#### Rochester Trust And Safe Deposit Company, Respondent, *v.*Oneonta, Cooperstown and Richfield Springs Railway Company and Others, Defendants, Impleaded with Oneonta and Mohawk Valley Railroad Company and Others, Appellants.

Third Department,

November 13, 1907.

Railroad — action to foreclose receiver’s Certificates — party — evidence — consent of bondholders to issuance of certificates —power of court to authorize receiver’s certificates — bondholders bound by notice to trustee — application of proceeds.

When, subsequent to the issuance of railroad bonds secured by a trust mortgage, the court, pending an action by a creditor of thei railroad to sequester its property, orders with the consent of the trustee that the receiver in the sequestration action issue certificates and apply the proceeds to the completion and extension of the road, such certificates to be a lien upon the property- prior to all other liens, a-purchaser of the railroad property on the foreclosure of the trust mortgage who takes the property ‘-'subject to the claim, if any, upon the receiver’s certificates” is the only party defendant having an interest in an action by a certificate holder brought to foreclose the certificates as a first lien upon the property.

As the purchaser on the foreclosure of the trust mortgage took subject to the claims. “ if any” of the certificate holders, it'is not estopped from questioning the validity of the certificates, and may avail itself of any defense which the bondholders could have asserted, but of those defenses only.

When in an action of foreclosure by the. holder of receiver’s certificates which have been issued by direction of the court as a lien on railroad property prior to an existing mortgage, the plaintiff does not allege that, the bondholders secured by the mortgage had - consented to the issuance of the certificates as a prior * hen, evidence of such consent is- inadmissible.

A receiver of a corporation appointed under section 1788 of the Code of Civil Procedure is appointed to “preserve” the property, and the power of the court to authorize him to issue certificates and extend and complete the railroad should be éxercised with caution and only when the cost is limited and the promise of return abundant; yet, when the holders of railroad bonds made parties through their trustee to a proceeding brought to empower such receiver to issue certificates and complete and extend the road consent through their trustee to the issuance of receiver’s certificates, the order of the court, made in conformity therewith, is *res adjudícala*as to the necessity and propriety of issuing the certificates. Such bondholders and the purchaser .of the railroad property on foreclosure of the trust mortgage are estopped from questioning the validity of such receiver’s certificates in the hands of one who *194has advanced moneys on the faith thereof, the proceeds of which have gone to the betterment of the bondholders’ security.

The court has power to authorize the receiver of a railroad to issue and sell receiver’s certificates to raise money for the further completion, equipment and extension of the road, for the court may protect the public in its legal right to have the railroad operated.

Notice of a proceeding * brought to empower the receiver of a railroad to issue certificates to raise money, for the completion and extension of the road given to the trustee of a prior mortgage on the railroad property is binding upon the holders of unregistered bonds and they are not entitled to individual notice of the proceeding, for the same is not practicable.

A court having authority to administer railroad property through its .receiver may, upon notice to the trustee of a prior mortgage, entertain an application by the receiver for permission to issue certificates for the purpose of completing and extending-the road.

The holder of such receiver’s certificates, suing to foreclose, need not show the application of the proceeds of the certificates, and although some of the proceeds have been applied to claims prior to those of bondholders, the latter can- • not object after having received the proceeds of the foreclosure of their trust mortgage without diminution by reason of the payment of such prior claims.

Appeal by the defendants, the Oneonta and Mohawk Valley Railroad Conxpány and others, from a judgment of the Supreme Court in favor of the plaintiff, entered in the office of the clerk of the county of Otsego on the 9th day of January, 1907, and in the office of the clerk of the county of Herkimer on the 10th day of January, 1907, upon the decision of the court, rendered after a trial at the Otsego Special Term, declaring certain certificates issued by the receiver of the Oneonta, Cooperstown and'Richfield Springs Railway Company and held by the plaintiff to be liens upon the property of said railway.'

In 1898 there existed a trolley railroad running from Oneonta to "West Oneonta, in the county of Otsego. This railroad was owned by á corporation known as the Oneonta and Otego Valley Railroad Company. The line was thereafter extended to Cooperstown, and' thence to Richfield Springs. The former company was in some' way merged into a company known' as the Oneonta, Cooperstown and Richfield Springs Railway Company, organized in 1902. A further extension from Richfield Springs northward to the village of Mohawk was in' process of construction at the time of the issuance of the receiver’s certificates hereinafter referred to. ' At the time of the construction of the extension of the road to Coopers*195town and Richfield Springs, bonds were issued by the Oneonta, Cooperstown and Richfield Springs Company, secured by a mortgage ; these numbered T,500, and were for $1,000* each. The Knickerbocker Trust Company of New York was the trustee of the mortgage. Of these bonds 1,364 only were issued. In 1903 one Lucius H. Townsend purchased a judgment against the defendant for $470.84. Execution was returned unsatisfied, and an action was brought by him for a sequestration of the property of the corporation. Herbert T. Jennings was appointed temporary receiver in the sequestration action. Thereafter and on the 19th of March, .1904, Myron A. McKee was appointed coreceiver with Jennings.

Upon the 10th day of February, 1904, at a Special Term held in Canastota before Mr. Justice Forbes, an order was entered i’jhich provided for the issuance by said Jennings as receiver of receiver’s certificates to the amount of $250,000. It was provided that the proceeds of said certificates should be applied to “ the completion of the extension of said railway from Richfield Springs to Mohawk, the improvement, betterment and equipment of the railway property and the payment of the receiver’s fees and expenses, including fees and expenses of his attorneys and counsel, and the payment of the fees and allowance of the Knickerbocker Trust Company, as trustee under the railway company’s mortgage, in the litigations mentioned in said' settlement agreement * * It was further ordered that the said certificates be made a lien upon the said property prior to all other liens and claims thereon whatsoever, and that for failure to pay interest the holders of the certificates might declare the full amount due and bring action to foreclose the same.

These certificates were afterwards purchased by this plaintiff, who purchased about $50,000 from other holders, and the balance from the receiver himself, and the. face value thereof was duly paid by the plaintiff. The Special Term has found that the moneys so received were applied according to the terms of said order, with the exception of between $4,000 and $5,000 which are now in the bank to the credit of said receiver.

In August, 1904, after a default had been made for ninety days in payment of interest upon said certificates, and after the plaintiff had elected to declare the whole amount due, an action was brought to foreclose the said certificates as a first lien upon said property and *196for the payment thereof. In that action no personal judgment was demanded against any one Pending that action the Knickerbocker Trust Compahy commenced an action to foreclose its mortgage. In that action Henry B. Coman was appointed temporary receiver. That action was prosecuted to judgment, the property sold thereunder and purchased by one Henry W. Bean for the sum of $960,000. Under the terms of the sale and by the terms of the deed to said Bean, the property was sold *“*subject to the claim, if any, upon the receiver’s certificates tliéretofore issued by Herbert T. Jennings and Myron A. McKee, or either or. both of them,” pursuant to the order set forth in paragraph 7 of the complaint. Thereafter the defendant, the Oneonta and Mohawk Valley Railroad Company, purchased the said property from the said Bean.

• Upon the application of the Oneonta and Mohawk Valley Railroad Company it was made a party to this action before judgment, and the complaint was deemed amended to state the facts leading' up to the purchase and ownership of said property by said defendant. The said defendant answered, raising the principal issue in the case. The trial judge determined that these certificate's were legally issued and directed a sale of the property for the payment thereof, with costs. . From the judgment so entered this appeal is taken. Further facts appear in the opinion.

*Edward B. Whitney*and *Joseph G.*Deane, for the appellants.

*William N. Cogswell*and *James Breck*Perkins, for the respondent.

Smith, P. J.:

My conclusions in this- case,, briefly stated, áre as follows:

*First.*The defendant, the Oneonta and Mohawk Valley Railroad Company, is the only party interested in this appeal. These certificates were not paid by the receiver; they were not directed to be paid from the proceeds of the sale. The full amount of such proceeds went to the bondholders. The sale was made subject to the claims, if any, upon these certificates. It is a matter of interest, therefore,, to the defendant railway company only whether - these certificates be adjudged valid and a lien upon said property.

*Second.*When- this action was brought the plaintiff had some *197right of action for reimbursement for the moneys paid. Before its conclusion the property had been sold to the defendant, subject to ■the claims under these certificates, if any. This sale and purchase itself constituted these certificates a lien, if the certificates were valid and enforcible obligations against the company. This is irrespective of any prior lien created by the order of February tenth. By the purchase, subject to the claims, *if any,*of the' certificate holders, the defendant railroad company in no way admitted their validity, and is not estopped from questioning the same. It acquired by the sale the rights of the mortgagor and mortgagee. It may avail itself of any defense to the certificates which the bondholders could have asserted and of those defenses only.

*Third.*This judgment cannot stand upon an estoppel against individual bondholders. There was considerable evidence introduced as to the consent to the issuance of the certificates, and of the priority of their lien by a large majority of the bondholders under a so-called voting trust agreement. There was evidence as to the written consents of still other bondholders who had not signed the so-called voting trust agreement. There was still further evidence as to the oral consent of other bondholders, from all of which the plaintiff claims that the bondholders have individually estopped themselves from questioning the validity of these certificates. However effective might be such proof if the plaintiff, had been in a position to present the same, no notice was given to the defendants by the plaintiff’s pleading of an intention to stand upon any individual consents. This objection was explicitly and fully stated at the time the'plaintiff offered the same in evidence. The defendants’ objection was, however, overruled, and the evidence is in the case without an amendment of pleading over the defendants’ objection and exception. I am of the opinion that the evidence was improperly admitted, and can form no basis upon which this judgment can stand.

*Fourth.*Plaintiff’s judgment must stand, if at all, upon' the. validity and effect of the order of February tenth, authorizing the issuance of certificates and their priority of lien. In Alderson on Receivers (§ 341) it is said: “ It is not true that the' power of a court to authorize the issuance of receivers’ certificates dejiends upon the consent of the parties to the litigation, or either of them. *198The. public character of the property, the necessity to preserve and operate it properly and safely, give and demand the exercise of the power.. It has been expressly declared that the exercise of this power does not depend on consent or on prior notice.”

Upon this issue it is first objected by defendant that this receiver was appointed in sequestration proceedings with power limited by the statute. By the statute (Code Civ. Proc. § 1188) his power and duty is to “preserve the property.” . A receiver under foreclosure is given no greater power. In Alderson on Receivers (§2) a receiver is defined as an officer appointed by the court “to take possession of and *preserve pendente lite*and for the benefit of the party' ultimately entitled to it, the fund or property in litigation * * *." The extent 0f the receiver’s power rests upon the construction of the word “ preserve.” . The pdwer and duty to “ preserve the property ” cannot differ in whatsoever action or proceeding the receiver be appointed. Again, it is objected that the order was improvidently made; that the completion of this road was not germane to the preservation of the property. If this were ,an open question I should incline strongly to approve of the defendants’ - contention. The power to authorize construction should be most cautiously exercised and should only be exercised .when the cost is limited and the promise of return abundant. If objection had been made at Special Term, the order, for the issuance of the certificates for this purpose would probably never have been made. It was granted, however, without objection on the part of the bondholders, in a proceeding to which they were parties, and in which they in effect joined in the application for their issuance.' This determination was *res ad/jxidicata*in all collateral proceedings Upon the necessity of their issuance and their propriety. It cannot matter that the bondholders were not parties to the sequestration action. They were made parties to the proceeding in which the certificates were ordered.. They have had their day in court. After being heard upon the application, and in effect joining therein and not appealing from 'the order, they are in equity and law foreclosed from questioning the validity of the certificates in the hands of one who has advanced the moneys on the faith thereof, which has gone to the betterment of their security. (High Receivers [3d ed.], § 398f.) -

*199But appellants challenge my assertion that the bondholders have had notice of the application for the issuance of the certificates and consented thereto. That notice was given to the mortgage trustee and it was he who consented. The challenge is well taken, unless the trustee represented the bondholders in that application.

It may be conceded at the start that if there was no power-under any circumstances to order certificates for the completion of the road, then the trustee had no authority to consent or to bind the bondholders on that application. But such a power had been recognized in several cases. -In High on Receivers (3d ed. § 398d) it is said: “Ho limit has been fixed to the purposes for which receivers’ certificates may be issued, other than that they shall be germane to the objects of the receivership and necessary to the proper administration of the trust. Thus, they have been authorized for the preservation, management and repáir of the road and for the purchase of rolling stock; for the making of repairs only ; for the further construction, equipment and final completion of the road; to complete an unfinished portion of the road within the time fixed by law, and thus to prevent the lapsing of valuable land grants and franchises of the company * * * *In Bank of Montreal*v. *C. C. & W. R. R. Co.*(48 Iowa, 518) the court had authorized the issuance of certificates for the “ further construction, equipment and final completion of the road.” It was held in that' case, under the wording of the order, that certificates could only be issued for materials after delivery, and not for materials only contracted for. In the opinion it is said: *“*In construing the order it must be borne in mind it confers upon the receiver extraordinary and unusual powers, *which, however, it will ie assumed were necessary and proper for the preservation and protection of the property committed to his*charge.” The court, therefore, was not without power to issue the certificates under some contingencies.

With the power to issue the certificates conceded under any circumstances, and the propriety of their .issuance alone at issue, both upon principle and authority, notice to. the mortgage trustee bound the bondholders. In some cases where the receiver was appointed in an action to foreclose the mortgage, it has been stated that the bondholders submitting their claims to equity' impliedly consented to the issuance of certificates upon notice to their trustee. But in *200this only half the truth is told. Bondholders have been held bound by notice to their trustee, where the trustee has been brought into court as defendant in an action where no consent can be implied from his'presence in court. *(Kerrison*v. *Stewart,*93 U. S. 160.) In that case, in writing of this rule, Chief Justice Waite says: “ The-principle which underlies this’rule has always been applied in proceedings relating to' railway mortgages, where a trustee holds the security for the benefit of bondholders. It is not, as seems to be supposed by the counsel for the appellants, a new principle developed by the necessities of that class of cases, but an old one, long in use under analogous circumstances and found to be well adapted to the protection of the rights of those interested in such-securities, without subjecting litigants to unnecessary inconvenience.” But were the rule not otherwise established, the necessities of this class of cases would give full warrant for its" existence. When property of a railroad is taken by the court into its possession the court has a double duty. It must conserve that property to the best interests of the creditors. Tt must also protect the public, which has the legal right to demand that the road be operated. To whatever is necessary to protect that public right the bondholders have impliedly consented. Their trustee has implied authority to , represent them in any proceeding instituted for such purpose. Holders of a large issue of railroad bonds are numerous, and theii names and residences wholly unascertainable. It is impossible to give to each one notice of each application by the receiver for direction in the execution of his trust. In the case at bar, suppose it had been necessary to issue certificates for the running of the road. The individual bondholders could not be ascertained that notice might be given to them. Defendants contend that notice to the trustee is not binding, because it is not a party to the sequestration proceedings. The logical conclusion of defendants’ contention is that in this case no certificates could have been directed for necessary running expenses, which would not be subject to question by each bondholder, when the certificate holder sought to enforce his prior lien. Certificates thus burdened would have little value.if a sale were at all possible, and the court would find itself unable to fully execute its trust. The better and necessary rule is that in, cases of railway mortgages where the court has a double duty in respect of property *201taken into its possession, a duty to all the creditors and a duty to the public, the trustee represents the bondholders for the purpose of any application by the receiver for direction in the execution of his trust in whatsoever proceeding the receiver has been appointed, and whether or not the trustee was originally a party to such proceeding. In this case the receiver made application for authority to issue these certificates, both for the purpose of maintenance of the property and to complete the extension from Richfield Springs to Mohawk, a distance of about twelve miles. Upon this extension the heavy work had been done, the bridges built and the rails and the ties partly placed. Of this application the Knickerbocker Trust Company was given notice. The tru.st company appeared and filed an affidavit of its vice-president, in which it is stated r “ That there has been exhibited to said trust company an instrument in writing purporting to be signed by the owners and holders of 1,110 of the bonds secured by said mortgage, out of a total outstanding issue of 1,364, and that the said trust company believes that the persons signing said instrument as aforesaid are the owners and holders of the number of bonds set after their names respectively. That the aforesaid instrument contains a consent on the part of each of the holders of ■ said bonds to the making of an order authorizing the receiver heretofore appointed in this case to issue his certificates to an amount not exceeding $250,000 for the purposes expressed in the petition; such certificates to be a lien upon all the'property and franchises of the said railway • company prior to the aforesaid mortgage. That the said assenting bonds constitute a very large majority of the bonds outstanding, and the said trustee knows of no person owning any other of the said bonds who has objected to the authorization of said certificates with a prior lien as aforesaid. "None of the bonds secured by the said mortgage are registered, and the holders thereof have not left'their addresses with , the said trustee. In view of these facts, the said trustee submits to the jurisdiction of the court for such action in the premises as it may deem just and proper.” Thereupon the order was made for the issuance of said certificates and for their priority as a lien upon the property. This order has never been directly questioned, either by an appeal or by motion. The case of *Hollister*v. *Stewart*(111 N. Y. 644) is cited as denying the power of the trustee to consent to the creation of á prior *202lien. In the opinion of Judge Finch in that case it is stated: That “thereafter the trustees under the authority of the mortgage, solely and *without judicial intervention took*possession of the railroad and began to operate it, and eventually joined with the bondholders outside of the plaintiff and a few others in a plan of reorganization. * * *” It would seem to be clear that without express authority in the mortgage, trustees would'not- have the right to consent to the placing of a prior lien. The validity of this order of February tenth does not stand upon their consent alone. It stands upon the authority of the court to administer the property in its possession upon notice to them. . If this order would be binding upon notice of the trustee, if the application were made by a receiver appointed in the foreclosure of the mortgage, I can see no reason for refusing to give it effect upon application by tlie receiver in sequestration proceedings. Under either receivership, the court takes the property in its possession, to- administer for the interests of exactly the same parties. Its duty is the same in either case-. Plaintiff, by his purchase from the receiver, stands in privity with him, and can invoke the protection of this adjudication.

That plaintiff need not show the application of the proceeds of the certificates is held in *Union Trust Co.*v. *Illinois M. Co.*(117 U. S. 435) and *Wesson*v. *Chapman*(77 Hun, 145). The other claims, to which the proceeds of the certificates were directed to be applied, come prior to the claims'of the bondholders. It would not be equitable to permit them to object to their allowance now, after receiving the ■ proceéds of the sale, without diminution by reason thereof. Other objections have been made to. the validity of this judgment, which have been examined and found untenable. . The judgment, should, therefore, be affirmed, .with costs.

Kellogg, J., concurred in result; ■ SeWell, J., not sitting.

Judgment unanimously affirmed, with costs.