Court Opinion

ID: 5207327
Source: CourtListenerOpinion
Date Created: 2022-01-06 16:05:05.942195+00
Date Added: 2024-06-11T08:27:18.900191
License: Public Domain

Clarke, J. (dissenting):
Defendant Chicago and Eastern Illinois Railroad Company owns, and has for many years owned, certain railroads in the States of Illinois and Indiana. For a considerable number of years prior to October 1, 1902, these railroads had been successfully operated as an independent system. Its net earnings were steadily increasing and for the fiscal year ending June 30, 1902, its surplus, after payment of operating expenses, taxes, rental, interest charges and dividends on its preferred stock, amounted to more than fourteen per cent on its common stock. Dividends on its outstanding common stock were declared as follows: 1898, two and one half per cent; 1899, three and one-lialf per cent; 1900, four and one-half per cent; 1901, five and one-lialf per cent; 1902, six percent. It had accumulated in it's treasury a surplus amounting to $10,353,448.08 in quick assets. These were free assets subject to no mortgage or trust lien.
In the year 1902 the defendant St. Louis and San Francisco Railroad Company operated and still operates a large system of railroads lying west of the Mississippi river and extending across *872the Mississippi river at Memphis to Birmingham, Ala. It acquired a large portion of this system by issuing its own obligations in exchange for the stock or securities of the acquired properties. In the year ending June 30, 1901, the capitalization of the Frisco system, including the stocks, bonds, notes, trust certificates and bonded obligations, amounted to over $200,000,000, and the surplus income applicable to dividends amounted to less than one per cent of that sum.
In August, 1902, the Frisco company issued an offer to the stockholders of the Eastern Illinois company to acquire the shares, common and preferred, thereof. It desired to purchase the Eastern Illinois without any present payment for the stock thereof. It promised to pay in 1912 or upon any dividend day upon thirty days’ notice $250 a share for the common stock and to pay $10 per year dividends; $150 a share for the preferred stock and $6 a year dividend. The stock, when deposited, was put in the name of the trust company, which became the owner thereof upon the books of the Eastern Illinois, but which held such stock, under the terms of the trust agreement, as security to the former owners, the sellers, to whom were issued trust stock certificates, and for the benefit of the Frisco railroad who, by the proxy which the trust company agreed to deliver to it, exercised full voting power therein and so controlled the railroad. But this power of control was limited by the terms of the agreement and for the benefit of the old stockholders by providing that the Eastern Illinois should be continued and kept up as a going concern with the exercise of all of its corporate powers, rights, privileges and uses, and by the provision that the voting power given by the proxy issued by the holder of record, the trust company, to the Frisco company should not be used to issue stock, bonds or certificates of indebtedness for any other purpose than the legitimate purposes of the preservation, improvement and betterment of the Eastern Illinois, and that the trust assets which stood upon the Eastern Illinois’ books on the -15th of August, 1902, amounting to upwards of $10,000,000, should only be used for the same purposes, that is, the payment of debts and obligations and for the improvement and betterment of the Eastern Illinois as a complete corporate individuality and a going concern, and this because upon any default of thirty days in the payment of *873dividends or a default at the end of the forty years in the payment of the amount agreed to be paid, the stock of the Eastern Illinois was to be given back to the original sellers in place of their trust stock certificates, and so, of course, the road surrendered to them. And by the terms of the offer of deposit and by the terms of the agreement itself, the certificate holders were in express terms made parties to that agreement and were possessed of the rights, privileges and beneficial interest therein provided for. The object of the agreement was to give to the Frisco road the benefit of the earnings of the Eastern Illinois above the amount necessary to pay its operating expenses, fixed obligations and the dividends agreed to be paid to the certificate holders, but as security for the payment ,,of those dividends and the keeping of the contract, the road was to be kept intact and the new management made possible by the ownership of the stock was limited by the trust agreement in the things which it could do. This, then, was move than a conditional sale where possession of the thing itself, that is, the stock, was to be given back in case of default. It was a controlling agreement that while possession of the railroad, evidenced by the stock, the thing sold, or agreed to be sold, was in the hands of the conditional purchaser, it should be managed, controlled and preserved according to the prescribed conditions and within the prescribed limitations of the trust agreement.
The defendant St. Louis, Memphis and Southeastern Railroad Company, a Missouri corporation, hereafter called the Southeastern company, was organized on or abopt January 8, 1902, and has constructed and otherwise acquired certain railroads situated in the States of Missouri and Arkansas and lying west of the Mississippi river and south of St. Louis. On or about January 10,1902, there were executed with reference to the Southeastern company certain agreements to wit, (a) a construction contract between the Southeastern company and the Missouri and Southeastern Construction Company ; (b) an agreement between the said construction company and the Frisco company; (c) a traffic agreement providing for the interchange of traffic between the Frisco company and the Southeastern company; (d) a trackage agreement providing for certain trackage rights between the Frisco company and the Southeastern company; {e) the first mortgage of the Southeastern company to the Old Colony *874Trust Company and John F. Shepley as trustees to secure a proposed issue of bonds of the Southeastern company. Under this mortgage $9,188,500 bonds were issued and were outstanding on April 14, 1904. The foregoing papers were all dated the same day, were executed with reference to each other and constituted a single plan or scheme for the construction or acquisition of the proposed railroads of the Southeastern company. Thereafter and prior to April 14, 1904, and pursuant to the said plan or scheme, certain of the proposed railroads of the Southeastern company were constructed or acquired and operated under the supervision and management of the engineers and traffic managers of the Frisco company. Pursuant to said plan or scheme, the Frisco company, long prior to April 14, 1904, acquired all of the capital stock of the Southeastern company at a price of about $32 per share in | the collateral trust notes of the Frisco company. For the purpose of said acquisition the Frisco company prior to said date issued about $4,000,000 of such collateral trust notes under an agreement with the Eastern' Trust Company, dated November 1, 1902, of a somewhat similar nature to the stock trust agreement made between the Frisco company and the Eastern' Illinois. During the period of construction and prior to April 14, 1904, the earnings of the railroads of the Southeastern company were credited to construction account, which account was in the control of the officers of the Frisco company, and the expenses of said construction were paid by said officers. The said earnings of the Southeastern company at no time during said period equalled its running expenses and the cost of construction and completion of its said railroad lines exceeded the amount realized from its stock, bonds and other securities by more than $3,500,000, which sum was, prior to April 14, 1904, advanced by the Frisco company for the purpose of such construction. On or about November 30, 1903, all of the railroads constructed or acquired, and to be constructed and acquired, and all of the appurtenant property of every description of the Southeastern company were leased to the Frisco company for a term of ninety-nine years. Under said lease the Frisco company was entitled to the immediate possession and use of all railroads and other property of the Southeastern company and to receive all the rents, issues and profits thereof and was obligated to apply the net earnings of the *875leased properties to the taxes and interest on the bonds of the lessor, , and thereafter to apply them in payment of dividends on the stock of the lessor, said stock being then owned by the Frisco company itself.
In substance and effect the organization of the Southeastern company was merely a means devised by the Frisco company to acquire a certain railroad route. The Frisco company participated in the creation of the Southeastern company, built and operated its road under the supervision of the Frisco company’s officers, absolutely controlled its traffic policy, owned all its stock, elected its directors and officers, and eventually leased its railroads and property to itself.
Shortly prior to December 18, 1902, the St. Louis and Gulf Railway Company, a Missouri corporation, hereafter called the Gulf company, was organized to construct, acquire and operate and has constructed and acquired certain railroads and other property within the States of Missouri and Arkansas lying south of the city of St. Louis. For the purpose of such construction and acquisition, the said Gulf company executed its first mortgage to the St. Louis Union Trust Company, dated December 18, 1902, under which mortgage there were issued and outstanding on April 14, 1904, bonds of the par value of $5,852,000. Some time after the date of its organization, and in or about 1903, the entire capital stock of said Gulf company was acquired by the Frisco company and the said Frisco company guaranteed the principal and interest of the entire issue of said bonds. On or about June 1, 1904, all the railroads and property of the Gulf company were conveyed to the Southeastern company. For a considerable time prior to April 14, 1904, and ever since, the operation and traffic policies and the corporate policy and actions of the Gulf company have been completely controlled by the Frisco company, and the said Gulf company has had no separate or independent action as distinct from the Frisco company.
The railroad of the Southeastern company connects physically with that of the Eastern Illinois company at Thebes, 111., and with that of the Frisco company at Liudenwood, Mo., near St. Louis. Under trackage agreements with the Frisco company, the Southeastern company operates into St. Louis over the tracks of the *876Frisco company, which trades connect in St. Lonis with the tracks of the Big Four system running from St. Lonis to Pana, 111., at, which, point the tracks of the Eastern Illinois company physically connect with the said tracks of the Big Four system. Both the Frisco company and the Eastern Illinois company, by trackage agreement have the right to operate fully all through traffic over the said tracks of the Big Four system between St. Louis, Flo., and Pana, 111., for a period of 999 years. Prior to April 14, 1902, it became greatly to the interests of the Frisco company to devise a moans of refunding the various obligations and securities aforesaid created with reference to the properties of the Southeastern and Gulf companies, and to devise a means of carrying said obligations which would be less burdensome to the Frisco company. The earnings of the Southeastern and Gulf companies were insufficient to meet their fixed charges, including their issues of bonds above mentioned, and the said bonds were selling below par. The said bonds of the Southeastern company and Gulf company were held, to a very large extent, by certain syndicates, some of which syndicates were about to expire by limitation in the spring and summer of 1904, on which expiration the said bonds were likely to become scattered. The collateral notes of the Frisco company, issued for the purchase of the Southeastern company’s stock, were also largely held by one of said syndicates, and the Frisco company had an option for the purchase or redemption of said collateral notes at eighty-two and one-half per cent of their face valué, which expired on July 1,1904.
Accordingly, the Frisco company attempted to put into execution certain plans for refunding the said obligations and securities. It first proposed to organize a new corporation to acquire a through line from Chicago to New Orleans. It was proposed that said corporation should, take over the properties of the Eastern Illinois and Southeastern and Gulf companies and should construct the remaining railroad necesssary to reach New Orleans.
This was a large proposition, about $175,000,000. This plan was abandoned for the time on the advice of the bankers who were to finance the plan, to the effect that the securities could not be floated at that time.
Thereafter the Frisco company proposed a second plan, to the effect that the above-mentioned obligations and securities of the *877Southeastern and Gulf companies should be purchased by the Eastern Illinois company, and that the Eastern Illinois company should issue its bonds for about $26,000,000 in payment therefor. Upon learning of said plan, the plain tiff Kissel and certain other large holders of the common stock trust certificates issued under the stock trust agreement, with reference to the Eastern Illinois company stock, protested and the said plan was abandoned.
Thereafter the Frisco company offered to the syndicates holding the Southeastern and Gulf debt to issue in exchange therefor bonds of the Frisco company secured by a mortgage of said railroads and property of the Southeastern company; but the said proposition was rejected by the syndicates as not satisfactory. They said they were satisfied with the securities they had and did not want to exchange them unless they could get something better than they had ; that they had practically the first mortgage on the St. Louis, Memphis and Gulf lines, and they had the Frisco collateral trust notes, and they practically had the Frisco as a guarantor of the bonds, because the Frisco owned all the stock that was underneath them, and they stated that they wanted something more or they preferred to stay where they were, and refused to accept the new scheme unless the bonds and obligations to be issued were guáranteed by the Eastern Illinois company.
Thereafter, and as appears conclusively from the evidence, for the sole purpose of ‘refunding said Southeastern and Gulf debt and of repaying to the Frisco company the advances upon the construction account of $3,500,000 which it had advanced, the Frisco company devised‘and put in execution the, plan under review in this case. Its basis was the so-called traffic agreement at bar. It did not have its inception in the operating or traffic departments of any of these railroads. It was not necessitated by any emergency in traffic conditions. It was not caused by any disruption of amicable relations or any prospect thereof. The parties to it were all operated and conducted as one road under the same management. The Frisco road dominated and controlled each of the subsidiary companies. It nominated, elected and kept in office all their directors and operating officers. The traffic had been and continued to be as it ordered and required, and there was absolutely nothing in the practical management of the railroads concerned which instigated *878or required this agreement. It was, from all of the evidence and as evidenced upon the face thereof, purely a financial measure dictated by the financial necessities of the situation, brought forward as the fourth of a series of plans to refund the outstanding obligations, the syndicates holding whieli were about to be dissolved, the members of which had demanded as a condition of their consent to a new refunding scheme the guaranty of the one successful and dividend-paying well-to-do road in the combination possessed of a handsome surplus, to wit, the Eastern Illinois.
It is impossible to read this record and to reach any other conclusion than the one just stated. It was not a traffic agreement as called, but a financial device to procure a solvent guarantor for a refunding scheme for the benefit of the dominant interest, the Frisco road, and to enable it to extricate itself from the difficulties in the refunding of its debts and obligations. Indeed, counsel for the railroads unwittingly corroborates this view, for he says in his brief: “ With this substantial guaranty of income to the Southeastern Company, the then holders of the Southeastern securities were willing to part with their securities and to accept in lieu thereof a materially less amount of short term securities.”
I said that its character was evidenced upon the face of the agreement. It was dated April 14, 1904, was between the Frisco company and the Eastern Illinois company as parties of the first part, and the Southeastern company as party of the second part. In other words, it was made by the Frisco company with itself. It provides: “ Whereas all lines of railroad and the appurtenant franchises, equipment and property of the Southeastern Company are subject to a mortgage dated January 10,1902, made to the Old Colony Trust Company and John F. Shepley as trustees, to secure the first mortgage four per cent gold bonds of the Southeastern Company of an issue limited to the aggregate amount of $13,000,000, of which bonds to the amount of not exceeding $9,188,500 have been issued and are outstanding; and whereas the Southeastern Company, for the purpose of refunding the said outstanding first mortgage bonds of the Southeastern Company and of completing its lines of railroad, and of refunding outstanding indebtedness, incurred for the construction and completion thereof, and for the acquisition of additional line? of railroad, proposes to execute a new mortgage to hear *879date June 1, 1904, and to issue thereunder five year four and one-half percent gold bonds of the Southeastern Company aggregating in principal amount $16,000,000, of which the interest obligations of the Southeastern Company will aggregate $720,000 per year; and whereas the entire capital stock of the Southeastern Company, amounting in par value to $12,500,000, is pledged and deposited with Eastern Trust Company, as trustee under a certain trust agreement dated November 1/1902, made by the Frisco Company to secure an issue of four per cent collateral trust gold notes of the Frisco Company, and amounts aggregating approximately $3,700,000 over and above the bonded indebtedness of the Southeastern Company have been advanced by the Frisco Company and expended in the construction of the railroad lines of the Southeastern Company, and the Frisco Company proposes to retire said collateral trust gold notes and to partially reimburse its treasury for said advances to the Southeastern Company by the issue and sale of two and one-lialf year five per cent gold notes of the Frisco Company of an aggregate face amount of $5,000,000 under a trust agreement to bear date June 1, 1904, and the interest obligations on such new gold notes will amount to the sum of $250,000 per year, for a valuable consideration, it is agreed as follows: * * * The parties of the first part jointly agree that they will collectively interchange with the i-ail-road lines of the Southeastern Company a sufficient amount of traffic during the term of this agreement to produce, together with the local and other traffic of the Southeastern Company, an aggregate semi-annual net revenue to the Southeastern Company of not less than $485,000 over and above all expenses of maintenance, operation, repairs and renewals of and taxes on the railroad property of the Southeastern Company; said amount of net revenue being at least sufficient to provide the interest on the entire proposed issue of said five year four and one-half per cent gold bonds of the Southeastern Company, and a dividend of $250,000 per year upon the capital stock of the Southeastern Company, pledged to secure said proposed issue of two and one-half year five per cent gold notes of the Frisco Company; and the Southeastern Company agrees that said net revenue will be applied semi-annually to the payment of such interest and dividends as they accrue, and to the extent necessary to pay them in full. * * * This agreement shall be and remain *880in force from the first day of June, 1904, until the first day of Jutie, 1909, and thereafter so long'as any of said five year four and one-half per cent gold bonds or of said two and one-half year five per cent gold notes shall remain outstanding and unpaid.”
In other words, by this agreement the Eastern Illinois guaranteed $910,000 per year for five years and thereafter so long as any of said bonds should remain unpaid.
This agreement, having been made by the directors, was submitted to and ratified by the stockholders at a meeting held on June 1, 1904. Out of 52,590 shares of preferred stock represented and 72,155 shares of common stock, 41,917 of the preferred and 72,124 common were represented by the proxy given to the Frisco road by the Colonial Trust Company, in spite of the written protest against such action sent by counsel for the plaintiff Kissel to the trust company.
It is not claimed that said agreement is ultra vires the corporation. Being an agreement within the powers of the company, and having been ratified at a meeting of the stockholders, ordinarily that would have been an end of this matter. But this was not an ordinary case. The stock trust agreement was in existence. As I read that agreement, this guaranty offends the language and intent thereof. I have no doubt that the limitations of said agreement against the issuing of stock, bonds or certificates of indebtedness or the use of the trust assets of said company for any other purpose than the payment of its own debts, obligations, betterments and improvements covers this guaranty. A burden was put upon the road which was pledged to bo kept intact and without outside obligations or bonds to secure the payment of the dividends and the payment of the obligations to the stockholders, and the handing back to them of the road, in case of default, unimpaired and without additional burden. Ko matter what the form of words, no matter what the precise definition may be, the intent of that instrument from many of its clauses clearly indicates that purpose, and by its terms the trustee thereunder was not only the trustee of - the Frisco company, the proposed purchaser of the stock, but of the certificate holders, who were the sellers thereof, for in express language they are made cestuis que trustent, and I think have a right to complain and to ask the interposition of a court of equity to pre*881vent or to undo an act done to their detriment by the aid of their trustee .in furnishing the Erisco company the proxies by which it was able to approve the action of its directors in making this contract, which evidently is not for the benefit of the certificate trust holders, may be detrimental to their interests, and ¡nits a serious obligation upon their security, and so it comes within the doctrine of waste, and, as I understand it, a cestui que trust may have an action in equity to prevent waste of the trust estate by the trustee or through the agency of the trustee.
Nor is this action to he defeated under the requirement of the trust instrument, which provides that actions thereunder need not be brought by the trustee except upon the request of twenty per cent of the certificate holders. Before instituting this action the plaintiff wrote to his trustee, the Colonial Trust Company, requesting access to the register of the holders of stock trust certificates which it had, in order to get the names of possible plaintiffs to join him in the suit. Although the trust agreement expressly provided for the keeping of such register which “ shall at all reasonable times be open for inspection by the trustee and by any holder of stock trust certificates,” the trust company declined such leave without the permission of the San Francisco company. This wasted valuable time. In the meanwhile the parties to the traffic agreement, and plan based thereon, were straining every nerve to put the scheme through. It seems insincere to claim that the suit must fail because twenty per cent of the certificate holders did not join as plaintiffs in its inception, since the refusal to allow inspection of the records prevented such joinder until after the scheme was perfected, though the necessary number were joined as plaintiffs by order of the court after the suit was commenced. Further, those provisions were and are expressed in the instrument itself, to be for the protection of the trustee. They had in view actions to declare or enforce the defaults therein stated. No default, as specifically provided for in the instrument, is here in suit. The act complained of is not under the trust instrument, but outside of the trust instrument. It affects the property held under the trust instrument, and is brought to prevent waste, and, therefore, it does not come within the provisions that a suit must be brought *882upon the request 'of twenty per cent of the stock trust certificate holders. Furthermore, although the plaintiff, at the time he commenced the action, did not represent twenty per cent of the certificate holders, yet• since then other certificate holders have, under orders of the court, been permitted to join in the action as parties plaintiff, bringing the amount now represented to over twenty per cent, as is conceded, and in addition thereto, while the Colonial Trust Company, the trustee under the instrument, was not a party plaintiff, yet in its answer it distinctly asked that if the court should determine the agreement attacked to be invalid, it should be set aside and annulled, and at the end of the case, the court having so decided, it joined in asking for the relief prayed, and it was upon its motion that the judgment here appealed from was entered. So that we have in this equity case all of the stockholders, because the Colonial Trust Company is the stockholder of record, holding said stock to be sure for the beneficial interests of the Frisco company, but also for the certificate holders, and over twenty per cent of the trust certificate holders, beneficial owners of that stock, uniting in asking that a contract made by their directors shall be set aside as against the interests of the company and theirs. So that it does not seem to me that from any point of view any technical obstacle lies in the plaintiffs’ way; that this instrument was executed in violation of the terms and the spirit of the trust agreement, was made by interested parties for their own benefit against the interests of .the Chicago and Eastern Illinois company and against the interests of the beneficial owners of the stock and ought to be set aside.
It has been suggested upon consultation, although not presented upon the argument or in the briefs of counsel, that this judgment ought not to be affirmed, because to do so would diminish the security covered by the mortgage upon the faith of which bonds were issued, and so diminish the security upon the faith of which the bondholders purchased. The record discloses that on the 26th of May, 1904, the plaintiff, through reputable counsel, wrote to the Colonial Trust Company, the trustee under the agreement, calling its attention to the terms of the so-called traffic agreement and pointing out why in the opinion of the writer the agreement was not good in law or in morals, and requesting the trust company to *883take steps to prevent the stock of the Chicago and Eastern Illinois Railroad Company, of which it held the legal title, from being voted in approval of said agreement, and that the trust company refuse to give any proxy which could be used for such purpose or that if any proxy had been given that it be revoked before the next meeting. On the same day the same counsel wrote to the president and board of directors of the St. Louis and San Francisco Railroad Company protesting against the proposed action and requesting that the railroad company proceed no further with, but forthwith retire from the pretended agreement of April 14, 1904. “ With this request you can readily comply for the reason that you yourselves in your different capacities constitute all the parties to that agreement. Ton made the agreement with yourselves. Tou used the power conferred upon you, as the representative of the beneficial owners of the Chicago and Eastern Illinois Railroad Company stock to benefit your own company and the St. Louis, Memphis and Southeastern Railroad Company, of which you own the entire capital stock; and exercising the same power you can retire from the agreement.”
On June first he wrote to the president and board of trustees of the New York Security and Trust Company, the proposed trustee under the proposed mortgage, calling its attention to the character of the transaction and stating, “ This information is communicated to you in order that you may not receive the conveyance of the said traffic contract of April 14th, without knowledge of its invalidity, and with great respect I hereby warn you in Mr. Kissel’s behalf against permitting any bonds of the said proposed $16,000,000 issue to go out with your certificate upon them into the hands of bona fide holders for value, without the purchasers having communicated to them the facts now put in your possession, showing that a portion of the security which purports to be conveyed to you in trust for the bondholders is invalid.”
On June first the same counsel wrote to the Colonial Trust Company stating, “ The natural effect of this transaction will be that the bonds being sold will pass into the hands of bona fide holders for value who will take them in reliance upon the provisions which will purport to give to them as a part of their security a right to have the earnings of the Chicago and Eastern Illinois Company. *884and in default of earnings any of the assets and money of that company applied to the payment of the interest upon their bonds until the bonds have been paid in full. These purchasers will, unless spe- . cially notified, be without knowledge of the facts which make the traffic agreement fraudulent and void as against you and as against your cestuis que trustent for whose benefit you hold the stock of the Chicago and Eastern Illinois Company; ” and he requested that the Colonial Trust Company bring suit to set aside the traffic agreement apd to restrain the execution and delivery of the mortgage, and to enjoin the issuing of bonds purporting to be secured by the said mortgage.
On the third day of June he wrote to Blair & Co., bankers, whom he had been informed were contemplating taking certain of the proposed bonds, informing them of Mr. Kissel’s claim that the said traffic agreement was executed in fraud of the rights of persons holding a substantial interest in the stock of the Chicago and Eastern Illinois Railroad Company and was invalid and that he contemplated proceedings to cause the same to be set aside. “ Under these circumstances this traffic agreement cannot constitute a substantial security for an issue of bonds or notes and this information is given to you in order that you may not be misled.”
Notwithstanding these repeated warnings, the parties proceeded with the utmost celerity to carry out the scheme so that on the tenth of June the papers had been executed and on the morning of the eleventh of June bonds had been certified by the New York Security and Trust Company to the face amount of about $15,000,000. This action was commenced on the eleventh of June and a preliminary injunction was issued on the thirteenth. On the motion to continue said injunction pendente lite, this question seems to have been before the court, where the learned judge said (44 Misc. Rep. 156): “In the view I take of the case, however, it is unnecessary to consider more than the single question, whether innocent purchasers for value of the bonds will be in any better position to enforce this traffic agreement against the Eastern Illinois sj'stem than would the original party to the agreement, the Southeastern company, through whom they would derive their right, that com- . pany having included this traffic agreement with other assets under the mortgage given to secure these bonds. The well-established *885rale of law in the case of a chose in action is that the purchaser acquires no greater right than his vendor had. In Bush v. Lathrop, 22 N. Y. 535, 538, the Court of Appeals said : ‘ All the cases agree that the purchaser of a chose in action takes the interest purchased, subject to all the defenses, legal and equitable, of the debtor who issued the security,’ quoting Lord Thurlow in Davies v. Austen, 1 Ves. 247, that ‘a purchaser of a chose in action must always abide by the case of the person from whom he buys.’ This rule as laid down in Bush v. Lathrop, supra, was said in Fairbanks v. Sargent, 104 N. Y. 108, to stand in full force and unquestioned, except to the extent that where the real owner has by the act of investing another with apparent ownership of the property estopped himself from disputing such title, the rule does not apply. * * * In the case in hand, so far from being guilty of any act which could be construed as an estoppel, the plaintiffs have shown the utmost diligence and energy in attacking the contract in question, and no one hereafter, whether a bondholder or other, will have good ground for complaining in this respect of anything that the plaintiffs have done or left undone. Unless the rule of Bush v. Lathrop is.held applicable to such a case as is here presented, it is difficult to conceive a case to which it would apply. Where a going concern mortgages all its assets, including outstanding contracts, if the mortgagee or the owners of bonds secured by the mortgage should be held to have any greater or different rights than the concern itself upon such contracts, intolerable confusion and in justice'would result.”
With this disposition of the matter all parties to this suit have acquiesced. It is true the Kew York Security and Trust" Company states in its brief “ Without fault on its part the trust company has been placed in a most embarrassing position.” That position is due to its act in certifying the bonds in the face of full information and timely warning; that in spite of said information and warning it decided to take the risk and make its certification and may, therefore, be liable thereon presents no question worthy of consideration in this case.
It seems to me that all we have to do is to decide the questions presented to. us upon this appeal, and that upon those questions the judgment appealed from was right and should be affirmed, with costs to the respondents.