PEARSON v. HARRIS, 200 F. 10

ROSS, Circuit Judge (after stating the facts as above). From the decision of the trial court that the mortgage executed by Mors-head in the name and on behalf of the English-Canadian Company, Limited, was invalid, Harris took no appeal, and therefore the decision in that regard must be taken as correct. It was based upon the conclusion that the meeting of the directors of the Company, at which the power of attorney was authorized to be executed to Morshead, under which the mortgage here in question was given, was not a legal meeting, and as a consequence that both the power and the mortgage were void.

The same view of those proceedings was taken by Mr. justice Martin of the Supreme Court of British Columbia, in the case of Harris v. Morshead, which was one of the numerous suits referred to in the statement of the case. Relying, however, upon the validity of both of those instruments, and in consideration of the execution of the mortgage given to secure the payment of money due him, Harris conveyed to the Company the title to the property in question, upon which he held an equitable lien 'as security for advances made by him to the Company.

We regard it as clear, as did the court below, that equity in such circumstances will re-establish the lien, even as against Pearson as holder of the debentures — assuming their validity in his hands. The record shows that Harris made the advances to the general account of the Company, on the credit of the property as well as of the Company, and that they were expended in the development of the properties under his control as general agent of the Company, and without reference to any specific piece of property. For such advances he had an equitable lien upon the property. 1 Am. & Eng.

Encyc. of Raw, p. 1119, and cases there cited.

Moreover, Pearson, as attorney in fact for the company- — the validity oí whose power of attorney is not questioned — in and by the Ottawa Agreement, for and on behalf of the Company, expressly agreed with Harris, among other things, as follows: “And the said party of the third part [Harris] hereby agrees to extend the tim¡e for payment of ids claim against the said Company, and any interest that may be due him at the rate of ten per centum per annum for a period of six months from the date hereof, and in consideration of such extension of time for payment, and in order to secure the said indebtedness, the said Company hereby grants unto the said William .1.

Harris the right to operate and use the dredge ‘Josephine,’ situate in Josephine county, Oregon, the property of the said Company, for a period of six months from the date hereof, he to keep accounts of receipts and disbursements in connection with such operations, as hitherto, and the income, if any, to be applied in reduction of his claim; and it is hereby further agreed that, in case the said indebtedness has not been paid in full within the said period of six months, then and in such case all interest that the said Company ipay have in the Chinese Herrick Ground and the appurtenances thereto (save and except the said dredge) shall absolutely cease and be vested in the said William J.

Harris freed from any claims on the part of the said Company; it being understood and agreed that the said Company may at any time pay off the said indebtedness, and thereupon all the terms and provisions in this paragraph mentioned shall cease, and the said Company shall also have the privilege during the said period of six months of having a confidential representative at the said dredge, who may reside thereat and shall be entitled to all informa (ion and inspection as to weighing of gold dust and cheeking same, and seeing that proper credit is given therefor, and generally shall be entitled to all information and details as to the operations of the said dredge.” When Harris’ advances were made, and when his liens attached, the English-Canadian Company, Limited, was a going concern.

Liens attaching to the property of a company under such circumstances, in the country where the property is situated, are not subject to any lien of valid English debentures, even according to the law of England, by which, as we understand it, the lien conferred by such instruments is a floating lien, which does not restrict or in any way interfere with the corporation issuing the debentures from prosecuting the business: for which it was organized, in foreign countries, and there incumbering, transferring, or otherwise dealing with its property in the ordinary course of business.

And such was the holding of the Supreme Court of Minnesota in the case of Howard v. Iron & Land Co., 62 Minn. 298, 302, 64 N. W. 896. The issuing of debentures by English corporations is authorized by the Companies Act of 1862 (St. 25 & 26 Viet. c. 89), and by that of 1862 (2 Chitty’s Statutes,, p. 16, § 43) express provision is made for registration of charges or liens in order to fix them upon specific property. The debentures here in question, after providing for the payment of the principal and interest as stipulated in the bond, contain, among others, these clauses: “3.

The Company hereby charges with such payments áll its property whatsoever and. wheresoever, both present and future, including its uncalled capital for the time being. “4. This debenture bond is issued subject to the conditions indorsed hereon, which are to be deemed part of it, pursuant to a resolution of the board passed on the fourteenth day of July, 1S99.” And among the conditions indorsed thereon are the following: “This debenture is one of a series of debentures of the Company for securing principal sums not exceeding in the aggregate the sum of £15,000.

The debentures of the said series are to rank pari passu as a first charge on the undertaking of the Company, without any priority one over another, and such charge is to be a floating security, but so that the Company is not to be at liberty to create any mortgage or charge on any of its property in priority to said debentures. “2.

A register of the debentures will be kept at the Company’s registered office, wherein there will be entered the names, addresses, and descriptions of the holders, and numbers of the debentures held by them, respectively, and such register will at all reasonable times during business hours be open to the inspection of the registered holder or his legal personal representatives. “3.

The registered holder will be regarded as exclusively entitled to the benefit of this debenture, and all persons may act accordingly, and the Company shall not be bound to enter in the register notice of any trust or to recognize any right in any other person save as herein provided.” That the lien of such debentures is but a floating charge, until fixed by some appropriate proceeding upon some specific property of the company issuing the bonds, seems to be the holding of the English courts. Thus, in the case of Ward v. Valletort, etc., Co., Limited, [1903] 2 Ch.

Div. 654, where the debentures issued by the Company were similar to those here presented, and where, after the issuance of the bonds, the company deposited title deeds with a bank as security for advances, the court said: “In the present case, although the managing director did not in language state to the bank that its debentures did not affect the hereditaments comprised in the title deeds, or prevent the company from making valid deposit, he in fact deposited the deeds with the bank to secure the overdraft, and by such act represented that he had power to do so. lie certainly thought that he had that power, as he says that condition 4 was not present to his mind; and his action was precipitated by the title deeds being left by the debenture holders In the custody of the company.

Condition 2 probably shows why the deeds are left in the possession of the company — namely, in order that the company might be at liberty to sell or otherwise deal with all or any part of their property in the course of their business, and for the- purpose of carrying on 1he same. Under these circumstances the observations of Itomer, J., in Castell & Brown, Limited, 1 Ch. Div. (1898) 815, 321, are directly applicable, lie says: ‘I now look to see how it was that the company retained possession of the deeds, notwithstanding the debentures.

The reason appears to me obvious: The debentures were only intended to give what is called a floating charge; that is to say, it was intended, notwithstanding the debentures, that the company should have power, as long as it was a going concern, to deal with Us property as absolute owner, and I infer that it was on this ground that the company was allowed to and did retain possession of the deeds.

In other words, the debenture holders, notwithstanding their charge, and, Indeed, by its very terms, authorized their mortgagor, the Company, to deal with its property as if it had not been incumbered, and left with their mortgagor the deeds in order to enable the company to act as the owner. It is üme that, hating given this general authority to the Company, the debentures purported to put a certain special restriction on Its exorcise.

By the first condition it was provided that, though the charge was to be a floating security, the Company was not to be at liberty to create any mortgage or charge upon its freehold and leasehold tenements in priority to the debentures. This restriction was no doubt quite valid as a private arrangement between ¡.lie Company and the debenture holders; but can the debenture holders. under the circumstances, set it up against the bank taking the security without noticeV I think not.

I take it to be established that if a first mortgagee, even though he has the legal estate, authorizes the mortgagor to retain the deeds in order that the mortgagor may thereby, as ostensible owner of the property, be able to deal with it, though only to a limited extent, yet if the mortgagor takes advantage of the deeds so left with him to deal with the property to an extent beyond what was authorized, then the mortgagee cannot set up his charge against an incumbrancer for value without notice, who claims under the unauthorized dealing and relied on the deeds and the apparent ability of the owner to deal with the property free from incum-brance.’ ” In the case at bar Harris acquired his equitable lien in the ordinary course of the business of the Company, and while it was a going concern, with notice of which Pearson is properly chargeable, and the initiation of which was long before Harris knew of the issuance by the Fnglish-Canadian Company, Limited, of any debentures; the first notice to him, so far as appears, being imparted by the Ottawa agreement of January 11, 1900.

In the case of Norton v. Florence Rand & Public Works Co., 7 Ch. Div. 332, the company was organized under the Companies Act of 1862, and empowered to issue debentures and mortgage bonds. The language of the bonds, so far as it related to the company’s property, was as follows: “I)o hereby, in pursuance and under the power of their articles of association, bind themselves, their successors, assigns, and all their estate, property, and effects to pay the said,” etc.

The company’s office was in London, and, having real estate in Florence, Italy, it raised money by issuing obligations payable to bearer, binding all its estate, property, and effects. Subsequently the Florence property was mortgaged to a bank, which took the mortgage with notice of the former obligations. The holders of the latter sought to restrain the bank from selling the company’s property at Florence, claiming that they were prior mortgagees under the debentures.

Jessel, Master of the Rolls, rendered the opinion of the court denying the motion,' and, after stating two grounds for the ruling, proceeded to say: “But there is a third, and in my opinion a fatal, answer, which is that, if the law of England does apply, still, as I read this document, the plaintiff has no charge on the houses in Florence; that is, supposing it were property in London, instead of in Florence, I should, hold that the plaintiff had no charge on it whateyer. That depends on the construction of the instrument which I haye before me.

It seems that the Florence Land & Works Company are authorized to issue bonds and mortgages. The question is whether the document which they did issue was a bond or a mortgage. In my opinion it is a bond. First of all, and that is a very strong point as between the parties, they themselves call it a bond. Now, there are two terms by which English lawyers designate bonds, both well-known terms; one is ‘bond,’ and the other is ‘obligation.’ Oddly enough, we generally use the term ‘bond’ to distinguish the instrument, and the terms derived from ‘obligation’ or from ‘oblige,’ to distinguish the parties to it.

We speak of a bond, and of the obligor and the obligee of .a bond. But still the word ‘obligation’ denotes a bond, as well as the word ‘bond.’ Now, this instrument is headed by the word ‘obligation,’ in very large letters. But this is not all. ‘In consideration of the sum of £1000 the company bind,’ which is a term of a bond, ‘themselves, their successors, assigns, and all their estate, property, and effects,’ to pay to John Norton £100, with the interest. The words ‘estate, property, and effects’ themselves are common words of a bond.

They bind themselves to pay, and then follows the common condition on a bond: ‘Provided always, and it is hereby declared that this bond is issued subject to and in accordance with the condition of a scale indorsed hereon.’ So that we have it called ‘a bond,’ and it is subject to a condition, and when we look at the condition we find the common condition to pay: ‘The company reserves the right of redeeming this, and any other obligations as they think fit,’ by drawings. And then they redeem them in the way they mention.

The bond becomes payable with accruing interest on the 30th of June following the time when it is drawn. That is very important, because, although in the body of the bond the sum is made payable to the bearer, the condition does not make it payable to bearer on presentation, but delays the payment until the time mentioned after each drawing. That being so, there is nothing to show that it is otherwise than a bond.

The words relied on are these: It is said they not only ‘bind themselves, their successors, and assigns,’ but ‘all their estate, property, and effects.’ Of course they do; a bond always does in a sense bind the property. In the case of a corporation, it can bind nothing else; it never could bind the persons who were corporators, and now, in the case of an individual, it does not even bind him in Ms person, but in his property generally, just as property was always bound'to pay debts on judgment, and in no other way. Any different

interpretation will lead to the most wonderful results. First of all, if it is a mortgage, it should take effect in order of date, and if some thousands were issued on several days, is each one to take precedence of the others according to date? It was argued, ‘No, they take pari passu, because they were issued as part of the capital of half a million, and the words “Capital half a million” are upon it.’ That will not do; that does not show it. If there are no words in the instrument to make them pay otherwise than according to date, according to our law they take according to date.

If they take according to date, what is the meaning of tossing them into a box and drawing them so many at a time, paying those drawn, and leaving the others unpaid? How could you pay those, and leave the others unpaid, if the others have'a prior charge on the property, and you cannot make the property available for payment? It seems to me that the words of the thing, and the reason of the thing, all point the same way: It is a bond, and nothing more; and I so hold.” In the case of Moore v. Anglo-Italian Bank, 10 Ch.

Div. 687, the same learned judge, referring to the Florence Rand Company Case, says: “That established something more than that the plaintiff’s had a charge; it also established, that the charge was subject to any mortgage made by the company carrying on their business before the debenture holders interfered to stop them, and therefore, in equity, notice or no notice of the charge of the defendants, the Italian bank would be prior to that of the plaintiff.” See, also, In re Hamilton’s Windsor Iron Works, 12 Ch. Div. 707, 713, 714; Colonial Trusts Corp. Case, 15 Ch.

Div. 468, 469, 472; Panama Mail Company Case, 5 Ch. App. Cas. 318; Yorkshire, etc., Association, [1903] 2 Ch. Div. 284; Foster v. Borax Co., [1899] 2 Ch. Div. 135; In re Maudslay Sons & Field, [1900] 1 Ch. Div. 602; Roper v. Costell and Brown, [1898] 1 Ch. Div. 315. In Palmer’s Company Precedents, it is said: “There was at one time a notion that a general charge upon all the property of a company, present and future, was ultra vires; but that notion has long since been exploded, and it is now well settled that such a charge is valid and effective.

Such a charge creates a valid equitable security by way of floating charge upon the assets for the time being of the company, and only attaches final-y on the appointment of a receiver, or on a winding-up, or when the company ceases to he a going concern. In the meantime it leaves the company at liberty to deal with its assets in the ordinary course of its business, by way of sale, lease, exchange, specific mortgage, or otherwise, as may seem expedient. The terms of the floating charge may limit the company's power of dealing with its property; e. g., may prohibit the creation of prior charge».

The company’s power to deal with the assets, unless otherwise expressed in the debenture, is limited to dealing in the ordinary course of the business of the company. Accordingly it was held that a sale of the whole undertaking of the company with a view to its coming to an end was not a dealing with the assets in the ordinary course of business, and could not he justified as against the holder of a floating security.

A general charge is not the less effective because it is expressed in general terms and covers future properly as well as present. * ~ * Although a floating charge does not finally attach until a final winding-up or an appointment of a receiver, this only means that until then the company can deal with the property in the ordinary course of its business; but it does not mean that there is no charge until then.

A debenture usually purports to be a present charge: e. g., ‘the company hereby charges its undertaking and all its property, present and future.’ And though it is necessary, in order not to paralyze the business, to construe such a charge as giving the company an implied power or license to deal with the property in the ordinary course of its business, there is no necessity or reason for holding that the charge is not to take effect at once, subject to that power. Re Florence Land Co., 10 Ch. Div. 530; Id. 632.

However, laud situated abroad, but belonging to a company registered here, can in most cases be effectually charged in favor of debenture holders or their trustees, without regard to the formalities required by the local la.w in relation to transfers or mortgages.

For it -was settled long since that the Court of Chancery, by virtue of its jurisdiction in personam, would, as between persons resident here, enforce equities in regard to foreign land. * * * The jurisdiction of the Court of Chancery being now vested in tbe High Court, it seems clear that if a company registered here covenants or purports to convey foreign land to trustees for debenture holders, or purports to charge it by the debentures or otherwise, or covenants that it shall stand charged in favor of debenture holders, the court will, if occasion arises, enforce the equity just as if the land were in England, and consequently, unless the local law forbids, will compel the company to convey the laud, so as to give effect to the relief decreed.

See Holroyd v. Marshall, 10 H. L. C. 191. And in accordance with the principles above referred to, relief has in many cases been granted here to the holders of debentures on foreign land.” Palmer, pp. 631, 632, 635.

The record shows that Pearson had knowledge of the condition of the title to the placer ground and of Harris’ claims, and that he purchased the Company’s property at the liquidators’ sale in England “subject to the liens -thereon.” He cannot, therefore, be held to have acquired a paramount lien to that of Harris, even if it be conceded that the debentures ever became a lien upon the Company’s property in Oregon. Besides, we are not prepared to hold that the debentures in question were valid instruments as against Harris.

The record in the case shows that long prior to July 14, 1899, the Company had run out of funds and had become indebted to Harris for advances made by him to its account in order that its mining operations be continued. The correspondence between the parties and the statements rendered by Harris to the Company show this.

Notwithstanding that indebtedness, and the inability of the Company to pay it, and without authorization by the shareholders so far as appears, the minutes of the Company show that on the 14th day of July, 1899, at a meeting of the directors held at the Company’s office, and at which were present Anderson, as chairman, and Messrs. Morshead, Mortimore, and Pearson— “Mr. Morshead explained to the board that since the last meeting charges on the Company’s assets have been arranged by the directors as follows: ¿5,500 advanced by himself, £750 by Mr. Anderson, and £750 by Mr. Pearson.

He also reported that further sums amounting to £2,940 would probably be required to meet expenses, and it was resolved that the money already advanced be secured on an equitable charge, the trustees to be Mr. Anderson and Mr. Morshead, and that a further sum of £5,000, making, with the amounts aforesaid, the sum of £15,000, be borrowed and secured on the assets of the Company in like manner, and that deeds be drawn up, sealed by the Company, and handed to Mr. Morshead, Mr. Anderson, and Mr.

Pearson.” The foregoing is the first suggestion appearing in the record concerning' the issuance of any debentures or the creating of any lien upon the property of the company, and all of the persons thus proposed to be ■ secured were directors of the Company. According to the minutes of the Company, no debentures had then been issued; for at a meeting of the board held on the 14th day of November, 1899, at which were present Morshead, chairman, and Pearson and Mortimore— “Mr.

Morshead informed the board that he had bought debenture bonds to secure the £3,500 and £2,000 advanced by him, and also for the £750 advanced by Mr. Anderson and the £750 advanced by Mr. Pearson, and it was resolved, that debenture bonds be sealed securing those amounts to the creditors.” Yet ten days before this last meeting, authorizing the issuance of the debentures to secure the money advanced by the directors, to wit, on the 4th of November, 1899, the minutes of the Company of that date disclose these proceedings at a meeting at which were present Anderson, Morshead, and!

Pearson: “The question as to the course the directors were to adopt in the present crisis was discussed. Mr. Burehell advised that Mr. Harris should be temporized with, and should be again asked to meet Mr. Morshead in Montreal; at the same time, if the creditors wished, application should be made to the court for the appointment of a receiver, and he, on behalf of the Company, would assent thereto, and he advised that Messrs. Anderson, Morshead, and Pearson should be appointed receivers to the Company. The meeting was then adjourned until 1:30 at the Colonial Club, when Mr.

Mortimore was also present, and after some discussion the following resolutions were passed: It was proposed by Mr. Pearson, seconded by Mr. Anderson, and resolved, that all documents of title and oilier securities belonging to the _ Knglisli-Oanadian Company, Limited, now in the custody and possession of Messrs. Burchell & Co., solicitors to the Company, be held by them for and on behalf of the debenture holders by way of equitable mortgage, in the terms of the resolution of the board dated the 1-lth day of July, 1899. It was proposed by Mr. Anderson, seconded by Mr.

Mortimore, and resolved, that under existing circumstances the board assents to an application intended to be made forthwith by Messrs. Anderson, Morshead, and Pearson, as equitable mortgagees, to apply to the court for the appointment of a receiver, being of opinion that this is tile proper course to be adopted in the interests of the shareholders.” Two days later, to wit, November 6, 1899, at a meeting of the board at which were present Anderson, Morshead, and Mortimore, as directors, and M.r. Burchell (the company’s solicitor) and the secretary in attendance, “Mr.

Morshead reported that a receiver couldl not be appointed immediately as there were no assets in England,” and at which meeting ‘‘a discussion took place as to the expediency of a director proceeding to Canada, and Mr. Burchell having strongly expressed his views on the subject, it was resolved, that Mr. Pearson should be cabled to in Paris to ascertain if he would start for Canada on AYediiesdav.” At the subsequent meeting of tlie board of November 10, 1899, “held at the Colonial Club, No. 4 Whitehall Court,” at which were present only “Mr. Morshead, in the chair. Mr. Pearson.

In attendance the secretary” — the following, among other, proceedings were had: “The committee were of opinion that Mr. Pearson should start for Canada as soon as possible, and the secretary was instructed to let him have a list of the documents of title in the Company’s possession and a list of the documents of title which are missing. It was also resolved that Ihe deeds themselves should be handed to Mcssi^i. Hoare’s Bank as security for the money which had been advanced. A discussion as to the title deeds belonging to the Company in the possession of Messrs.

Burchell & Co. took place, and it was resolved, that they be handed to Messrs. Hoare & Co., the bankers, as security for the creditors entitled to debentures under the terms of the resolution of the 14th July, 1889.” In view of these proceedings, and of the well-established rule that directors are not permitted to secure themselves at the expense oí other creditors, we repeat that we are not prepared to hold the debentures in question valid as against Harris’ claim, but refrain from deciding the question, as the views above expressed on other points render it unnecessary to do so.

The record, we think, would not justify us in interfering, on the appellant’s behalf, with the judgment of the court below in respect to the amount found to be due the complainant. The judgment is affirmed.