FARMERS' LOAN & TRUST COMPANY v. ST. JOSEPH & DENVER CITY RAILROAD COMPANY.

(Circuit Court for Kansas: 3 Dillon, 412, 413. 1875.)

STATEMENT OF FACTS.- Bill to foreclose. The plaintiffs were trustees in a railway mortgage. The mortgage covered the rolling stock and other property appertaining to the railroad. It was duly recorded as a real estate mortgage, but not as a chattel mortgage, as the latter, to be valid, are required to be by the Kansas laws. The question was whether the above mortgage was valid as against certain judgment creditors who levied on the rolling stock.

§ 1320. A mortgage of a railroad with its rolling stock need not be recorded as a chattel mortgage.

Opinion by MILLER, J.

After having taken time to consider the question involved in this case, my judgment is that it was not necessary, as to the rolling stock, to record the instrument as a chattel mortgage. As to this it is sufficient, even as to creditors, that the mortgage was duly registered as a mortgage of real estate.

§ 1321. Rolling stock a part of the road.

In my opinion rolling stock and other property, strictly and properly appurtenant to the road, is part of the road and covered by the mortgage in question, which in terms embraces rolling stock. The cases are conflicting upon the point as to the nature of rolling stock, but considering the peculiar character of a railroad, the true principle is the one above stated. Under the provisions of this mortgage a different principle would apply to fuel or other property personal in its nature, and which is used, or is such as is commonly used, for other than railway purposes. Such property would be subject to the levy and not be held by the mortgage. Judgment accordingly.

DILLON, J., concurs.

§ 1322. After-acquired rolling stock. A mortgage of a railroad in operation, including its entire property, future receipts, and property subsequently to be acquired, in equity creates a mortgage on the property subsequently acquired; and, therefore, where rolling stock of the road subsequently acquired was levied upon, a sale under the execution was perpetually enjoined. Coe v. Pennock,* 6 Am. L. Reg., 27.

§ 1323. Chattel mortgage statutes do not apply.-Statutory provisions in regard to chattel mortgages do not embrace mortgages by a railroad corporation, in connection with its real estate and franchises, of its personal property used and appropriated for railroad purposes. Hammock v. Loan & Trust Co., 15 Otto, 77 (§§ 1382–93).

§ 1324. Rolling stock of separate divisions.- Where rolling stock was purchased by a railroad company and placed and used on the entire line of road, embracing two separate divisions, covered by separate mortgages, as well as by a mortgage of the whole line of road, and no division of the rolling stock was ever made between the two divisions, it was held that the mortgages operated upon all the rolling stock in the order of their dates, and that a mortgage of one of the divisions, being the oldest, had priority of lien upon the entire rolling stock of the road. Minnesota Co. v. St. Paul Co.,* 6 Wall., 742.

§ 1325. In Illinois, rolling stock subject to execution.- A mortgage or deed of trust given by a railroad company to secure its bonds includes all present and after-acquired property, whether real or personal, and is superior to a judgment lien which afterwards attaches to such property. Scott v. Clinton & Springfield R. Co., 6 Biss., 529, 534.

§ 1326. A provision of the constitution of Illinois, that rolling stock and all other movable property belonging to a railroad company shall be liable to execution in the same manner as the personal property of individuals, does not change the rule that a mortgage made by a railroad company of all its after-acquired property includes rolling stock, if given before the rights of execution creditors attach. Ibid. 497

VOL. IX-32

VI. MORTGAGE BONDS AND COUPONS.

[See BONDS, B, Vol., IV.]

SUMMARY - Numbering bonds does not affect standing in case of overissue, § 1327.- Priority of first mortgage bonds not issued when second mortgage is made, §§ 1328, 1329.- Coupons puid by bankers, not by the railroad company, § 1330.— Guaranty of municipal bonds, § 1331.

§ 1327. The numbering of bonds does not ordinarily give the holders of the lower numbers any preference over the holders of the higher, when there has been an overissue of bonds beyond the amount provided for by the mortgage. All bona fide holders for value stand upon the same footing. Stanton v. Alabama & Chattanooga R. Co., § 1332-1336.

§ 1328. A first mortgage of a railroad as against a second mortgage of the same property protects such bonds of the corporation purporting to be second, by such first mortgage, as have been actually issued and are held for value at the time the second mortgage is made. Such bonds held in pledge for debts of the company at the time of making the second mortgage are protected. Claflin v. Railroad Co., §§ 1337-1340.

§ 1329. Bonds in the hands of the company, or which it afterwards takes up, are protected as against a second mortgage unless this mortgage in terms limits the lien of the prior mortgage to bonds actually out at the time, and provides against reissues. Ibid.

§ 1330. When a railroad corporation which had previously paid its coupons at its own office directed the holders to take the coupons to a banking house, where they would receive payment, and the holders there received the amounts due on the coupons and left them in the possession of the bankers, they might properly presume that the company was not pay. ing the coupons. On the contrary there is a fair presumption that, when the holders delivered the possession of the coupons, they assented to a transfer of ownership. Duncan v. Mobile & Ohio R. Co., §§ 1341-1347.

§ 1331. A railroad having express authority of law both to issue its own bonds to raise means to construct and operate its road and to receive the bonds of cities and counties as subscription to its stock may also guaranty such city and county bonds for the accomplishment of the same end; and the fact of such guaranty being determined, stockholders cannot deny its validity. Railroad Co. v. Howard, §§ 1348–1354.

[NOTES.-See $$ 1355-1362.]

STANTON v. ALABAMA & CHATTANOOGA RAILROAD COMPANY.

(Circuit Court for Alabama: 2 Woods, 523-531. 1875.)

STATEMENT OF FACTS.-The bill in this case was filed to foreclose a mortgage made by the railroad company to secure its first mortgage bonds. The mortgage covered the entire road, which extended from Chattanooga, Tennessee, to Meridian, Mississippi. The company was a corporation of Alabama, and was recognized by legislation in the states of Tennessee, Georgia and Mississippi. The statute of Alabama provided that whenever any railroad company should finish and equip twenty miles of road, the governor should indorse its first mortgage bonds, at the rate of $16,000 for each mile of road. The bonds. secured by the mortgage purported to be issued and indorsed under the above law, and each purported to be one of a series of numbered bonds so issued. The property was sold pursuant to the decree of sale, and bid off by the trustees for the benefit of the bondholders. It appeared that the length of the road justified the issue of four thousand seven hundred and twenty bonds of $1,000 each, at the rate of $16,000 per mile, and that bonds to the number of five hundred had been issued in excess of this amount, each indorsed by the governor. The question is whether the holders of the bonds issued in excess of the amount authorized are entitled to share in the title to the property bought by the trustees.

Opinion by Woods, J.

It is conceded that the petitioners are holders of the high numbered bonds for value and without actual notice of any infirmity attaching to them. These bonds are commercial paper, and as such are binding upon the railroad company when in the hands of a bona fide holder for value. Commissioners of Knox County v. Aspinwall, 21 How., 539; Woods v. Lawrence County, 1 Black, 386; Mercer County v. Hacket, 1 Wall., 95; Gelpcke v. Dubuque, id., 175; Van Hostrup v. Madison City, id., 291; Meyer v. City of Muscatine, id., 384; Murray v. Lardner, 2 id., 110. (a) By the same authorities they are equitably binding upon the state by reason of its indorsement. Neither the railroad company nor the state enter into this controversy. The contention is between bondholders; the parties who hold bonds bearing numbers less than 4721 insisting that their bonds only are secured by the mortgage, and what they style the overissue or high numbered bonds are not secured. The claim of the holders of bonds bearing numbers below 4721 is based on two grounds: first, because the petitioners holding the high numbered bonds were put on notice of the fact that their bonds were not secured by the mortgage; and second, because by the very terms of the mortgage these bonds are not secured by it; that mortgage declares what bonds it is intended to secure, and these bonds are not among them.

§ 1332. The holder of railroad bonds is charged with notice of what appears on his bonds or on the mortgage securing them.

1. Were the holders of the overissue or high numbered bonds put on notice of the fact that the bonds they held were in excess of what the terms of the mortgage deed authorized? The power of the railroad company to issue bonds was unlimited. It could issue as many as it chose. The bonds are therefore binding upon the railroad company. Were the holders of the bonds put upon sufficient notice of the facts that bonds held by them were not secured by the mortgage? The holders of the bonds were bound to take notice of what was contained in or indorsed upon their bonds; they were bound to take notice of what was contained in their deed of mortgage, and of the laws of the state referred to in the deed of mortgage. Royal British Bank v. Turquand, 6 Ell. & Bl., 327. Upon a reference to this mortgage deed, the purchaser of bonds would have learned that the mortgage was only intended to secure bonds at the rate of $16,000 per mile. He was, therefore, bound to reasonable diligence to find out whether his bonds were secured by the mortgage deed or not. By a perusal of the laws of the state referred to in the mortgage, and also upon the face of the bond, he would have learned that the governor of the state of Alabama was authorized to indorse the bonds of the railroad to the amount of $16,000 per mile of completed railroad; that the oath of the president and chief engineer of the railroad company as to the number of miles of completed railroad was required to be filed with the governor as the evidence of the fact that so many miles had been completed, and that he was authorized to act on that evidence in making his indorsement. By a reference to the bonds they would have seen that the governor had indorsed them and recited in his indorsement that he had done so in pursuance of law; they would have seen that the face of the bond recited that it was one of a series of numbered bonds, issued in accordance with the laws of the state above recited, secured by the indorsement of the governor, made in pursuance of the same laws, and was a

(a) These cases are in full under BONDS. The sections of the cases, in the order in which the cases are cited above, are as follows: §§ 1413-18; 998-1002; 1409-12; 1367-70; 1196-97; 921-925; 1340-42.

first lien upon the railroad and other property of the railroad company; and they would have seen that the bonds bore the indorsement of the trustees named in the mortgage deed, to the effect that they were the bonds described in and secured by the said mortgage.

§ 1333. If bonds and mortgage of a railroad company satisfy inquiry the holder is not bound to look further.

So it would seem that the very bonds and mortgage which put the purchasers upon inquiry lulled and satisfied inquiry. They had the right to presume that the governor had not violated his duty; that before he indorsed the bonds, he had on file the oath of the president and chief engineer of the railroad company, that a sufficient number of miles of railroad had been completed to authorize the indorsement. Besides this, they had the statement of the president and treasurer of the railroad company on the face of the bond, and of the trustees for all the bondholders upon the back of the bond, that the bonds were secured by the mortgage. To require the purchaser to go behind the indorsement of the governor, sustained, as they had the right to presume, by the oath of the president and chief engineer of the railroad company, and the statement of the railroad company itself, made by its president and treasurer, and of the trustees who were appointed to act for all the bondholders, would be to require every purchaser of a bond actually to measure the road for himself to ascertain its length. While, therefore, the mortgage put the purchaser upon inquiry as to the length of the road, the mortgage itself, and the bonds, with their statements and indorsements, answered the inquiry in such a way as to satisfy the most cautious and wary.

§ 1334. There is no presumption that a bond of a particular number was sold first or last.

But suppose the purchaser of bonds had ascertained the length of the road for himself by actual measurement, how would that help him to know whether his bonds were outside or inside the terms of the mortgage? The bonds all bear the same date, and fall due on the same day. Bond number one has, therefore, no advantage over any other bond, and no presumptions are to be indulged in its favor. There is no presumption of law that it was issued first or sold first. On the contrary, the presumption is that all were sold at the same time. Practically, we know that where a large number of bonds are put upon the market, the high numbered bonds are just as likely to be sold first as the low numbered bonds. So that if the purchaser should, before purchasing, ascertain for himself the precise length of the road, he would have no means of ascer taining whether his bonds were overissue bonds or not. The holders of the five hundred bonds highest in number would have precisely the same ground to say that the first five hundred are overissues as the holders of the five hun dred have to say this of the last five hundred. I conclude, therefore, that while it is true that the mortgage limits the number of bonds to be secured thereby, and the holder of bonds might be required to take notice of that limitation, there was nothing to put him upon notice that the limit thus fixed had been exceeded; on the contrary, that all the presumptions and all the evidence was that it had not; nor if he had ascertained that the limit had been exceeded, was he bound to conclude from the fact that his bonds bore the highest numbers, that they were the overissue bonds, rather than others.

§ 1335. Railroad bonds are numbered for convenience of identification, not to indicate preferences and priorities.

But second, it is claimed that the mortgage was executed to secure sixteen

bonds of $1,000 each to the mile, and no more, and that no larger number of bonds can be secured by it than its terms authorize; that when the officers of the railroad company had issued sixteen bonds to the mile, they had no power to issue a greater number to be secured by that mortgage, and the overissue is not secured. But the difficulty recurs that there is no way of ascertaining which are the overissue bonds. The law presumes they were all issued at one and the same time, and the purchaser has the right to act on that presumption. The bonds are numbered, not for the purpose of giving one number any advantage over another, but as a matter of convenience in their registration and identification.

1336. Where, from the unfaithfulness of trustees, there is an overissue of bonds, the rule that equality is equity is applied.

The case is this: A mortgage is made to trustees to secure a given number of bonds, and, as a matter of security to the bondholders, the trustees are required to place their certificate upon the bond to the effect that it is described in and secured by the mortgage. The common trustees of all the bondholders are unfaithful, and certify to a larger number of bonds than were intended to be secured by the mortgage. The result is that all must suffer from the unfaithfulness of the trustees. But no part of the bondholders can say that the loss shall fall exclusively on others. It is a case for the application of the rule that equality is equity. A second mortgage bondholder would have the right to insist that the first mortgage should only secure bonds to the extent of $16,000 per mile. But no first mortgage bondholder has the right to say that he shall be paid in full to the exclusion of others whose bonds purport to be secured by the same mortgage, and whose equities are equal to his.

The views expressed are illustrated by a fact in this case. The length of the railroad constructed is, in fact, only two hundred and ninety miles; five miles of the line between Chattanooga and Meridian is not the property of this road, but is leased from the Nashville & Chattanooga Railroad. So that, according to the mortgage, the company should have issued and the governor indorsed only four thousand six hundred and forty bonds; yet it issued four thousand seven hundred and twenty as for the entire line between Chattanooga and Meridian. There is, therefore, among the four thousand seven hundred and twenty bonds an overissue of eighty bonds. Now I ask what eighty bonds of the four thousand seven hundred and twenty are to be excluded from the benefit of the mortgage? There is no rule by which any can be excluded. They must all share pro rata in the proceeds of the mortgage property. As the proceeds of the property sold are not sufficient to pay more than one-fourth of the first mortgage bonds, no second mortgage bondholder is injured by allowing the overissue bonds to share in the proceeds, and no first mortgage bondholder can exclude any other from sharing in the proceeds. The result is that the prayer of petitioners must be granted.

CLAFLIN v. RAILROAD COMPANY.

(Circuit Court for South Carolina: 4 Hughes, 12-40; 8 Federal Reporter, 118-140. 1880.)

Opinion by WAITE, C. J.

STATEMENT OF FACTS.-This is a suit in equity by holders of bonds of the South Carolina Railroad Company, secured by what is known as the second mortgage, to foreclose that mortgage subject to the lien of prior incumbrances. It naturally divides itself into six parts, which, for convenience, will be consid