288; & ,
FEDERAL
BOSTON SAFE-DEPOSIT
TRUST CO. "'. BANKERS'
Co. et ale
&
TEL.
(Oz'reutt Oourt, S. D. New York. September 17, 1888.)
1.
In order to effect an amalgamation of the two telegraph corporations, two agreements were entered into, by one of which the B. & M. Co. covenanted to construct and deliver to the R. Co. certain systems of telegraph lines, (among them one connecting Buffalo by a northerly route with Chicago,) and the R. Co. agreed to create its bonds for $3;000,000, to be secured by a mortgage of all its franchises and property. including the property to be thereafter acquired from the B. & M. Co. The other agreement was between the B. & M. Co. and one B., by which B. was to act as trustee for the B. & M. Co. to exchange the $3,000,000 of bonds, dollar for dollar. for the stock of the R. ·Co.; and deliver to the B. & M. Co. the stock receivecl. by him in exchange for the bonds as soon as 51per cent. of the whole stock of the R. Co. was received by him. The two agreements contemplated that the B. & M. Co. should obtain the property and control of the R. Co. by obtaininj:\' all or the majority of its stock, givinj:\' the stockholders of the R. Co. the option to transfer their shares for bonds secured by a mortgageoupon all the existing and to be acquired property of the R. Co. The scheme was carried out, and the B. & M. Co. acquired a majority ()f the stock of the R. Co., and while in control of the latter corporation reconstructed and rebuilt some of its telegraph lines, and acquired new rights ()f way in the name of the R. Co. to straighten the lines, and strung new and additional wires upon the poles. It also constructed one of the new lines which It had agreed to build, and connected the wires with the existing system ()f the R. Co., and operated them as part of the general system; and partially constructed some of the other new lines which it had agreed to build. It also strung additional wires upon other lines of the R. Co. pursuant to an · ment between the two companies by which each was to have the right to string wires on thepples of the other at a specified rental. Soon after the B. & M. Co. acquired co.ntrol of the R. Co. it created a J;Ilortgage of $10.000,000 upon all its eXisting property, which also conveyed all the property of the B. & M. Co. to be thereafter acquired. The new hne built by it was pai<l .for out of ilie proceeds of this mortgage; and it became insolvent before it had com, pleted the building of any of the other new lines. The $10,000,000 mortgage was foreclosed, and all the property of the B. & M. Co. was purchased by the U. L. Co. at the sale under the foreclosure decree. At the time of the pur, chase the U. L. ,00. had notice of the terms of the $3,000,000 mortgage. In a suit brought in aid of a suit to foreclose the $3,000,000 mortgage, to subject to the operation of the decree property claimed by the W. U. Co. as a purchaser at the foreclosure sale of the $10,000,000 mortgage, held. (a) There being no questions arising under the registry acts, and the U. L. Co. being a purchaser with notice of the terms of the $3,000,000 mortgage, the rights of the bondholders of the $3,000,000 mortgage were paramount to those of the U. L. Co. SAME-PROPERTY SUBJECT TO.
I.
(b) That the reconstructed lines were subject to the lien of the $3.000,000 mortgage, because the improvements UpOll the mortgaged property became part of the realty.
4.
(e) That the strung wires did not become part of the realty by annexation, because the two companies had agreed in effect that they should remain personalty;and that it was competent for the two companies by such. an agreement to determine the character of the property annexed, as against an exist. lng mortgage. SAME-NEW LINES.
(d) That the new line built by the B. &"M. Co. for the n. Co. under the agreement between the two companies in equity the property of the R. .Co. as soon as completed, witoout any transfer from the B. & M. Co·· and being described in the of the R. Co. as part of the after-acquired property included in it, inured to the security of thl; bondholders; and that the com-
BOSTON SAFE-DEP0SIT & TRUST 00. 11. BANKERS' & MERCHANTS' TEL. 00.
289
5: ,SAME-AFTEil.-AcQUIRED
plainantas trustee for the bondholders succeeded to theriltht of the R. Co. to compel a conveyance of the new line by the B. & M. Co. and those cl8.iming under that company . . validljep. immediately when the property is acquired by the mortgagor; and that. as between successive mortgages of after·acquired property,priority'of lien isdetermil'led Dy priority of time; the mortgage first in point of time being the senior liel' (e) That a mortgage of property to be thereafter acquired takes effect as a PROPERTY.
, In Equity.
Bill ancillary to a bill for foreclosure of mortgage.
lrfnt8h, Wilson & J.Vallis, for complainant.
R. G Ingersoll, for defendants. W'ALLACE, J. The complainant is the trustee named in a mortgage made by the American Rapid Telegraph Company, bearing date September I, 1883, to secure $3,000,000 of bonds, for $1,000 each,with interest, payable semi-annually, from March 1, 1884, and maturing September 1, 1893 This mortgage was created by the American Rapid Telegraph Company pursuant to an agreement made August 28, 1883, with 1t is exprt::ssed, in terms, the Bankers' & Merchants' Telegraph Compan to cover all the existing lines and property (\f" the American Rapid Telegraph Company., "together with the lines of telegraph intended to be shortly constructed or acquired for the party 01 the first part, (the mortgagor,) so as to connect the following points: Buffalo, N. Y., by. a northerly route, with Chicago, Ill.; Pittsburgh, Pa., via Columbus, Ohio, Indianapolis, and Terre Haute, Ind., with St. Louis, Mo.; Columbus, Ohio, with Cincinnati, Ohio, and Louisville, Ky.; and Terre Haute, Ind., with Chicago, Ill." Default having been made in the payment of the interest upon the bonds, the complainant filed a bill for the foreclosureof the mortgage in the circuit court of the United States for the·district of ConnecticJlt, the mortgagor being a Connecticut corporation; and an ancillary bill was filed in this court. The present suit is brought in aid of the foreclosure suit, the defendants being in this jurisdiction, to subject to the operation of the decree certain telegraph property to. which some of the defendants claim title. Relief is prayed, in substl:lnce, that this property be adjudged to be subject to the lien of the mortgage, and, when sold under the decree in the foreclosure suit, that the claims of the defendants be barred and cut off. Relief is also prayed that the defendants be required to convey the property to the complainants. The Bankers' & Merchants' Telegraph Company created a mortgage, bearing date .November 24, 1883, to secure bonds to the amount of $10,was named as 000,000, in which the Farmers' Loan & Trust the trustee; and the claim of the defendant the United Lines Telegraph Company tq the property in question is founded upon this mortgage, being derived. by purchase upon a decree of foreclosure thereof, under which it asserts a title Ptlramount to the complainant's title. No other the defendant sets up any adverse claim or title to the property defendant Stokes. He answers jointly with the Unitod Lines Telegraph QOilll'any, and alleges that a part o( the property in ¥.36F.110.5-19 . .
:. 'j,' '.;' ,
it ,court o{ common pleas of Cuyahoga county, Ohio, and he became the purchaser at the sale. As it appears in the proofs that this sale was set aside and vacated as void by an ' appella.te court. having j.urisdiction.,a.nd the suit in .which-the. judgment . dismissed,andlls Stokes sets up no otherright or clailn by his answer, the controversy is reduced to the single question of title as between the complainant and the United Lines Telegraph Company to the property in dispute. The complainant is entitled to a decree if the made by the Amel'ican Rapid Telegraph Company is it prior lien to the mortgage made by the Bankers' & Merchants' Telegraph Company upon the property described in the bill and known as (1) the" Reconstructed Lines;" (2) the "Western Lines;" and (3) the "Strung Wires." Although the bill alleges the priority of complainant's fitle to certain lines of 'telegraph extending from Indianapolis to Richmond, thence to Cincinnati and Newark, and from Newark to Pittsburgh, this contention was abandoned at the hearing, and the;only part of the "Western Lines" now involved is the line between Cleveland and Chicago. In August, 1883, those who respectively controlled the Rapid Company the Bankers' & Merchants' Company concerted a scheme by which the Bankers' & Merchants' Company WaS to acquire the control and property of the Rapid Company, and the stockholders of the Rapid Company were to transfer their stock to the Bankers' & Merchants' Company, and become mortgagehondholders of the Rapid Company,instead.of stockholders. At that time the Rapid Company owned ahd wa13 operating a telegraph system extending from Boston in the east to Cleveland in the west and Washington iothe south,havingstations in the more important places between these points.' It had,;been constructing its Hnes for several years, and stations were established at those points between which the lines were completed. It had line from New York, through NewHaven, Hartford, and Providence,toBostc)Uj one from Hartford toSpringfieldj one from Albany to to Saratoga and Albany, and to the stockBuffalo, with branches yards at West Albany; one from Buffalo to the oil and Newcastle to Pittsburgh; oIie.from Newcastle to Cleveland; one from Canton, through Cleveland, ·to 'Coshoctonj one from Canton toSherredsville, Ohio; one from Philadelphia, through Harrisburg, to Pittsburghj one from Harrisburg to Baltitnore;and there were several'''looplines." Its system was incomplete j and:those in control of the corporation believed that the extention and <lompfetion of the system was essential to the prosperity of the company. The company had been doing business at a loss, but its btisiness was inoreasing. It bad no bonded debt, and its property represented an expenditure of between $2,000,000 'and $3,000,000. The Rankers' & Mel'ehants' Telegraph Company owned and was operating a line from New Ytirk to Washington:. Its business was profitable, and its stock was selling cOBsiderablyabove par. 'Those who oontrolled it contemplated e!lttending its system to the New England states, and inthe south and west. It was, in a good financial condition, and, with a view 'of extending its system,had created a mortgage upon its property for $300,000. and was ina rea.lizeabout $1,000,000 by the unissued capital
a
l.
BOSTON SAFE-DEPOSIT & TRUST. CO; V. BANKERS'&lMERCHANTS' TEL. CO.
291
4>tock. In!this ,situation tliosdn c6nlrol:of the t,h), corpofatiGliseamet0 an understanding by which the two concerns wete to be practically merged in one, with.theBankctfs',&'Merchants' Company as th.e owner and ,manager. To effect this object, and to induce the stockholders ofthe Rapid Company to transfer' their stock. to the Bankers' & Merchants'" two can,. tracts were ex:ecuted, bearing date, respectively, ,August 28, 1883; and August 29{:1888.The first was a contract between the Bankers' & -chants' Company and the Rapid.Company, by which the forniericove,. nanted to construct or acquire and deliver to the latter 11 system oUourwire telegraph lines connecting Buffalo by a northerly route with,Ohicago; Pittsburg with St. Louis, via Columbus, Indianapolis, and Terre Haute; and ColumbuslLouisville, and Terre Haut'ewith Chicago; and in ,consideration thereof the Rapid Company agreed to cl'eateits bonds fortha amount of $3,000,000, to be secured by a mortgage covering all its franchises and property, including the telegraph lines whieh were to be built or acquired forit byihe Bankers' & Merchants' Company, and deliverthem to the Bankers! & Merchants' Company. The second contract was entel'ed into between the Bankers' & Merchants' Company and one Bullens, and. by its .terms Bullens agreed to aetas a trustee, to whom the Bankers' & Merchants' Company was to deliver the $3,000,000 of bonds for exchange, dollar for dollar, for ,the stock of the Rapid Company. By this contract Bu:!:.. lens was to deliver to the Bankers' & Merchants' Company 51 per .centum of the stock of the Rapid Company, as soon asthe samewasreceived byhim from the holders' of such stock, and was to retain the balance of such stock received by him in exchange for bonds, and the balance of the bondsnQt exchanged, until the completililh of the lines of telegraph agreed to be built or acquired for the Rapid Company by the Bankers' & Merchants' , Company, and then to deliver the balance to the latter. The two contracts are to ,be regarded as executed simultaneously. Viewed in the light of the testimony and read in connection with a third contract nlade at the same time by the Bankers' & Merchants' Company, to which particular reference is unnecessary,it is plain that it was the understanding on the part of all concerned 'that the Bankers' & Merchants' Company was to acquire the property and control olthe Rapid Company by acquiring all ora majority of the stock of that company,and that the stockholders of the Rapid Company, as an inducement to their consent, were to receive the bonds, dollar for dollar, in exchange for their stock, secured bya mortgage which was to cover not only all the property which was then owned by the Rapid Company . but also the new lines which the 'Bankers' & Merchants' Company was to construct and deliver according to contract. Pursua:nt to this scheme, the bonds and the 33,000,000 mortgage were created by the Rapid Company; the bonds were placed by the mort'gagee in the hands of Bullens; the stockholders Of the Rapid Company delivered to ,BuUens more than 28,000 of the 30;000 shares of which the <:apital stock oHhat compil:ny consisted; and BuHens transferred to the <Bankers' &. Merchants' Company the 51 per..centum of the whole capital '$tock, pursuant to the agreement by which he became trustee. Shortly 'afterwards and directors of tl,le Bankers' & Merchants' Company
292
FEDERAL REPORTER.
were made officers and directors of the Rapid Company, and the Bankers' & Merchants' Company assumed and exercised control and administration of the affairs of the Rapid Company; the leases of the offices theretofore occupied by the Rapid..company were transferred to the Bankers' & Merchants' Company; the wires belonging to the Rapid Company were connected with the offices of the Bankers' & Merchants' Company; and the business of both corporations was practically merged together, although distinCt organizations were maintained. Soon after this change of control was effected, the managers proceeded to repair and reconstruct Bomeof the existing lines of the Rapid Company, and to build or acquir" the new lines which, by the contract between. the two companies, were to be built or acquired for the Rapid Company by the Bankers' & Merchants' Company The line extending from Meriden, Conn., to Boston, via Hartford and Providence, and the line in the statp of New York extending from the Harlem river to Portchester, were substantially rebuilt on the original lines of the Rapid Company. The lines were straightened, and, when necessary for this purpose, new rights of way were obtained in the name of the Rapid Company. Many of the old poles were discarded, and new ones put in their places, additional wires were.strung, and such was the character of the repairs and improvements that these lines were practically reconstructed, and adapted to carry a larger number of wires than the original lines. These lines are the" reconstructed lines" in controversy. In the early part of 1884 a new line of telegraph was built by the Bankers' & Merchants'Company, connecting the system of the Rapid Company at Cleveland with Chicago.' This line extended from Cleveland to Freeport, and from Freeport to Hammond, near Chicago, until it met an underground telegraph system leading into the city of Chicago. The system of the Rapid Company reached Cleveland from Buffalo by the way of Newcastle, in Pennsylvania, and Streetsboro, in Ohio. The new line from Cleveland to Chicago. was built upon rights of way seoUTed in the name of the Bankers' & Merchants' Company l or subordinate corporations of which that coiripany was the owner, and through which it acted. Mr; May, who represented the Rapid Company, was requested by the officers of the Bankers' & Merchants' Company to supervise the selection of the route, and did so. While the linc was in process of construction it was understood by those who represented the Bankers' & Merchants' Company and the Rapid Company that it was being built to form a part of the line which was to be a connected system with the Rapid Company, at Buffalo, by a northerly route with Chicago. The portion of the new line, which was to extend from Cleveland to Buffalo by a northerly route, was not commenced. The new line from Chicago to Cleveland was inspected and accepted by the Bankers' & MerChants' Company, and was connected with the Rapid system at Cleveland, and the wires run into the office of the Rapid Company , there. As early as in July, 1884, the line was used as an ndjunctof the Rapid system. There was no formal transfer or delivery of this line by the Bankers1&Merchants'Company tothe.Rapid Company.
BOSTON SAFE-DEPOSIT & TRUST CO. V.BANKERS' & MERCHANTS' TEL. 00.
29S
plainant insists that the $3,000,000 mortgage is a lien upon this line paramount to that of the $10,000,000 mortgage and the rights acquired under it by the United Lines Telegraph Company at foreclosure sale. , The contemplated new lines for extending the system of the Rapid Company from Pittsburgh, by way of Indianapolis and Terre Haute, with St. Louis, Columbus with Cincinnati and Louisville, and Terre Haute with Chicago, which, by' the August agreement, the Bankers' & Merchants' Company promised to build or acquire for the Rapid Company, were not completed. Detached portions of these lines were built, but before the lines were completed the Bankers' & Merchants' Company became insolvent, a receiver of its property and effects having been appointed in September, 1884. As has been said, it was not insisted on at the hearing that the $3,000,000 mortgage a lien upon these uncompleted lines, and it is therefore unnecessary to consider the question whether it did or not; but it is proper to state that there seem to be quite satisfactory reasons why the claim, if urged, could not prevail. The property known as the"Strung Wires" consists oflines of wire strung by the Bankers' & Merchants' Company upon the poles Rapid Company, and which were used and employed, in conjunction with the other wires of the two companies, as part of the general system, while the Bankers' & Merchants' Company was in control of both companies, and before it became insolvent. As to this property the case involves the question of fact whether a contract was made between the two com panies by which each was to have the right to string wires and maintain them on the poles of the other on payment ofa rental of four dellars per mile per wire, annually,the wires to become the property of the lessee if not removed within six months after notice to do so. The evidence that such a contract was made consists (1:) of an entry in the minute book of the executive committee of each company, as of the date of October 18, 1883; showing that a resolution was that day adopted by the committee 'to enter into such a contract; (2) an agreement in writing between the two companies embodying the agreement referred to in the minutes of the two committees, which purports to have been made on October 18, 1883; and is tligned for the Bankers' & Merchants' CompaQY by its then preSident and for the Rapid Company by its then general manager; and (3) a resolution of the board of directors of the Rapid Company, adopted August 14, 1884, ratifying and approving the previous contract. The bill asserts that the contract was an afterthought, and that the entries in the minute-book of the executive committee of the respective companies were fabricated, and that the written agreement was not executed untii it was made in contemplation of the insolvency of the Bankers' & MerCompany.· In support of this theory testimony is given by several of the persons Who principally represented the interests of the bond:' holders of the Rapid Company while the two companies were amalga;mated, one of whom was a member of the executive committee of the :Rapid Company, to the effect that they did not hear of any such re80lution, .and had no information about such a contract prior to the meeting of the board of directors in August, 1884. It will not be profitable
,294
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, ,
';;,: : , ' : v,EDll:RAJj 'Il;EPORTE,R.
'
.. ',,,
.:1
tQ consid!lr, iQ detail the testhnony upon the issue whether the contract :was really.made.If it was not made it should have been, inju;:;tice to the theatockpolders of the Bankers' & Merchnnts'Oompany; ;because what ;was be. done ·involved a large expenditure of their and ,they'should have been protected as far as practicable against just!'lucha,contingency as has arisen. The terms were fair fOIl all the parties there is not the slightest reaSon to suppose that any of who represented the bondholders of the Rapid Company woulq., hav6;objected if they had been consulted.. It was not necessary to consult them, because the managers of the Bankers' & Merchant.s' pany haqfullpowertocommit them by the control of the majority of of ;the Rapid Company,anda majority vote in .its executive comand board of directors, An ,omission to provide for such a contrac;t,lj.I1d .tohaveit properly authenticated, would have been inconsistent with the methods which prevailed at the time in,the management of the companies pf keeping the relations' between them formally distinct, and their transactions as those of separate concerns acting through their respective agents. Such entries as appear in the minute-books of the executive ,committees do not, upon inspection of the books, appear to have been. interpolated, but appel:tr in their regular, chronological order, and !'leem to be in all. respects regular; and there is nothing to indicate the books have been tampered with. It is much more reasonable to conclude. that, what t-ook place with reference to the contract was not hnpressedupou the attentionQf Mr. May and the others,because it was proper and reasonable, and a matter of co.urse, than to suppose that the evidence hl:tllbeen fabricated. It has been urged against the validity of the mortgage made by the Rl:tpid CmnpallY that it was created merely asa device to enable the Bank& Merchants'Company to acquire the property of the Rapid Company; that the scheme was a fraud upon the stockholders of the respective companies, and intended to be a fraud upo.n the public; and that the agreement between the two companies, under which the mortgage was vires as t@ each corporation. Witho.ut considering at presentwhl:ttthe effect would be upon the legal rights of the parties if werenlaintainable upon the proofs, it is proper to conaider whether there is any foundation in fact for the charge of bad faith. As stated, the $3,000,000 mortgage was doubtless made in order that the Bankers' &, Merchants' Company could acquire the shares of the stockholders of the Rapid Company in exchange for the bonds. It wasintended as an instrumentality to effect that object, and to give the stockholders of the Rapid Company the option of transferring their shares to the Bankers' & Merchants? Company, and taking bonds in exchange for their stock. All concerned understood that if the Bankers' & MerGolllpany could acquire all theshares·of stock in the Rapid Company, or p:r:aQtically all, it would acquire the control' and substantial own;. ersQip of the property of that'corporation:. What the stockholders of the would get.for their stock would depend upon the value as se,curityforithebonds. ' As a oonsidera-
BOSTON SAFE-DEPOSIT & TRUST CO.
v.
BANKE:Rs' & MERCHANTS' TEl,. CO.
295
tion for surrendering their control of their own property, 'and virtually transferring it to the Bankers' & Merchants' Company, they relied upon the understanding that their bonds were to be fortified by the additional s'ecurity of the new lines which were to be built by the Bankers'&:Merchants' Company, and when built' or acquired were to be covered by the lien of the mortgage. They took the chances of the good faith of the Bankers' & Merchants' Company in carrying out the agreement, and 'of its financial ability to fulfill. It is impossible to discover anything immoral or dishonest in the transaction upon the part of the Rapid' Company, or of its stockholders. It was entirely legitimate for the stockholders to obtain all they could for their property. It may be that they expected to get more for their shares than the shares were really worth, but they were only to' get such a consideration as the purchaser was willing to give; and they knew what they would ultimately receive' was largely contingent upon the success of the purchaser in carrying out its enterprises. On the other hand, the purchaser, or the persons who were in control of the. Banker's & Merchants' Company, doubtless considered that the acquisition of the property of the Rapid Company was worth all' it would cost. Probably they could have duplicated the property at the time for much less than $3,000,000. But they were to get by the'purchase, besides the property, an established business, and good will, and at the same time remove a rival whose competition would impair the profits of their business. Whatever they might expend upon the erty, by way ofimprovements, or by way of extending the existing syStem, would ultimately be to the advantage of the Bankers' & Merchants' Company. There is nothing in the proofs to denote that those 'in 'control of the Bankers' & Merchants' Cdmpany were not acting in good' faith towards the stockholders of the Rapid Company, or their own or the public; or that there was any plan or purpose in view on their part exceptto promote and consummate the legitimate business' scheme of merging the two companies together, and building up art extensive ,telegraph busiriessby extending and consolidating the existing systems; It is very probably true that some of the'persons concerned expected to make money for themselves by'marketing their shares and trading in the securities; and ifthis were so it wou1d not militate against any rules"of law or necessarily of ethics. There is no fair reason to doubt thlltthe promoters would have honestly canied out their enterprise, and that their expectations would have been. measurably realized if it had not become financially crippled at an early stage in its progress. Although the Bankers' & Merchants' Company created a mortgage of$10,000,OOOvery soon after it acquired control of the Rapid Company, which covere4all its own property and the property of'the Rapid COmpanY-,and was to cover all the property to be thereafter acqUired by the Bankers' & Merchants'Company, and although the bonds of this mortgage at. what now seems an extravagant price, the proofs do not show thai! 'the parties to the August agreement, either those who represented the Rapid Gompanyor those who represented the Bankers'&Merchants'Company, had any fraudulent design upon the public whieh were to be cal'dedou1;
296
FEDERAl, REPORTER.
by means ofthis mortgage. It cannot be assumed that they supposed the public would buy the bonds without some investigation into the merits of the enterprise and the value .of the securities; and if they intended to put the bonds oft' upon the public by any fraudulent concealment or misrepresentation, the evidence fails to furnish a foundation for the theory. It has been argued that this mortgage was created to enable the Company to build the new lines which it had Bankers' & agreed to build by its contract with the Rapid Company; that those who Bankers' & Merchants' Company intended to raise the money by deluding the public ill the bdief that the mortgage would be a first lien upon all new lines which were to be built, when in fact the lien to that of the $3,000,000 mortgage; and that those would be who represented the Rapid Company, when the August agreement was made, understood at the time that this was the scheme contemplated, and became participants in misleading those who invested in the bonds of the $10,000,000 mortgage. In this argument the fact is ignored, which has already been r(;,ferred to, that when the August agreement was made the Bankers' & Merchants' Company had in its treasury, or available, the sum of about $1,000,000, and was ,supposed by those who represented the Rapid Company to be financially able to carry out its undertaking. The case is destitute of evidence to justify the assumption that those who represented the Rapid Company supposed that the contract of the Bankers' & Merchants' Company was to be oarried out at the expense of third persons, much less to be carried out by defrauding third persons. The fact that the Bankers' & Merchants' Company did use the bonds of the $10,000,000 mortgage to get the means for building the new line is not inC(ll1sistent with the good faith of its officers. By doing this they were enabled to use .is other resources for other legitimate objects. But whatever may have been the design of those who controlled the Bankers' & Merchants' Company,' whether honest and legitimate, or the contrary, the bondholders represented by the complainant are not shown to have been implicated in any fraudulent scheme. The organic law of the corporations permitted them to do what was provided for by the August agreements, and there is no ground, upon which to assail the $3,000,000 mortgage as ultra vires. Laws N. Y. 1870, c. 568. It is not obvious how any such considerations as have been suggested would be pertinent in the present suit, if there were any foundation for them in fact. The Rapid Company does not assert any objection to the mortgage. Those who were stockholders of that com pany, and became bondholders, do not, and the Bankers' & Merchants' Company, after receiving the mortgage and exchanging the bonds for stock, cannot beheal'd to allege want of consideration Qr a fraudulent consideration, or that its acts in acquiring and transferring the bonds were without legal validity, while it retains the stock which it received as the fruits of the transaction. Nor can the Bankers' & Merchants' Company be permitted to assert that the August agreement was uUm vires while retaining the fruits. Mining Cb. v. Bank, 96 U.S. 640; B(Lnk v. Matthew8, 98 U. S. 621; ArmB Co. v. Barlow. 63 .N. Y.62; &ilroad Co. v. TransportatumCo., 83 Pa. St. 160; Bly v. Bank,
BOSTOl' SAFE-DEPOSIT & TRUST CO. V. BANKERS' & MERCHANTS' TEL. CO.
297
79 Pa. St. 453. And it is equally clear that the bondholders of the $10;000,000 mortgage, who became creditors of the Bankers' & Merchants' Company after all these transactions took place, cannot be heard to impeach the eonsideration of the complainant's mortgage. Graham v. Railroad Co., 102 U. S. 148. No good reason having been suggested why the mortgage is not valid, and why it should not be enforced, the question as to the rights of the parties in the property in controversy is merely whether it is covered by the lien of the mortgage, or equitably belongs to the complainant, and whether the rights of the complainant therein are paramount to those acquired under the $10,000,000 mortgage. No satisfactory reason is as-signed why the lien of the $3,000,000 mortgage should not include the reconstructed lines. .The mortgage was duly recorded before the $10,· 000,000 mortgage of the Bankers' & Merc-hants' Company was recorded, and no question arises under the registry act as to the priority of lien of the respective mortgages. If it should be conceded that the money of the Bankers' & Merchants' Company was exclusively used in the improvement and reconstruction of these lines, and that the improved value.0f' the property represents nothing except what was put into it by that corporation, there is nothing to distinguish the case from· the ordinary one where a mortgagor or his vendee of the mortgaged property rnakesrepairs and improvements ofapermanent character. Suchimprovemelits as become a part of the realty always inure to the seciurity of the mortgage. III ustrations of the application of the rule in somewhat alialogous cases are found in U. S. v. Railroad Co., 12 Wall. 362; Butler v. Page, 7 Mete. 40; and Snedeker v. Warring, 12 N. Y. 170. But,the strung wires do 'Dot fall under the operation of this rule. Inasmuch as they can be removed without material injury to the structure. they do not. lose their character as personalty, and become a part of the realty, if it was the ibtention and contract of two com panles, at the time they were affixed to the poles of the Rapid Company, that they should retain their original character. With respect to this class of property the parties in interest may agree that it shall remain personalty, subject to be removed; and such an agreement determines the real characteras against an existing mortg-a,ge. The effect of such an agreement, where the subject was the ullnexationof telegraph wires to telegraph poles, was considered in Telegraph Co. v. Railroad Co., 11 Fed. Rep. 1, and it was ruled that the wires did not pass under an existing mortgage. The general doctrine is so well established that it is unnecessary to cite authorities. The line from Cleveland to Chicago was constructed "to connect Buffalo by a northerly route with Chicago," pursuant to the agreement of August 2;';, 1883, and is the same property described and conveyed in the mortgage as one of the lines" to be shortly constructed or acquired" for the Rapid Company. The circumstance that there was no formal delivery or transfer of this property to the Rapid Company by' the Bankers' &, Merchants' Company is' not material. Equity regards that as done which onght to have been done; and as soon as the property' was acquired by the Bankers' & Merchants' Company it became in equity the
298
! ,,:
pl'opertYo£:tb'e'RapidCompaily·. 'The'complaiMnt, at that time, by reason ,of the ,. conveyance in: the mortgage, deed,. succeeded to the right of .the Rapid Company to enforce a specific. performal;lce of the contract against the Bankers' &. Merchants'CoU1pany. It was competent for the Rapid Company to mortgage the lines which were not in existence at the date of the instrument, but which by the contract. of the Bankers' & M.erchants'Compauy were thereafter to be built or acquired by that company for the Rapid Company,and by the terms of the mortgage were to inure to the security of the bondholders. Such a mortgage, although ineffectual aS'8 conveyance in prresenti, takes effect as an equitable transfer, and attaches to the after-acquired property as soon as the title of the mortgagor accrues. Pennock v. (Joe, 23 How. 117; Dnnharn v. RailWl),y 00., 1 ,Wall. 254; Railroad 00. v. Oowdrey, 11 Wall. 459; Butt v. EUett, 19 Wall. 544; Holroyd v. Marshall, 10 H. L. Cas. 209. The case is exceptional only because it presents a question of priority as between two mortgages of after-aquiredproperty. Although the $10,000,000 mortgage. was not, like the $3,000,000 mortgage, expressed to cover the specific property to be thereafter acquired, there is nothing in this feature alone to postpone it to the latter. Upon the principle that, as between equal,equities, priority .of time will prevail, the lien of the $3,000,000 mortgage is paramountto that of the $10,000,000 mortgage subsequently created. Grantees and incumbrancers claiming in equity take and are ranked according to the dates of their securities, because the purchaser of an equitable tWa takes it subject to all prior equities, and the grantor or assignor cannot .transfer a greater interest than he himself possesses, In. the attempt to avoid the application of this rule, in the present case. much stress has been laid upon the circumstance thnt the 11l1e in question was paid for in bonds of the $10,000,000 mortgage, or with ,the proceeds of such ,bonds at the time it was built; but this factis of no legal significance. Those who bought the bonds secured by. that mortgage have no higherclalm for consideration than the bondholders·of the $3,000,000 mortgage who parted with their property upon the promise that this line should stand as a security for the payment of their bonds. In Railroad 00. v. Cowdrey,11 Wall. 459, similar considerations were urged, but were not countenanced by the court. The United Lines Telegraph Company does not. occupy the position of a bona fide purchaser of the property. Full notice of the equities and claim of the complainant was given it before it purchased the property at the foreclosur.esale. It aCCJ.uired the rights of the bondholders in. the $10,000,000 mortgage, and nothing more. It has been suggested in argumentfor the defendants that receivers' certificates were created pursuant of to .the order of the court in suits brought in the courts of the New York and Ohio, in which receivers of the property of the Bankers' and Merchants' Company werenppointed, which certificates were olared by the orders to be first liens on all the property of the company j and it is urged that the lien of the $3,000,000 mortgage cannot have precedenoe,oUhese certificates. As the complainant was not a party to which their.certificateswere created are nuga·
L
GOFF'S ADM'R 11: NORlhlLK & W. R. CO.
299
could bind complainant by: a declaration that the certificates should,:outrank its equitable lien. It is entirely clear that cer-, tificates would not acquir\) a li\Jn prior to the $3,000,000 mQrtgage:,upon' the property included in it when it was recorded, or upon the accessorial improvements and additions. It is not so clear that a- 'purohaser without notice, and for value, would not obtain a paranlount lien lipon the western lines; assuming that the certificates were ,authorized by the order or decree of a competent court in possession of the property at the time by its receivers. But these questions are not properly .here, and cannot be considered under the issues made by the pleadirigs. .The .defendants do not assert in the answer that they are bona fide purchasers of such certificates, but, as has been mentioned, one of them, the l)'nited Lines' 'felegraph Company, sets up title under the foreclosure of the $10,- , 000,000 IIIortgage, and the other, the defendant Stokes, founds his claim upon the sale by Ohio court, which has been set, aside. ,ltmay be gathered from the record that the certificates which were issued by the receivers were subsequently used as ca&h, and applied towards the purchase money at the sale in the foreclosure of the $10,000,000 mortgage. If this were so, the certificate holders would not reqUire any protec;tion, and this is probably the reallon why no attempt has been nmde to pre., sent the defendllnts as certificate holders in the answer. It is noipbstacle to the relief prayed for by the bill that the real estate sough't t() be subjected to the decree lies in another state. It suffices thatthe cq1,1rt has jurisdiction of the persons qf the defendailts, and can compel them to observe its deCree. Mulle:r v. Dows, 94 U. S. 444. A de<;lree is or- ' dered for the Complainant, conformably to the conelusions which have been expressed. If necessary there will'be a reference to a Ill,asterto ascertain what property is to be included in the description of the" reconstructed lines" ip the decree. ' .
·
GOFF'S Am,I'R
NORFOLK
& W. R. Co.
, (Circuit Court,
w: lJ.
Virginia. February 11, 1888.)
,After administrator appointed by a Virginia cou,oty court had qualified , by giving bond without security, the court, in term, made an order permitting him to resign, and on the following day appointed a new administrator, who qualified' by giving bond with security. Held, that the second appointment' was regular. , , ,SAME..,-ACTION-COURTS--:-FljlDluUL COURTS-JURISDICTION-CITIZENS1lI1'. ,',
ExECUTORS AND ADMINISTRATORS-AppOIl'iTMENT AN'II'REMOVAL.
"'0
9.
, The .fact 'that a citizen Ofanottier state is se.1ectedaiJ administrAtor for the purpose of:coJlfettJng on the United ·8tates circuit court Jurisdiction of an tion to be brought by him. does not defeat that jurisdictIOn. 8.:MAsTEBAND SERVANT-"-RISKS' OF' EliIpLOYMENT-bu!'ANCY. ' , i .It is,an act of negligence on the part of a railrOad company to take·int'o'its' employment as a brakeman a minor of such tender years as not to know tho
ac-