EMERY, V. C.

Bill by the Camden Safe-Deposit & Trust Company against the Burlington Carpet Company and others to foreclose a mortgage. Heard on bill, answer, replication, and proofs.

Martin P. Grey, for complainant. Mark R. Sooy, for defendant.

Gaskell, receiver. R. L. Lawrence, for defendant W. & J. Sloane Co. F. B. Levis, for defendant Tomlinson.

EMERY, V. C. The bill in this case is filed by the complainant as trustee for the bondholders, to foreclose a mortgage given by the Burlington Carpet Company upon lands, and also upon chattels, to secure an issue of bonds made by the company. This company, by proceedings taken under the insolvent corporation act, subsequent to the filing of the bill to foreclose, has been declaredinsolvent, and the receiver is a defendant to the bill to foreclose. The property, real and personal, covered by the mortgage, has been sold by the receiver for less than the amount of outstanding bonds, and by his answer, and on the hearing, the receiver now questions the validity of the mortgage, and the right of the bondholders to the proceeds of sale in his hands. The validity of the mortgage, as to both real and personal property, is contested by the receiver upon the grounds: First. That the company had no legal authority to issue the mortgage. This objection is made at the hearing, but ndt by the answer. Second. That the directors of the company, who authorized and directed the execution of the mortgage, were not at that time stockholders of the company, and therefore were not qualified to act as directors. Third. The validity of the mortgage as a chattel mortgage is further attacked upon the ground of the insufficiency of the affidavit under the act relating to chattel mortgages. Supp. Revision, p. 491, par. 11. My conclusions upon these questions are:

First. The company had authority to execute the mortgage in question. The company was a corporation created by the merger or consolidation of two previously existing corporations, under the authority of the act of 1893 (c. 67, p. 121), entitled, "An act to authorize corporations incorporated under the laws of this state to merge and consolidate their corporate franchises and other property." Under this act (section 2, subsec. 1), the agreement of consolidation is to prescribe, among other things, the amount of the capital stock of the new corporation, and the manner of converting the capital stock of each of the merging or consolidating corporations into the stock or obligations of the new corporation. By section 4, all the debts and liabilities of the former corporations attach to the new corporation, which upon the merger is vested with all the property of the former corporations, saving the rights of their creditors and their liens. Section 6 provides that the new or consolidated corporation shall have power and authority to issue bonds or other obligations, negotiable or otherwise, to an amount sufficient, with its capital stock, to provide for all the payments it will be required to make, or obligations it will be required to assume, in order to effect such merger or consolidation, and to mortgage its franchises and property to secure such bonds. In the present case the consolidation agreement provided that the capital stock of the new corporation should be $400,000, being equal to the joint issue of both the constituent companies, and that the stock of the new company should be issued, share for share, for the surrendered stock of the old companies. There was no provision in the consolidation agreement for the payment of any cash for any portion of the old stock of either company, or for the issuing of any obligations of the new company on such exchange or surrender, nor was there any provision in the consolidation agreement relating to the debts of the old companies. The mortgage now in question was made to secure an issue of bonds to the amount of $400,000, which bonds were to be used in part for the purpose of paying off mortgage liens and indebtedness of each of the constituent companies existing at the time of consolidation. The amount of this pre-existing indebtedness was not equal to $400,000, the sum fixed for the capital stock of the new company, and counsel for the receiver contends that the new company was therefore not entitled, under the sixth section to issue any bonds to be used for paying this indebtedness, and that this sixth section is the only authority for any issue of bonds by the new company. But it seems clear to me that the bonds specially authorized by the sixth section were the bonds necessary to provide for the payments to be made or the obligations to be issued in order to effect the merger or consolidation on the terms therein provided, i. e. to provide the cash or obligations which were made necessary on the conversion of the stock, or other purposes specially provided for by the agreement, and necessary in order to effect the merger according to the terms of the agreement. The payment of the pre-existing debts of the old companies was not an obligation which the new corporation was required to assume in order to effect the merger, but was an obligation imposed upon it by law as a consequence of the act of merger; and for the payment or securing of such indebtedness the new corporation has all the general powers of any corporation, including the power to mortgage. This objection, therefore, is not well founded.

The second objection to the validity of the mortgage is that the mortgage was not executed by lawful authority, and the specific reason assigned is that at the date of the execution of the mortgage neither of the four directors who authorized the mortgage to be given by the new or consolidated company was a stockholder of the new company. These four directors were each stockholders of one or the other of the old companies, and as such were, under the consolidation agreement, absolutely entitled to their stock in the new company, and this new stock was actually issued to each of them shortly after the date of the mortgage. These four directors were also the four persons named in the consolidation certificate as the first directors of the new company, and the certificate provided that these directors should hold their offices until their successors should be chosen or appointed according to law, or according to the by-laws of said corporation. Their successors were not chosen until after the execution of the mortgage. The act of 1893 (P.L. 121, § 2, subsec. 1) provides, inter alia, that the consolidation agreement shall prescribe "the number, names, and places of residence of the first directors and officers of such new or consolidated corporation, who shall hold their offices until their successors shall be chosen or appointed either according to law or according to the by-laws of said corporation." There is no express provision in the act that the first directors of the new corporation shall be stockholders, either in the new or in one of the old corporations, and in the absence of legislation a director need not be a stockholder. In re St. Lawrence Steamboat Co., 44 N. J. Law, 529 (Depue, J., page 541). The contention is that the sixteenth section of the general corporation act, providing that "the business of every such company shall be managed and conducted by the directors thereof who shall be shareholders therein * * *," applies to the case, and that these four directors named in the consolidation certificate were not entitled to act as directors until the certificates of stock to which they were entitled were actually issued to them. I am inclined to think that, inasmuch as the act of 1893 terminated the existence of the former companies, so far as their stockholders were concerned, upon the formation of the new company under it the stockholders of the old companies became, ipso facto, on the merger, such shareholders in the new company as would entitle them to be considered qualified as directors of the new company, and that for this purpose a certificate of stock of the old company, for which, under the consolidation agreement, a similar certificate in the new company must be issued, was a sufficient qualification. The four directors were certainly equitably entitled to the rights of shareholders; and, as no other person than the directors had any legal or equitable right to the new certificate in exchange for their old ones, I am inclined to think that they are not disqualified, under the language of the sixteenth section of the corporation act, merely because the new certificate had not been actually issued. But my opinion is that this section 16 of the general act does not apply to the first directors under the consolidation act, who receive their appointment by the consolidation agreement under the express provision of the statute of 1893. This act of 1893 changes the general act, so far as the provisions of the latter are inconsistent with it, or restrict the powers of the directors so named to act under the law. In Davidson v. Light Co., 99 N. Y. 558, 565, 2 N. E. 892, a general law requiring directors to be stockholders was held not to apply to the directors required by law to be named in the corporate certificate as the managers for the first year. I am of opinion, therefore, that these directors were authorized to execute the mortgage, and so decide, without reference to the question of the subsequent ratification of the mortgage by the stockholders of the company, which ratification is claimed to be made out by the evidence.

The third question is one of more difficulty. It relates to the validity of the mortgage in question as a chattel mortgage, and the question is whether it is void under the chattel mortgage act (Supp. Revision, p. 491, par. 11), which expressly declares such mortgages void as against the creditors of the mortgagor, "unless the mortgage, having annexed thereto an affidavit or affirmation made and subscribed by the holder or holders of said mortgage, his, her or their agent or attorney, stating the consideration of the mortgage and as nearly as possible the amount due and to grow due thereon, be recorded," etc. The receiver in insolvency, as representing the creditors of the company, is entitled to enforce this provision against chattel mortgages. Receiver of Graham Button Co. v. Spielmann (Van Fleet, V. C.; 1892) 50 N. J. Eq. 120, 24 Atl. 571, affirmed on appeal. See Martin v. Bowen, 51 N. J. Eq. 460 (reporter's note), 26 Atl. 823. The objection now made by the receiver is that the affidavit is insufficient under the statute. The mortgage was given by the Burlington Carpet Company to the complainant, the Camden Safe-Deposit & Trust Company, and the affidavit is made by the" treasurer of the complainant as follows:

"State of New Jersey, County of Camden —ss.: William Stiles, being duly sworn, saith that he is the secretary and treasurer of the Camden Safe-Deposit and Trust Company, the mortgagee above mentioned, and its duly-authorized agent in this behalf; that the true consideration of the above mortgage is the issue of four hundred thousand dollars ($400,000) in the bonds of the mortgagor, for the purpose specially set forth in the mortgage. Wm. Stiles.

"Sworn and subscribed at Camden aforesaid this second day of December, Anno Domini eighteen hundred and ninety-three (1893). Thomas B. Harned. M. C. C."

The mortgage being thus referred to in the affidavit as showing the purpose of the mortgage, it must, under the rule settled by the court of errors and appeals in Fletcher v. Bonnet, 51 N. J. Eq. 615, 618, 28 Atl. 601, be regarded as part of the affidavit, so far as the purpose of the mortgage is concerned; and, if this purpose disclosed by the mortgage shows as nearly as may be the consideration of the mortgage, and the amount due and to grow due thereon, the affidavit is not defective. The mortgage is in the usual form of corporation mortgages made to trustees for the purpose of securing bonds intended to pass current in the market. The total issue of bonds intended to be secured is declared to be $400,000, being 400 bonds of $1,000 each; and each bond, a form of which is set out at length in the mortgage, acknowledges the indebtedness of the company to the bearer thereof in the sum of $1,000, to be paid 10 years after the date of the bond (December 1, 1893), with interest,etc. As to the purpose of the issue of bonds, the mortgage recites the previous incorporation of the two constituent companies, the Burlington Carpet Company and the Stanwick Carpet Company; their consolidation into the Burlington Carpet Company, the mortgagor; that both of the constituent companies before the consolidation were heavily indebted and financially embarrassed, the indebtedness consisting of mortgages due and unpaid on all the real and personal property of both companies, which mortgages were recorded in the clerk's office of Burlington county, and also of a large indebtedness due and unpaid and unsecured, and that for the purpose of saving the companies from insolvency, and of continuing their business, a consolidation was resolved upon and effected, and that the consolidated company should fund a loan of $400,000, and secure the same by mortgage on all the property, real and personal, and then owned or thereafter to be acquired, and issue bonds secured by said mortgage, 400 in number, for $1,000 each, payable 10 years after date, and that the said bonds should be issued at par, to such creditors who should be willing to accept the same in payment of their respective indebtedness; and that the balance should be used for the purposes of the company, as its board of directors should direct, said loan not to become operative until all the mortgages, real and personal, recently recorded, should be delivered up and canceled. The mortgage further recites the resolution of the board approving the form of the bond and mortgage, and authorizing the execution for the purpose above stated, and, after conveying the real and personal property and franchises of the company to the trustee, declares the same to be "in trust, nevertheless, for the security, equal use, and benefit of the several persons or bodies politic or corporate to whom said bonds may or shall be issued, and who shall hereafter or thereafter become the lawful holders thereof, their respective executors, administrators, successors, and assigns, according to law." The mortgage also contains a covenant with the trustee to pay the several holders of the bonds and their assigns the principal sums and interest mentioned, and provisions for foreclosure and sale on default. This mortgage, it will be perceived from the above recitals, is one of a class designed to secure bonds of corporations such as are dealt in commercial transactions, and which for this reason constitute, in some respects, a class by themselves. In Central Trust Co. v. Continental Iron Works (Err. & App.; 1894) 51 N. J. Eq. 605, 28 Atl. 595, this distinction was recognized; and it was held that, under mortgages issued by corporations to secure the issue of bonds of this character, the mortgages were valid as securing future advances, and operated from the time of recording, and that bonds issued under the mortgage, received without actual notice of incumbrances subsequent to the mortgage, were prior to such incumbrances, although the bonds were actually issued after these incumbrances. The mortgage seems to have been referred to in the case as a real-estate mortgage only; but a chattel mortgage, as well as a real-estate mortgage, may certainly be given to secure future advances. The provision of the chattel mortgage law prescribing the affidavit of consideration was not intended, and cannot be construed, to restrict the purposes for which a chattel mortgage may lawfully be given. Horowitz v. Weidner (N. J. Ch.; Pitney, V. C; April 1895) 31 Atl. 771. If, then, the mortgage in this case had simply recited the issue of bonds to the amount of $400,000, upon which bonds loans of money to the company to that extent were proposed to be obtained, it seems to me that there could be no question that the affidavit, referring to the mortgage which disclosed that fact, would sufficiently state the consideration of the mortgage, and the amount due or to grow due. The true consideration would then be the future advances, and the amount due or to grow due would be the amount of those future advances made on the bonds up to the limit of the issue authorized. The contention of the receiver's counsel in this case is that inasmuch as the bonds were to be delivered to such creditors as were willing to accept them in payment of their respective Indebtedness, and the purpose of the balance was not specified, the true consideration of the mortgage and the amount due were not stated; and he insists that under the chattel mortgage act the amount of this prior indebtedness, and the true origin and consideration of each debt, should have been stated. Had the mortgage been given to a trustee, simply to secure the pre-existing debts which were intended to continue as debts of the company, I think this view would be well founded; but the mortgage being one which, according to my view, was primarily given to secure bonds of the corporation intended to pass from hand to hand in the market as negotiable securities, the fact that the mortgage provided that the bonds should first be given to the creditors who would accept them in payment of and satisfaction of their prior Liens and debts, and that only the balance of the $400,000 bonds should be subject to the control of the directors, does not, in my judgment, constitute the mortgage a mortgage to secure pre-existing debts, and necessitate the proof of the origin and consideration of those debts as preliminary to the validity of any of the bonds issued or to be issued under the mortgage. In other words, the true consideration of this mortgage was a loan to the company, to the extent of $400,000, for the purpose of paying its indebtedness and procuring funds. Creditors were to have the first right to these bonds at bar, in satisfaction of their previousliens and debts; but, on receiving the bonds in satisfaction or payment, they stood, so far as subsequent creditors of the company are concerned, on the same footing as bondholders who had advanced money to the company for the bonds. The mortgage cannot be considered simply as a mortgage given to and accepted by them for the purpose of securing their debts as existing debts, and it was not necessary, therefore, that the consideration of these debts should be stated in the affidavit; and this objection to the affidavit is not sustained. If this view of the nature of the mortgage is correct, then the further objection of the receiver that the affidavit should have shown that the prior mortgages were canceled must also be held insufficient, upon the same grounds. The proof shows that these mortgages were canceled on the 16th day of December, 1893, 10 days after the mortgage was recorded as a chattel mortgage, and that they were then canceled of record by the prior mortgagees, on the receipt of bonds issued under the consolidated mortgage to the amount of their own mortgages. I consider the affidavit sufficient under the chattel mortgage act, and will advise a decree that, as to bona fide holders of the bonds under the mortgage, the mortgage is valid, both as a real-estate and as a chattel mortgage. Questions in relation to the bona fides of some of the holders of the bonds, the amount for which they should prove, and some other questions, were reserved, and the form of decree will be settled on notice.