Guaranty Trust Co. v. New York & Queens County Railway Co.

The action is one for the foreclosure of a mortgage given in 1892 by the Steinway Railway Company to a trustee for bondholders.

The mortgagor owned and operated a street railroad in Long Island City, and the subject-matter of the mortgage was the road so owned and operated, its rolling stock and equipment, and any after-acquired property necessary or convenient for use in connection therewith.

The defendant New York and Queens County Railway Company was incorporated in 1896 to acquire by merger the Steinway line as well as other lines in neighboring communities, i. e., in Newtown, Flushing and College Point.

Having purchased the entire capital stock of the Steinway Railway Company, it filed a certificate of merger under section 58 of the Stock Corporation Law then in force (L. 1896, ch. 932; Cons. Laws, ch. 59), with the result that it became the owner of the franchise and property of the corporation so merged. It did not, however,

The shares of the Newtown Railway Company which operated a line in Newtown, the shares of the Riker Avenue and Sanford’s Point Company and the shares of the Flushing and College Point Company, as well as the property and franchises of the Long Island and Newtown Railroad Company, were acquired at or about the same time.

The New York and Queens County Railway thereupon executed its first consolidated mortgage to a trustee, subject to the underlying mortgages on the constituent lines, the new mortgage covering the property then owned by the mortgagor or thereafter to be acquired.

The present controversy is one between the trustee of the Steinway mortgage on the one side, and on the other side the maker and the trustee of the consolidated mortgage, the former contending that certain after-acquired properties are subject to the hen of the Stein way mortgage, and the others that they are free from that lien and subject only to the lien of the consolidated mortgage. The chief properties so acquired are the Purvis Street sub-station, the Woodside car barns and contiguous tracks, the Borden Avenue office building, and rolling stock, tools, supplies and miscellaneous equipment.

The essential facts as to these acquisitions are the following:

1. In 1906, ten years after the merger, the merging corporation acquired a new parcel of land at Purvis street, in what had formerly been Long Island City, and built a new power house thereon, which was completed in 1908, for the use of all the fines. Until then power had been supplied from the Mills Street power house which belonged to the Steinway fine. Sixty-three

2. In 1896 the merging corporation acquired a new parcel in what was formerly known as Woodside, Long Island, for a new car barn to serve the unified lines. A new barn was built upon the land in 1897. Till then the Steinway company had maintained a separate barn in which it kept its own cars. It also used the barn as a repair shop, though the shop and its equipment were already out of date. By the decision of the courts below the Woodside barn and connecting tracks have béen held to be security for the consohdated mortgage. The plaintiff insists that they should be made to feed the Steinway mortgage, at least to the extent of 50.8%, a percentage determined by the proportion of the use.

3. Land and building described as 7 and 9 Borden avenue were acquired in 1896 for use as an office, and title thereto was taken in the name of the Steinway company. The courts below have held that the result was an accession to the property that was subject to the Steinway lien. The trustee under the consohdated mortgage insists that its own bondholders should have the protection of the new security.

4. Railroad cars, bought by the merging corporation, have been held by the Appellate Division to be subject for the most part to the consohdated mortgage only, the evidence being insufficient except as to nineteen cars to make out an allocation to specific fines. On the other hand, miscellaneous equipment, tools and supplies have

A mortgage of property to be acquired in the future is not a present lien at law (Rochester Distilling Co. v. Rasey, 142 N. Y. 570 ). It is, however, equivalent to a covenant to give a lien, and as such, when the property comes into existence, may be specifically enforced in equity (Kribbs v. Alford, 120 N. Y. 519 ). In the absence of intervening equities forbidding such a use, the property, when acquired, is deemed to feed the mortgage, as if in existence at the beginning (Holroyd v. Marshall, 10 H.L. Cas. 191; Zartman v. First Nat. Bank, 189 N. Y. 267 ). There is need to distinguish, however, between the enforcement of the covenant in respect of property thereafter acquired by the mortgagor itself, and property thereafter acquired by a successor or a purchaser. Property thereafter acquired by the mortgagor itself will be subject to the mortgage, if within the description of the covenant, however alien it may be in quality or function to the property presently subjected to the hen (People’s Trust Co. v. Schenck, 195 N. Y. 398 ; Ithaca Trust Co. v. Ithaca Traction Corp., 248 N. Y. 322 ). It is otherwise in respect of purchasers, and even at times successors. To spread the lien of the mortgage to property acquired by these, there must be an independent ground of duty. This may have its origin in a statute or in a covenant of assumption or in the principles of estoppel, or accession, or in some other kindred equity (Trust Co. v. City of Rhinelander, 182 Fed. Rep. 64 , 69; Metropolitan Trust Co. v. Chicago, etc., R. R. Co., 253 Fed. Rep. 868 ; certiorari denied, 248 U. S. 586 ). In the case at hand the covenant as to acquisitions is sweeping in its terms, embracing anything “ necessary or convenient ” for the operation of the road. By its terms also it is to apply to such property when acquired by the mortgagor’s “ successors ” as well as by the mortgagor itself. The problem to be solved is the effect to be given to a covenant so phrased in its applica

At the outset there is need to consider the meaning of the term “ successors.” A covenant by a corporation for itself and “ its successors ” is like a covenant by a natural person for himself, “ his executors and administrators.” It adds nothing of substance, for it is the expression'of an obligation that if not stated would be implied (Matter of Buccini v. Paterno Constr. Co., 253 N. Y. 270 ; Kernochan v. Murray, 111 N. Y. 306 , 308; Chancellor v. Bell, 45 N. J. Eq. 538 , 541; Overseers, etc., v. Sears, 22 Pick. 122 , 126; Cumberland B. & L. Assn. v. Aramingo M. E. Church, 13 Phila. [Pa.] 171, 172; 8 Halsbury Laws of England, pp. 371, 372). In like manner, a covenant by a corporation extending the lien of a mortgage to property thereafter acquired by its “ successors ” is not an attempt to impose the continuing burden of the covenant in respect of future acquisitions upon a new corporation that is merely a purchaser. It is directed to future acquisitions by those successor corporations that preserve or continue the corporate persona (Mississippi Valley Trust Co. v. Southern Trust Co., 261 Fed. Rep. 765 ), much as the heir in the Roman law continued the persona of the ancestor (Holmes, The Common Law, p. 343), and in our own system the executor continues for the most part as universal successor the persona of a testator (Holmes, The Common Law, pp. 344, 345, 350; Holmes, Executors, 9 Harv. L. Rev. 42 ; Collected Legal Papers, pp. Y41, 143; Holdsworth, History of English Law, vol. 3, pp. 573, 583). How far the covenant is effective even then as to land or other property subsequently acquired must depend upon the statutes that regulate dissolution or succession.

At the present time in New York a possessor corporation, i. e., one which merges another through the purchase of its shares of stock, “ shall be deemed to have assumed

. It cannot be by force of any duty of assumption, contractual or statutory.

An attempt is made to relate the obligation to the principle of estoppel. Cases such as Galveston R. R. Co. v. Cowdrey (11 Wall. [U. S.] 459, 481); Wade v. Chicago, etc., R. R.Co. ( 149 U. S. 327 ,342) and Compton v. Jesup ( 68 Fed. Rep. 263 ) are cited to that end. There is, however, a distinction. In all those cases the property had already

Nothing in these cases is authority for a holding that, apart from any principle of accession, a mortgagor can, by covenant in a mortgage, create an affirmative obligation running with the land whereby any and all subsequent purchasers acquiring for themselves other property convenient for use in connection with the mortgaged

What has been written is no denial that the new owner will be charged if the circumstances of the transaction are sufficient to bind him by an estoppel (that is, an estoppel by deed, for there is clearly none in pais), just as he may be bound in other circumstances by a covenant of assumption (Foley and Pogue, After Acquired Property under Conflicting Corporate Indentures, 13 Minn. L. Rev. 94 , 95). Wffiat is meant is merely this, that the acceptance of a deed subject to such a mortgage of record does not avail without more to give rise to the estoppel, for the mortgage to that extent is invalid and inoperative. The buyer takes the land cum onere in the sense that he must carry out the covenant as to after-acquired property in so far as it was already specifically enforcible against the seller by force of acquisitions prior to the purchase. He does not take it cum onere in the sense that he must carry out the covenant in respect of acquisitions, not within the principle of accession, made thereafter by himself. The distinction is clearly marked in Ithaca Trust Co. v. Ithaca Traction Corp. (supra), where a separate power house acquired by a reorganized corporation was held to be free from the hen of an underlying mortgage, though power contracts previously acquired were part of

If estoppel is inadequate to enlarge the subject-matter of the mortgage, there is yet to be considered whether enlargement can be accomplished by force of the principle of accession. Accession as a source of title is quite distinct from the operation of a covenant for after-acquired property (13 Minn. L. Rev. at pp. 93, 94). Even in the absence of such a covenant the lien of a mortgage upon a railroad will extend to accretions such as fixtures that are physically united with the subject-matter of the mortgage, and to accretions that may be classified as appurtenances, where the bond of union is organic rather than corporeal. Not only that, but the nature of rail

The principle of accession, however liberally interpreted, cannot bring within the mortgage the power house and the barn. We put aside for the moment the extension of the mortgage to rolling stock, supplies and miscellaneous equipment. The power house and the barn are built upon land not owned by the merged corporations or any of them at the time of the merger. What is even more important, they serve the uses, not only of the Steinway line, but of all the other lines that have been operated since the merger by the merging corporation. Each road has been subject from the beginning to its own independent mortgage with after-acquired property clauses substantially the same. In these circumstances there is no more reason for holding the new buildings to be accessions to one road than for holding them accessions to the others. If accessions to one they must have been accessions to all, and this in uncertain proportions, fluctuating from year to year with the extent and nature of the use. Title by accession imports something more, however, than an executory right to acquire a hen or interest in the future through the judgment of a court of equity. It imports a hen or interest presently vahd ahke in equity and at law. If the use of the power house and the barn for the benefit of the merged fines gives any interest at ah to the underlying mortgagees, it is at most a right to compel the creation of a hen in equitable proportions as an incident to the jurisdiction to enforce the specific performance of a covenant. The reasons have already been stated why the covenant is unenforcible against an assignee or a purchaser as to later acquisitions. If those reasons are vahd and the property is not subject to an equitable mortgage through the operation of the

Since neither estoppel nor accession will extend the underlying lien to the power house or barn, it remains to be considered whether there is to be discovered some other equity whereby the extension can be justified. We are told that such an equity exists in the necessity of providing the underlying mortgagees with a substituted security as compensation for what was lost when the barn and the power house were abandoned or dismantled. Withold this security, it is said, and through the action of the merging corporation the subject-matter of the mortgage will have become a mere shell, a railway without power to move cars, without cars to be moved, and without barns in which to store cars. Granting, though provisionally only, that these consequences, if real, would supply the foundation of an equity, the assumption of their existence has its origin in a misconception of the facts. The Steinway mortgage was either a lien on the new power house and the new barn at the time of their construction, or it was never a lien at all. If it was not a lien at that time, then the lien of the new consolidated mortgage attached eo instanti for the benefit of the consolidated mortgage bondholders, and the plaintiff, to prevail, must be able to show that the lien thus attaching has been divested or subordinated. But plainly there was no impairment of the security of the underlying Steinway mortgage, no reduction of the Steinway line to the state of an empty shell, when the lands for the new bam and the new power house were acquired by the merging corporation and the new buildings were erected. The land for the new barn was acquired in 1896, and the work of constmction completed a short time thereafter.

What has been written as to the lien upon the power house and the barn supphes the answer to the question as to the hens upon the rolhng stock, supphes and miscellaneous equipment. In respect of the hens upon the rolling stock the appeal is by the plaintiff, the trustee for the Steinway bondholders; in respect of the tools, supphes and miscellaneous equipment, the appeal is by the Bankers Trust Company, the trustee for the bondholders under the consolidated mortgage. The cars in use by the merged hues at the date of the merger are no longer in existence. The cars now in existence were bought by the merging corporation, and with the exception of nineteen cars which were subjected to the Steinway hen were never allocated to any special hne, but were used indiscriminately for all. In the absence of a covenant, the merging corporation did not subject the new cars thus indiscriminately used to the underlying hens (New York Security & Trust Co. v. Louisville, etc., R. R. Co., supra, at p. 398; Mississippi Valley Trust Co. v. Southern Trust Co., supra; Metropolitan Trust Co. v. Chicago, etc., R. R. Co., supra, at p. 878; Hinchman v. Point Defiance Ry. Co., 14 Wash. 349 ; United States v. New Orleans R. R. Co., 12 Wall. [U. S.] 362). The situation might be different if they had been allocated specifically or even chiefly to the use of a particular road (Commercial Trust Co. v. Chattanooga Ry. & L. Co., supra). There is no need to dwell upon the difference, for the defendant trust company does not appeal from the segregation to the plaintiff of the cars appropriated to its use by the act of the receivers.

The property 7 and 9 Borden avenue was correctly held to be within the coverage of the Steinway mortgage, since title thereto was taken in the name of the Steinway company, without reservation or condition.

The land, the buildings and the equipment, the subject of this controversy, were paid for with moneys supplied by the consoHdated mortgage bondholders. Without the aid of those moneys the unified operation of the fines would have been impossible, and the underlying bondholders would have lost the benefit of economies and facifities incidental to the merger. As a consequence of the merger, or at least as its sequel, foreclosure has been warded off for upwards of twenty-five years, and an income has been earned from which interest has been paid on the underlying obligations.

From the viewpoint of economics, the furtherance of business interests, there have thus arisen equities in favor of the consoHdated bondholders that may not be ignored altogether in determining their equities from the viewpoint of the law. To the extent that improvements, though made upon newly-acquired lands through the use of the new loan, have been charged with a Hen, declared with reasonable clarity, in favor of underlying mortgage bondholders, the courts wiH give effect, through the remedy of specific performance, to the ensuing equitable right. On the other hand, the advantages incidental to merger and consofidation would be discouraged, and new loans would be precarious, if less than reasonable clarity were exacted as a condition of subordination and extension.

Pound, Crane, Lehman, Kellogg, O’Brien and Hubbs, JJ., concur.

Judgment accordingly.