MERCANTILE TRUST CO. v. KANAWHA & O. RY. CO. et al., (ADAMS EXP. CO., Intervener.), 58 F. 6

TAFT, Circuit Judge, (after stating the facts as above.) Two questions are presented for our consideration. The first one arises on the motion to dismiss, and the second on the merits. First.

It is argued that the decree of the circuit court, appealed from, affected equally the Kanawha & Ohio Railway Company and the Mercantile Trust Company, and that therefore, in order to give this court jurisdiction of the appeal, both the trust company and the railway company should have been made appellants, or some proceedings in the nature of a summons and severance against the railway company should have been bad in the court below. We are of opinion that tbe circumstances of this case and the character of the decree entitled the trust company to bring (ins appeal alone.

By tbe decree of foreclosure and sale, and the decree of confirmation, the Kanawha & Ohio Railway Company, which was the defendant below, was deprived of everything it had except its franchise to he a corporation. For all practical purposes it became defunct. Under (he decree of confirmation in the court below, its property bad passed from it in tbe purchaser free of all liens and claims, and the proceeds of sale, which amounted to not more than half of the bonded debt due tbe complainant, became' the properly of the complainant.

To these proceeds, by stipulation of, sill the parties, the lien, if any, which the Adams Express Company had, was transferred. The only shadow of an interest which it can be contended that the Kanawha & Ohio Railway has in a reversal of the order of the circuit court in favor of the Adams Express' Company is that, if it is reversed, the unpaid indebtedness on tbe bonds of the railway company will be reduced by the amount ordered paid to the Adams Express Company.

As the Kanawha & Ohio Railway Company is a defunct corporation, with no means with which to pay its debts and no franchises to exercise, the amount of its indebtedness, which it never can pay, and never will pay, is wholly immaterial. If its stockholders were liable for the unpaid portion of the mortgage debt to an amount equal to their capital stock, as provided by tbe Ohio statute and constitution, there might be some ground for saying tliat the Kanawha & Ohio Railway Company had an appreciable interest in the decree, requiring its presence in tbe appeal proceeding or a severance.

But the contract in the bonds expressly waives such liability. The complainant did not seek to obtain a judgment for the unpaid balance on the bonds against the company; doubtless, for the very good reason that the foreclosure and sale under the mortgage would deprive the company of all.means and poiver to pay another dollar upon the claim. After the sale for less than the face of the mortgage the railway company became a mere nominal party to the suit, with no interest whatever in the distribution of the proceeds.

After the confirmation of the sale, the only controversy remaining was betAveen the complainant and the Adams Express Company, because the order only affected the proceeds, and, in any possible aspect of the case, they were the only parties entitled" to share therein. The sale was confirmed on the 7th day of April, 1890. Thereafter stipulations with reference to evidence were entered into, to which only the Adams Express Company and the complainant were parties. The court below proceeded as if the railway company had no interest in the proceeds, and we think that in this the court was right..

This constituted a substantial severance of the interests of the railway company and the trust company. It would be yielding to the merest technicality to hold, under such circumstances, that the omission of a nominal and useless party from the appeal proceedings should deprive the real party in interest of its right to have the question ré-examined on its merits by the appellate court. But how as to the authorities? Undoubtedly, the general rule is that all parties named as defendant, where the decree is a joint one in favor of the complainant, must join in the appeal. Owings v. Kincannon, 7 Pet. 899; Mussina v.

Cavazos, 6 Wall. 855; Masterson v. Herndon, 10 Wall. 416; Hardee v. Wilson, 146 U. S. 179, 13 Sup. Ct. Rep. 39. But this rule is not inexorable. In Forgay v. Conrad, 6 How. 201, a bill was filed by an assignee of a bankrupt against the bankrupt and three other defendants to set aside three several deeds to each as fraudulent. The deeds were set aside by decree of the court below, and one of the alleged fraudulent grantees took an appeal. A motion to dismiss was made on the ground that the other three defendants below were not joined. The motion to dismiss was overruled.

The supreme court, speaking by Chief Justice Taney, said: “The appeal is taken by Samuel A. Forgay and Ann Fogarty, otherwise called Ann Wells, and they alone are interested in that portion of the decree last.above mentioned. The bankrupt and the three other defendants have not appealed.

These three defendants claimed other property, which had been conveyed to them at different times and by separate conveyances, as mentioned in the proceedings, and it was not, therefore, necessary that they should join in this appeal.” The railway company in the present action would seem to have no more real interest in the appeal from the order in favor of the Adams Express Company than the bankrupt in the case of Forgay v. Conrad had in appealing from the decree in that case. In Brewster v. Wakefield, 22 How. 118, the bill was to foreclose ,a mortgage, and subsequent lienholders were made parties.

A decree of foreclosure was entered. The mortgagor alone appealed from the amount of the judgment rendered against him on the mortgage debt. It was held that it was not necessary to maleé the lien, claimants parties to the appeal. Chief Justice Taney said: “Nor wa.s it necessary that the parlies who acquired liens on the mortgaged premises subsequent to the mortgage in question should join in the appeal. They were not necessary parties to a proceeding in equity to foreclose the mortgage, and none of them have appeared to the suit to contest the claim oi! Wakefield.

And if it had been otherwise, yet the question in controversy hero is the amount duo from the appellant; and. in the case of Forgtiy v. Conrad, 6 How. 201, this court decided that a defendant in equity, wiiose interest is separate from the other defendants, may appeal without Ihem.” And yet it is very evident that the other lienholders were very substantially interested with the mortgagor in reducing the amount due from the mortgagor to the mortgagee, because such a reduction would necessarily give them a better chance of collecting their claims out of the mortgaged property. In Germain v.

Mason, 12 Wall. 259, suit was brought by Mason and others to recover judgment for work and material furnished, and for the establishment of a mechanic’s lien prior to those of a number of other lien claimants, made parties defendant. Judgment was rendered against Germain for the amount claimed, and it was decreed to be a lien prior to all the rest. It was held that Germain might appeal alone from this decree without bringing in the other lien claimants, although it established the debt of Mason as a paramount lien on the real estate as to all the other defendants.

It is very clear in this case that the interest of the other lien claimants to have the judgment in favor of Mason against Ger-main set aside was substantial, and that it affected the security of the other liens. In Railroad Co. v. Johnson, 15 Wall. 8, a mortgagee filed a bill for foreclosure against his mortgagor, and against certain trustees who held shares of stock as collateral security for the same debt, praying for the foreclosure of the land mortgaged, and the sale of it and the stock. The decree was against the mortgagor for foreclosure, and against the trustees for sale of the collateral.

The mortgagor sued out a writ of error. It was held that the trustees were not necessary parties to the writ. In Milner v. Meek, 95 U. S. 252, an assignee in bankruptcy brought suit in equity to sell laud of tlie bankrupt, and to secure an adjustment of the liens upon the land against all the lien claimants and the general creditors. The decree determined the amount and priority of the several liens. It was held that one lien claimant who was defeated might appeal without making the other lien claimants parties to the appeal. In Hanrick v. Patrick, 119 U. S. 156, 7 Sup. Ct.

Rep. 147, a plaintiff brought trespass to try title against one defendant. The other defendants were made parties on their own motion, according to the Texas practice, and claimed title to the land through the plaintiff, and adverse to both the plaintiff and the defendant. It was held that it was not necessary for the three defendants to join in a writ of error, because their interests were distinct. Mr. Justice Matthews says, (page 164, 119 U. S., and page 153, 7 Sup. Ct.

Rep.:) “In equity, wliere interventions pro interosse suo have been permitted to those affected by the proceedings, hut not parties to the original controversy, or where the original parties have distinct and separable interests, the same general rule applies to appeals as to joint decrees; hut it has always been held that, where the decree is final and separate or separable, those not affected by it are not necessary parties to the appeal. Porgay v.

Conrad', 6 How. 201.” We think it quite clear from the foregoing authorities that the railway company, considering its defunct condition, had no such interest in reversing the decree in favor of the Adams Express Company as to make it a necessary party to the appeal. It certainly had no direct interest in the proceeds, and the indirect interest — that of reducing its indebtedness — was as immaterial as if the road had passed through bankruptcy. The order was not made against the railroad company, but was made against the proceeds which belonged to the trust company.

By the decree of foreclosure and sale, the railway company was deprived of all interest in the' subject-matter which the order in favor of the Adams Express Company affected, namely, the proceeds of sale. It is well settled that a party to a decree or order who has parted with all his interest in the subject-matter thereof, and cannot be injured by such decree, cannot appeal from the decree. Kelly v. Israel, 11 Paige, 147; Mills v. Hoag, 7 Paige, 18. Much reliance is placed on the case of Hardee v. Wilson, ubi j supra.

The original action in that case was by the complainant 'against a debtor who had conveyed real estate of his own to him'self, in trust for his wife,, and had thereafter conveyed the same land to one Hardee, with the purpose, as charged, of hindering, delaying, and defrauding his creditors. The decree below de- : dared that the conveyance of the debtor in trust, to himself for his wife was fraudulent, because made for the purpose alleged, and that the subsequent conveyance to Hardee was in reality a mere security for a debt. Hardee appealed. It was held that he should have joined with him the debtor and his wife.

The decree of the court below obviously was to the disadvantage of the-debtor and his wife. They had, therefore, an appealable interest in reversing it, though it may be difficult to see why their interest was not so separable from that of Hardee that he might, under previous decisions of the supreme court, have appealed alone.

However this may be, the case at bar seems to us clearly distinguishable from the Hardee Case, in the two respects already mentioned: First, the course of the proceedings below showed a substantial severance and ousting from the controversy of the railway company; secondly, there was an absence of interest in the railway company to reverse the decree as a whole, or any part of it.

An examination of the cases in the supreme court (and there are many of them) where, on the question of the distribution of the proceeds, the foreclosing complainant has appealed from a decree in favor of an intervening claimant, shows that the supreme court has not regarded it as necessary’to join in the appeal the defunct corporation, whose life was substantially ended by the confirmation of the sale in foreclosure. Thus, in Fosdick v. Schall, 99 U.

S. 235, the original action was by trustees against a railway company to foreclose the mortgage and sell ilie entire property, franchises, and rights of the company. The question which the court had to consider in that case was whether certain rolling stock belonged to the mortgagor company so that it was covered by the mortgage, or whether it belonged to an intervening claimant, who alleged that, nuder the contract by which the company acquired (he use of the rolling stock, the title still remained in him.

The court below held that the vendor of the rolling stock still held the title in himself; 'that he was entitled to rent out of the proceeds of the sale of the mortgaged property. From this decree the complainants, representing the bondholders who would be entitled to the proceeds, appealed. The defendant railway company did not appeal. The appeal was considered on its merits, it is said the case is not authority, because the question of jurisdiction was not raised.

It is, however, the well-known custom and disposition of the supreme court to make an independent examination of the record in every case for jurisdictional defects, and the fact that the question was not made by counsel by no means establishes that it was not considered by the court. The presumption is otherwise with respect to such a question. See, also, Farmers’ Loan & Trust Co., Petitioner, 129 U. S. 206, 9 Sup. Ct. Rep. 265. Second. We come now to the merits of the order in favor of the Adams Express Company.

It is well established in the federal courts, by numerous decisions of the supreme court of the United States, that a court of equity which, in foreclosure or other suit, has taken into its custody railroad property, may authorize its receivers to borrow money for the preservation, maintenance, or necessary betterment of the road, and may, by its order, make the loans thus incurred a paramount lien on the income and corpus. Wallace v. Loomis, 97 U. S. 146; Union Trust Co. v. Illinois M. Ily. Co., 117 U. S. 434, 6 Sup. Ct. Rep. 809.

The court does not act as the agent for the parties in the sense that it creates the lien by contract of the parties with the lenders, but, by virtue of its custody of the property and its jurisdiction of the parties, it pledges its own faith to the lender that it will enforce such a lien against the property and the parties as a condition of its releasing the property, and of its enforcing any equities in favor of any of those who invoke its assistance.

Now, it may enforce the lien in one of two ways: It may directly order out of the proceeds of sale the prior payment of the loans, or it may impose a continuing lien on the property by providing in its decree for sale that the purchaser shall take' it subject to such a lien. If the bitter method is followed, then a lien is established by contract with the purchaser in favor of the lender, which, appearing in the chain of title by which the purchaser holds, is attached to the property in the hands of all subsequent grantees of the purchaser, aud may, of course, be enforced by the lender in an independent action.

Swann v. Clark, 130 U. S. 602, 4 Sup. Ct. Rep. 241. But the court may order the sale of the property free of all liens, in which case the purchaser lakes a title freed from the burden, as well of receiver’s loans as of mortgage debts, and tbe pledge of the court that the receiver’s debts shall constitute a paramount lien can only be fulfilled by the court in its distribution of the proceeds of sale.

It is very clear from the record of the proceedings of' the district court of West Virginia in . the first foreclosure suit against this railroad that the final order and decree of that court was intended to and did vest in the purchasers a title free of all liens for receiver’s debts. There was a deed of release expressly declaring and effectuating this intention. This was inconsistent with the order making the receiver’s certificates, to be issued, a paramount lien on the road, and pro tanto it set that order aside, and transferred the lien, if any, to. the proceeds of the sale.

But it is contended, and it was so held by the learned court below, that the permission given to the purchasing committee to pay part of the purchase money in bonds which were themselves subsequent in priority of lien to receiver’s debts prevented the purchasers from taking as bona fide purchasers of the property for cash, without notice.

The argument is that, as the bonds represented a lien inferior to the receiver’s debts, the substitution of the property for them in the hands of the bondholders preserved the prior lien of the receiver’s debts in the property in spite of the tei-ms of the release, because the deposit of the bonds was only a constructive payment. Vilas v. Page, 106 N. Y. 439, 13 N. E. Rep. 743.

The purchasers were permitted to deposit bonds in payment of the purchase price after paying into court sufficient cash'to extinguish all costs and liens prior to the bonds, as adjudicated by the court; the bonds to be taken as equivalent to the cash which, if the price had been paid in money, their holders would have received on distribution. This was precisely the same as if the purchasers had paid the whole price in money, and had then withdrawn, on distribution,their pro rata share of the proceeds. Their rights cannot be different because they did not go through this useless formality.

The railroad property, to the extent that it was paid for by bonds, was, in the hands of the purchasing bondholders, proceeds of sale. The real question here is, therefore, whether the holder of receiver’s certificates could follow the proceeds of the sale into the hands of bondholders receiving the same on distribution by final decree of the court, because that court had failed to redeem its pledge to make the receiver’s debts a paramount lien by providing on distribution for their payment.

If the holder of receiver’s certificates were in court at the time of the entry of the decree of distribution, protesting against and excepting to the' same, it seems perfectly manifest that his only recourse would be by appeal from the decree, and, oh a failure to appeal, the decree would finally cut off his iights. The controversy Would then have become res judicata. He would be thereby estopped in any subsequent independent action to recover against the bondholders his equitable share of the proceeds of the sale.

Does the Adams Express Company, as a holder of receiver’s certificates, stand in any better position than if it had been present by counsel in court when the final decrees of confirmation, release, and distribution were entered, objecting to the same? It is very dear that it does not. When tire Adams Express Company received from Sharp the evidences of indebtedness on which it now x-elies for its lien, it was informed, by what was written thereon, that.

Sharp was a receiver acting under order of the district court of Wed Virginia, and Inning custody for the court of the Ohio Central Railroad, of which the corad had taken possession in a ciase then pending before it, and that the lien assured to the express company cm the face of the certificates was dependent on an order and adjudic tkra of that court.

The doctrine of lis pendens would charge any one, who purchased this railroad, or acquired an interest in it, pending the litigation, with notice of the litigation, and -would subject the property in his hands to the final action of the court, without his being brought into court as a party. If this be true of one acquiring an ini emit by deed, conveyance, or mortgage, a fortiori must it be true of one whose interest is acquired, and has its existence, only by virtue of the litigation.

The express company was put upon inquiry, then, as to all that had been done in that litigation, and was charged with, no lice of all the subsequent proceedings therein, much as if it had been a party to (he record. It is said that the company had the right to await notice from the receiver before presenting its claims. We do not think so. If.it relied on the receiver, it was a personal trust, in which it has been deceived, and must bear the loss. It was its plain duty at an early day to advise the court of its claim against the receiver and the railroad.

Inquiry would have shown it that the order authorizing the issue of these certificates was made ex parte. It was charged with notice, therefore, that by final action of the court the validity or security of the certificates might he prejudieally affected. Said Mr. Justice Blatcbford, speaking for the supreme court in Union Trust Co. v. Illinois M. Ry. Co., 117 U., S. 434-456, 6 Sup. Ct. Rep. 809: “The receiver, and those lending money to him on certificates issued on orders made without prior nolice, to parties interested, take the risk of the final action of the court in regard to the loans.

The court always retains control of the matter, its records are accessible to lenders and subsequent holders, and the certificates are not negotiable instruments.” For three years the company made no demand of any kind. This was laches of the grossest character, and entitles it to no consideration in a court of equity.

Meantime an officer of the court had been especially authorized by decree of the court to investigate and report on the receiver’s debts, and a fina] decree had been entered, adjudicating, in effect, that there were certain valid debts, not including that of the express company, and no others, and ordering confirmation and distribution. This is a final decree, nnappealed from and nnreversed. It estops the express company, as an alleged creditor of the receiver in the first foreclosure sale, from seeking payment of its claims against either the purchasers or the dis-tributees in that suit, The case of Vilas v.

Page, 106 N. Y. 439, 13 N. E. Rep. 743, which the court below relied on, is in our opinion quite distinguishable from the case at bar, because in that case, by the decree and by express agreement between the parties to the foreclosure suit, a lien was secured to the holder of the receiver’s certificates, upon the property mortgaged, and the title of the vendees was made subject to the claim of the holder of the receiver’s certificates, if any should be finally adjudged. The decree in favor of the Adams Express Company is reversed, with instructions to dismiss its intervening petition.