Case Name: Harrisburg & Eastern Railroad Co.'s Appeal
Court: Supreme Court of Pennsylvania
Jurisdiction: Pennsylvania
Decision Date: 1888-10-01
Citations: 1 Monag. 692
Docket Number: No. 16
Parties: Harrisburg & Eastern Railroad Co.’s Appeal.
Judges: 
Reporter: Cases in the Supreme Court of Pennsylvania; being those cases not designated to be reported
Volume: 1
Pages: 692–697

Head Matter:
Harrisburg & Eastern Railroad Co.’s Appeal.
A court of equity has no jurisdiction to declare railroad bonds and mortgages void because issued in violation of article xvi, ? 7, of the constitution of Pennsylvania, and the Act of April 18,1874, where the bondholders are not joined as parties, the suit being against the trustees alone, against whom a decree pro confesso was entered for want of an appearance.
May 30, 1888.
Certiorari sur Appeal, No. 16, May T. 1888, from decree of C. P. Dauphin Co., refusing decree recommended by master, on bill in equity to declare bonds and mortgage void, by the Harrisburg & Eastern R. R. against George ¥m. McPherran and Pierce C. De Sauque, trustees, and the Pa. & New Eng. R. R., No. 102, Equity Docket. Trunkey, J., absent.
There was no appearance for defendants and a decree pro confesso for want of an appearance was entered.
The facts were reported as follows by the master, George Kunkel, Esq. :
“ The Pennsylvania, Poughkeepsie and New England Railroad Company was chartered under the general railroad laws of this State on the sixth day of May, A. D. 1819, with a capital stock subscribed to the amount of $535,000,10 per cent, of which, $53,500, was paid in. On the following day, May seventh, at' a meeting of the Board of Directors of the company, a resolution was adopted authorizing the President to borrow a million dollars, and to execute bonds ana a mortgage to secure the payment of the same. Pursuant to this, resolution, one thousand bonds for one thousand dollars each were executed, and a mortgage for one million dollars upon the line of railroad, franchises, rights, and privileges and property, real and personal, of the company then owned or thereafter to be acquired, was executed and delivered to George W. McPherran and Pierce O. De Sauque in trust to secure the principal and interest of the bonds, which mortgage was recorded in the office of the recorder of deeds in Northampton county. These bonds to the amount of $200,000 were negotiated, most of which, however, have since been surrendered to the complainant company. This action of the directors was taken without any notice to the stockholders by publication or otherwise of the time, place and object of the meeting and this indebtedness incurred without the consent of the persons holding the larger amount in value of the stock of the company having been first obtained. The indebtedness so authorized was greater than the amount of the capital stock subscribed, not more than 10 per cent, of which was paid in. In addition to this bonded indebtedness, the company was indebted in the further sum of $25,000.
“ Subsequently the property, franchises and rights of the company were taken in execution by the sheriff of Northampton county by virtue of a writ of fieri facias upon a judgment obtained against the company by creditors other than bondholders, and on the twelfth day of June, 1886, were sold to Luther L. Cheney, representing these creditors. Afterward, Luther L. Cheney transferred all his right, title and interest in the rights, franchises and property so sold to the persons whom he represented, who organized a company under the name and title of the Harrisburg and Eastern Railroad Company, which is the complainant in this suit.
■ “ The only question of law to be determined in this case is that of the validity of the bonds and mortgage executed and delivered as above set forth. If the bonds and mortgage are valid, then the complainant has acquired the rights, franchises and property of the Pennsylvania, Poughkeepsie and New England Railroad Company, subject to the mortgage, the lien of which the law provides shall not be affected by the sheriff’s sale.
“ The purpose of this bill is to relieve the complainant’s property from its apparent liability to pay the mortgage upon the ground that the same was incurred without authority of law. The defendants are the trustees named in the bonds and mortgage, and that the bill is properly filed against them is sustained by the decisions in Kerrison, Assignee, v. Stewart et al., 93 U. S. 155; Shaw v. R. R., 100 U. S. 605; and Shaw v. Norfolk R. R., 5 Gray, 162.
The master then quoted § 7, article xvi, of the constitution of Pa. and §§ 1, 2 and 3, of the Act of April 18, 1874, P. L. 61, and proceeded:
“None of these requirements of the constitution and the Act of April 18, 1874, were observed by the Pennsylvania, Poughkeepsie and New England Railroad Company in the issuing of the bonds and the creation of the mortgage here in question. The failure so to do on the part of a corporation is fatal to the validity of its bonds and mortgage. “A mortgage of the property of a corporation is an increase of its indebtedness, and can be affected only in compliance with article xvi., section 7, of the Constitution, and the Act of April 18,1874. Otherwise the mortgage is void.” Pitts-burg and State Line Railroad Company v. Rothschilds, 1 Cent. 107. Wherefore the master is of the opinion that the bonds and mortgage in suit are null and void.”
The master suggested a decree accordingly. Upon motion for decree, the court filed the following opinion, by Simonton, P. J.:
“ The complainant seeks in this case to obtain a decree declaring void certain bonds, amounting to the sum of say $200,000, which were issued by the corporation defendant, payable to the defendants De Sauque and McPherran, trustees, or bearer, by the Pennsylvania, Poughkeepsie and New England Railroad Co., on the security of a mortgage on the property and franchise of said corporation which was executed and delivered to said sureties. None of the holders of the bonds have been made parties, nor has there been service upon any of them, or, so far as appears, any notice to them to appear and defend their interests. Service has been made upon the said trustees, who have' declined to appear, and the bill as to them has been taken pro confesso.
“ In this state of the case, we are asked to decree, for reasons set forth in the bill and on the facts found by a master, to whom the case was referred ex parte, that the said bonds ‘are void and never had valid existence, and all proceedings thereon are null; and that the holders of said mortgage and bonds, and those claiming ownership therein, or in the corporate franchise of the corporation defendant, by reason of any proceeding based on said bonds, be enjoined and restrained from using said bonds.’
“ It is very possible that the complainant has, ex parte, shown such facts as, if not contradicted or explained, might warrant a decree declaring the bonds invalid.
“ But have we jurisdiction to make a decree, as this case stands, which would be binding upon the bondholders, without notice to them, either actual or constructive ? Complainant contends that we have, on the ground that the trustees are the representatives of the bondholders ; that the latter would be bound by a decree against the trustees, and that they are the only necessary parties to the proceeding, and cites Kerrison v. Stewart, 93 U. S. 155; Shaw v. R. R. Co., 100 U. S. 605; and Shaw v. Norfolk County R. R., 5 Gray, 162, in support of this position.
As is said, in the first case cited, by O. J. Waite: ‘It cannot be doubted that, under some circumstances, a trustee may represent his beneficiaries in all things relating to their common interest in the trust property. He may be invested with such powers, and subjected to such obligations that those for whom he holds will be bound by what is done against him, as well as what is done by him. The difficulty lies in ascertaining whether he occupies such a position, not in determining its effect-if he does. If he has been made such a representative, it is well settled that his beneficiaries are not necessary parties to a suit by him against a stranger to enforce the trust.’
“We have nothing in this case, either in the allegations of the bill or in the findings of the master, except the bare fact that the mortgage to secure the bonds was executed and delivered to DeSauque and McPherran, ‘in trust to secure the principal and interest of said bonds,’ and that the bonds were issued to said trustees or bearer. There is no averment nor evidence tending to show that the trustees had any duties to perform beyond holding the naked legal title to the mortgage, or, if any other, their nature or extent. We are, therefore, entirely without data from which we might be able to determine how far a decree, made in their absence, would bind the bondholders. Chief Justice Waite says, in the opinion quoted from above: ‘ Undoubtedly cases may arise in which it would be proper to have before the court the beneficiaries themselves, or some one other than the trustee to represent their interests.’ So far as we are furnished with facts from which to determine the question, we think this is such a case, especially since, as found by the master, ‘ there is no appearance on the part of the defendants [the trustees], who, in all its stages, have refused to have anything to do with this proceeding.’
“ We do not doubt that, in a proceeding to enforce a mortgage, made to trustees for the benefit of bondholders, with power to the trustees — on the happening of the contingencies specified in the bonds and mortgage — to foreclose, a proceeding for this purpose in their name alone would be regular and binding on the bondholders; but when the suit is for the purpose of having the bonds declared void, and there is nothing in the case to show that the trustees are required, or even authorized, to represent the bondholders, we think it would be going a dangerous length, and far exceeding the bounds of a proper discretion, to make a decree against the latter, without notice, either actual or constructive, to the latter.
“We therefore decline to make the decree asked for, and recommended by the master.”
The assignments of error were contained in the history of the case, which, after reciting the proceedings to refusal of decree, concluded as follows:
“ To all of which the plaintiff files the following exceptions: I. The court erred in refusing to confirm the master’s report. II. The court erred in refusing to declare the bonds and mortgage void. III. The court erred in refusing to grant the plaintiffs the relief asked for in the bill.”
Henry Trumbore, for plaintiff in error.
The rule is that the trustees are to represent the bondholders in all matters of litigation respecting their common and general rights, unless- the contrary appears. Justice Bradley, in Campbell v. R. R., 1 Woods, 377. The true-party is the trustee. McElrath v. R. R., 68 Pa. 40, 41.
This depends, not merely upon the terms of the mortgage.deed, but upon the implication which arise from the relation of the parties and the condition of the trust property. Jones By. Securities, §§ 357, 361.
Whenever cestui que trusts, i. e., bondholders, creditors, etc., are not necessary parties to a suit by the trustee, assignee, etc., to enforce the trust, assignment, etc., the same class of beneficiaries are not necessary parties in a suit by a stranger against, the trustee, assignee, etc., to defeat the trust, assignment, etc., in whole or in part. Kerrison, Assignee, v. Stewart et al., 93 U. S. 160.
As to trustee enforcing trust, etc., and as to suit against trustee, etc., see, also, Shaw v. R. R., 100 U. S. 605; Van Vechten v. Terry, 2 John. Ch. 197; Willink v. Morris’ Canal and Banking Co., 4 N. J. L. 379; Ames v. N. J. Franklinite Co., 12 N. J. L. 66 and 507; McElrath v. R. R., 68 Pa. 40; Rice v. R. R., Phila. 294; Williamson & Upton v. R. R., 25 N. J. Eq. 13; Cullen v. Queensbury, 1 Brown’s Ch. 101; Rogers v. Rogers, 3 Paige Ch. 379; Wakeman v. Grover, 4 Paige Ch. 34.
Vail, Receiver, v. Hamilton and Bruce, Trustees, 85 N. Y. 453, is on all fours with this case, on the question of parties.
The mortgage and bonds in question, issued in violation of § 7, Article xvi of the constitution and the Act of April 18, 1874, P. L. 67, are without authority and void. Pittsburg and State Line R. R. v. Rothschild, 4 Cent. 107; Borough of Millerstown v. Frederick, 114 Pa. 435.
No counsel appeared for appellees.
Oct. 1, 1888.

Opinion:
Green, J.,
It is scarcely necessary to add anything to what has been so well said by the learned court below. The proceeding is aimed directly against the bonds in question, and of course assails necessarily the rights of the persons who hold them. The trustees hold their office for the benefit and protection of the bondholders, but cannot be regarded as their representatives for all purposes. Of course, if they were, if the relations between them were such as to constitute the trustees general agents or attorneys in fact in all matters relating to the bonds, so that service of process in adverse proceedings would be binding upon the bondholders when made only upon the trustees, the contention of the appellant might be sustained. But there is nothing in that relation which makes them general agents for the bondholders as to all matters affecting the bonds. The right of the latter to own the bonds and to defend their ownership, and to defend the validity of the bonds, is a right which is personal to the owners of the bonds. Whenever that right is assailed, they have an undoubted right to protect themselves and their title, in their own persons and by their own counsel. It may be conceded that, for many purposes, the trustees do represent the bondholders, and, wherever they do, the latter are bound by their acts. The authorities cited by the appellant do not reach to the position that, in a proceeding such as this, which attacks the very validity of the bonds, the trustees may be substituted as defendants and process served on them so as to obligate the bondholders by all the consequences of an adverse proceeding and judgment. In the absence of clear and satisfactory authority for a ruling to that effect, we are unwilling to take such a step. It is true, the appellant may be subject to some inconvenience in ascertaining who are the holders of the bonds, but that difficulty is not insuperable; as against the consequences which might result from allowing an adverse judgment to be taken against persons who had no notice, and have never had a day in court, it is not to be considered.
Decree affirmed.