Polhemus v. Fitchburg Railroad

and, if allowed to prevail, will have the result obviously enough of depriving the various holders of these bonds of valuable property rights, which they had every reason to believe themselves secure in. For the bonds represented an obligation of the Troy & Boston Company to pay upon the principal annually seven per cent, interest until the day of their maturity. As a matter of familiar knowledge to all, such a form of security for the payment of which, according to its tenor, all the obligor’s franchises, properties and revenues were mortgaged, would induce the investment of their moneys by all who desired a well secured corporate obligation, bearing the highest legal rate of interest, and having a long period of existence. From the reading of the consolidation plan, as developed by the agreement of the companies, it is plain enough that a leading principle is to alter the obligation represented by these bonds, so that no more than four per cent, interest should be paid by the new company on that particular amount of indebtedness. It is also quite evident from this plan that the stockholders will gain materially by the difference in the interest payments, and will receive from the proceeds of the Troy & Boston property in this consolidation an amount of stock measured by the saving of interest.

The question for us to decide is whether this scheme is sanctioned by the statute, and if, under its cover, the bondholders can be deprived of those rights and remedies which they had previously enjoyed. The consolidation is under and subject to the statute, and if it is open to such a construction as the appellant claims, it is difficult to see how a great wrong is not permitted. By an act of the legislature, passed in 1869, Laws 1869, chapter 917, the consolidation of railroads was authorized in certain cases, of which this is one. By its third section, the parties to the agreement of consolidation are created one corporation. By its fourth section all the rights, privileges, exemptions and franchises of each corporation and all of its property, real, personal and mixed, its debts and other things in action are vested in the new corporation. Its fifth section reads as follows, viz.:

“ Sec. 5. The rights of all creditors of, and all liens upon the property of either of said corporations, parties to said agreement and act, shall be preserved unimpaired, and the respective corporations shall be deemed to continue in existence to preserve the same, and all debts and liabilities incurred by either of said corporations, except mortgages, shall thenceforth attach' to such new corporation, and be enforced against it and its property to the same extent as if said debts or liabilities had been incurred or contracted by it.”

The defense here is based on certain words in that section, and the argument is, in. effect, that by the excepting of mortgages from the liabilities, which are made to attach to the new corporation, the bonds themselves, to which the mortgage was a collateral security, are also excepted. This seems to be somewhat startling as a proposition, whether we view it in the light which a usual and correct use of the English language affords, or whether we view it in connection with the legal fact that by the consolidation

a transfer of the properties and franchises of the debtor is effected and its earning capacity annulled. The statute, under which the defendant is organized, was passed to authorize the consolidation of companies owning continuous or connected lines of road. Naturally, it has reference to solvent, or going concerns, and the force of its authority is in the direction of empowering corporations to do what otherwise they could not do. Its evident object is to enable corporations, so situated, to unite their business means and facilities, when it seems to their mutual advantage.

For this statute, which we may presume to have been enacted with a public and liberal end in view, to be construed, nevertheless, in such wise as to legalize the impairment of promises made to creditors, we should find language so unmistakable and words so explicit as to make such a legislative intent patent. The natural idea of such a statute, I take it, is that the new corporation, which springs from the two consolidating corporations, represents each one, as well in its duties or obligations assumed to others as in its rights to enforce performance by others of their obligations. The idea of a transfer of properties and franchises involves, as the correlative idea, an assumption of those duties and obligations which were predicated upon the possession and operation of such properties and franchises and which gave strength and inducement to corporate promises. And this idea is, in my opinion, what underlies the legislative act and not the one which the appellant seeks to inject into it and which so strongly shocks the moral sense. The legislature, after having vested in the new corporation all the rights, franchises, properties and claims of each party to the consolidation agreement, proceeds, in this fifth section, to define the position of the creditors of each. It preserves their rights and their liens, acquired against or upon the property of the corporation, and each corporation is continued in existence solely for that purpose. It provides that “all debts and liabilities incurred by either corporation, except mortgages, shall thenceforth attach to such new corporation and be enforced against it and its property to the same extent as if said debts or liabilities had been incurred or contracted by it.” Omit the •words “ except mortgages,” and the new corporation would fill the precise position towards creditors which each corporation had filled. What does their insertion accomplish ? They are ill calculated to express anything in the legal sense; for mortgages mean the instruments which charge property with the liability to make good the debt its owner 'has contracted. They may be said to describe a property liability; but never to describe the principal debt, or promise, which is evidenced by the promissory note, or bond, of the property owner. They are collateral, or incident, to the debt itself, and where made, as here, to secure the payment of bonds, they cannot properly be termed the debt, or liability of the obligor; but only the liability charged upon his property.

The argument for the appellant is that we must supply the sense which is wanting in the words- and should read the clause as excepting mortgage debts, and that such a reading would exempt the new corporation from any liability upon the bonds

of either corporation. I think several considerations militate against this course of reasoning. In the first place, it is a rule in the interpretation of statutes that where a sense is to be supplied to inaccurate or incomplete words in an enactment, that sense which works an injustice should be avoided. In the next place, to except mortgage debts from the debts and liabilities which are assumed by the new corporation does not operate to except the corporate liability upon the bonds, unless we are willing to adopt a vulgar, or careless and inexact, use of language. In construing language so fraught with important consequences to the rights of persons, we ought to give to its words their precise and natural sense, and not force from them a meaning which strains construction and works a wrong. If the legislature had meant to except the personal debts or obligations, that is, the bonds themselves, it is altogether a more natural supposition that it would have used language importing that much. It would have said “except bonds and mortgages.” To refer to popular expressions, we all know that in speaking of the liabilities of railroad companies, men mention their “ bonded debt,” and speak of the “ bonds outstanding;” and they inquire as to the extent of the company’s earnings beyond an amount sufficient to meet the interest on its bonds. But it is possible for us to attach a sense to the words “ except mortgages ” which is more natural and avoids our sanctioning the impairment of a corporate obligation. The word “ mortgages,” taken in its literal sense and as it would be employed by persons dealing with legal rights, or in affecting legal conditions, means the liability impressed by the company upon the property then owned, or thereafter to be acquired, and to except mortgages means to confine the property lien created by a mortgage to the property theretofore held by the consolidating company.

Eailroad mortgages are known to contain clauses for extending their lien" to future acquisitions of property, or extensions of road, and by their exception in the clause under consideration such a consequence would be prevented. We need not consider the legal probability of such a result in this case; although we have been referred to a decree of the federal court for the northern district of Ohio, in The Farmers’ L. & T. Co. v. The Toledo, etc., R. R. Co., extending a mortgage lien to property acquired after consolidation by the new company. We need only see a reason for the legislature’s inserting the exception. If we read the words simply and naturally, they merely emphasize the understanding that all liens remain as they were before consolidation, neither impaired nor extended. Questions and complications which might be raised by the ingenuity of minds as to the status of the mortgages of consolidating companies are set at rest. It may be surplusage; but that criticism is not infrequently invited by legislation. Except for these words, it is conceded that the consolidated company is liable upon the bonds of the consolidating companies; and because of their insertion it is insisted that the bondholders are remediless to enforce performance of their debtor’s obligation other than by a foreclosure of the mort

gage. That would be a most inequitable and harsh rule. It discriminates against the bondholder. The act professes to save the rights of all creditors, and yet only the general or unsecured creditors can hold the new company upon the liabilities of the consolidating company. The consolidating companies are solvent, and they are divested of their property and earning capacities’ in favor of the new company, which thus is enabled, by operation and use of the acquired property, to appropriate its earnings. If it refuses to discharge the full obligation incurred by a consolidating company in its bonds, we are asked to hold that the bondholder is at its mercy, and bound to accept what it is willing to pay him, or to foreclose his mortgage. Manifestly, as in this case, that is a process for forcing the bondholder out of his contract, which should not meet with the favor of courts of equity.

If here the defendant can compel the plaintiff, and those similarly situated, to accept payment of the principal and interest of their bonds, it would be in a position to effect a new loan at a less interest rate, which means a very great saving and a consequent benefit to the stockholders. Shall we ascribe to the legislature a purpose to benefit stockholders, at the expense of bondholders ; practically, to give an advantage to the. debtor over his creditor ? The inequity and as well the iniquity of the thing seem most apparent. Except in bankruptcy courts, the secured creditor is never obliged to resort to his security in the first order; or to surrender it, if he wishes to come in and claim with other creditors. The rule in equity imposes no such obligation in cases of solvency, or of insolvency, and yet, here, in a case of the transfer of its franchises, properties and dioses in action by a solvent corporation to. another, for the purpose of operation and use, conjointly with those of another corporation, under the authority of a statute which purports to preserve the rights of all creditors, and to give them a claim upon the new corporation, it is. insisted that the creditor who holds a bond has no rights against the new corporation at all; that that obligation is practically extinguished. The ability of the old corporation to earn money by operation of its chartered franchises is taken away; for it is divested of its properties, and, thereby, the remedy by action and judgment for the interest, where payment has been refused to be made by the company, is rendered futile. I think the legislature never intended such a condition of affairs to result from consolidation under the statute, and that it is doing violence to language and to the rules for the construction of statutes to imply such an intention. The true theory of this act is that each consolidating company survives in the consolidated company, and that it represents each company in its claims and its obligations; but as to mortgage liabilities the properties acquired remain affected only as they were affected before the consolidation. Whatever the liability created by the mortgage instrument, it shall not be deemed tobo extended, or to affect the new company otherwise than might result from a foreclosure.

In the case of Vilas v. Page, 106 N. Y., 439 ; 11 N. Y. State Rep., 416, Andrews, J., speaking of this statute of consolidation,

uses language which, while the case does not involve the same question as here, is yet significant as to the scope of the act He says it “ saves the rights of all creditors and bondholders of any company embraced in the consolidation authorized by that act.” How is that the case, if bondholders may not look to the consolidated company for the fulfillment of the current obligation to pay the interest upon the bonds of the several companies; but must look to the corporation which has practically ceased to exist? The franchises and properties which, by operation, had furnished the means for meeting the personal liability have been vested in and are used by the new company. The rights of bondholders are not saved if, by the act of consolidation, the right to enforce the principal debt is extinguished, and they are remitted to their collateral security.

I think every legal and every moral consideration demand that we affirm this judgment, with costs.

Andrews, Beckham and O’Brien, JJ., concur; Euger, Ch, J., Earl and Finch, JJ., dissent.