Opinion
05-02-1904
MORTON TRUST CO. v. HOME TELEPHONE CO. OF TRENTON.
Vredenburgh, Wall & Van Winkle, for exceptants. Frank S. Katzenbach, opposed.
Suit to foreclose a mortgage by the Morton Trust Company, trustee, against the Home Telephone Company of Trenton. On exceptions to the master's report. Sustained in part.
Vredenburgh, Wall & Van Winkle, for exceptants.
Frank S. Katzenbach, opposed.
REED, V. C. A mortgage dated October 1, 1896, was executed by the Home Telephone Company upon its property to the State Trust Company, trustee, afterwards merged into the Morton Trust Company, to secure 300 coupon bonds, of the par value of $500 each. The property of the Home Telephone Company was sold pendente lite, and the proceeds, amounting to $20,000, paid into court. The question underlying the exceptions to the master's report is whether certain coupons have precedence in payment, over the bonds themselves, in the distribution of this fund.
The mortgage, in its eighth clause, in substance provides as follows: "In case of default in payment, it shall be lawful for the said trustee to sell the mortgaged property and apply the proceeds as follows: First, to the payment of the costs and expenses of such sale. Second, to the payment of the coupons, or interest warrants hereby secured to be paid, and then due and unpaid, pro rata, and without discrimination or preference, except that in case such proceeds shall not be sufficient to pay the same, and also the bonds hereby secured to be paid in full, such payment or upon interest coupons shall be in the order of date of their maturity. Third, to the payment of the bonds." This language confers upon the coupon holders the right of payment prior to the payment to the holders of the bonds themselves. The master found that, notwithstanding this clause, certain coupons presented to him, while good in the hands of those presenting them, as proof of a debt against the company, were yet subordinated to the lien of other coupons, as well as the lien of the bondholders. The coupons thus disallowed had been paid for by money which certain stockholders of the company had advanced for the purpose of saving the credit of the corporation. The grounds upon which the master reached this conclusion was that these coupons were, as to the other coupons and bondholders, to be regarded as canceled. The master put his conclusion upon the well-settled doctrine that if third persons, under an arrangement with a corporation, have advanced money to pay the interest upon bonds, and, as security for its advance, are allowed to take up and retain uncanceled the coupons representing such interest, as they are presented by the several bondholders for payment, these coupons will stand as valid securities in the hands of the payers, as against the corporation, and the mortgage by which they are secured may be enforced for their benefit; but as between the payers and the bondholders who presented their coupons for payment, and received the amount in ignorance of the fact that they were paid by third parties, and transferred to them without being canceled, or who supposed them to have been paid, the latter have prior equities, so that if, upon foreclosure of the mortgage covering the bonds and coupons, the sum realized is not enough to pay the face of the bonds and the matured coupons, the parties so advancing the money to take up the coupons are not entitled to share in the proceeds of the sale. 5 Thompson on Corps. § 6110.
The facts are, in substance, these: The officers of the telephone company discovered that they could not pay the coupons maturing October 1, 1899, out of the earnings of the company. Mr. Atkinson, a director and sometime treasurer of the company, was so informed by Mr. Risden, the president. Mr. Atkinson suggested to Mr. Risden that the passing of this payment was not good judgment, and would injure the company, and further suggested that he had friends who would come in and assist in raising money to pay the coupons, if Mr. Risden would help in so doing. Mr. Risden then said that he would indorse a note for $2,500, the proceeds to be used for this purpose, if Mr. Atkinson and his friends would raise $2,000; $4,500 being required to pay the October maturing coupons. Money was so raised, and deposited in the Broad Street National Bank of Trenton, in which bank the $2,500 note indorsed by Mr. Risden was discounted, Mr. Atkinson became treasurer of the telephone company on December 2, 1899. The preceding October coupons were still unpaid. He notified the bondholders that they could have their coupons paid by presenting them at the Broad Street National Bank, at Trenton. Most of the bondholders placed their coupons in their local business bank for collection, whence they were forwarded to the Broad Street Bank, and there cashed. Mr. Atkinson, after the failure to pay the October coupons when they matured, represented to the bondholders that he would endeavor to bring money into the company and rehabilitate it, and procured from most of the bondholders a paper by which they agreed not to takeany action against the company before January 1, 1900. As already observed, before that time the amount of $4,500 had been raised, deposited in bank, and the bondholders notified to present their coupons to the Broad Street National Bank. It is to be observed that, of the $4,500, $2,000 in cash was advanced by Mr. Stillman. When the coupons payable on the following April were about to mature, the company was short $2,500 of the amount sufficient to pay them, and Mr. Atkinson procured $2,500 from William J. Davis. When the succeeding October coupons were about to mature, he procured an additional $4,500 from Mr. Davis. These maturing coupons were paid at the Broad Street National Bank in the same manner as those of October, 1899, had been paid. This was the last payment of coupons. After the payment of the coupons by the Broad Street National Bank, enough of them were transferred to Mr. Stillman, Mr. Davis, and Mr. Risden, respectively, as equaled the amounts of money advanced by them, namely, $11,880. These gentlemen claim priority of payment for this sum out of the fund in court.
The question thus propounded is whether, in respect to the bondholders, the transaction was a purchase of the coupons by Mr. Stillman, Mr. Davis, and Mr. Risden, or whether it was a payment of the coupons by and for the company, with money which those gentlemen had advanced. There seems to be no doubt that those who advanced the money to pay for the coupons expected to get the rights of the holders of the coupons. The receipt given by Mr. Atkinson to Mr. Stillman was for money to be used to take up coupons due October 1, 1899. The money raised by Mr. Atkinson was not deposited to the credit of the company, but to the credit of Mr. Atkinson, as I understand the testimony, and the coupons were received by the bank and charged up to this fund. The solution of the question propounded, however, does not stop with the ascertainment of the intention of those who advanced the money. It involves the further question whether the bondholders understood or had reason to inquire whether Mr. Atkinson was buying the coupons. For, even if a third person was buying them, instead of the company paying them, the bondholders may insist on their mortgage lien free from these purchased coupons. The reason is that it takes two to make a sale, and, moreover, the coupon holders might have preferred to foreclose, rather than to sell their coupons. 2 Cook on Stock & Stockholders, § 772. The gentlemen whose money paid for these coupons place their right to assert a prior lien on the authority of the case of Ketchum v. Duncan, 96 U. S. 659, 24 L. Ed. 868, decided by a divided court. In that case Duncan, Sherman & Co. had advanced money for the purchase of coupons on the bonds of the Mobile & Ohio Railroad. The federal Supreme Court held that they were purchasers, because there were circumstances attending the transfer which should have awakened the attention of holders of the coupons, and led them to inquire as to the true character of the transaction. The circumstances were that the coupons were not paid in the usual manner, or at the usual place, or by the persons accustomed to pay them. They were not paid by check, as they had been theretofore paid. Some of the bondholders knew that the company was not paying the coupons, others were informed that the Bank of Mobile was purchasing them, and others did not know that the company was not paying, and made no inquiry. Some of the coupons were paid in London, and some in New York City. Those who presented their coupons in New York were told that Duncan, Sherman & Co. were purchasing them. There were notices posted in the Bank of Mobile and in the office of the company that the bank was purchasing November coupons. Notice of an intention to purchase was publicly given by the London house of Duncan, Sherman & Co. Most stress was laid by the court upon the fact that the holders, upon delivery of the coupons, were paid without checks. It was said that the holder, from these facts, must have known that the bank would hold the coupons as a voucher in its settlement with the railroad company. I am unable, however, to appreciate the force of the last inference. If the coupons were cashed, I cannot perceive why the holder would not assume that they were paid out of the money of the company, and so by the company, whether they were paid by cash or otherwise. An arrangement between the bank and the company that the coupons themselves should be accepted as vouchers in the settlement of the bank's account with the company could make no possible difference to the holder, and, as it seems to me, would have no significance whatever for the holder. It is the usual method of collecting coupons. They are deposited in the holder's bank for collection, and forwarded to the company's bank, and paid upon the delivery of the coupons. The inference arising is that it is charged to the company's bank account. The case of Ketchum v. Duncan, supra, is the subject of some interesting observations in the opinion delivered in Wood v. Guarantee Trust Co., 128 U. S. 416, 9 Sup. Ct. 131, 32 L. Ed. 472.
In the present case I am unable to see how it can be concluded that the coupon holders were parties to a sale of their coupons. Some of them, who were applied to by Mr. Atkinson to assist in raising money, were told that he wished to bring new money into the company and to rehabilitate it. Others knew that the company was in temporary financial embarrassment by reason of their October coupons remaining unpaid, and of their agreement to foreclose before January 1, 1900. When, however, in December, theyreceived notice to present their coupons to the Broad Street National Bank, no one, so far as appears, knew that the money out of which the coupons were to be paid was not the money of the company, nor whether it had been raised by loan or by sale of stock, or partly derived from the business of the company. No notice was given to these holders that their coupons were being bought. It was not the intention of those who raised the money to disseminate such a notion. They were interested, as stockholders, bondholders, and officers, in preserving the credit of the company and the value of their stock and securities. It was not their policy to have it go out that the coupons were not being paid, but were accumulating as a debt, preferable to the bonds themselves. Mr. Atkinson, who gave the notice to the bondholders, was the treasurer of the company. Why, then, should not those notified not have supposed that they were to be paid by the company? Indeed, there is nothing shown which have put the bondholders upon inquiry, except the fact that the coupons were to be paid at the Broad Street National Bank, in Trenton, instead of at the office of the trust company. But this bank was located at the home of the company, and its substitution as a place of payment would seem to be the most natural occurrence, and would seem to have no significance as an indication that the company were not paying the coupons. At this place the October, 1899, coupons were paid, and here the coupons maturing in April and October, 1900, were regularly paid. Most of them, as already remarked, were paid through the agency of the local banks of the bondholders. In my judgment, there was practically nothing to inform the coupon holders that they were selling their coupons, and there was everything to indicate to them that their coupons were being cashed by the company itself.
But it is further insisted that Mr. Hamill, who has acquired most of the bonds of the telephone company, is precluded from asserting the prior lien of the bonds over those coupons, because one Redford, from whom he acquired them, had notice of the outstanding claim of the coupon holders. It would be profitless to examine in detail the testimony as to the alleged notice possessed by Mr. Hamill, Mr. Redford, or any other person interested in the purchase of the bonds. If it should appear that the purchaser of the bonds knew that the coupon holders claimed precedence in lien, it would not in any way affect the relative right of the parties, for these rights were fixed when the coupons were cashed. If by that act they were canceled as to the bondholders, no subsequent information received by a bondholder or a purchaser would discharge the lien of the bonds. No information received by any person who made subsequent purchases of bonds would affect the status of those instruments.
It is also insisted that Mr. Hamill promised to pay the coupons. This promise is asserted to have been made in an interview between Mr. Hamill and Messrs. Davis, Wearts, and Stillman in August, 1901. It is insisted that at that interview Air. Hamill made an absolute promise to pay the amount of these coupons to the holders thereof. My examination of the testimony respecting the interview or interviews between Mr. Hamill and these gentlemen leads me to the conclusion that Mr. Hamill, after examining the eighth clause in the mortgage, admitted that by the terms of that clause the coupons had a superior claim to payment over the bonds. He admitted this as a matter of construction of the instrument, and thereafter all the parties at the interviews assumed that they should be first paid, and the question discussed was merely how and when they should be paid. It seems quite apparent that all that took place was based upon the view taken of the legal status of the coupons under the terms of the mortgage, and that, instead of their being a promise to pay, there was simply an assumption by all the parties that the liability rested upon the property mortgaged for the payment of the coupons first. This led to an engagement on the part of Mr. Hamill, in order that the sale of the property might not be delayed by litigation, to see that enough was paid for it, and paid into court, to cover the claim for these coupons. It is to be observed, however, that, in the letter in which this arrangement was put in a written shape, Mr. Hamill said that he would bid sufficient to cover these claims if they were subsequently determined to be good. I fail to find any proof of any absolute promise by Mr. Hamill to pay these claims. It is to be remarked, however, that, if Mr. Hamill had personally promised to pay the coupons, the promise would seem to be an entire nullity. This view does not rest upon the obvious fact that, if made, it was made under a mistaken view of his legal rights, but rests upon the fact that there seems to have been no consideration to support such a promise. The purpose of Mr. Hamill's arrangement was to assure those gentlemen that the fund arising from the sale of the property would be sufficient to meet their claim as coupon holders. Now, it does not appear that, if the promise had not been made, the coupon holders would have taken any steps beyond securing that result. This result was brought about at the sale, and therefore the holders of the coupons stand in exactly the same posture as though the alleged promise had not been made.
The finding of the master upon this branch of the case is affirmed.
The master allows as preferred claims upon the fund in court the amount paid by Mr. Risden for some coupons in the years 1897 and 1898. The circumstances surrounding the acquisition of these coupons are disclosed entirely by the testimony of Mr. Risden.Mr. Risden was elected president in 1896, and continued in that position down to 1901. In speaking of these coupons, he said: "I cashed these coupons. I do not recall for whom. It is not a matter of record." He says he thinks he held a number of bonds in 1897, but afterwards sold them. He says he does not recall how many coupons he cashed in 1897, but presumes he cashed some in 1897 and in 1898. He explains as follows: "People would present their coupons there for payment, and the company had not the funds to pay the coupons. So I advanced it myself and retained the coupons." He was asked: "I suppose, as the coupons were presented, you paid them, but did not state to them that you were paying these yourself? That is right. I was under no obligation to pay them personally." "Did you state to any one that you were paying them personally? No, sir." "Were you interested in keeping up the credit of the company? Yes, sir." When Mr. Risden speaks of the coupons being presented "there," the inference is that they were presented at the office of the telephone company, and were presented to him, as the head of the company. I am unable to conceive how a coupon holder, who presented his coupons to such a person at such a place, and who was paid, with no notification that this president of the company was purchasing them, could remain under any other impression than that the coupons were paid by the company. The question, as was remarked by Mr. Justice Lamar in his opinion in Wood v. Guarantee Trust Company, supra, is always one of fact—whether there was a purchase or a payment. To be a purchase, as already remarked, it requires the consent of the bondholder presenting his coupons. So far as appears, there was no consent to a sale from any one presenting these coupons to Mr. Risden.
I am compelled to the conclusion that the exception taken to this branch of the master's report must be sustained.