New York Security & Trust Co. v. Saratoga Gas & Electric Light Co.

The above entitled appeals all arise out of an action commenced by the New York Security and Trust Company, to foreclose a mortgage executed by the Saratoga Gas & Electric Light Company. Appeals 1 and 2 are appeals from judgments, and numbers 8, 4, and 5. are appeals from orders made in the course of such proceedings. The facts in each appeal shed some light upon the others, and to save unnecessary repetition, it it seems to me best to consider all the appeals in a single discussion. On the 1st day of February, 1887, the defendant the Sara-toga Gas & Electric Light Company, a corporation organized un,der the laws of the state of New York, and doing business at

“ All the corporate property, real, personal and mixed, including all lands, easements, rights of way, buildings, fixtures, materials, supplies, machinery, and plant, franchises, contracts, and choses in action, whether now owned or hereafter acquired or constructed by said gas company, together with the appurtenances thereto, and all the rents, tolls, issues, income, and profits of said gas company present and future.” .

It was provided that said property was to be held by said trust company, its successors and assigns, in trust for the equal benefit and security of all the holders of said bonds, and it contains the usual covenants and conditions of mortgages executed for such purposes. It is provided that—

“ Any vacancy ip the trusteeship, from whatever cause, may be filled by a written appointment executed by said gas company, and the holder or holders of a majority of the bonds hereby secured; or if in thirty days such appointment be not made, then by the supreme court of the the state of New York for the Fourth judicial district, upon application of any party in interest, on such notice as the court may prescribe.”

Such mortgage also provided that—

“If any default shall be made and shall continue for sixty days, as above specified, then the principal of all said bonds, although not then due by their terms, shall at the trustee’s option, become immediately due and payable, anything in said bonds or herein contained to the contrary notwithstanding. Such option shall be exercised or not exercised, and such principal declared due or such declaration annuled and withdrawn by the trustee, according to the written request of the holder or holders of a majority of said bonds.”

In March, 1891, an action was brought in behalf of the people of the state of New York against the American Loan & Trust Company, for a dissolution of that corporation for alleged insolvency ; and thereafter, in the month of May, 1891, a judgment was rendered in said action dissolving such corporation, and appointing J. Edward Simmons as permanent receiver thereof. Thereafter, and in the month of May, 1892, one Walter Stanton presented to the supreme court a petition wherein he stated that he represented a majority of the bonds issued by the Saratoga Gras & Electric Light Company, 'and was the owner, or in the possession, and had control, of the majority of said bonds at that time, and representing that the American Loan & Trust Company had become insolvent and that J. Edward Simmons had been appointed as receiver thereof, and that no proceedings had been taken for the appointment of a successor trustee to said company, and that the interest-upon said bonds which had matured May/l, 1892, was in default, and coupons therefor had been presented, but were unpaid;

The appellants claim that there was no authority given to execute said instrument, and none was proved upon the trial, and the book of minutes of said company does not show that any resolution was ever adopted authorizing the execution of such instrument. On the 1st day of December, 1893, an agreement was en

The defendant the First National Bank, of Saratoga Springs, in answer to the plaintiff’s complaint, alleged that before the commencement of the foreclosure action, and on or about the 27th day of September, 1893, it recovered judgments in the supreme court against the Saratoga Gas & Electric Light Company, to the amount of over $7,900 ; that executions had been issued thereon, and personal property belonging to the said gas company had been levied upon and sold, and bid in by the said bank, upon which sale the amount realized, over and above the fees and expenses of the sheriff, was the sum of $1,296.06, which had been credited upon the amount of said judgment, and that the balance of said judgment remained due and unpaid ; that thereafter, and on the lltn day of November, 1893, other executions upon said judgments were issued to the sheriff of Saratoga county; and the said bank claims .that such executions are liens “ upon any property acquired by said gas company after the execution and delivery of the mortgage set out in the complaint, prior and superior to the lien of said mortgage. ” The bank also asserts in its answer

The appellant Andrews, in his answer to the complaint, set forth the obtaining of a judgment against the gas company, the return of an execution unsatisfied, the commencement thereon of sequestration proceedings against the gas company, and the appointment of William Y. Reynolds as receiver thereof. He also put in issue the legality of the appointment of the trust company as successor trustee, and also raised the same question as to the use of the mortgaged property by the mortgagor as is raised in the answer of the Saratoga Rational Bank, and asked that his judgment be declared a lien upon all the property of the gas company, and in all other repeets asked the same relief as is asked by the bank in its answer. The appellant William Y. Reynolds, in his answer to the complaint, set forth his appointment as receiver on the 16th day of December, 1893, and put in issue the legality of the appointment of the trust company as successor trustee, and also put in issue the exercise of the option, by the trust company, to declare the whole amount of the principal of the bonds to be

On the 28th day of April, 1894, William Y. Reynolds, as receiver, commenced an action against the New York Security & Trust Company and others, as defendants, alleging in his complaint the commencement of the action first entitled, for the foreclosure of the mortgage, the dissolution of the American Loan & Trust Company, and the appointment of the New York Security <& Trust Company as successor trustee to the American Loan & Trust Company, and alleging that no notice of any application for the appointment of the New York Security & Trust Company was given to anyone, except to the attorney general, and to the attorneys for the receiver of the American Loan & Trust Company ; and alleging, upon information and belief, that Walter Stanton, upon whose petition such appointment was made, was not at that time the owner of any bonds issued by the Saratoga Gras and Electric Light Company, and did not have any in his possession nor under his control, and that the receiver of the American Loan & Trust Company, Simmons, did not, nor did the people of the state of New York, own any such bonds; and asked that the order appointing the New York Security & Trust Gompany as successor trustee “ be reviewed, vacated, set aside, and held for nothing; ” and also asked that the complaint in the foreclosure action commenced by the New York Security & Trust Company be dismissed.

Both actions, the one to foreclose the mortgage and the action of Reynolds as receiver to review the order appointing the trust company as successor trustee, were bv agreement tried at the same time, and resulted in a judgment dismissing the complaint in the action brought by Reynolds as plaintiff, and in a judgment and decree of foreclosure and sale in the action brought by the trust company to foreclose the mortgage. Separate decisions and separate judgments were rendered and entered in each. Final judgment in the action wherein Reynolds was plaintiff, and an interlocutory judgment in the foreclosure action, were entered September 19, 1894, and final judgment of foreclosure and sale was entered in the foreclosure action November 19, 1894. From each of these judgments appeals have been taken—from the judgment of foreclosure and sale, by the Saratoga National Bank, by Andrews, and by Reynolds, as receiver; and from the judgment dismissing the complaint in the action brought by Reynolds, an appeal has been taken by Rejmolds—which appeals constitute the first and second entitled appeals. The appellant Reynolds made a motion to set the decision in each case aside, and after judgment was entered upon such decisions, moved to set such judgment aside and to have one judgment entered, upon the ground, that the foreclosure action and the action by Reynolds to review the order appointing the trust company as trustee constituted but onei cause, and should end in but one judgment, disposing of all the issues in both actions. Both these motions were

The history of the entire proceedings having been thus given, so that the situation of all the parties, as to each appeal, may be fully understood, we will now consider such appeals in then-order. First, the appeal of Reynolds from the judgment in the foreclosure action, and from the judgment in the action seeking to review the order by which the trust company was appointed the successor trustee.

No question was raised upon the trial but what default had been made in the. payment of interest upon the bonds, and that such default had continued for a period of over sixty days before the commencement of this action. No question is raised but. that the trust company represents in fact a large majority of the-bondholders, and it appears that upon the hearing before the referee appointed under the interlocutory judgment the plaintiff trust company produced before such referee, and had in its custody 271 of the 300 mortgage bonds. The only questions raised upon the trial, and argued upon this appeal, by the appellant Reynolds, were as to the legality of the appointment of the trust company as successor trustee, which question is common to both actions, and which is the only question presented in the-action wherein Reynolds, as receiver, is plaintiff; and as to-whether the trust company did in fact legally exercise its option to declare the whole principal amount of the bonds immediately due and payable, pursuant to the terms of the mortgage, after the expiration of sixty days from the default upon the payment of interest—which last question only enters into the action for foreclosure.

The plaintiff is properly acting as trustee of the gas company. The court of chancery has jurisdiction of trusts and trustsees, and had power, independent of any statute, to remove a trustee, on good cause shown, and to appoint another in his place. The-supreme court has succeeded to the jurisdiction and power of the court of chancery and it seems to me unnecessary to cite-authorities to prove its jurisdiction and power to appoint one trustee in the place and stead of another. The original trustee under the mortgage becoming insolvent, the supreme court had jurisdiction to appoint a successor trustee. Its order making such appointment was therefore not a void order, but may have been, under the circumstances, irregular.

Without discussing the question as to the power and authority

After the commencement of the foreclosure action a motion was made at a special term, before the same justice who had appointed the trust company as successor trustee, to vacate such appointment, which motion was denied, and no appeal was taken therefrom. This ordinarily would conclude the matter. But assuming the right in a proper case to have reviewed by action a judgment, decree, or order obtained by fraud, in what position does the appellant then stand ? He alleges as his cause of action that the person upon whose petition such appointment was made falsely represented himself as the owner, or in possession of, or having under his control, bonds of the gas company, and claims that at that time such petitioner neither owned, possessed, nor controlled any such bonds. In my view of this case, as it now stands, it is a matter of absolutely no importance whether such petitioner owned, possessed, or controlled at that time any. bonds or not. This action is one in equity. To sustain it the plaintiff must show some equity existing in his favor. The only persons interested in the question of who shall be trustee under the mortgage are the bondholders and the gas company, all of whom have recognized, acquiesced in, and requested such appointment: The gas company, first, by its officers, the president and treasurer, executing to the trust company the so called supplemental mortgage ; secondly, by its board of trustees, adopting the resolution, heretofore set forth, designating the trust company as the successor trustee; and thirdly, by paying over to it, from time to time, money to pay the interest upon its bonds. The bondholders, by requesting the trust company to exercise its option and declare the whole principal sum due, and commence foreclosure proceedings upon the mortgage ; again, in the agreement of bondholders, constituting a committee to act for them, heretofore referred to, wherein the trust company wop designated as their trustee, and, in pursuance thereof, depositing a large majority of the bonds with it ; and still again, upon the motion made at special term to vacate and set aside the order appointing the trust company as

As to the exercise of the option to declare the principal sum due, the majority of the bondholders requested the trust company to exercise such option. The contention is made that the trust company did not legally comply with that request; that the notice ■sent by the secretary of the company to the gas company was not sufficient, it not appearing that he was authorized so to do by a resolution of the board of directors of such company. I am inclined to think that no such resolution was necessary ; that it was a matter that called for no deliberation or action upon the part of the directors, but that it was a mere executive duty, which the executive officers of the trust company could perform in its ordinary discharge of their duty. By the terms of the mortgage, the request of the bondholders was conclusive and mandatory; but, be that as it may, the bringing of the suit itself was a sufficient declaration of its intention to exercise such option. Northampton Nat. Bank v. Kidder, 116 N. Y. 221 ; 8 St. Rep. 621 . And no question is raised here but what the action was commenced in the name of the trust company by proper authority.

But, in addition to that, there was produced and given in evidence upon the trial a resolution of the board of directors of the trust company ratifying and approving the action of the secretary in giving notice that the trust company exercised the option in question. It is true that this resolution was passed after the commencement of the action, and during the trial thereof, but nevertheless I think it was a sufficient confirmation of the action of the secretary to sustain and make good the position of the trust company, if any such resolution was at any time necessary to authorize the secretary to act. What should " have been done only by their authority, having been done without such authority, they, may at any time ratify.

The contention of the appellants the bank and Andrews that the liens of their judgments, execution, and sale be declared liens prior to the lien of the mortgage, I do not think should be sustained. The gas company was organized under chapter 40 of the Laws of 1848, entitled “ An act to authorize the formation of corporations for manufacturing, mining, mechanical or chemical pur

The mortgage being recorded in the proper county, it was notice to all persons as to the personal property as well as to the real estate. I am not prepared at this time to assent to the doctrine that mortgages of the kind in question here do not extend to after-acquired personal property. It seems to me that the principle established in Rochester Distilling Co. v. Rasey, 142 N. Y. 570 ; 60 St. Rep. 284 , in not applicable to mortgages of the kind here under consideration. Enterprises like that of the gas company commonly require too much capital to be carried on by single individuals. A partnership is not adapted to conduct such undertakings. It requires an aggregation of capital, and a method of business, which is best secured by a corporation. The accepted manner of raising the greater part of the needed capital is by an issue of bonds, secured by a mortgage upon the franchise, real estate, and business plant and property of the corporation. These bonds and mortgages are ordinarily, and almost necessarily, long-term bonds and mortgages. Those in question here are payable twenty years from the date of their execution. Frequently the most valuable portion of their property does not consist in the land owned by them; and the buildings erected thereon, but in the implements and machinery necessarily used in carrying on the business. In the natural course of business, during the long term of the bonds and mortgage much of such machinery, implements and tools becomes worn out, and must be replaced. Then, too, there is a constant improvement in machinery. Better and cheaper methods are devised, but which demand new and different machinery. • The machinery that is from time to time put in, in place of that which is worn out,— the new machinery which supersedes the old, in order to adapt the plant to modern processes and methods,—becomes an essential part of the plant; and such renewals and additions I think may fairly be said to be contemplated when any large enterprise of the kind I have been discussing is inaugurated: and may be said to be of the when investors

When the real estate is conveyed to the mortgagee, the lien of the mortgage, which before that time remains but an equitable claim upon the property to be acquired, becomes a vested legal right to such subsequently acquired realty. Fisk v. Potter, 2 Abb. Dec. 138-144. In the case of Seymour v. Railroad Co., supra, where, the question was whether real estate acquired by a railroad corporation, after the execution of a "mortgage, was within, the lien of such mortgage, the court said that it was entirely “ immaterial whether the right of way was all acquired, or not, at the time the mortgage was recorded ; or whether the road had, or had not, been at that time entirely located, or the location thereof, if previously made, was afterwards changed.” That case was approved in the case of Carpenter v. Mining Co., supra. The mortgagor in that case was organized under the same act that the gas company in this case is, and the court said of the mortgage given by it that: “It is not in conflict with the statute because it mortgaged the future as well as the present real estate of the company. There is nothing in the statute which limits the effect of the mortgage to the present real estate of the company, and nothing in the nature of a mortgage security which can thus limit its-effect.” 65 N. Y. 51 . I can see no difference in principle between mortgages of this nature upon the realty from those given upon chattels. The power to mortgage the personal property is under the same statute that authorizes the mortgaging of realty. Creditors and persons dealing with the company have the same notice of the mortgage of the personalty that they have of the-mortgage upon the realty. Chapter 171, Laws 1891, above quoted, renders the recording of a mortgage of the kind in question, including both real estate and personal property, equivalent, so far as the personal property is concerned, to the filing of a chattel mortgage upon the same property. It seems to me, therefore, that unless some third person has acquired a lien upon such property prior to its acquisition by the gas company, as soon as the gas company

If I am mistaken, however, as to that aspect of the case, there is another which I think must dispose of the appeal of the bank and Andrews. Their contention, it will be borne in mind, is that their judgments and executions should be declared liens, prior to the mortgage, upon all after-acquired property. The mortgage by its terms covered all the property of the gas company, and all property to be thereafter acquired. As to after-acquired property, I take it that there is no occasion to cite authorities to show that, as between mortgagor and mortgagee, at least, it was valid. Upon the face of the mortgage, then, the trust company was entitled to foreclose upon all the property in the possession of the gas company at the time of the foreclosure. The appellants the bank and Andrews by their answer claim a lien prior and superior to that of the mortgage. They allege that they have such a lien because the property levied upon by them was purchased after the execution of the mortgage. It was incumbent upon them to prove that allegation; and if the fact that any part of it was after-acquired property was an essential element to establish the priority of the lien claimed by them. It was incumbent upon them to establish that fact. Their mere assertion of their claim in their answers was not sufficient to place the burden of proof upon the trust company to show that all the property in the possession of the gas company was in its possession at the time of the execution of the mortgage. There is no evidence that any of the property upon which the bank and Andrews claim that their judgments or executions and sale should be declared liens prior to that of the mortgage was purchased after the execution of the mortgage, except the dynamos and exciters. Dynamos and exciters are essential in the manufacture of electricity. They were placed in the building used by the gas company for the manufacture of electricity as a part of the electric plant. It appears that the dynamos weighed about two tons each; that they rested upon special foundations, upon which were sliding grooves in such form that a dynamo could be slipped out and another of the same size slipped in. They were fastened to the floor by screws. Each dynamo was joined by a leather strap to the shafting. The floor of the building could be removed without disturbing the dynamos. The exciters weighed about 500 pounds each, and were fastened in the same way that the dynamos were, except that there was no special foundation built for them. It was the intention, in placing these dynamos and exciters in the building, to keep them there until they were worn out, or superseded by others. The fact that a piece of machinery can be taken out of a building without impairing the construction of the building does not determine the question as to whether it has become a part of the real estate. The question is, was it the intent to place it there as a permanent improvement, an addition to the freehold, to be applied to the property and to the use of the business there carried on ? Potter v. Cromwell, 40 N. Y. 287 ; Voorhis v. McGinnis, 48 id. 278; McRea v. Bank, 66 id. 489. The case of Potter v. Cromwell, supra, was one where a port

The property of the gas company that has been used, disposed of, and sold by the gas company since the execution of the mortgage, as set forrh in the answer of the bank and of Andrews, the value of which they allege should, as against them, be credited upon the amount of such mortgage, appears to have consisted of coal oil, lime, and articles of that character, which were used in manufacturing gas and electricity, and renewed from time to time in carrying on the business of the corporation. The moneys expended appear to have been expended for the purchase of supplies, repairs to the building and plant, and the general expenses of conducting the business. It is hardly worth while spending time upon the contention that is made that such use and sales of property, and expenditures of moneys thould be credited upon the mortgage, as made in fraud of creditors.

As was stated in the court below, the question “ whether a mortgage is fraudulent as against creditors is a question of fact;” and again: “Every case must stand upon its own facts, and the test of fraud in such cases is whether the mortgaged property is really devoted to the creditor’s security.” It is not pretended here that this was any scheme by which the gas company, under the shield of a mortgage, was to be permitted to dispose of its property for its own profit in fraud of its creditors. No question is raised but that the mortgage was actuallj' given for the security of the bondholders. Such being the case, the rule that is in-

The appeals from the orders denying the motions to vacate the judgments entered as above stated, and direct the entry of a single judgment, embracing both actions, are next to be considered. These motions were founded upon the assumption that a cross-action as known- to the old chancery practice still exists. The argument to that effect was predicated upon section 217 of the Code of Civil Procedure, which states that the general jurisdiction formerly possessed and exercised by the supreme court of the colony of New York, at any time, and by the court of chancery of England, on the 4th day of July, 1776, is now vested in the supreme court, with such exceptions, additions and limitations as have been created and imposed by the constitution and laws of the state; “ and that subject to those exceptions, additions and limitations, the supreme court of the state has all the power and authority of each of those courts, and exercises the same in like manner.” By the words “ exercises the same in like manner,” I do not think it can be held that a cross-action, with the forms and procedure relative thereto, has been preserved ; because by the old Code of Procedure all forms of action, both legal and equitable, theretofore existing, were abolished, and by section 518 of the present Code of Civil Procedure, it is provided that the chapter of which that section forms a part prescribes the forms of pleadings in all actions, and the rules by which the sufficiency thereof is determined, except where special provision is otherwise made by law. Section 3839 provides that there shall be but one form of action, abolishes the distinction between actions at law and suits in equity, and abolishes all forms of'action at law and suits in equity. While the jurisdiction of the old supreme court and of the court of chancery has

As to the appeal of Reynolds from the order denying the motion to direct the receiver Gleason to pay certain coupons, and, upon the payment by said Reynolds of the remaining coupons, to turn over all the property of the gas company in his possession to said Reynolds, it seems to me that such motion was properly denied. No question was raised upon this appeal but that the appointment of a receiver in the foreclosure proceeding to preserve the property and receive the profits for the bondholders was within the power and discretion of the court. The order appointing Gleason receiver seems to have never been questioned or appealed from. The motion to discharge him, and to turn over the property in his possession to a receiver appointed in a sequestration proceeding, was one largely in the discretion of the court at special term to grant or refuse. Each of these receivers is an officer of the court, acting for it and in its place and stead. Each is simply the instrument of the court, to guard, protect, and manage for it the property and interests which are in its custody and control. The discretion of the court as to which receiver should have the future control of the property was exercised after a review, probably, of all the proceedings in this matter, as they have been herein set forth, the motion having been heard by the same justice before whom the actions were tried. The motion was made after the final judgment and decree of foreclosure and sale in the foreclosure action, and after the receiver Reynolds had been beaten in his efforts to defeat such actiom; and there is nothing before the court to show that any person interested would be benefited by granting such order, except the receiver Reynolds, who would thus have placed

The number of questions to be considered in these appeals, and the length to which their consideration would necessarily extend, have precluded me from entering upon any discussion of many of the authorities cited in the learned and ingenious briefs of counsel, and I have therefore largely confined myself to an expression of the conclusions at which 1 have arrived after considering the authorities referred to.

The views herein expressed lead to an affirmance of the judgments and orders appealed from, with costs of the appeals wherein Reynolds, as receiver, is appellant, against said Reynolds personally.

Mayham, P. J., concurs ; Putnam, J., not acting.