Belden v. Burke

It may be assumed that Burke and bis associates, having acquired all of tbe stock of tbe different railroads and consolidated them into the Columbus, Hocking Yalley and Toledo Railway Company, had

The task, probably, would have been difficult if not impossible of accomplishment, and because of that fact, doubtless, the idea was born to attract investors with the assurance that the proceeds of the bonds to be issued, over and above the amount necessary to take up the bonds outstanding of the divisional companies, should be applied in double-tracking, equipping and increasing the transportation facilities of, and improving the company’s railway, and in purchasing such real estate and other property as the interests of the company require. This provision, it was but reasonable to assume, would prove attractive to purchasers and enhance the price of the bonds, for, in addition to the equity of the corporation over and above the mortgages on the primary railroads, the security would embrace the result of using the proceeds in improving and adding to the property, and necessarily enhancing its value.

' The importance which investors would ordinarily attach to these promises is more fully appreciated when it is considered that the contract of the obligor contained in the mortgage and in the bonds secured by it, is of a twofold nature : First, that the sum named in the bond shall be repaid with annual interest; and, second, that the money borrowed, of which the bond is the evidence, shall be expended for improvements and betterments to the mortgaged property, and the acquisition of additional property to be subject to the lien of the mortgage.

The first covenant is simply for the repayment of the money borrowed, with the accruing interest. And the second covenant is to secure the loan and make its repayment, with interest, more certain. The improvements and accretions to the mortgaged property were for the benefit of the lender as well as the borrower.

The agreement to make such use of the money was the stipulation of the borrower, upon which the loan was made. It was a material and important part of the obligation of the borrower to assure reimbursement of interest for the use of the fund.

A railroad is an artificial structure. It deteriorates by usé and requires frequent renewals. Its value depends on its adaptation for the use to which it is applied, and its earning capacity is an essential part of its value as a security or an investment. This in turn depends on the condition of the road for safe and speedy movement of the trains, adequate rolling stock,, and the proper and needful facilities for transportation. If any of these prerequisites are neglected, the value of the property is diminished, and the security correspondingly impaired.

.The ability to pay arises from the capacity to earn revenue. And business from which revenue is derived is invited by the character of the transportation facilities supplied. Interest is a fixed and imperative charge, and like operating expenses must be earned from the business done before it can be paid.

The creditor who loans money, therefore, upon the security of such property and upon the condition or covenant that the money loaned shall be applied in improving and increasing the value of the property is vitally interested in the application of the money in accordance with the agreement which has for its purpose the protection of the loan.

And the fact that officers charged with the duty of guarding the interests of the stockholders should deem it wise to incumber the property in so large an amount for the purpose of securing moneys with which to improve it, would naturally suggest that the result of the expenditure would be to largely add to its earning capacity.

But the promise which the mortgage contains was not kept, nor was it ever intended that it should be. Not a dollar of the proceeds of the $8,000,000 bonds was applied in the direction covenanted in the mortgage.

Seven hundred and thirty-six of the bonds were applied in paying the vendors of the lands owned by the coal company, the stock of which was acquired by the consolidated company, but that did not feed the mortgage security, the stock of other companies being

'The proceeds of the remainder of the bonds being applied in payment of the debt incurred by Burke and his association, in purchasing the stock of the primary companies, or to the personal use of Greene, and of Burke and his associates.

That the action of Burke and his associates was wrongful and has resulted in great injustice to the holders of the bonds is apparent.

But so far it has been determined, and it is now vigorously contended by the respondents, that the settled principles of law and equity which should guide the footsteps of the courts in new fields of litigation, deny to them all redress.

The ground on which the learned trial court rested its decision was, that the first holders of the bonds knew of, and participated in the misappropriation of the proceeds, and thereby lost the right to enforce the covenant, and that all subsequent bondholders stand in precisely the same position in reference to it as their predecessors in ownership. The assertion of such a proposition is startling, when we consider that five thousand millions of money have been invested in the bonds of corporations in this country.

If one covenant constituting an essential part of tbe obligation of the instrument can be waived or abrogated by a private unwritten agreement between the corporation and the first taker of the bonds and become nugatory in the hands of subsequent purchasers of the bonds, why may not other covenants be thus eliminated and the bond itself by this process become a nullity without any indorsement or indication upon the instrument of an alteration in its character ?

If a secret arrangement, which shall conclude subsequent bona fide purchasers of bonds, may be made to waive or extinguish a covenant, like the one in this case, to apply the money borrowed in improving and enhancing the value of the mortgaged property, why may not the covenant, that after-acquired property shall come under the lien of the mortgage, be waived with like effect % Or, why may not a secret understanding with the original owner deprive a later purchaser of the benefit of any covenant contained in the bonds ?

If such a doctrine could be sanctioned, an easy way would be open for any fraud that ingenuity might devise,' and the protection

IIow would it be possible for the purchaser in an open market to ascertain if there had existed such an agreement? Where would he go to find out ?

Now he understands lie must look to the bond and to the mortgage, which is a matter of public record, for the information which he may desire, with full assurance that the conditions contained therein can he enforced for his benefit. It would be a public misfortune if it should be determined that these sources of informar tion aré not reliable.

The successive steps leading to the conclusion reached at Special Term are, as I understand them: (1) The bonds were issued to the president and vice-president of the corporation, accompanied with a covenant that the proceeds should be applied to a particular purpose.

(2) The covenant was not then operative, and could not become so while the bonds remained unsold in their hands.

(3) The bonds were then disposed of to Winslow, Lanier & Go., under an agreement the effect of which was to abrogate the covenant.

(4) They could not, therefore, enforce the covenant.

(5) Plaintiff, as the purchaser of the bonds, which were negotiable instruments, did not acquire any greater or other rights to enforce the collateral obligation than his predecessor in ownership had.

The second proposition presents the first legal question in the series of propositions, which is that the covenant could not become operative until after the bonds were sold.

The fifth covenant in the mortgage provides that the 8,000 bonds shall be at once executed by the president and secretary of the railway company, certified by the Central Trust Company of New York, and delivered to the president and vice-president of the railway company, to be used and disposed of by them according to the stipulations thereinbefore contained.

The grant is stated to be “ For securing the payment of said bonds to be made and executed to the amount of $14,500,000 * -x- * anc] carry out and effectuate the resolutions aforesaid.”

And the defeasance is, “That the trustee may at any time, whether said bonds are due or not, upon their presentation to it and cancellation by said railway company, cancel this mortgage, and this mortgage shall, upon such cancellation, be null and void * * * but it is hereby expressly provided, and this indenture is made upon condition, that if the * * * railway company * * -x- siiaii weu an(i truly pay or cause to be paid all the interest and coupons * * * and shall pay the principal of said bonds at maturity * * * and shall keep and perform all and every the covenants herein contained on its part, then and in that case this indenture shall be and become null and void.”

And the mortgage further provides that “upon each of said bonds shall be placed the indorsement of the party of the second part, or its successor or successors, without which the bond shall not be entitled to the benefits of this deed, which certificate shall be in substance of the tenor and effect following, that is to say, it is hereby certified that the said bond is one of a series amounting to $14,500,000, secured by the mortgage therein referred to, and duly issued in conformity with its provisions,” and signed, “ Central Trust Company of New York trustee, by-, president.”

It is apparent that it was the intention of the parties to the instrument, as disclosed by the provisions to which reference has been made, that the covenants contained in the mortgage should go into effect so soon as the trustees should certify and deliver any of the bonds to the president and vice-president of the railway company. • It is not conceivable that the trustee would have consented to the contract otherwise, for upon the delivery of the bonds to the officers selected for that purpose by the railway company it was required to certify that the bonds bearing the certificate “ had been duly issued in conformity with its provisions.”

The parties were competent to make the contract, which we think they intended to make and did make. The trustee was interested

The consideration was ample to uphold the contract which the railway company made with the trustee, for it accepted the trust, promised to certify the bonds, which was essential to their validity, and it did, in fact, certify and deliver them.

"When that was done, and before their disposition by the officers, it had such an interest in them as entitled it to prevent their disposition for any other purpose than that provided in the mortgage.

For example, had the railway company attempted to make a dividend of half the bonds among its stockholders, and this fact had ■come to the knowledge of the trustee, there could be no doubt of its right to obtain an injunction preventing such a disposition of them.

The other proposition of the series involving a legal conclusion, to which reference will be made in this connection, asserts that as the first takers of the bonds could not enforce the covenant contained in the collateral obligation, neither could subsequent purchasers. The reasoning which led to this conclusion was that the mortgage was not negotiable, but the bonds were; their negotiable character, however, only extending to the title to the bonds, the amount due thereon, the liability of the obligor and the consideration, and, therefore, as to the obligations of the corporation collateral to those matters, such as the covenant under consideration, a holder of the bonds takes merely as assignee of the first takers.

In support of this proposition are cited Lamourieux v. Hewit ( 6 Wend. 308 ); Watson’s Executors v. McLaren (19 id. 565); Birckhead v. Brown ( 5 Hill, 644 ); Barlow v. Myers ( 64 N. Y. 44 ); Trust Co. v. National Bank ( 101 U. S. 68 ); Bailey v. Smith ( 14 Ohio St. 406 ).

The cases in Wendell ^presented the question whether a guaranty of the payment of a note by the payee, written in the first case on the note and in the second on a separate piece of paper, inured to the benefit of the subsequent purchaser upon a delivery of the note and guaranty, and it was held that it did not, the guaranty being a special contract and non-negotiable.

In Bcurlow v. Myers the defendant promised to pay all the debts of a certain firm, and the contract was held to be with the then creditors, and them alone; that by it the creditors obtained additional security, which would pass by assignment, and, therefore, subject to any equities on the part of the promisor existing against the debt while in the hands of the assignor.

In Trust Company v. National Bank two propositions only were decided: The defense of a maker of a promissory note can only be cut off by the payee’s indorsement of it before maturity, and that a guaranty thereon by the payee is not such an indorsement.

In Bailey v. Smith it was held that where a negotiable promissory note is transferred to a bona fide holder for value before maturity, a defense that the mortgage collateral to it was obtained by fraud by the mortgagee or payee of the note was a valid defense, in an action to foreclose the mortgage by the transferee.

That case was subsequently considered by the Supreme Court in Carpenter v. Longan ( 16 Wall. 271 ), and not followed, the court holding that mortgages given to secure negotiable paper, transferred to a good-faith holder for value, and before maturity, for the benefit of the holder, are subject to no equities, and to no defenses except such as may be asserted against the negotiable paper itself. That rule has been followed in this State (Gould v. Marsh, 1 Hun, 566 ), and in other jurisdictions. (New Orleans v. Montgomery, 95 U. S. 16 ; Swett v. Stark, 31 Fed. Rep. 858 ; Thomas on Mortgages [2d ed.], § 308.)

It will be observed th*at the facts of the cases relied on to support the judgment rendered are not at all like the one under consideration, but their applicability to the question now presented is said to rest in the fact that they declare certain special contracts to lie nonnegotiable; that as this mortgage is a special contract, therefore, it is not negotiable. But with the assertion that this mortgage is not negotiable we have no quarrel.

It has never been understood that mortgages of the character of

But rather that a bondholder’s claim is founded on the direct promise of the railway company to himself, by virtue of the trust instrument in which he is described as the beneficiary. Clearly there is no legal obstacle to the making of a contract in which the obligations, with respect to the security for the bonds put out, shall be coextensive with the obligation of the bonds themselves for the purpose of enhancing their public credit and currency.

In Peoria & Springfield R. R. Co. v. Thompson ( 103 Ill. 187 ), a distinction was made between a mortgage for the benefit of some one sjtecifically mentioned, such as the payee of a note, and a deed of trust declared to be for the benefit of the holders of the bonds.

In the first case it was said that the note can only be transferred by indorsement, the mortgage passing in equity as an incident of the debt by virtue of such indorsement.

But that such doctrine has no application to deeds of trust, given to secure a railroad coupon bond intended to be thrown on the market and circulated as commercial paper, and to be used as security for permanent investments.

“ To hold otherwise (said the court) would be doing violence to the manifest intention of the parties to such instruments, and would unquestionably lead to very disastrous consequences.”

It is the rule as between bondholders and persons acquiring liens on the mortgaged property, subsequent to the recording of the mortgage, that the rights of the bona fide holders of the bonds are to be determined as if they had been, acquired at the date of the recording of the mortgage securing them.

Necessarily it must be so as against the railway company itself, and as against those chargeable in equity with its obligations.

A bona fide purchaser takes such bonds freed from any equities which might have been set up against the original holder. (Knee land v. Lawrence, 110 U. S. 209 .)

In Claflin v. R. R. Co. (8 Red. Rep. 118), Chief Justice Waite said: “ Railroad bonds are a kind of public funds. They are put

“ The security has been considered a continuing one, and the bonds negotiable by the company so as to carry the mortgage security until they have become commercially dishonored.”

For the public reason stated by Chief Justice Waite, coupled with the fact that it is entirely within the power of the railway company, and the trustee under its trust deed, to provide for a continuous security for the benefit of the successive holders of the bonds to be issued thereunder, inquiry should be made whether such intention is manifested in the trust instrument, and, if So, effect should be given to it.

After naming the parties, the mortgage declares that the party of the first part lias become the owner of certain railroads, with numerous branches and short lines, and 10,000 acres of coal lands, but certain of the property is incumbered by mortgage given to secure bonds issued, and the recitals continue :

“ Whereas, said railway company, party of the first part, for the purpose of providing for the redemption and cancellation of the bonds secured by said prior or divisional mortgages, to enable it to borrow a further sum of money found necessary to be used in building and double-tracking its road, paying for property purchased and to be purchased, improvements made and to be made, and for the equipment of its said line of railway, providing terminal facilities, constructing docks, building bridges, and otherwise extending and enlarging its capacity for the transportation of freight and passengers, and for other general purposes of said railway, and for the purpose of resolving its entire bond and mortgage indebtedness into one loan, secured by one consolidated mortgage, lias, by its board of directors and all its stockholders, resolved to issue its bonds; * * . * and,

“ Whereas, for that purpose the directors and stockholders of the said Columbus, Hocking Valley and Toledo Railway Company, at a meeting held at the office of said company in Columbus, Ohio, on the twenty-eighth day of September, eighteen hundred and

“ Resolved, that the remaining eight thousand bonds, amounting to $8,000,000, shall be sold and disposed of by the president and executive committee, and the proceeds thereof shall be applied for the purpose of double-tracking, equipping and increasing the transportation facilities of and improving the company’s railway, and in purchasing such real estate and other property as in the judgment of its board of directors, or of the president and executive committee, the interests of said company require.”

These resolutions, the mortgage declares, were, after their passage-by the hoard of directors of the railway company, ratified and adopted by a unanimous vote of the stockholders at a meeting held for that purpose. This statement was followed by a grant, intended to give assurance to all inquirers, that the money to be expended in making the promised improvements should come under the lien of the mortgage. The grant was to the “ Central Trust Company of New York, party of the second part, and its lawful successors in the trust hereby created, all and singular the railroad aforesaid, with its appurtenances, depots, depot grounds, branches, switches, tracks, superstructure, real estate, right of way, yards, shops, locomotives,, cars, furniture and equipments, and all and every right, title or interest which the said party of the first part, had or has, or shall hereafter acquire, .in or to the same. * * * ” The habendum of the grant to the trustee is :• “ To have and to hold the same, with the appurtenances, unto the said party of the second part, its successors and assigns, in trust, for the use and benefit and security of the several persons and their successors, administrators, executors- or assigns, who shall hereafter become the owners and holders of any of the bonds to the amount of $14,500,000 intended to be hereby secured, and to be made and issued as hereafter provided. * * *”

The covenants which immediately follow the- habendum to the grant are introduced with a clause which, standing alone, would seem to put at rest all contention touching the question whether it was the intention of the parties to contract for the benefit of and with the persons who should become the holders of the bonds. It reads s

“And it is hereby expressly covenanted and agreed by and

“ First. That the said parties of the first part do hereby covenant for themselves and successors severally, and do agree to and with the party of the second part and its successors, and to and with the holders of each and every of the bonds issued or to be issued under and secured by this indenture, that it will satisfy and cancel all valid and existing bonds now outstanding. * * * ”

“ Fifth. Eight thousand of all bohds, amounting to eight million dollars, numbered from one to eight thousand, shall be at once executed by the president and secretary of said railway company, and certified by said Central Trust Company of New York, trustee, and delivered to the president and vice-president, or either of them, of said party of the first part, the Columbus, Hocking Yalley and Toledo Railway Company, to be used and disposed of by their, in aceoi’dance with the stipulations hereinbefore contained. * * The stipulations referred to being evidently those thereinbefore recited in the resolutions.

It is apparent from the provisions quoted that the parties to the instrument intended that the general understanding of the public, that it is beyond the power of the first takers, or any of the successive holders of the bonds, to diminish the security or in any .way affect the rights of subsequent holders, should be assured to those who might inquire respecting it.

They manifest the intention of the parties that the contract should be for the benefit of and directly with all persons who should become holders of the bonds. And disclose a settled purpose to assure all purchasers of bonds that the obligation of the company touching the security would be equal in all respects with its obligation on the bonds. And they thereby entered into a contract with the subsequent purchasers of the bonds to that effect.

The mortgage contained no provision whatever which suggests a discrimination based upon the time of performance, and none can be implied.

By virtue of the covenants, therefore, the trustee became vested

Provision was made for a surrender and cancellation by the company of all the bonds secured by the mortgage, but in no other way could the company terminate the trust. Its effect was to impress on the specific bonds numbered from 1 to 8000 inclusive, and their proceeds, a lien or equity in the nature of a trust for the application thereof to the purpose specified in the mortgage.

Jn Pomeroy’s Equity Jurisprudence (§ 1235), the general rule is stated as follows :

“ The doctrine may be stated in its most general form, that every express executory agreement in writing, whereby the contracting party sufficiently indicates an intention to make some particular property, real or personal, or fund therein described or identified, a security for a debt or other obligation, or -whereby the party promises to convey, or assign,, or transfer the property as security, creates an equitable lien upon the property so indicated, which is enforceable against the property in the haudsuiot only of the original contractor, but of his heirs, administrators, executors, voluntary assigns and purchasers or incumbrancers with notice.”

Illustrations of the application of this doctrine may be found in the following cases : Pennock v. Coe (23 How. [U. S.] 177); Weetjen v. St. Paul & P. R. R. Co. ( 4 Hun, 529 ); Van Weel v. Winston ( 116 U. S. 228 ); Ketcham, v. St. Louis (101 id. 306 ); Hauselt v. Harrison (105 id. 401); McMurray v. Moran (134 id. 150); McGourkey v. Toledo R. R. Co. (146 id. 536); Rogers v. Land Co. ( 134 N. Y. 197 ).

In Pennock's case, the court, in reaching its conclusion, made use of the following argumeirt: “We think it very clear, if the company, after having received the money upon the bonds, and given the mortgage security, had undertaken to divert the fund from the purpose to which it was devoted, namely, the construction of the road and its equipment — and upon which the security mainly depended — a court of equity would have interposed and enforced a specific performance.”

This principle also receives consideration in Story’s Eq. Juris. (§ 1237); 2 Pomeroy’s Eq. Juris. (§§ 1051-1058) ; Perry on Trusts. (§§ 245, 246).

It would seem to follow that so long as the bonds are outstanding unmatured, which were duly certified by the trust company, it is its right and duty to enforce all of the provisions of the security for the benefit of present bondholders, as well as those who may hereafter become such.

It is true that the mortgage provides that the trustee shall be in no respect answerable for the use made of the bonds by the president or vice-president of the railway .company after their certification and delivery by the trustee, but that in no way lessens the obligation which the trustee assumed when it accepted the trust, to use due diligence to save its eestuis que trust from injury.

It was, and still is, its duty to proceed in court to redress any remediable wrong which has resulted to its eestuis que trust from a. breach of the covenants of the deed of trust.

If the views so far expressed are sound, it follows :

(1) That the contract made between the railway company and the trust company was for the benefit of, and with all persons who should at any time become holders of the bonds, securing to them the benefit of the security according to the terms of the mortgage, free and clear of all equities which might exist as against prior holders.

(2) The railway company’s right of dominion over the bonds in question, and the proceeds thereof, was so qualified that it was bound to make use of them to feed the .mortgage security.

(3) The trustee was charged with the duty of using reasonable diligence to secure faithful performance on the part of the railway company, in the interest of the bondholders, present and future.

Whether the proceeds of the bonds, or any portion of them, were so applied as to improve the mortgage security will now be • considered.

There is no room for pretense even, that the proceeds of any portion of the bonds, except seven hundred and thirty-six (136), were s.o applied as to enhance the value of the mortgage security.

And they were in fact used to pay a debt which Burke and his associates had incurred in buying coal lands, which were conveyed to the coal company and afterwards became subject to the lien of the ■ trust mortgage.

It may be but for such payment Burke’s predecessors in title would have had a vendor’s lien, which would have had priority over the mortgage lien, and it is said that to the extent of such payment the mortgage security was in fact fed.

But the mortgage embraced the coal lands, as well as the property of the primary railroads, and it assured to the bondholders, as it was -intended that it should, that the property therein described was only incumbered to the extent of six and one-half millions, which incumbrance was all upon the property of the primary railroads. So that in paying the debt of Burke and associates for the coal lands, the bondholders received no added benefit to that which the mortgage undertook to assure to them.

That which was done with the bonds was substantially in accordance with the scheme of Burke and associates prior to the formation of the consolidated corporation, and necessarily before the execution of the mortgage.

One of the modes by which it was sought to cany out the plan, so as to give it the appearance of legality and the semblance of honesty, was by the exchange of 15,000 shares of the coal company’s stock for the 8,000 bonds of the railway company.

par value of the coal stock was one hundred dollars ($100)

At the time of the exchange Burke and associates owned all the stock of the railway company, except seven outstanding shares of one of the primary companies, and controlled its board of directors, executive committee, president and vice-president. They also owned or controlled all the subscriptions to the stock of the coal company, which they caused to be transferred to Greene, the president of the railway company, and a certificate for the 15,000 shares to be issued in his name as president, which was the only certificate ever issued.

Burke and his associates, therefore, represented both parties to the transaction.

It is trne that by this transaction the railway company acquired the stock of the coa1 company, but it is clear, we think, that the mortgage security was not in anywise benefited by its acquisition.

(1) Because the stock, notes or bonds of other companies are expressly excepted from the clause providing that after-acquired lands, property, rights and franchises shall pass under the lien of the mortgage, and become part of the security for the payment of the bonds.

(2) Stocks of other corporations are not included in the enumeration of property in which it is covenanted that the proceeds shall be invested. The covenant is that the proceeds “ shall be applied for the purpose of double-tracking, equipping and increasing the transportation facilities of, and improving the company’s railway, and in purchasing such real estate and other property as in the judgment of its board of directors, or of the president and executive committee, the interests of said company require.”

It is contended that stock of other companies is “ other property,” within the meaning of the mortgage stipulation as to the use of the bonds.

If this contention be well grounded, then, by the use of those two words, a way was opened through which the bonds could be entirely applied in the purchase of stock, notes and bonds of other companies, which would not fall under the lien of the mortgage, because specifically excepted in the after-acquired property covenant.

The construction contended for cannot obtain because,

Second. The rule of construction that where the words of a promise may have been used in an enlarged or restricted sense, they wall be generally construed in the sense most beneficial to the promisee- (Hoffman v. Ins. Co.,, 32 N. Y. 405 ), is especially applicable here, where, if the words be construed in the enlarged sense, they would permit an entire diversion of the proceeds of the bonds from the purpose which the corporation intended to assure the purchasers they were to be used for.

Third. If the meaning contended for should be given to the words “ other property,” it would be in violation of that settled principle of construction, that where words of general description are associated with words of particular description the general words, in the absence of anything clearly manifesting a contrary intent, shall' be limited so as to be ejusdem generis with the particular words. (1 Chitty on Cont. [11th Am. ed.] 181; Alabama v. Montague, 117 U. S. 602 ; Matter of Reynolds, 124 N. Y. 388 .)

The general words “ other property,” therefore, must be limited to property of the general character of that 'particularly described, which referred to improving the property of the corpoi'atioh and the purchase of such real estate as its interests required.

Stocks and bonds of other companies are not ejusdem generis with double-tracking, equipping and improving the company’s railway, and, therefore, are not “ other property ” within the meaning of the stipulation.

We have already observed that the effect of the mortgage covenant was to impress on the bonds in question a lien or equity in the nature of a trust, for the application thereof, in the manner provided in the mortgage, and, if this position be well taken, it affords adequate ground for relief in equity against Burke and his associates.

They had full knowledge of all the circumstances creating the lien. They caused to be organized the corporation which made the

And in what the president and vice-president Burke did in pretending to exchange the bonds for the stock of the coal company, they in form obeyed the directions of the company, but in reality they but carried out the wishes and directions of Burke and his associates.

And a court of equity will go behind the corporate veil, with which these parties undertook to hide from view the real transaction and the parties who were executing it, and administer equity in accordance with the 'facts disclosed.

- The exchange of the bonds for the stock was in contravention of the statute 'of the State under which these corporations were organized. Of this fact Burke and his associates must be presumed to have had knowledge, and in bringing about the transfer of the bonds, Burke and Greene, in practical effect, acted for Burke and his associates.

If that transaction be regarded as a disposal of the bonds, they are chargeable in equity with knowledge of the trust lien, and it may be enforced against them. If it be treated as invalid and a mere cover, then the transfer from the authorized officers of the corporation, of which Burke was one, to “ Winslow, Lanier & Go.,” resulted in effect in the receipt of the. proceeds by Burke and his associates. It is true the money was not put in the hands of Burke and his associates, but it was in legal effect paid to them, because, being indebted to Drexel, Morgan & Co., from whom the loan was procured by Winslow, Lanier & Co., they directed the proceeds to be applied in payment of such debt.

For these reasons, equity can and should require Burke and his associates to turn over the proceeds of the bonds to the railway corporation, to the end that it may in turn be required to apply them in accordance with the covenants contained in its mortgage.

There is another ground on which a court of equity is warranted

The fraud was not of such a character as would permit of redress in a court of law, but it was, we think, sufficient to enable a court of equity to compel them to do that which they professed an intention to do, but did not, to the injury of the trustee and bondholders.

The court has found as a fact, that “ Burke and associates and said Milbury M. G-reene combined together to make money and gains for themselves by the means and in the manner following: * * * By concealing and causing said consolidated company * * * to conceal the use intended, as aforesaid, to be made of said $8,000,000 of bonds, and by causing said consolidated company in said mortgage to represent that it was its intention and purpose to apply said $8,000,000 of bonds and their proceeds in the way specified and limited in the corporate resolution to be set forth in the said mortgage (these being such as would improve the mortgage security). * * * 'That such scheme was carried out by said Burke and associates and said G-reene, substantially as hereinafter set forth.” By the execution of this plan they obtained, as they originally intended to do, a benefit to which they were in no way entitled, because the promise necessarily enhanced the credit of the bonds with the public, and their action at the same time deprived the mortgage trustee and the bondholders from obtaining the benefit which the covenant in the mortgage entitled them.

The means by which they were enabled to perpetrate this fraud upon the trustee and bondholders, was due to the absolute control which Burke and his associates exercised over the railway corporation. A control which was, from the beginning, deemed an essential requisite to the carrying out of the plan which they originated and executed.

How they were enabled to exercise complete control over the corporation and its officers has already been adverted to.

It is enough in this connection to say that the railway company had no will except theirs. That while many things were done which took the form of corporate action, they were, nevertheless, inspired and commanded by them, and were in reality their acts. Under these circumstances, the corporate action taken, which was

Having caused the covenants to be made, they were bound in good conscience to promote performance of them.

This they did not do, nor did they intend to permit it to be done, when they caused the promise to be made.

Such conduct is inconsistent with upright dealing, but consistent with an intention to deceive. The result of their action was a fraud on the trustee, for, by reason of it, there was put upon the market bonds bearing its certificate, which operated to assure investors of the lona'fieles of the entire transaction, when in truth it was wholly wanting.

A wrong has been done the Iona fide bondholders, for they have-been deprived of the added security which the mortgage promises. That the execution of the promise made would have been of very considerable advantage to them has support in the fact that at the trial the bonds did not have, and never had had, a market valne. equal to their par value.

In Pomeroy’s Equity Jurisprudence (Vol. 2, § 873), it is said: “ It has been shown in a former chapter that the jurisdiction of Chancery was originally rested upon two fundamental notions — equity and conscience or good faith. The first of these embraced all cases where a party acting according to the rules of the law, and not doing anything contrary to conscience or good faith, might obtain an undue advantage over another, which, though strictly legal, equity would not permit him to retain. The second embraced all those cases where a party, although, perhaps, still keeping within the limits of the strict law, so as to be sustained by the law courts, had committed some unconscientious act or breach of. good faith, and had thereby obtained an undue advantage over another, which advantage, even though legal, equity would not suffer him to retain. The relief given by equity in all cases of fraud is plainly referable to this second head of the original jurisdiction.”

It does not require argument, but only a simple statement of the-facts, such as has already been made, to demonstrate that, under the rule thus laid down, defendants can in equity be required to place the fund which they have diverted where it of right belongs.

In Piper's case a father died seized of real estate, which he devised to his two sons, A. and B., subject to the limitation as to B., that should he die without issue, his share should go to A.; thereafter B. conveyed his interest in such real estate to defendant, ■who subsequently induced 0., plaintiff’s mother, to marry B., by means of the false and fraudulent representation that B. had a fine property so left to him that if he married and had an heir, the land would go to the heir.

The plaintiff was the only child of the marriage. At the time of the commencement of the suit the real estate had been partitioned between A. and defendant as the grantee of B. The relief prayed for was that plaintiff be declared the owner of the portion so acquired by defendant.

It was held that, inasmuch as the plaintiff would have had the property had the representations been true, the defendant should make it good to her ; that while it was true the representations were not made to the plaintiff, for she had not yet been born, they were made in her favor and inured to her right. The result was worked out in that case by way of equitable construction, the fraudulent holder of the property being converted into a trustee to preserve it for the purpose of recompense. The court said : “ There is no legal objection towards constituting such a trustee in favor of one who was not in esse when the fraud was perpetrated, so long as it can be seen that .such person seeks to take the property which the defendants hold by virtue of his fraud.”

Other illustrations of the jurisdiction of equity under the head to

In the latter case the court quotes with approval from Story’s. Equity Jurisprudence as follows : “ Fraud, indeed, in the sense of a court of equity, properly includes all acts, omissions and concealments which involve a breach of legal or equitable duty, trust or confidence, justly reposed and are injurious to another, or by which an undue and unconscientious advantage is taken of another.”

■ But while the conduct of Burke and associates has been unconscionable, being inspired solely with a desire to make gains to themselves by deceiving others, no basis appears upon which to found a charge of fraudulent misconduct against "Winslow, Lanier & Oo.

It does not appear that they were parties to the original scheme of Burke and associates, nor that they understood that it was their intention from the first to cause this covenant to be inserted in the mortgage for the purpose of attracting investors.

So far as their knowledge is concerned, the utmost suggested by the findings is that they had seen the mortgage, and knew its contents, so that when they paid for the bonds by paying the notes of Burke and his associates, they must have been aware that the fund was not appropriated for the purposes covenanted in the mortgage. But knowledge of that fact, coupled with the further one that they consented to the application of the proceeds in payment of the loan which they had procured, in the absence of any conspiracy between them and Burke and his associates, having for its object the accomplishment of that for which the latter planned from the beginning, is not sufficient to charge them with liability under this head of equitable jurisdiction.

We have asserted the liability on the part of the defendants Burke and his associates in equity, under another head of equitable jurisdiction, and it is contended that under it the defendants Wins-low, Lanier & Oo., are also liable.

It is found as a fact that in November, 1881, six thousand four hundred and eleven (6,411) of the bonds were delivered to them, the proceeds to be applied in payment of their certificates, and to satisfy notes aggregating $6,000,000 which they had delivered to Drexel,

Were there no other facts, it may well he that equity would declare and enforce a lien on the proceeds of the bonus in their hands. But there were other facts.

Nearly three months before the passage of the resolutions by the railway company, authorizing the making of the mortgage and asserting the purposes for which- the bonds were to be used, an agreement was entered into between Burke and his associates and Winslow, Lanier & Co., by which the latter were to furnish the former with the funds necessary for the purchase of the stock of the primary railroads. It provides, in part, that as soon after the contemplated consolidation as possible, Burke and his associates shall cause to be issued a consolidated mortgage upon the consolidated railway, covering all its property, and ten thousand (10,000) acres of coal lands for $14,500,000, $6,500,000 not to be issued or used except to pay off or cancel the outstanding bonds of the primary railroads, and bonds representing $8,000,000 to be delivered as additional security for the loan. It was also agreed that-the bonds should be duly vested in Burke and his associates prior to their delivery, so that they would be proper collateral to their indebtedness.

The court further found that they had no interest in the properties which were consolidated, and it does not appear that they had any knowledge of the intention of Burke and his associates to enhance the value of the bonds, by inserting covenants in the mortgage to the effect that the proceeds of the bonds should be so applied as to feed the mortgage security.

Indeed, it is difficult to conceive that they would have made the contract which they did make with knowledge of the scheme which Burke and his associates then contemplated and subsequently executed.

On the same day a further agreement was made between the parties, which secured to Winslow, Lanier & Co. the option to purchase $6,000,000 of the bonds within ninety days at par and interest, in which it was further provided that the proceeds of the bonds purchased should be applied in payment of the notes given by Burke and his associates to secure the loan of $6,000,000.

It had in view the purchase of all the stock of the railroads, and their subsequent consolidation into one railroad company, of which Burke and his associates should be the owners of the capital stock, which would justify them in giving a mortgage to secure as many bonds as they chose, so long as no deception should be practiced for the purpose of inducing investors to pay a larger sum for them than they were fairly worth.

Prior to the passage of the resolution authorizing the mortgage, and on September fourteenth, an interim certificate to the amount of $8,000,000 was issued by the railway company and delivered to Winslow, Lanier & Co., who in turn delivered it to Drexel, Morgan & Co., as part of the collateral security provided for in the agreement of July first.

Under the date of July eighth, Winslow, Lanier & Co. received subscriptions for the bonds amounting to $1,590,000, and, in accordance therewith, they accepted the option to purchase bonds in the amount so subscribed. It was not until October second that they saw the mortgage which supports the finding that they had knowledge of its covenants and stipulations. It does not appear that prior to that time they had any suspicion that the mortgage was to contain any such covenant. Their conduct seems to indicate that they could not have had. But at that time they had fulfilled their part of the agreement. The loan had been procured for Burke and his associates ; the option to a considerable amount of the bonds had been accepted, and the interim certificate, which was to be replaced by the bonds, had been accepted as collateral. Under these circumstances it -would be most inequitable to charge them with the proceeds of the bonds unless they were at the time of their receipt in a position to effectually insist that the contract with them should be carried out — the first instrument canceled — and a new mortgage executed, and bonds issued, -which should not on their face prohibit the use of the proceeds in the manner then intended. In respect to this question the findings are silent, and as the evidence is not contained in the record before us further consideration should be postponed until, on a new trial, the evidence in relation

The conclusion is reached that the trustee was entitled to maintain a suit against Burke and his associates, but it refused to commence one, although duly requested by the plaintiff, who at the same time informed it of the principal facts which were proved on the trial. Belden, being a bona fide owner and holder of; fifty bonds, as he is and has been since December, 1883, thereupon became entitled to bring this suit, as he has, in behalf of himself and all others similarly situated.

The judgment should be reversed and a new trial granted, with costs to the appellant to abide the event.

Yan Brunt, P. J., and Follett, J., concurred.

Judgment' reversed and new .trial granted, with costs to the appellant to abide event.