Court Opinion

ID: 8862060
Source: CourtListenerOpinion
Date Created: 2022-11-26 17:51:57.902913+00
Date Added: 2024-06-11T17:05:51.616928
License: Public Domain

PURNELL, District Judge
(dissenting). . I concur in the reasoning
and conclusion that the coupons .of the. bonds must be paid before *405the bonds themselves, but cannot concur in tbe conclusion as to the method of sale. The holders of the different series of bonds, and. especially of Series A, have never accepted the terms of the morí: gage of 3889, and their rights must he adjudicated under the terms of the mortgage of 1886. Since the adoption of the state constitution in 1868 the policy and law of North Carolina in regard to corporations has been materially changed. Charters granted prior to 3868 wore held to he contracts, which th'e legislature could not change without the consent of the corporation. In Mills v. Williams, 33 N. C. 561, Pearson, J., afterwards chief justice, speaking for the supreme court of the state, in a very learned opinion, after stating the differ ence between public and private corporations, says:
“The expectation of benefit to the public is the moving consideration on the one side, and that of expected remuneration for the on day is ihe consideration for Hie other, ii is a contract, and, therefore, cannot be modified, changed, or annulled without the consent of both parties.”
This is in accord with many decisions of the supreme court of North Carolina and of the supreme court of the United States, follow ing the decision of the latter court in the Dartmouth College Case, i Wheat. 518. The same doctrine is held in Railroad Co. v. Reid, 13 Wall. 264, which was a writ of error from the supreme court, of the state reversed by the supreme court of the United States. The constitution since 1868 (article 8, § 1), reserves to the state the right to alter from time to time, or to repeal, all acts of incorporation other than municipal, and it is held that a corporation which has accepted an' amendment to Its charter since 1868 is under this provision. The large number of acts of incorporation passed at every session of (lie legislature shows the facility with which franchises are obtained, not withstanding there is a general corporation law and a provision in the article of the constitution quoted that "corporations may be formed under general laws, but shall not: be created by special act, except for municipal purposes and in cases where, in the judgment of the legislature, the object of the corporation cannot be obtained" under general Jaws.” Whether tbe reservation in this article of the constitution would place charters granted by (he legislature upon the same legal footing with charters with the right to diminish or impair the rights granted without the consent of the grantees, it is unnecessary to decide, but it would not give to the legislature power to disturb vested rights acquired in pursuance of a charter granted or former act of the legislature. A state legislature cannot impair the obligation of a contract or disturb vested rights in violation of the constitution of the United States. With the incorpora tors the legislature may deal; but when third parties, putting faith in an act of the legislature, have made contracts and acquired rights of property, the legislature cannot disturb them. Therefore the act of 1897, referred to, would be declared unconstitutional and inoperative if attempted to be applied t.o the mortgage made or the bonds issued in 3886 in pursuance of the act of the legislature of 3883. It is well settled that the laws which are in force at the time and place of the making of a contract, and where it is to be performed, enter into and form a part of the contract as much as if they were incorporated in *406its terms. This principle embraces the acts which affect its validity, construction, discharge, and enforcement, or the remedies under the contract. Von Hoffman v. City of Quincy, 4 Wall. 535; Walker v. Whitehead, 16 Wall. 314; Barnitz v. Beverly, 163 U. S. 118, 16 Sup. Ct. 1042; Edwards v. Kearzey, 96 U. S. 595. Notwithstanding the constitutional provisions in article 8, before quoted, and a general railroad law in the state, it appears from the acts of the legislature — the only source from which courts can derive any authentic evidence of a state policy as to corporations (Swann v. Swann, 21 Fed. 301) — parties building or buying railroads in North Carolina almost invariably go to the legislature for a new franchise, it is reasonable .to suppose that a purchaser at a sale of this property, either as an entirety or in divisions, would apply to that body for a new charter. The act of 1897, subject to all these objections and others, should not, therefore, “chill the sale,” as said by the circuit judge, or in any way affect it; nor should its passage have any weight with a court of equity in determining the best method of sale for this important property. Lobbyists should not be permitted to affect pending litigation, especially when they are inadvertent to constitutional provisions.
Courts of equity do not make contracts. There can be no doubt about the principle contended for by appellees that under a deed of trust containing a power of sale application may be made to the court to decree a sale, but a court of equity will follow, as nearly as may be, the provisions of the deed itself. The application to the court does not change the contract made by the parties themselves, and, upon this principle that the parties have so contracted, preference is given to the holders of the coupons to the bonds themselves. To hold otherwise is, in effect, to hold that the court may do what the lawmaking power cannot, — impair the obligation of a contract.
The original purpose of this railroad seems to have been to establish railroad communication between Fayetteville, at the head of navigation on the Cape Fear river, and the coal beds of Chatham, county, near the center, and not in the western part of the state, as is erroneously stated. From this original purpose the Cape Fear & Yadkin Valley Railroad has been formed by additions from time to time. At the date of the mortgage (1886) only that part known as “Division A” had been built, and the mortgage was on all the road then in esse to secure this series of bonds. I agree with the learned circuit judge that the usual and the best mode of ascertaining the value of property is by public auction, and, where the parties have by their own deed and contract established a method of sale, a court of equity should follow that method prescribed by the parties themselves. Expert testimony apd estimates may be biased and influenced by circumstances of which the court can know nothing. They do not make values. The safest test of the value of property is what it will bring in the open market. The parties contracted as to how this property should be sold, and how its value should be ascertained, and that contract seems to me to be binding even on a court of equity. The mortgage provides that the property shall be sold “first as an entirety, and in case that no acceptable bidder is forth*407coming for the said property as an entirety, then the said trustee shall proceed to sell separately the three divisions of the road herein-before made," and upon which the several series of bonds are hereby made or intended to be made first liens.” Who is to determine what is an acceptable bid for (he road as an entirety is left in doubt, and there is no means for determining how this question was to be settled. Is the hid to be acceptable to the trustee? To the bondholders? If so, to which class, or to the party of the first part? Or was it to he acceptable to all of these parties? A satisfactory answer to either question is not possible. Disregarding, then, this language, doubtful and ambiguous, the mortgage provides for the sale of the property first as an entirety and then by divisions, the bid to he accepted that realizes the best price for the parties directly interested in the property on which they hold the first lien, — what is known among auctioneers (an every-day practice at public sales) as an upset sale. The sole object of the court, keeping in view well-established principles, must be to secure to the parties in this cause the best result for the properly in which they have an interest. This, it seems to me, will he accomplished by following the contract made by the parties themselves, and not invoking any of the extraordinary or extrajudicial powers of a court of equity. •
Where there is a well-established rule of property in a stab;, the courts of the United States will follow that rule. Barber v. Railway Co., 166 U. S. 83, 17 Sup. Ct. 488, and cases cited. The rale in North Carolina in regard to mortgages and deeds of trust is well settled by a number of decisions of the supreme court of that state. The doctrine that a mortgage is a mere incident to the debt has never been favorably considered by the courts of the state?, but these courts hold, with a rare exception, to the better doctrine that it is a direct appropriation of the mortgaged property lo the payment of the debt, and a direct proceeding may he maintained to subject the property to the payment of the debt for which it is appropriated as a security. Murphy v. McNeil, 82 N. C. 221; Capehart v. Dettrick, 91 N. C. 344. It is equally as well settled that the grantor in a mortgage or deed of trust cannot, after execution, vary in any wav the trust. Ingram v. Kirkpatrick, 41 N. C. 463; Hogan v. Strayhorn, 65 N. C. 279.
Applying these well-established rales of property to the case under consideration, the conclusion must be that the mortgage of 1886 was an appropriation of the road then constructed from Greensboro to the South Carolina lino, known as “Division A,” to the payment of the series of the bonds known as the “A” bonds; and of Division B, from Greensboro to Mt. Airy, not completed, to the payment of the series of bonds known as the “B” bonds; and Division 0, from Fayetteville to Wilmington, not commenced, to the payment of the series of bonds known as the “Series G” bonds; and that after the execution of this mortgage neither the railroad company, the trustee, nor the legislature could vary the trust. Three years after, the debt being still unpaid, there remained in the company only an equity of redemption as to this property to be appropriated to the payment of the debt secured by the mortgage of 1889. Registration being legal notice, those claiming under this latter mortgage took with notice of the provi*408sions of the mortgage of 1886, and it appears from the mortgage itself they had actual knowledge, and were well advised as to all of its provisions. They cannot now Tbe heard to vary any of the trusts, remedies, or rights under the prior mortgage. Equity may grant them a hearing as to the distribution of the surplus funds after the debts secured by the prior mortgage are satisfied, and as to the best method of realizing, the largest returns from a sale of the property, but they should not be heard to question the validity of prior liens subject to which they accepted a second lien. Bronson v. Railroad Co., 2 Wall. 283.
The mortgage provided for a distribution of the proceeds in the event of sale in language easily understood and constituting a part of the contract. The provisions are as follows:
“It [trustee] shall apply the residue of the proceeds of said sale [after paying certain expenses] to the payment, first, to the interest due on said bonds outstanding secured or intended to be secured hereby; and, secondly, to the principal of said bonds in full, if the said purchase money, after deducting the expenses above mentioned, be sufficient; but, if not, then pro rata.”
“Pro rata” here means that creditors are to be paid or to prorate with those of the same class, and the holders of A bonds would be paid out of the funds arising out of the s„ale of the road as an entirety according to the bids for the property especially appropriated as a security for this series of bonds; and this rule would apply to the other divisions of the road, and the payment of the bonds for which they are appropriated as a security. There should therefore be a sale of the road first as an entirety, and then by divisions. It is so provided in the contract. With great deference, I dissent.