record for about 10 years, and that record, under the law which made it a public record, was a flaming signal of danger that charged the Fidelity Company and all others dealing with the Railway Company with full knowledge of the terms and legal effect of the mortgage and of the bonds it secured. After the bondholders had recorded their mortgage no duty rested upon them to notify the Fidelity Company, or any other party dealing with the Railway Company, of any default in the payment of their bonds or coupons, or of any insolvency or solvency of the Railway Company. They had secured themselves against the risk of the insolvency of the Company by their mortgage, and by its record they had given all men legal notice of that fact, and of the further fact that every party who thereafter dealt with the company took its own risk of the insolvency of that company and of its inability to pay any debt or discharge any obligation it contracted in the face of the record notice of the prior and superior lien of the mortgage. The bondholders were not estopped from enforcing their superior lien by the facts or the alleged facts of this case.

It is next insisted that the Fidelity Company is entitled in equity to a preference over the holders of the bonds, because its bond preserved and enhanced the value of the property to the bondholders secured by the mortgage. But the fact that liabilities or guaranties incurred, money or materials furnished, or work done at the request of the mortgagor preserve the mortgaged property and enhance the security of the mortgagees, is no ground for displacing the prior lien of the mortgagees for the reason that the record of the mortgage is plenary notice that such acts will ordinarily and naturally have that effect, and will subject the enhanced value to the superior lien of the recorded mortgage. Dunham v. Railway Company, 1 Wall. 254, 267, 17 L.Ed. 584; Railroad Co. v. Cowdrey, 11 Wall. 459, 464, 481, 482, 20 L.Ed. 199; Railway Co. v. Hamilton, 134 U.S. 296, 301, 10 Sup.Ct. 546, 33 L.Ed. 905; Porter v. Pittsburgh Bessemer Steel Co., 120 U.S. 649, 671, 7 Sup.Ct. 1206, 30 L.Ed. 830; Thompson v. Valley R.R. Co., 132 U.S. 68, 73, 74, 10 Sup.Ct. 29, 33 L.Ed. 256; Morgan's Co. v. Texas Central Ry., 137 U.S. 171, 195, 11 Sup.Ct. 61, 34 L.Ed. 625; Southern Railway v. Carnegie Steel Co., 176 U.S. 257, 259, 296, 20 Sup.Ct. 347, 44 L.Ed. 458; Lackawanna, etc., Co. v. Farmers' Loan & Trust Co., 176 U.S. 298, 315, 316, 20 Sup.Ct. 363, 40 L.Ed. 475; Illinois Trust & Sav. Bank v. Doud, 105 F. 123, 124, 136, 44 C.C.A. 389, 390, 402, 52 L.R.A. 481; International Trust Co. v. T. B. Townsend, etc., Co., 95 F. 850, 863, 37 C.C.A. 396, 409. The dominant rule that runs through and controls this case, and all other cases upon this subject, is thus stated by the Supreme Court in Dunham v. Railway Company, 1 Wall. 254, 267, 17 L.Ed. 584:

'Contractor, under the circumstances, could acquire no greater interest in the road than was held by the company. He did not exact any formal conveyance; but, if he had, and one had been executed and delivered, the rule would be the same. Registry of the first mortgage was notice to all the world of the lien of the complainant, and in that point of view the case does not even show a hardship upon the contractor, as he must have known, when he accepted the agreement, that he took the road subject to the rights of the bondholders. Acting, as he did, with a full knowledge of all the circumstances, he has no right to complain if his agreement is less remunerative than it would have been if the bondholders had joined with the company in making the contract. No effort appears to have been made to induce them to become a party to the agreement, and it is now too late to remedy the oversight.'

Finally counsel argue that the fact that the Fidelity Company gave a supersedeas bond and thereby prevented Madison from levying an execution on the property of the Railway Company, and thereby interrupting the running of the railroad, entitles it to an equitable preference over the bondholders secured by the prior...