Majority
p. 226Jacob A. Cram, plaintiff and respondent, vs. The Farmers’ Loan and Trust Company, defendants and appellants.
Headnote
1. Mortgagees in trust, the mortgage to whom has been foreclosed hy a suit in equity, the decree in whose favor in such suit, directs the amount found due on such mortgage to them as such trustees, as well as another amount found due to them in their own right for expenditures upon the mortgaged premises, to be paid out of the proceeds of their sale in such suit, indiscriminately, with- ■ out providing for any order of payment, are bound to apply such moneys to the satisfaction of both claims in their order of legal priority.2. A new estate in lands, previously conveyed to a trustee upon certain trusts, may be granted to him, as well as a stranger, upon entirely .different trusts; without affecting his duties or responsibility under such first conveyance, which cannot be changed without the consent of the cestuis que trust under it, although by his acceptance of such new conveyance and trusts, he may subject himself to a double responsibility for not discharging two sets of inconsistent duties, both of which cannot be discharged without interfering with each other. He may be even made responsible to the first set of cestuis que trust iot any personal benefit derivable from such second conveyance, where he was aided in obtaining it by his prior position as trustee for them.
3. The liability of a trustee to account for advantages obtained by him through his position as trustee, is not imposed as a punishment for a breach of duty, but arises from his agency for his cestuis que trust, who have a right by ratify-1 ing and adopting his acts to obtain the benefit of them.
p. 227(Before Robertson, Ch. J,, Monell and Garvin, JJ.) Heard June 22, 1867 decided October —, 1867.
4. Cestuis que trust who claim the benefit of any act done by their trustee beyond the line of his duty as such, are bound to ratify it as a whole and accept it cum onere, so that where he acquires the possession of trust property or other advantages, not directly arising from his situation as trustee, upon condition ■ of assuming certain burdens and duties not imposed upon him by his duty as trustee, such cestuis que trust are not entitled to avail themselves of such advantages so as to deprive their trustee of all claim for expenditures, and lien on the trust property therefor, where the making of them was the consideration for the acquisition of such advantages.
.6. It would be highly inequitable, for the holders of bonds issued by a railroad company, secured by a mortgage in trust upon the road, its stock and appurtenances, to lie by for a series of years and allow the trustees in such mortgage to continue the making of such road and work it at their own expense under a new conveyance to them upon new trusts, and claim the benefit of their earnings, while repudiating the expenditures which produced them. Per Robertson, Ch. J.
6. It is questionable how far a mortgagee in trust, in possession of mortgaged premises, on or by means of which, in order to make them profitable, complicated and expensive operations, (such as running railway trains, conducting a manufactory or working a mine,) must be carried on, is bound or entitled to carry them on-at the expense of the mortgagor or his cestuis que trust. Hence, where mortgagees of a railroad in trust for the .payment of bondholders entered into possession of it, immediately after a conveyance of it to them subsequent to such mortgage, in trust to run its trains, build its depots and continue the making of the road which yielded its earnings, it would he very doubtful whether their acts in carrying out such latter trusts could in any way be attributed to their position as mortgagees in trust, so as to exclude their rights as such grantees in trust. Per Robertson, Ch. J.
7. Even in such a case, a holder of a bond secured by such mortgage would be bound, before becoming entitled to a share of the profits in working the road to the extent of the amount of his bond, to ratify all acts of expenditure by the mortgagee in trust, while in possession, (beyond those permissible in a mere mortgagee,) which may he necessary to render the new enterprise successful.
8. Whatever may be the facility or" difficulty of apportioning the profits and expenditures of a continuous railroad, composed of different parts owned by different persons, among the holders of separate bonds of the owners of such different parts secured by a deed of trust of the whole of such road and its appurtenances in solido, where such bondholders are by the terms of such deed of trust to share indiscriminately in the net earnings pf such road pro rata, and it is made an integral enterprise for the benefit of all of them, the bondholders who have ratified or may ratify such deed of trust and claim under it, are bound to contribute to the indemnification of the trustee, even where their expenditures exceed their earnings.
p. 228
Appeal from a judgment entered at a special term, on a trial before a justice of this court without a jury, and from an order denying a motion for a new trial.
On the 1st of September, 1855, the Racine and Mississippi Railroad Company, who were chartered by the state of Wisconsin, executed a trust mortgage to the defendants, to secure six hundred and eighty bonds, issued to raise money for the construction of the road; the premises mortgaged being in Wisconsin, on the line of the railroad extending from Racine to Beloit. The plaintiff was the holder of two of such bonds, and brought this action to compel the defendants to account for the earnings and profits of that railroad, received by them, and also for the proceeds of a sale of such premises made under a foreclosure of the mortgage.
On the trial the plaintiff introduced in evidence the following documents:
(1.) The mortgage in the complaint described, called, the “ Eastern division mortgage,” and a copy of one of the bonds in question set out in such mortgage. (2.) A decree of foreclosure of such premises in the United States Circuit Court of the district of Wisconsin, in a suit wherein the present defendants were plaintiffs and the Racine and Mississippi Railroad Company were defendants. (3.) An interlocutory decree in the same suit. (4.) A report of a master on which the decree was founded.
The counsel for the defendants admitted that such suit-in the United States Circuit Court was merely to foreclose the first mortgage on the eastern division of the road, and that the bill merely described the portion known as the eastern division of the road and no other, and that none of the bondholders were made parties as such in said suit. He also admitted that a sale was had on the 29th October, 1865, for $1,000,000; that the marshal conducting the sale paid over $997,000 in the suit to the trustees, and that a report of the sale and disposition of the purchase money was made, which report was confirmed. He also admitted
p. 229
that the" plaintiff owned the two bonds described in the complaint. The plaintiff then rested.
The defendant then put in evidence: (1.) A mortgage of the western division of such railroad, being in Illinois, executed by a company of the same name, chartered by the latter state. (2.) A receipt dated June 14, 1866, given to Jacob A. Oram, plaintiff, by the Farmers’ Loan and Trust Company; and the plaintiff’s counsel then admitted that a foreclosure suit of such “ western division mortgage ” (so called) was then pending in Illinois.
The plaintiff’s counsel proved, that George A. Thomson, the purchaser at the foreclosure sale, was, during the five years that the defendants had the management of the road, agent of the defendants and of the parties interested. He made the purchase at the time of the sale, for the benefit of all the bondholders interested in the road and not for Ms own individual benefit. It was then admitted that the two sections of this railroad owned respectively by the Hlinois and Wisconsin companies, separately, were operated as one line, the directors and stockholders being the same on both.
The defendants on the trial claimed as follows, to wit: that
(1.) The plaintiff, in claiming his dividend of the amount received under the foreclosure and sale of the eastern division, ratified whatever might have been irregular or in excess of authority in the proceedings for that purpose.
(2.) The plaintiff does not claim that the defendants have not properly distributed all the moneys which by the terms of the master’s report and of the decree, are applicable to the bonds and coupons; his remedy, therefore, to obtain any greater sum, should be by getting from the court that made the decree, a correction of it.
(3.) If there is any greater sum to which the plaintiff is entitled, it is because some of the money retained is for advances, repairs, &c. which he claims to be properly chargeable to the western division. The defendants do not in this
p. 230
suit represent the bondholders interested in that division, and the suit is defective in not having these bondholders, or some representatives of them, made parties.
(4.) So far as it is claimed that no part of the advances can be paid out of the proceeds of the sale, the suit is defective in not making the persons making such advances parties.
(5.) The suit is improperly brought on behalf of the plaintiff and others, as there is no evidence that any other bondholder stands in the same situation as the plaintiff. And therefore that the complaint should be dismissed.
The court, by its decision, found the following facts, to wit: that
1st. The Racine and Mississippi Railroad Company was a corporation created by a law of the state of Wisconsin ; such corporation, on the first day of September, 1855, executed to the defendants, in trust, six hundred and eighty bonds, each conditioned to pay the holder thereof the sum of $1000, on the 1st day of August, 1875, with interest, at the rate of eight per cent per annum, payable semi-annually; on the same day it executed and delivered to the defendants, as security for the payment of said bonds, a mortgage on the eastern division of said railroad, extending from Racine to Beloit, its appurtenance, equipments and franchises ; which mortgage was to the defendants, as trustees, in trust to secure the payment of said bonds, and is set out at length in the complaint.
2d. The defendants accepted such trust, and indorsed upon each of said bonds a certificate, to the effect that the same was included in said trust mortgage.
3d. The plaintiff was the holder and owner of two of said bonds, (numbered respectively 122 and 123,) upon which no part of the principal or interest has been paid, except the sum of $859.92, (paid on each bond, June 14, 1866.)
4th. In October, 1858, default having been made in the payment of interest upon said six hundred and eighty
p. 231
bonds, including the two bonds of the plaintiff, the defendants, as such trustees, proceeded to foreclose said mortgage by action. Pending such action, and' before the final decree therein, the defendants, as such trustees, took pos-' session of all the mortgaged property and continued in such possession and to operate and run said railroad, and to take the income and profits thereof from May 10, 1859, to December 1,1865, on or about which latter day the said railroad and its appurtenances were sold under a final decree obtained in said foreclosure suit.
5th. During the time the defendants were in possession of, and operated and ran said railroads, they received a large income and profit therefrom, and upon the sale thereof, under said decree, received as the purchase money therefor, the sum of $997,000.
6th. In operating and running said railroad, during the period aforesaid, the defendants expended large .sums of money.
7th. The income and profits received and the moneys expended in operating said railroad, cannot be ascertained, except upon an accounting, by said defendants.
8th. The defendants, trustees, as aforesaid, while in possession of the eastern division of said railroad as aforesaid, operated and ran the same in connection with the western division of said railroad, extending from the town of Beloit to the city of Freeport, in the state of Illinois, and thence to the town of Savannah, in the same state, and expended large sums out’of the income and profits of said railroad, in constructing depots and station houses, along and upon the line of said western division of said railroad, and in operating the same.
9th. The income and expenses of said two divisions of railroads were kept by the defendants in a common account.
10th. That the plaintiff did not consent, nor was he in any way privy to any arrangement made by the defendants to operate or run the western division of said railroad
p. 232
in connection with the eastern division of said railroad so held in trust by the defendants as aforesaid.
To which it applied the following conclusions of law:
1st. The income and profits received by the defendants, while operating and running the eastern division of said railroad from Racine to Beloit, and the moneys received by them upon the sale of said eastern division under the decree of foreclosure, after deducting the necessary and proper expenses of operating and running said eastern division, and other proper expenditures upon and connected with said eastern division was a trust fund in their hands, applicable to the payment of the several bonds secured by said trust mortgage thereof.
2d. The defendants had no right to use, employ or expend any portion of the income or profits of the eastern division "of said railroad, or of the moneys received upon the sale thereof, in and for the construction of depots or station houses upon or along the western division of said railroad, extending from Beloit to the city of Freeport, and from the city of Freeport to the town of Savannah, or in operating or running such western division; and the use, employment and expenditure thereof was a violation of the trusts declared in said mortgage.
3d. The plaintiff is entitled to an account from the defendants of the income and profits received by them,.and of the moneys expended by them, in operating and running the eastern division, and other proper expenditures upon and connected with the eastern division of said railroad from the tenth day of May, 1859, to the first day of December, 1865; and also to an account of all moneys received by said defendants from the sale of the eastern division of such railroad, under the decree of foreclosure.
4th. In taking and stating such account, the defendants should be required to separately state, as far as the same is capable of being separately stated, the receipts and expenditures of each division of said railroad; and should be charged in such account with the income or profits which
p. 233
p"hn.ll appear upon a separation of said accounts, to have been derived from the eastern division of said railroad, and should be credited therein with the expenses of operating and running said eastern division, and other proper expenditures upon and connected with said eastern division, and the defendants should not be credited with or allowed any money expended by them in or upon the western division of said road, either in the construction of depots or station houses, or in operating or running the same.-
4th. That there should be a reference to Benjamin Y. Abbott, Esq. as sole referee, and it was thereby referred to him, to take and state such account, upon the principles stated in the last preceding finding; and that said referee should be directed to ascertain the whole amount of moneys derived from said eastern division of railroad, which under this decision are applicable to the payment of said trust bonds, and the proportion which each of said bonds was entitled to, taking as a basis for calculation the amount due on one of the bonds of the plaintiff in this suit; to ascertain which the said referee should allow interest thereon .from the date thereof to the first day of December, 1865, at the rate of eight per cent per annum, and thereafter at seven per cent, deducting the payment mentioned in the third finding of fact, with interest thereon at seven per cent, the said referee to make to the defendants herein, as trustees, all just and proper allowances.
5th. That the plaintiff should have judgment against the defendants; that the defendants pay the plaintiff such sum as upon the filing and confirmation of the report of said referee should appear to be applicable to said two bonds, together with the costs of this action, to be taxed, and that the plaintiff have execution therefor.
8. P. Nash, for the appellants, defendants.
I. This action, simply as one for an account of the income and profits received by the defendants as mortgagees in possession, operating the railroad in Wisconsin,
p. 234irrespective of the fact that they have sold the mortgaged property under decree, and hold the proceeds as a fund in money, is improperly brought in this court. H. The plaintiff is not éntitled to maintain this action. 2. The mortgage under which the plaintiff claims was simply a mortgage of the eastern division of the railroad, (which was only a portion it,) “ made and to be made.” The property covered by it was unfinished and intimately connected with the property covered by the western divison mortgage. When the trustees commenced their foreclosure of the eastern division of the road in the United States
It is an action to administer a trust created in Wisconsin over lands situated there, and is, consequently, an action for the “determination” of the plaintiff’s “right or interest” in real estate not situated within the city of New York. (Code, § 33, subd. 1; 123, subd. 1.) In either aspect, it is an action against a corporation, not “ for the recovery of any debt or damages arising upon contract made, executed or delivered within this state, or upon any cause of action arising therein.” (See. 33, subd. 3. See 4 Duer, 658 .)
I. He has received, on the bonds he holds, all the interest that has accrued upon them up to the present time. Interterest is due only from August, 1858, less than ten years, at 8 per cent; equal to 80 per cent, or $800 on each bond. He has received $859.92, and is now claiming the principal, which is not due till 1875. His only ground for this claim is that the defendants have sold the road under the mortgage. This they were not bound to do except upon the request of the bondholders. The plaintiff never made any such request, but he is asking the benefit of proceedings taken upon the request of others. In so doing, he ratifies whatever may have been irregular or in excess of authority in the proceedings, provided it was done in good faith, for the benefit of all. (Bennett v. Judson, 21 N. Y. Rep. 238 . Allen v. Rosevelt, 14 Wend. 100 , 102, 103. Palmer v. Smith, 6 Seld. 303. Chautauqua Co. Bank v. Risley, 4 Denio, 480 .)
p. 235court sitting in Wisconsin, the deed of surrender, which included loth divisions of the road, was made. That authorized the defendants, as mortgagees in possession, to make all needful repairs, alterations and additions; to extend the road to Freeport; to apply the income of the road to payment of arrears of wages, and to clearing off liens and incumbrances, taxes, &c. As trustees, they had power, by the mortgage, to take possession of the mortgaged property, operate the road, make “ all needful repairs, alterations and additions ” thereto, and in case of a sale, to deduct from the proceeds, before distribution, the costs “ of managing such property.” Even if the powers given by the deed of surrender were greater than those, the plaintiff never objected, and he cannot take the benefit of the exercise, by the defendants, of powers alleged to be excessive, and at the same time hold them liable for the alleged excess. 3. The defendants, as trustees, entered into possession, borrowed money, and extended the road to Freeport, operated the whole road, kept it in repair, supplying the requisite rolling stock, &c. This lasted from the date of the surrender (May 10, 1859,) until the foreclosure (in December, 1865,) and the plaintiff never protested. The decree of foreclosure ascertained and declared the balance due to the trustees, and it is of this balance, that the plaintiff, who never contributed to it, claims a share. The complaint charges that the defendants operated the two divisions of the road together, after the western division was completed to Freeport, and then an additional road from Freeport to Savanna; that they expended moneys, “in building large and commodious depots and station houses,” on loth divisions, which were too good for the road ; that the accounts of the several divisions were all kept together; and that the trustees “ fully stocked and equipped said three lines of road with engines, cars, and all other rolling stock and furniture, necessary and convenient for operating said roads.”
p. 2364. After the time for redemption secured by the deed of surrender had expired, the trustees applied for a foreclosure and sale.. A decree was made, based upon such deed of surrender, directing a reference to ascertain how much was due to the trustees for advances, &c. After this was ascertained, the property was sold, and bought in by the agent who had managed .the road, for the benefit of the bondholders. They have the option of taking the road, or their shares of the proceeds, but 'those of them who take the proceeds must take them cum oneribus, on the terms of the decree. The plaintiff has taken a partial dividend, but now claims to have the sum divided which, by the terms of the decree, is found to be due to the defendants, as trustees, foi* advances. He is estopped from making such a claim. III. The plaintiff does not claim that the defendants have not properly distributed all the moneys which, by the terms of the master’s report and .of the decree, are applicable to the bonds and coupons. His remedy for any greater sum must be, therefore, by getting from the court that made it a correction of the decree. TV. If there is any further sum to which the plaintiff is entitled, it is because some of the money retained is for advances or repairs, &c. properly chargeable to the western division. How much is so chargeable can only be ascertained by an accounting in which the parties interested in the western division are in some way parties. This present action is against the defendants as the plaintiff’s trustees, not as representatives of the western division bondholders. These bondholders are interested in the apportionment which is to determine what sums expended by the trustees are chargeable on the respective divisions, and som'e persons who are bondholders of that division should be before the court to represent that class." The defendants herein, as representing under two trusts two classes of bonds, cannot be parties for both in a suit in which the interests of the two classes are adverse. The plaintiff sues in behalf of
p. 237himself and other eastern division bondholders, but does not sue on behalf of any western division bondholders. The rule that one or more persons may sue, or be sued, in a representative character, requires that the persons represented shall have homogeneous interests. (Story’s Eq. Pl. § 162. Hallett v. Hallett, 2 Paige, 15. Holland v. Baker, 3 Hare, 68.) “Be united in interest,” or have a “common or general interest.” (Code, § 119.) V. The last point is on the ground that there is an equity to be ascertained between the two sections of the road, as to which should bear the burden of the indebtedness created by repairs and improvements. And as to the western division, perhaps the Racine and Mississippi Railroad Company itself, whose equity of redemption was not barred by the foreclosure in Wisconsin, would be a sufficient party as representing the interests of all who have liens or charges on that section of this road. But there is another equity proper to be protected by the court, and that is the equity of the parties making advances. The property, which by the sale has yielded the sum of which the plaintiff claims a share, is property to the improvement of which many of the bondholders have contributed by lending money to the trustees. This money, or a part of it, has gone into the construction of “ commo- , dious depots,” “rolling stock,” &c. If they have nota strict prior right to repayment out of the proceeds of the mortgaged property, they have clearly an equitable right to have so much of their money as has gone to enhance the value of the mortgaged property restored to them. . It cannot be pretended that at any time the eastern division would have sold for enough to pay fifty per cent upon the bonds, but for the increased value imparted to it by the improvements which have been made upon it. As an unfinished road, it never even paid interest, it was being foreclosed, would have gone into the hands of a receiver, and the value of the plaintiff’s bonds have been utterly lost, if some of the bondholders had not come forward to
p. 238rescue it. The arrangement is indicated at the end of the deed of surrender, and by the resolutions and letters. annexed. Both the eastern and western bondholders contributed to these advances. They were all notified and requested to contribute pro rata. The plaintiff did not contribute, but he is now seeking the aid of the court to get the benefit of the contributions of the others, claiming to take the proceeds of the property as improved by them, without repaying any portion of the advances which went to make it valuable. The claim is without equity, and should not be entertained. "VI. The allegations in the complaint about foreign bondholders, and fraud on the part of the agent of the Farmers’ Loan and Trust Company are baseless, and no attempt even was made to support them by evidence. VH. The plaintiff, though professing to sue on behalf of himself and others, is, in truth, suing alone. There is no ' other bondholder with him. It is evidently an attempt to compel the others to buy up his bonds. His suit is-needless to secure any just rights. The Farmers’ Loan and Trust Company recognize the necessity of adjusting between the two sections of the road the expenditures which have been incurred for the common benefit, and are only waiting to get a title under the foreclosure in Hlinois to do so without litigation, if possible. This will be done before the plaintiff can get his pay here by means of the decree for an account made herein. The testimony for an accounting must come from Wisconsin and Illinois. The defendants have distributed to. the plaintiff equally with all the other bondholders, they have no interest adverse to his, they are not acting in hostility to him, they are simply carrying out the decrees of the courts at the west as they are rendered, and should not, in the progress of this duty, be arrested, because upon the footing of one of the degrees, which is but one stage in the work, there is an apparent right on the part of the plaintiff. The court will not order an account while the party liable to
p. 239account is getting ready to give a full account. There must -be some refusal or neglect to account, or some improper delay or management to justify a plaintiff in coming into court. I. The mortgage on the eastern division, declared by both the railroad eopapany and the defendant, to be a first mortgage, created a trust, accepted by the defendant, in case of non-payment of principal or interest of the bonds, (1) to enter on, and use, the road, and apply the proceeds of such use, or (2) to sell the road, and apply the proceeds of such sale, to the payment of the principal and unpaid interest of these bonds; and to so apply such proceeds, with no diversion of any part of them to any other purpose. 1. As between the trustee and the-bondholders, therefore, in whatever way the defendants might take possession, or' make a sale, they were bound, whenever they used the road, to apply the entire proceeds of such use, or whenever it sold the road, to apply the entire proceeds of such sale, to the payment of these bonds, no matter how such began, or such sale was brought about, whether by consent of the railroad company on the record, or by consent of the rail- ' road company by deed, or without either. 2. The deed of surrender, in 1859, expressly provided that “ all rights and liens that have legally become a charge or incumbrance thereon, are in no way to be affected by this agreement.” And had it not done so, it is matter too plain and elementary to require even a statement, that a first mortgage made in 1855 has priority over an agreement, which is at best, a second mortgage, made in 1859. 3. The decree in the foreclosure suit, to which no bondholder was party, can, at most, only bar the bondholders from any further resort to the real estate, which was the subject of the suit. As against the railroad company, they have independently and in spite of such a decree, the right to be paid the full amount due on their bonds. And as against the trustee, they have,- independently and ■ in spite
A. Stickney, for the respondent, plaintiff.
p. 240of such a decree, the right to have the entire proceeds of a sale, whether made under the decree, or not, applied to the» ^payment of such full amounts due on their bonds. 4. Undoubtedly, the plaintiff, by claiming part of this fund, would debar himself from questioning the right to make , the sale, or the use of the road, but not from questioning the disposition of the proceeds of such sale or use. The decree, as a decree, could conclude only parties who could have reviewed it by appeal or writ of error. And it would conclude them only as to points which were, plainly, and as the record shows, raised on the trial or hearing of the cause. How, in the suit in "Wisconsin, the only questions raised on the record were the claims of the trustee to the real estate in Wisconsin, or. its proceeds ; and those claims, only against the railroad company. Ho point was raised as to rival claims against the trustee for the proceeds, by others not parties to the suit. ( Vose v. Morton, 4 Cushing, 31. Holland v. Cruft, 3 Gray, 187 . Collins v. Lofftus, 10 Leigh, 5 .) The plaintiff here makes no claim under the decree, nor does he rely on any of the proceedings in the foreclosure suit, as proceedings in a suit. He merely sues the trustee for misapplication of trust moneys, and for an account. II. The objection of want of parties ought not to prevail, On the defendant’s own showing, this was a case of two separate trusts, concerning two separate pieces of real estate, for two separate purposes, and with two separate sets of cestuis que trust, the .amounts of which they were unwise enough to mix. The plaintiff seeks an account of but one trust, and no western division bondholder, as such, has any interest in the eastern division trust. The defendant claims that the advances were made by eastern and western division bondholders alike. It matters not who made the advances. The only point is whether the trustee had any right to use trust moneys to re-pay them. Supposing the Farmers’ Loan and Trust Company had chosen the eccentric course of keeping only one common account of all their numerous trusts, or no account at all, would the plaintiff
p. 241be compelled to bring all their multitudinous cestuis que trust into this suit as parties ? 2. But even if the western division bondholders were interested in this suit, the court would not require them to be brought in, both on account of their number, and because they are already before the court in the person of their trustee. (Stevenson v. Austin, 3 Metc. 474 . 1 Daniel’s Ch. Pr. 252. Van Vechten v. Terry, 2 John. Ch. 197. Story’s Eq. Plead. §§ 109, 115, 118, 149, 150.) 3. It does not appear in the complaint, and is not raised by demurrer. 4. It is not well set up in the answer. The answer should have given the names of the parties alleged to be necessary. There is no allegation that any parties, other than the ones now before the court, are interested in the eastern division trust, nor are any parties, who are interested in any thing named. Simply a friendly warning is given by the defendant’s attorneys, of the course of argument they intend to pursue on a point which they do not raise on the pleadings. (Fowler v. Kennedy, 2 Abb. 347 . Mech. and Farmers’ Bank v. Dakin, 24 Wend. 411 . Cook v. Mancius, 3 John. Ch. 427. Scofield v. Van Syckle, 23 How. 97 .)
No satisfactory reason has been afforded, from any thing in the papers before us, why the plaintiff and other bondholders of the eastern or Wisconsin division of the “ Racine and Mississippi Railroad,” are not entitled to all the proceeds of the sale of that branch of the road, in the suit in the United States court in Wisconsin, for the foreclosure of the mortgage upon it. It was a suit simply to foreclose such mortgage, which first ended in a decree of strict foreclosure, although subject- to redemption in five years after the completion of an addition to' such branch road, by continuing it on the western or Illinois division to Freeport, in the latter state, upon payment of all the amount then to become due on such bonds, leaving the mortgage, however, subsisting as
p. 242
security for the principal and future interest. No such redemption having ever been made, an additional decree for the sale of the mortgaged premises, by the marshal of the court, was then made in the same suit. It, however, directed the payment to the defendants, not only of the amount due upon the bonds of such eastern division, but also of certain other moneys advanced by them, in. their own right, after the commencement of such suit, in order to conduct the operations of such road, and complete such continuation of it to Freeport, as the same had been reported by a master, to whom the subject was referred. Neither in that decree, nor in the report of the master on which it was founded, was any discrimination made as to the order in which such two debts one being due to the-defendants, as trustees for the plaintiff and other bondholders, and the other to themselves, in their own right, should be paid. In the absence of any adjudication in that suit upon that point, they were, of course, entitled - to be paid in the order of their legal priority. The debt due to the defendants, in their own right, which was not incurred until long after the commencement of such suit, was, therefore, to be postponed to that due to them as mortgagees in trust. Nothing done by the defendants after they became such mortgagees, without the consent of their cestuis que trust, could take away the preference to whiph the latter were entitled, and nothing was actually done, either in such suit or by matters in pais, to affect it. Possibly there may have been prior incumbrances or liens, having by law a preference, paid or satisfied by the defendants, for which they are entitled to be reimbursed out of such proceeds. Otherwise that part of the judgment in this case, directing the defendants to account for the whole of the proceeds of the sale in such foreclosure suit to the plaintiff and his associate bondholders was perfectly correct.
In regard, however, to that part of such judgment or order made in this case at special term, which requires an account te be taken of the receipts and disbursements of the
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defendants, while in possession of the entire road from Racine to Savanna, conducting its operations from May, 1859, to October, 1865, other considerations must govern. It is alleged in the complaint, and found in the decision of the court, that the defendants took possession of such road on the 10th of May, 1859, which was the date of the execution of the deed thereof to them, called in the pleadings, and in itself, a “ deed of surrenderand it appears by the testimony before the master in such foreclosure suit, introduced by the plaintiff in evidence in this case, that an agent of the defendants (Thompson) took possession for them on that day. There cannot, therefore, be any question that the defendants took possession of the mortgaged premises in question, under and in pursuance of that deed. The only question which is made is, whether, although having so obtained possession by virtue of such deed, such possession by law immediately enured to the benefit of the plaintiff and his associate bondholders, so as to render the defendants liable, as mortgagees in trust in possession, to their eestuis que trust, for all the profits received by them, deducting merely necessary outlays in protecting the mortgaged premises, or rendering them productive. It is not charged in the complaint, as a fact, that the defendants took possession under the original mortgage, which, in fact, only expressly authorized them to take possession of the mortgaged premises, as <( agents and attorneys in fact ” of the mortgagors. It might, therefore, well be claimed that the fact of possession, under such mortgage, was not at all in issue in this case; or, if it were, it might be doubted whether if ordinary mortgagees could, by the laws of Wisconsin, take possession of mortgaged premises, trustees under such an instrument could do so, except as representatives of the grantors. Even as mortgagees they could not, if the laws of Wisconsin were the same as those of this state, which is to be presumed. Assuming, however, that possession could be taken under such an instrument by the defendants, as trustees for the bondholders, against the will
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of the grantors, the question of law is then presented, whether the grant of a new estate in lands upon new trusts, and the delivery of possession under it, to enable such trusts to be executed, enures to the benefit of eestuis que trust, under a prior grant of them, upon different trusts, merely because the trustees are the same. It seems, by the opinion given at special term, to have been assumed in the decision that the possession so taken could be detached from the new estate, which it accompanied, and attached to the prior right, which it is supposed the defendants had, to take possession, as mortgagees, so as to be considered a performance of their duty as such, and thereby render them responsible for the profits, which were afterwards capable of being received from such mortgaged premises. From that view of the law I am compelled to dissent. A trustee of lands upon special trusts to arise in futuro, as well as a stranger, may take a grant of a new estate, in the same lands in the meantime, upon different trusts, subject to the performance of the first trusts, which cannot thereby be destroyed. Or he may even take a conveyance upon new trusts, whose execution may interfere with that of such first trust, so as to entangle himself in a double responsibility, and make himself liable to both sets of eestuis que trust for any loss sustained by his not discharging the duty owing to them, and also to the first cestui que trust, for any profit obtained by him under such second conveyance, where he was aided in obtaining it by his position as trustee for them. The present, however, is not an action for damages against the defendants for accepting the second deed, (of s.urren? der,) and thereby embarrassing the rights of the plaintiff. The claim is not of profits acquired by the defendants under a new estate gained by an advantage, derived from their situation as trustees. But it is that, having gained possession by assuming such new estate, all the concomitants, incidents and consequences thereof may be rejected, and only the possession which accompanied it retained, so as to make the defendants liable, as mortgagees in trust in
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possession, and then all the money paid by them and liabilities they incurred, in pursuance of such second deed, which were not allowable to mortgagees in possession, may be rejected. This, I apprehend, is erroneous. The conveyance of a new estate by the deed of surrender, the assumption by the defendants of the new duties imposed by it, and the possession taken under it, of both the mortgaged premises and the western division in solido as one road, to enable them to perform such duties, formed in contemplation of law but one transaction, giving new rights, and creating new duties. The defendants became also thereby mortgagees for their own future advances. It being, therefore, considered in law but one indivisible act, the possession could not be severed from the residue of the transaction, and attached to a prior barren estate without perception of the profits, in order to render it productive. Such acceptance of the second set of trusts, and the estate created for their performance and possession under it, however beneficial the acts done by the defendants under the same, may have been to their first cestuis que trust, was undoubtedly a violation of their strict duty under the first instrument, and for any loss sustained by them thereby the defendants would be responsible, as well as for any profits made by them therefrom, which were to the prejudice of the plaintiff. But in either case every part of the transaction is to be taken together, as a whole, and either ratified or disaffirmed by the plaintiff and his associate bondholders. They never lost thereby the right of having the first instrument carried out, or any of their security for their claim. The postponement by the defendants of the foreclosure of such first mortgage (as it is considered) although perhaps the result of a desire to carry out such deed of surrender, might have taken place without it. Whatever the responsibility of the defendants by reason thereof may be, it is as wholly independent of any action under such deed of surrender as if it had been taken by a stranger with their assent. The first set of cestuis que
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trust might have had a remedy, by procuring the removal of the defendants as trustees for a breach of duty in assuming incongruous trusts and the substitution of others in their place, who might have procured such decrees to be opened as procured by fraudulent collusion. But no movement was ever made by any one in such suit until the time for redemption had expired; the road had then probably increased in value by being put in successful operation, the mortgaged premise's, probably undiminished, if not increased in value, remained as security for the principal of the bonds not yet due, and a decree was then obtained for the sale of such premises to satisfy the whole of such principal and interest, as well as other claims. The defendants, therefore, undoubtedly took possession of the mortgaged premises by virtue of a new estate and upon new trusts which they carried out and then quit such possession on the sale, probably without impairing thereby the value of the security of such premises for the bonds in question, (any more than any stranger would have done, who had gone into possession under the mortgagors,) and on the whole transaction, not only without any profit, to themselves, but as appears by the master’s report in the foreclosure suit, at a loss of nearly four hundred and fifty-six thousand dollars.
I am not aware of any principle of law which enables a cestui que trust, when claiming the benefit of an entire and indivisible transaction by his trustee, to reject all the additional burdens or responsibility assumed by such trustee to procure whatever advantages may be obtained therefrom and yet claim such advantages, unless some of the original rights of such cestui que trust were' so destroyed thereby as to be incapable of restoration. (Evartson v. Tappen, 5 John. Ch. 497.) A trustee is.not' compellable to account for ad-, vantages obtained by his position as trustee, by way of punishment for a breach of trust, but as becoming thereby an agent of his cestui que trust, who has a right by a ratification and adoption of all his acts, to claim the benefit of them. The plaintiff and his associate bondholders had therefore
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no right to separate the possession and other advantages acquired by the defendants under the deed of surrender from the burdens it imposed or the duties assumed by the defendants so as to reject the latter and deprive the defendants of their claim for expenditures and lien on the road therefor. It would certainly be highly inequitable to lie by for nearly eight years, and permit the defendants to continue such road and work it at their own expense and then claim the benefit of all their earnings, while repudiating the expenditure which produced them.
It may also be considered as questionable whether a mortgagee in trust in possession of real estate on or by means of which complicated operations, such as running railway trains, conducting a manufactory or working a mine, are to be carried on, would be bound or entitled to carry on such operations at the expense of the mortgagor. It would therefore be very doubtful, even if the defendants had entered into possession solely as mortgagees, whether their acts in running the cars, or building depots, or continuing the road which produced its earnings, are to be attributed to their right as such mortgagees, and not to their position as trustees under the deed of surrender. If profitable on the whole, the plaintiff might, even in such case, have been entitled to his share of the profits to the extent of his claim; but he would be equally bound to ratify any acts of expenditure by the defendants, performed by them while in possession, beyond those allowable in a mortgagee, and necessary to conduct such new enterprise and render it successful.
I cannot doubt, therefore, that any claim by the plaintiff to any share of the earnings of even the eastern division of the road in question during its management by the defendants, can only arise under the deed of surrender of 1859, and that any account to be taken of them requires the presence in court of all the bondholders of both divisions, as the trust and conveyance was joint. I do not know how light or difficult a task it may be to apportion the profits and expenditures of a continuous railroad composed of
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various parts, among the owners of the different parts, but in this case, all the bondholders of both divisions were by the terms of such deed of surrender to share indiscriminately pro rata in the net earnings of the entire road. It was made an integral enterprise for the benefit of all. And if the expenditures should prove in excess of the earnings, the bondholders, ratifying such deed of surrender, and claiming under it, are bound to contribute to the indemnifying the defendants for such excess.
A new trial must therefore be granted in this case under the recent amendment of the 268th section of the Code of Procedure, unless the plaintiff will consent to amending the decision and judgment or order in this case, by striking out that part which directs an account of the earnings of the road in question while under the management of the defendants.
Cases cited
- Allen v. Roosevelt 14 Wend. 100 at 102, 103 p. 234
- Mechanics' & Farmers' Bank v. Dakin 24 Wend. 411 p. 241