Holland Trust Co. v. Thomson-Houston Electric Co.

This action was brought by the Holland Trust' Company, as trustee, to foreclose a mortgage made by the Thomson-Houston Electric Company to secure the payment of certain coupon bonds issued by the East River Electric Light Company; the name of the said company having been subsequently changed to the Thomson-Houston Electric Company. Upon the sale under the foreclosure the mortgaged property was purchased by the appellants for the sum of $50,000. The mortgage foreclosed was dated September 1, 1889, and was to- secure bonds aggregating $600,000. These bonds were of the denomination of $1,000 each, with 6 per cent, interest, and had semiannual coupons attached maturing on the 1st days of March and September in each year. Two hundred and ninety-three of them were issued to take up bonds secured by a prior mortgage; 1 being retained by the plaintiff, and an equal number of the first issue not having been presented to be exchanged. The mortgage was acknowledged by the East River Company on July 9, 1890, by the Holland Trust Company (plaintiff) on July 15, 1890, and was recorded August 9, 1890, and none of the bonds under it were issued until August 11, 1890. • On that day there seem to have been issued 217 bonds, and other bonds were subsequently issued at different dates, to and including May 6, 1892, when 15 bonds were issued. The bonds being dated September 1, 1889, the first coupon became due March 1, 1890. That, however, was four months before the mortgage was executed and before the bonds were issued. Three hundred and ninety-three of the coupons sought to be enforced In this proceeding became due before the mortgage was executed and before any of the bonds were issued. These coupons were detached from the bonds by the corporation, and when thus detached they certainly did not represent interest. If subsequently disposed of by the company, they might become in the hands of a bona fide holder obligations of the company to pay a sum of money; but, as against the holders of the bonds and of the coupons representing interest thereon which were secured by the mortgage, they were not entitled to payment as interest accrued upon the bonds.

The present inquiry came before the court upon a motion made by the holders of these coupons to require the purchaser at the sale under the judgment of foreclosure to pay to the referee, on account of his bid of $50,000, an amount in cash sufficient to pay them. In answer to this application an affidavit was interposed in which it is alleged that the coupons had been paid. Subsequently the court granted an order of reference to take proof as to whether the said coupons referred to in the affidavit of the moving party were paid, and also to take testimony and report whether the possession of the said coupons, or any of them, referred to in the affidavit, were actually acquired by the deponent prior to the maturity thereof and for value. Upon the proceeding before the referee a mass of testimony was taken, which the referee reported to the court with conclusions of fact, and he stated in his report that in his opinion the coupons were valid, outstanding, and entitled to priority of payment in the order of the dates upon which they became due, respectively, and were entitled to share in the proceeds of sale heretofore had in this action to the full amount of their value together with interest thereon. Upon the original affidavit and upon the testimony taken before the referee the motion was then brought on for hearing at special term, and an order was entered reciting the proceedings and requiring the purchaser at the sale to pay to the referee for the use of the moving party the sum of $28,114.20, with interest thereon from November 30, 1900, and amending the decree entered in this action nunc pro tunc as of the 30th of October, 1894, by directing that out of the proceeds of the sale herein there be paid to the moving party the said sum of $28,114.20, and also

The respondent insists on this appeal that, as the only defense to the granting of this motion set up in the affidavit submitted in opposition was the allegation of payment of the coupons, that is the only question before the court, and, as it is undisputed that these coupons have never been paid by the purchaser or by the company, the court properly granted the motion. We think that counsel for the respondent misapprehends the nature of what is involved in this proceeding. The case came before the court upon a motion in an action, and, a question of fact appearing upon that motion, the court ordered a reference under section 1015 of the Code of Civil Procedure, which authorizes the court to direct a reference to determine and report upon a question of fact arising at any stage of the action, upon a motion or otherwise, except upon the pleadings. There were no specific issues to be determined by the referee. He was directed to take testimony, and upon the testimony taken and returned to the court, with the original affidavits, the question was as to whether the moving party was entitled to the relief demanded. That depended upon the right of the holder of these coupons to have them paid out of the proceeds of the foreclosure sale of this property, or, in other words, whether they were secured by the mortgage to foreclose which this action was brought. The mortgage was introduced in evidence. It recited that the board of trustees of the mortgagor had duly directed the issue of 600 bonds to be dated September 1, 1889, of $1,000 each, payable in gold coin, with interest at the rate of 6 per cent, per annum, payable semiannually, on the 1st days of March and September in each and every year, to be signed by its president and secretary, sealed with its corporate seal, and duly certified by the trustee, and having interest coupons thereto attached. A copy of the bonds was therein set forth, by which it appears that the mortgagor promised to pay to the mortgagee, as trustee, or bearer, $1,000, “to pay interest on said sum in like gold coin, at the rate of. six per cent, per annum, on the,first days of March and September in each year, at the office of said East River Electric Light Company in the city of Hew York, according to the tenor of the coupons hereto annexed, upon the presentation and surrender of said coupons,” and that the bonds were secured by a first mortgage upon the corporate property of the mortgagor, executed to the Holland Trust Company as 'trustee for the holders of said bonds, and to each of the bonds there were attached coupons which provided that the East River Electric Light Company “will pay to the bearer thirty dollars in gold coin of the United States, at the office of said company in the city of Hew York, on the first day of-, being six months’ interest then due on its first mortgage bond Ho.-, and signed by the treasurer of the corporation. The mortgage also contained a provision that in case a default should be made in payment of the principal or any interest thereby secured to be paid upon such bonds, and such default should continue for three months after payment shall have been demanded, the trustee shall have the right to enter into and upon, and take possession of, all the property, leases, goods, and chattels con

The referee reported that of the coupons presented by the respondent there were 393 of the No. 1 coupons, which became due March 1, 1890; and it is entirely clear that none of these coupons ever represented interest upon the bonds, as they were all due and payable prior to the time that the bonds were issued by the company or became its existing obligations. Upon no principle could these coupons be deemed to be secured by the mortgage, or come within any of the provisions of the mortgage before referred to, which gave to coupons representing accrued interest a priority of payment over other indebtedness. Ninety-three of the coupons, due September 1, 1890, were upon bonds Nos. 306 to 398, which were issued on August 15, 1890. Before these bonds were issued, and had become actual obligations of the mortgagor and secured by the mortgage, the coupons were detached and delivered by the mortgagor to William H. Kelly, so that they never as a fact represented interest upon the bonds secured by the mortgage. Six of the coupons that became due September 1, 1890, were upon bonds Nos. 534 to 539. It appeared that these bonds were issued by the mortgagor on the 12th of November, 1891, long after these coupons became due. Eight of the coupons, due September 1, 1890, were detached from bonds Nos. 586 to 593, inclusive. The bonds were not issued until May 6, 1892, long after these coupons became due. Two of the coupons, .due September 1, 1890, were detached from bonds Nos. 596 to 597. The bonds were not issued by the mortgagor until May 6,1892. None of the coupons, therefore, due September 1, 1890, represented interest upon the bonds. Nine of the coupons, due March 1, 1891, had been detached from bonds 531 to 539, inclusive. The bonds were issued on November 12, 1891, long after the coupons had become due. Fourteen coupons, due Starch 1, 1891, were detached from bonds Nos. 584 to 597. The bonds from which they were detached were not delivered by the mortgagor until May 6, 1892, after the coupons became due; and these coupons, therefore, cannot be said to represent interest upon the bonds secured by the mortgage. Nine coupons, due September

It is not necessary to decide upon this appeal whether or not the company would be liable to Kelly or his transferee on account of these coupons. What we have to keep in mind is the distinction between any obligation of the company created by the transfer of these coupons and the right of the holder of the coupons to have them secured by the mortgage, and paid by way of priority or otherwise out of the proceeds of sale. The mortgage secured the payment of the bonds and interest thereon, with a provision that upon the sale of the property the accruing interest upon the bonds represented by the coupons attached should be entitled to preference; but these coupons only became entitled to participate in the security of the mortgage by virtue of their incident as interest upon the amount due upon the bond. They represented, when attached to the bond, no distinct obligation of the corporation mortgagor. When severed from the bond by the corporation, they necessarily lost their character as representing interest accruing or accrued, and detached in the hands of the company, they had no possible relation to the bonds and represented no obligation secured by the

A great number of cases have been cited by counsel for the respective parties upon the argument of this appeal. None of them, so far as I can see, are adverse to the views before expressed. It follows that the order appealed from should be reversed, with §10 costs and disbursements, and the motion denied, with §10 costs.

PATTERSON, McLAUG-HLIN, and HATCH, JJ., concur.

I do not concur in the views of Mr. Justice IN-GRAHAM that these coupons are not covered by the mortgage. The mortgage which secured the bonds was dated September 1, 1889, and was acknowledged by the two companies in July, 1890, and recorded the following month, when part of the bonds were issued. Of the 576 coupons which it is sought to have recognized as a prior lien, 393 were due March 1, 1890, before the mortgage was acknowledged and recorded, or bonds were issued; and these coupons were detached by the East River Company before delivery of the accompanying bonds to the Holland Trust Company. Of the remaining 183 coupons, 90 fell due before their accompanying bonds were issued; and they also were detached from the bonds before the same were delivered. The other 93 coupons were due September

393 coupons, due March 1, 1890, before any bonds were issued and before the mortgage was acknowledged.

93 coupons, due September 1, 1890, issued August 15, 1890.

90 coupons due before bonds issued, but after mortgage was acknowledged and recorded, as follows:

6 due September 1, 1890, on bonds issued November 12, 1891.

10 due September 1, 1890, on bonds issued May 6, 1892.

9 due March 1, 1891, on bonds issued November 12, 1891.

14 due Maich 1, 1891, on bonds issued May 6, 1892.

9 due September 1, 1891, on bonds issued November 12, 1891.

14 due September 1, 1891, on bonds issued January 11, 1892.

14 due March 1, 1892, on bonds issued Blay 6, 1892.

14 due September 1, 1892, on bonds issued Blay 6, 1892.

Upon the ground that all coupons in the hands of bona fide purchasers are to he regarded in the same light as promissory notes, with all the attributes of negotiable paper, I think that this judgment, which holds them all to be valid claims, should be sustained. That coupons may he sued upon and recovery had without producing or being interested in the bonds from which they are detached has been repeatedly held. See City of Lexington v. Butler, 14 Wall. 282 , 20 L. Ed. 809 , and Aurora City v. West, 7 Wall. 82 , 19 L. Ed. 42 . In the latter case it was said:

“Coupons are written contracts for the payment of a definite sum of money on a given day, and, being drawn and executed in a form and made for the very purpose that they may be separated from the bonds, it is held that they are negotiable, and that a suit may he maintained on them without the necessity of producing the bonds to which they were attached.”

In Collins v. Gilbert, 94 U. S. 753 , 24 L. Ed. 170 , it was said, speaking of such negotiable instruments:

They “are commercial paper in the strictest sense, and must ever be regarded as favored instruments, as well on account of their negotiable quality as. their universal convenience in mercantile affairs. They may be transferred by indorsement, or, when indorsed in blank or made payable to bearer, they are transferable by mere delivery.”

And in Spooner v. Holmes, 102 Mass. 503 , 3 Am. Rep. 491 , the court said:

“Its coupons were negotiable promises for the payment of money, issued by the government, payable to bearer, and transferable by mere delivery, without assignment or indorsement. They are therefore not to be considered as goods, hut as representatives of money, and subject to the same rules as bank bills and other negotiable instruments payable in money to bearer.”

So far have the courts gone in considering the right to deal in coupons apart from the bonds that they have sustained actions upon coupons which matured after the bonds had been paid. As said in Miller v. Berlin, 13 Blatchf. 245 , Fed. Cas. No. 9,562:

“Coupons are annexed to bonds in order that they may be severed and transferred by delivery, and thereby carry to the purchaser the interest which they represent. It is not necessary that the purchaser should produce upon the trial the bond to which the coupon was originally annexed, and the surrender or cancellation of the bond after the coupon has been transferred will not defeat the action.”

These principles are well summarized in Burr. Pub. Secur. p. 578, as follows:

“Such coupons have all the qualities of other negotiable paper. The holder is entitled to all the privileges and subject to all the liabilities of ordinary commercial paper by the law merchant. The title passes by delivery. The holder for value obtains an absolute title, although they have been stolen from the true owner, if he has no notice of the theft. The holder takes them free from equities attaching to them in the hands of the original parties, and he is unaffected by any mere irregularities in their issue.”

In this case it is admitted that all the bonds are valid and correctly issued, except that the coupons in some instances, although originally attached to the bonds, were severed before the bonds were delivered. This is an irregularity of which a subsequent holder without notice would have no means of being apprised, and it would be practically abolishing dealing in coupons if it were held that each purchaser must at his peril ascertain from the books of the company and the bonds from which the coupons were detached that there was no informality incident to their issue and sale. These coupons were apparently as good as any others, and a purchaser would not know that No. 1 was detached prior to the issuing of the bond, while No. 2 was detached thereafter. The Holland Trust Company, however, which, received and receipted for the bonds, had positive notice when the bonds were delivered that the coupons had been detached, and could have accepted or rejected the bonds. This they did not do, though now it is insisted that it was the duty of the East Biver Company to have canceled these coupons. Whatever rights the trust company may have against the mortgagor for failure in this alleged duty, it is no reason for shifting their own failure to take exception to the bonds issued as they were without the coupons, or the failure of the East River Company to cancel the detached coupons, to the subsequent bona fide purchasers of those coupons.

I have thus far referred to the coupons other than those due April 1,1880, on bonds issued August 15,1890. These coupons admittedly represented a valid claim, and the testimony is that they were detached as the result of an arrangement with a Mr. Peach, to whom the bonds were delivered; he agreeing to take in their stead one month’s interest. The coupons thus detached were thereafter sold. They are, at least so far as they extend over the period after the bonds were issued, as good as any other conpons, and should be so recognized and paid. I therefore dissent, and think that as to all the coupons the referee was right in the conclusions reached, and that the judgment appealed from should be affirmed.