Opinion ID: 1473139
Heading Depth: 1
Heading Rank: 2

Heading: Minneapolis & St. Louis First and Refunding Mortgage.

Text: The special master and the trial judge both found that this mortgage contained an after-acquired property clause conveying equipment, and this holding we think cannot be seriously contested. The controlling clauses of the mortgage are set out in the opinion of the lower court and need not be repeated here. The lower court held, however, that the after-acquired property clause was terminated by what is referred to in the record as the closure agreement of 1912, which was entered into by the Minneapolis & St. Louis No. 4, the Central Trust Company of New York, trustee under the first and refunding mortgage, and the Guaranty Trust Company, trustee under the refunding and extension mortgage. This agreement recites the existence of the first and refunding mortgage, and that the Minneapolis & St. Louis No. 4 is about to execute the refunding and extension mortgage; that Minneapolis & St. Louis No. 4 has covenanted in the refunding and extension mortgage that it would not permit any further issue of bonds under the first and refunding mortgage. With respect to the successors to Minneapolis & St. Louis No. 4, the mortgagor company, the first and refunding mortgage contains the following provisions. Section 1. All the covenants, stipulations, promises and agreements in this indenture contained, by or in behalf of the railroad company, shall bind its successors and assigns, whether so expressed or not. Section 2. Nothing contained in this indenture, or in any bond hereby secured, shall prevent any consolidation or merger of the railroad company with any other corporation, or any conveyance and transfer, subject to the continuing lien of this indenture, and to all the provisions thereof, of all the mortgaged premises as an entirety to a railroad corporation at that time existing under and by virtue of the laws of the United States or of any state or states, and entitled to acquire the same: Provided, however, that such consolidation, merger or sale shall not impair the lien and security of this indenture, or any of the rights or powers of the trustee or of the bondholders hereunder, and that, upon any such consolidation, merger or sale, the due and punctual payment of the principal and interest of all of said bonds according to their tenor, and the due and punctual performance and observance of all the covenants and conditions of this indenture, shall be assumed by the corporation formed by such consolidation or merger, or purchasing as aforesaid. Section 3. In case the railroad company, pursuant to section 2 of this article, shall be consolidated or merged with any other corporation, or shall sell, convey and transfer, subject to this indenture, all the mortgaged premises as an entirety as aforesaid, the successor corporation formed by such consolidation or into which the railroad company shall have been merged, or which shall have purchased and received a conveyance and transfer as aforesaid, upon executing, and causing to be recorded, an indenture with the trustee, satisfactory to the trustee, whereby such successor corporation shall assume the due and punctual payment of the principal and interest of said bonds and the performance of all the covenants and conditions of this indenture, shall succeed to, and be substituted for, the railroad company, party of the first part hereto, with the same effect as if it had been named herein as such party of the first part, and such successor corporation thereupon may cause to be signed and may issue, either in its own name, or in the name of the Minneapolis & St. Louis Railroad Company, any or all of such bonds which shall not theretofore have been signed by the railroad company and certified in accordance herewith; and, upon the order of said successor corporation in lieu of the railroad company, and subject to all the terms, conditions and restrictions herein prescribed, the trustee shall certify and deliver any of such bonds which shall have been previously signed and delivered by the officers of the railroad company for certification, and any of such bonds which such successor corporation shall thereafter cause to be signed and delivered for that purpose. All the bonds so issued shall in all respects have the same legal rank and security as the bonds heretofore or thereafter issued in accordance with the terms of this indenture, as if all of said bonds had been issued at the date of the execution hereof. Section 4. For every purpose of this indenture, including the execution, issue and use of any and all bonds hereby secured, the terms `railroad company' and `the Minneapolis & St. Louis Railroad Company' and equivalent terms include and mean not only the party of the first part hereto, but also any such successor corporation. Every such successor corporation shall possess and from time to time may exercise each and every right and power hereunder of the Minneapolis & St. Louis Railroad Company, in its name or otherwise. The closure agreement of January 1, 1912, above referred to, by which Minneapolis & St. Louis No. 4 relinquished its right to authorize and deliver first and refunding mortgage bonds in addition to the $13,244,000 principal amount then outstanding, contains the following: First. The railroad company waives and relinquishes its right to the authentication and delivery of any first and refunding mortgage bonds, in addition to the $13,244,000 face value of principal of said bonds now issued and outstanding as hereinbefore set forth, and covenants and agrees with the trustee and with the trust company, jointly and severally, that it will not at any time hereafter request or demand the authentication and delivery, under the said first and refunding mortgage, of any such additional bonds, and that it will not issue or suffer or permit to be issued any of such bonds; but any and all bonds not heretofore authenticated and delivered under the said first and refunding mortgage shall forthwith upon the execution and delivery of this agreement, be cancelled; the intention and purpose of their agreement being to dispose of all the bonds secured by the first and refunding mortgage of the railroad company (including the bonds which were under the terms and provisions of said mortgage to be issued only for extensions, improvements and equipment) not heretofore issued and now outstanding. The purpose of this agreement was to close the issue of bonds under the first and refunding mortgage and to cancel the unissued bonds. Doubtless the motive for so doing was to terminate the after-acquired property clause in the mortgage, and the question is squarely presented as to whether a cancellation of the unissued bonds is tantamount to the expression to sell or dispose of them as provided in the granting clause of the mortgage. We are of the view that the words sold or disposed of, as used, contemplated a sale or disposition of the bonds in accordance with the provisions of article 2, sections 2 and 7, of the mortgage. No other method could have been in contemplation of the parties at the time of the execution of the mortgage. This purpose was not satisfied by a cremation, cancellation, or destruction of these bonds. Phelps v. Harris, 101 U. S. 370, 25 L. Ed. 855; Allen v. Hawk, 196 Ky. 607, 245 S. W. 170; Platt v. U. Pac. R. Co., 99 U. S. 48, 25 L. Ed. 424; Bullene v. Smith, 73 Mo. 151; Newcomb v. Newcomb, 12 N. Y. 603; Love v. Pamplin (C. C.) 21 F. 755; Gould v. Head (C. C.) 41 F. 240. The holders of the bonds were not parties to this agreement of 1912. It is, however, argued that the trustee was the duly accredited representative of the bondholders, and as he joined in the execution of this instrument, they should be bound. The lower court held that the trustee under the railway mortgage, before default, was without such authority, and in this view we concur. Duncan v. Mobile & Ohio R. Co., 2 Woods, 542, Fed. Cas. No. 4137; Colo. & So. Ry. Co. v. Blair, 214 N. Y. 497, 108 N. E. 840, 842, Ann. Cas. 1916D, 1117. In the last-cited case, the Court of Appeals of New York, among other things, says: But if the trustee has discretion to change or compromise the security held by it, it may exercise that discretion unwisely and improvidently, and the bondholders will have no recourse except to it. The vast sums invested in railroad bonds presumably on the faith of the security pledged would be subject to an unknown risk if a mortgage trustee could sell, change, or in any manner compromise the security except as authorized in express terms or by necessary implication. While it was the view of the lower court that this act of the trustee was ultra vires, the agreement was nevertheless held to be binding on the bondholders upon the ground that there was no sufficient proof in the record that the agreement was entered into without their knowledge; that there was no showing as to the time when the bondholders first learned of the agreement, even if they did not know of it at the time of its execution; that there was no showing whether these bondholders had held their holdings in 1912; and, finally that the recording of this agreement in the various counties in Minnesota, and with the secretary of state of South Dakota, besides other acts of publicity, showed laches on their behalf in asserting the alleged violation of their rights. There is no proof that the bondholders had actual knowledge of the execution of this agreement, and the circumstances of the making of the agreement are not such as to indicate a likelihood of actual notice. It was not incumbent upon the bondholders to prove that they did not have knowledge of the execution of this agreement, but, in order to bind them on this ultra vires act of the trustee, it was necessary to make proof that they had such knowledge or notice. The bondholders are not charged with constructive notice. There is no retrospective effect to a record, and a mortgagee, having once recorded his mortgage, is entitled to the protection of the registry laws, and is not required to search the record from time to time to see whether or not other conveyances have been placed upon the record. Jones on Mortgages (8th Ed.) § 651; Tiffany on Real Property (2d Ed.) § 567; Abbott v. Peek, 35 Minn. 499, 29 N. W. 194; Norton v. Met. Life Ins. Co., 74 Minn. 484, 77 N. W. 298, 539. The bondholders in their pleading denied knowledge of the 1912 agreement, but the decision of the lower court, in effect, imputed knowledge to them, apparently on the ground that a reasonably prudent man should have found out what was shown by the public records, or what was a matter of some notoriety. We are of the view that such an imputation is not warranted. The agreement was made without consulting the bondholders, and without their knowledge, and, until there was a default in the payment of the interest coupons, there was nothing to arouse in any bondholder the least suspicion that the mortgage had been modified by a subsequent agreement. The lower court was of the view that the bondholders were guilty of laches, in that they had a cause of action upon the making of the agreement in 1912 and failed to prosecute it. This is predicated on the theory that the making of the agreement in 1912 disposed of the bonds contrary to the special purpose clause in the mortgage, and thus gave rise to a right of foreclosure. This conclusion we think is unsound, because the effect of the agreement was not, as we have already held, to dispose of the bonds, but was ineffectual for that purpose. Where a cause of action has not matured, a party cannot be charged with negligence for not having made an ineffectual attempt to institute suit. Consaul v. Cummings, 222 U. S. 262, 32 S. Ct. 83, 56 L. Ed. 192; Powell v. Bowen, 279 Mo. 280, 214 S. W. 142; 21 C. J. 238. Having in mind that a mortgage creditor is not chargeable with notice of the terms of subsequently recorded instruments, it would seem clear that a mortgage creditor should not be required to anticipate that his position would be affected by the conduct of subsequent incumbrancers. Equitable estoppel cannot be invoked by those who are equally as well aware of the vice in their title as the party who is claimed to have been under the duty to speak, but remains silent. As between the trustee under the refunding and extension mortgage, and the bondholders under the first and refunding mortgage, the former had much more direct knowledge of the 1912 agreement. It was a party to it, while the latter was not, and it was charged with notice of the previously recorded mortgage. It is axiomatic that only the innocent may invoke estoppel. What is said by this court in Ill. Trust & Savings Bank v. Doud (C. C. A.) 105 F. 123, 52 L. R. A. 481, in an opinion by Judge Sanborn, is here apposite. It is there said inter alia: It is contended that it is inequitable for the trustee and bondholders to insist that the lien of their mortgage is superior to that of the intervener, because the Ottumwa bondholders knew that the addition to the plant and power of the mortgagor was being made, and that the intervener was loaning money to the mortgagor to assist in paying for it. But the residents of Ottumwa owned only 58 of the bonds, while the majority of them were held by nonresidents, who knew nothing of the construction of the addition or of the loan of the intervener until after the new building was erected and the new machinery was purchased. The bondholders at Ottumwa could not, by their action, estop the trustee or the majority of the bondholders; and, if the intervener has any claim against the residents who held these 58 bonds, it is against them individually, and not against the trustee, or the mortgagees which it represents. Moreover, the Ottumwa bondholders did not advise, consent to, or request the loan from the intervener, and he was not induced to make it by any of their acts or omissions. The mortgage which secured them was of record, and contained a covenant that the mortgagor should make no lien superior to theirs. The intervener knew this fact, and made his loan in the face of it. The bondholders had the right to believe, and doubtless did believe, that he had advanced his money upon the credit of the mortgagor, and that he took his rights subject to the lien of the mortgage. The facts constitute no estoppel against them from insisting upon their prior lien. There is nothing unjust or inequitable in their position, and the fact that after the commencement of this suit they purchased the bonds of the nonresidents in no way changes the situation. To hold, under the record in this case, that the bondholders under this mortgage are guilty of such laches as to estop them to question the validity of this closure agreement of 1912, would certainly go far to shake the credit of railroad securities throughout the world. Duncan v. Mobile & Ohio Ry. Co., supra. We conclude that the after-acquired property clause of this mortgage survived the 1912 closure agreement. For reasons stated in other portions of this opinion, neither was this after-acquired property clause terminated by the 1916 consolidation.