MOWRY v. FARMERS' LOAN & TRUST CO., 76 F. 38

JENKINS, Circuit Judge, after this statement of the case, delivered the opinion of the court. Since this cause came to this court, provision was made by order of this court which would permit the complainant in the original decree to proceed to a sale of the railway thereunder, and providing that an amount should be paid into the court on the sale, which would fully protect the appellant here in case Ms claim should be sustained.

We need not, therefore, stop to consider the various assignments of error which deal with certain alleged irregularities in the entry of the decree and its subsequent modification, The only matter with which we need concern ourselves is the contention of the appellant that by reason of the reorganization agreement, and the proceedings thereunder, the 1,49,5 assenting bonds were paid by the exchange for the new bonds issued under the consolidated mortgage, leaving the 105 nonassenting bonds the only outstanding debt secured by the first mortgage, and that the appellant, as the holder of these nonassenting bonds, is entitled to have them first paid out of the proceeds of the sale, and in priority to the assenting bonds.

Whether this contention be well founded or not must, in large measure, depend upon the intention of the parties. It is manifestly true that it is possible that one hold- • ing bonds secured by a prior mortgage can so surrender them in exchange for bonds secured by a subsequent mortgage that he will lose any right to the higher security. The question must be resolved in each case upon the facts of the particular transaction. Where a novation is thus sought to be established, it must be shown that the substitution of the new' obligation was with design and intent to extinguish the old obligation; and as such

an act would, upon its face, appear to. be against the interest of the holder of the bond, such intent will not be presumed, but must be clearly established. A mere change in the form of the mortgaged debt, such as the substitution of new bonds for those originally secured by it, would not extinguish or affect the lien. Stevens v. Railway Co., L. R. 8 Ch. App. 1064. But where the new bonds are secured by a new mortgage, and the old bonds are surrendered to (he debtor, generally a prima facie case would be established of novation when no purpose of the parties appeared to retain the elder security. Jones, Corp.

Bonds, §§ 319, 320. The scheme of reorganization here involved is manifested by the agreement between the assenting bondholders and stockholders and their trustee or committee, and by the concurring act of the railroad company, manifested by the mortgage issued by it to effectuate the scheme.

It was clearly expected that all the bondholders under prior mortgages and the stockholders would unite in this plan of reorganization; and yet, recognizing what oftentimes, and perhaps generally, occurs in the reorganization of railways, that some of the bonds might not be found, or that some holders would not assent to the scheme of reorganization, provision would seeni to have been made to guard against just such a contingency, and to prevent the inequitable result which will follow if nonassenting bondholders should, by means of and through the reorganization to which they would uot agree, obtain, with respect to the nonassenting bonds, a decided and inequitable advantage over assenting bondholders, who theretofore stood with them upon an equal plane.

This thought, possibly', is not specifically expressed in the refunding agreement, but the committee was therein authorized to exercise all necessary power to efficiently execute the trust, and to carry out the reorganization; and the agreement recites that it was not deemed probable tha t It would be necessary, in order to effect the contemplated reorganization, that there should be a sale of the mortgaged premises under foreclosure, and it disclaimed any power to affect the rights and interests of nonassent-ing bondholders, and that the agreement was made subject to such rights and interests as they might have.

The committee was also empowered to supply any defects and omissions in the agreement, and which it would be necessary to supply to carry out the purposes and objects of the plan; and any new bonds or mortgages necessary or expedient for that purpose should contain such provisions and contracts, not inconsistent with the agreement, as might be approved by the railroad company and by the trust company, to whom the mortgage might be made.

These provisions clearly indicate that the discretion was lodged with the committee of the assenting bondholders to protect their rights in the consummation of the plan, and to insist upon such provisions as might be necessary to safeguard their interests.

We therefore naturally find in the consolidated mortgage a provision that the bonds and coupons of prior issues of the railroad company received in exchange should he held by the trustee under the consolidated mortgage as additional security for the benefit of the holders of the bonds secured thereby, and that, when the bonds and coupons outstanding of any one issue should have been delivered oyer to the trustee, then the mortgage securing such bonds so delivered over, and for which bonds had been received in exchange, should, on request of the railroad company, be canceled, and that no mortgage should be canceled until the second income mortgage had been satisfied and discharged.

It is manifest that at this time the nonassent of certain bondholders was lmown to the committee of the railroad company and the trust company; that it was hoped they might be induced to concur, but that, in anticipation of nonconcurrence, provision must be made to maintain the equitable position and the parity of relation which the bondholders bore to each other; and that it was not designed that the bonds should be surrendered and exchanged in satisfaction of the mortgage debt, but that there should be reservation of the security attaching to the elder bond.

There was, in fact, no surrender of these bonds to the railroad company; nor, indeed, can it properly be said that there was completed substitution. The legal effect of the transaction was that the assenting bondholder received the consolidated bond and held the prior bond, keeping both alive until the satisfaction of prior mortgages.

This position is not weakened by the fact that the prior bond was delivered into the custody of the bondholders’ trustee to hold for him and for his security until the final consummation of the plan of reorganization and the satisfaction of all prior mortgages, and until the consolidated bond should be the first and only lien upon the property. This was not a substitution of securities. It was an additional security, and “addition is not substitution.” Bag Co. v. Van Nortwick, 9 U. S. App. 25, 3 C. C. A. 274, and 52 Fed. 752.

The appellant comes demanding of a court of equity that it shall exercise its equitable powers to compass an inequitable result. Holding a minority of the bonds, he declined to enter into this plan of reorganization. That he had a right to do; but he has not right, either moral, equitable, or legal, to say that through his nonassent he shall obtain so inequitable an advantage over the assenting bondholders. A court of equity would be slow to so construe any agreement of reorganization that it would work such unjust result.

We find nothing in this agreement or in the act of the parties thereunder which even tends to that conclusion. The understanding seems to us to be express that the first mortgage, and the bonds issued thereunder, should be kept alive until all interests prior to the consolidated mortgage should be finally merged in the latter security, and all interests stand upon an equality of security under the plan of reorganization. We cannot entertain a construction of this agreement which would enlarge the rights of the appellant.

There was no contract or agreement with him, and the contract between the assenting bondholders and the railroad company clearly contemplated the continued existence of prior securities. It was contemplated that to fully effectuate the reorganization it might be necessary to foreclose the prior mortgage, and, as observed by Judge Wallace in Barry v.

Railway Co., 34 Fed. 829, 833, when it became necessary to enforce the mortgage securing the nonassenting bonds, “complete equity is done them if they are awarded the same share of the proceeds of the property which they would have received if no bonds had been surrendered.” The conclusion we have reached is fully sustained in Ames v. Railway Co., 2 Woods, 207, Fed. Cas. No. 329; Fidelity Insurance, Trust & Safe-Deposit Co. v. Shenandoah Val. Ry. Co., 86 Va. 1, 9 S. E. 759; Ketchum v. Duncan, 96 U. S. 659. The case of Union Trust Co. v. Illinois M. Ry. Co., 117 U. S. 434, 6 Sup.

Ct. 809, is in no wise inconsistent. There was no contingency and no reservation on the part of those surrendering. As the court states, the surrender was for cancellation, and there was cancellation. That was a case of novation pure and simple. Alike unfounded is the contention of the appellant that the court below erred in decreeing that the lien of the assenting bonds upon the La Crosse branch still existed, and that they should share in the proceeds arising from the sale of that branch.

It is not correct to say that this branch road was, by the refunding agreement, or by any acts done thereunder or in pursuance thereof, released from the lien of the first mortgage.

The clause of that agreement upon which the claim is rested merely provides that, as that branch road had no connection with the main line, and its operation was nonremunerative, and was not essential to the operation of the main line, the branch line should'be sold when and as the committee should determine, and might be so sold free and discharged of all claims of the assenting bondholders, and that the proceeds should be applied as the committee might determine. It was not so sold.

It is true that this branch road was not included in, and was expressly excepted from, the consolidated mortgage, and this was because, manifestly, that mortgage was executed in contemplation of the success of the refunding scheme, which designed a sale of the branch line and the appropriation of the proceeds to the uses of the main line, or for the benefit of the bondholders. That could not have been accomplished without the assent of all of the bondholders, and failed in consequence of the nonassent of some of them.

The provision of the agreement was in aid of granting a clear title in the event of a sale, and was inoperative otherwise. It certainly was not within the purpose of the assenting bondholders to waive their security in favor of a stranger to the agreement, and surely a court of equity ought not to torture the language of the writing into an unconditional release of security, going to enrich a nonassenting bondholder.

It is further urged that the provision of the consolidated mortgage which authorized the trustee to hold the exchanged bonds and coupons as additional security for the benefit of the holders of bonds secured by the consolidated mortgage was an attempt to reissue, and a gratuitous pledge of the retired securities, within the prohibition of the statute. Rev. St. Wis. § 1753. This

section is to the effect that “no corporation shall issue * * * any bonds or other evidences of indebtedness except for money, labor or property estimated at it3 true money value actually received by it, equal to seventy-five per cent, of the par value thereof, and all stocks and bonds issued contrary to the provisions of this

section * * * shall be void.” This statute was considered and applied in National Foundry & Pipe Works v. Oconto Water Co., 52 Fed. 29, 36; Pfister v. Railroad Co., 83 Wis. 86, 53 N. W. 27.

It was there held that the object of the statute is to protect stockholders and bona fide creditors from improvident issue of bonds by a corporation, and that, when a corporation hypothecates its bonds as security for a loan, or for any other purposes, or in any other manner, it issues them within the meaning and intention of the statute; and, failing a stipulation that they shall be accounted for at not less than 75 cents on the dollar of their par value, the statute is violated, and the bonds are void.

This exposition of the statute by the supreme court of Wisconsin is binding upon us, and, were it not, we fully concur in the conclusion of that court. The writer of this thus construed and applied it in the case first cited, and before the decision by the supreme court of Wisconsin referred to. This case, however, does not fall within the statute. The first mortgage bonds were issue for value, and were valid obligations of the railroad company. They were never surrendered to that company, and consequently they were never reissued by that company.

It was not contemplated that they should be surrendered until the happening of a contingency which has never occurred. They were deposited by the holders with the trust company, to be held by it as their security, or as security for other bonds then issued by the railroad company. The company, by this mortgage, assented to the transaction. This transaction is in no sense within the prohibition of the law, nor does it come within the mischief sought to be prevented by the statute in question. The decree will be affirmed.