Canal Company's Case

35 A. 161, 83 Md. 549, 1896 Md. LEXIS 83

• Court: Court of Appeals of Maryland
• Decided: June 17, 1896
• Status: Published

Opinions

Fowler, J.,

delivered the opinion of the Court.

This appeal presents questions growing out of the controversy between the State of Maryland and various classes of creditors having liens against the Chesapeake and Ohio Canal, its property, franchises, revenues and tolls. The State is the largest creditor, and next to it stands the appellees, who represent the bonds issued under the Act of 1844, ch. 281, as well as those of-1878, ch. 58, generally known as repair bonds, which latter are conceded to be a prior lien on the canal, its property and revenues, so far at least as concerns the claim of either the State under its mortgages or of the appellees under the Act of 1844, ch. 281.

While the history of the canal and the relation of the State to it as creditor and the legislation which from time to time has been adopted by the State for the purpose of waiving its liens in favor of others, are so well known that it would be useless to refer to it here, it will be necessary, in order to have an intelligent understanding of the questions before us, to examine the decree in this case which we affirmed on the former appeal and which is reported in 73 Md. 503, as well as to refer somewhat fully to the opinion of this Court in that case, which was delivered by the late Chief Judge Robinson.

The decree which we have said was affirmed in 73 Md. provided that upon certain conditions therein prescribed the appellees should take possession and control of the canal, together with its rights and property, with power and authority to use and exercise the franchises of said company and operate the said canal to the same extent that said company could do. Provision was made for the disposition of the net revenues, and in the sixth section of the decree it was provided that if at the end of four years from the first day of May, 1891, there should not be tolls and revenue over and above the amount necessary to pay cur^, rent operative expenses and to keep the canal in repair, sufficient to liquidate and discharge the amount of repairing and restoring the canal to a working condition from its then broken condition, and the amount necessary to pay expense and compensation to the receivers, and also certain other expenses not necessary now to mention “ such failure in the tolls and revenues was to be regarded as evidence conclusive (unless the time be extended by the Court for good and sufficient cause shown) that the said canal cannot be operated so as to produce revenue with which to pay the bonded indebtedness of the said canal company.” It was also one of the provisions of that decree that whenever it shall clearly appear that the said canal cannot be operated by the said trustees so as to produce revenue with which to pay the bonded indebtedness of said company, the right and power was reserved to the Court to order and direct a sale, as provided by that decree.

Prior to the expiration of the four years mentioned in the decree, during which the appellees were to possess and operate the canal, they applied by petition to the Circuit Court for Washington County for the extension of time they were authorized to ask for by said decree, for the purpose, as they allege, that they might have an opportunity under better auspices to demonstrate that the canal would, with proper management pay annually out of its net tolls and revenues something on account of and in reduction of its bonded indebtedness. The State, through its Attorney-General, resisted this application, first, upon the ground that it was premature, and secondly, because, assuming that the Court below had the power upon a proper case to grant the extension, the appellees had failed to make out such a case as called for the further interposition of the powers of a Court of Equity. But the Circuit Court having come to the conclusion that the appellees had shown good and sufficient cause, on the i$th February, 1895, passed an order so declaring and directing that the said period of four years jxxed by the decree should be extended to the end of six years from the first day of May, 1895. From this order the State has appealed.

It was not seriously contended in argument that if a proper case was made, the Court did not have power to pass the order appealed from, and we shall therefore proceed at once to consider the question presented. But before doing so, it is proper to mention the fact, that after the question as to the extension of «time, which was regarded as the only one directly presented by this appeal, was argued in this-Court, we acquiesced in the request expressed at the hearing, that befoi-e passing upon the question of sale vel non, the question as to the pi'ioxdty of liens as between the State and the appellees, should be fully px-esented, so that in case this Court should come to the conclusion that a sale should be had, there need be no further delay caused by reason of the uncertainty of the x'ights of the State or of the appellees in i-espect to their respective liens—it being apparent, as we said in 73 Md., that the question as to the priority of liens is one “ which the pai'ties are entitled as matter of right to have decided before a sale is made.”

The principal question with which we are confronted^at the vexy outset is whether the canal shall be sold. In order to solve this question in a satisfactory manner it will be necessary to point out the relations of the parties to each other and to the encumbered property, and thus to ascertain their respective rights in and to said property. There can be, we think, no difficulty in so doing, for these rights and relations, with one exception, have been so clearly and fully fixed by what we said on the former appeal (73 Md.) that we need only refer to and cite portions of that opinion to show what these rights and relations are.

What, then, was decided on the former appeal? We affirmed the decree of the Circuit Court for Washington County, holding, first, that these appellees were, by virtue of their rights under the Act of 1844 and the mortgage of June 6th, 1848, which was executed in pursuance of said Act, as well as because of their rights as trustees for the holders of the bonds issued under the Act of 1878, ch. 58, entitled to take possession of the canal upon the terms prescribed by the decree ; second, that the appellees being lawfully entitled to the possession of the canal under the decree, they must “ be allowed to put it in a condition to produce revenue—otherwise its possession would be without benefit to them.” It was, however, contended on the former appeals as now, by the State, that whatever may be the rights of the appellees, as against the mortgagor, the canal company, the State has superior lights under its long overdue mortgage, and especially the right thereby to demand an immediate sale of the entire canal and its franchises —free from any claim of the appellees as trustees-under the Act of 1844. The attempt to enforce this right was thus commented on in 73 Md.:

“ Now upon what grounds can this right be supported ? To induce the bondholders of 1844 to furnish the money necessary to complete the canal, the State not only agreed to waive its own liens upon its revenues, but agreed, also, that the company should pledge them by mortgage as security for the payment of these bonds. And now, when the State and the company have operated the canal till they are no longer able to operate it, and when the canal itself is no longer in a condition to earn revenue, and the company, during all these forty years, has been in default in the payment of its indebtedness, according to the terms of the mortgage, and when the bondholders ask to be allowed to take possession of the canal, and to repair and operate it for the purpose of ascertaining whether it can be made to produce any revenue applicable to the payment of the mortgage, the State interposes and insists that it shall be sold clear of the liens of these bondholders, which the■ State agreed should be preferred liens upon its revenues, and when it is sold, the State further claims as against them, the entire proceeds of sale, because their liens, it is said, extend to the revenues only, and not to the property of the canal. In other words, the State insists that they shall be deprived of the only remedy open to them by which they may have the opportunity, at least, of reimbursing themselves for the money which they, at the instance of the State, furnished to finish the canal. So it is not the case even of a junior incumbrancer asking for the sale of mortgaged property, and the proceeds of sale to be applied to the payment of the several liens upon it, according to their priority ; but it is one in which the State, holding liens upon the revenues and property of an unfinished canal, in order to induce others to furnish the money necessaiy to finish it, waives its own liens upon the revenues in favor of such persons, and then insists that the canal shall be sold, whereby .these liens are destroyed. Wc do not see on what ground, legal or eqttitablc, such a contention as this can be supported

Such being the rights of the parties, and the appellees having been ■ in possession of the canal for the past four years, and the right of the State to demand a sale having been thus denied by us in 1891, when the canal was in a broken and useless condition, what has happened since that time which would justify us in now ordering a sale?

This brings us to the consideration of the direct question presented by this appeal, namely, should the application for an extension of time be favorably considered. The answer to this question depends upon the terms and conditions of the decree, which, as we have seen, has already been affirmed, and the facts relied on by the appellees, which we do not understand to have been seriously denied to show that, as a matter of justice and equity, the extension of time asked asked for, should be allowed. As we have seen were held in the former appeal (73 Md.) that not to have granted the appellee’s possession of and time to operate the canal for the benefit of their cestuis que trustcnt would have been inequitable as well as illegal under the then existing circumstances. Then the canal was a wreck —useless for any of the purposes for which it was intended; now it has been restored. Then the appellees had not expended nearly half a million dollars, which they have since done, in restoring it to its unprecedented good condition. It is apparent also that it was impossible then to know definitely what would be the effect upon the future business of the canal of the conditions under which the appellees took possession. The amount of money as well as the length of time required to repair the canal could only be estimated, and the many difficulties encountered by the appellees as set forth in their petition and brief, could not possibly have been foreseen, nor could they have been provided for, except by the wise provision which was inserted in the decree providing for an extension of time upon showing good and sufficient cause. If it was inequitable to deny the appellees possession of the canal in 1891, we think it would be even more so now, when, in addition to the loss they would then have sustained by a sale, they would, according to the State’s contention, now lose also the large amount they were authorized under the decree to spend in repairs and restoration.

But, irrespective of the right of the appellees to possession upon equitable grounds, based on the facts set forth in their petition, and the conditions upon which they took posession, we do not think that the State can maintain its right to a sale upon any fair or reasonable construction of the Act of 1844, ch. 281, its mortgage of January 8th, 1846, and that of the appellees of June 5th, 1848, which together contain the contract between the canal company, the State and the bondholders of 1844; Certainly no right to such a sale can be enforced until it appears that the cestuis que trustent can derive nothing on account of their claims from the operation of the canal by the appellees. It is manifest that under the decree we affirmed no sale of the canal by the State, under the terms demanded by it, can be decreed until “ it shall clearly appear that the said canal cannot be operated by the said trustees so as to produce revenue with which to pay the bonded indebtedness.” But the rights of the bondholders of 1844 are still more emphatically recognized in the mortgage which the State accepted from the canal company, for we find in that instrument the following provision : “ Subject, nevertheless, to all and singular the liens and pledges created by the provisions of the Act of 1844, * * * which said liens and pledges are in nowise to be lessened, impaired or interfered with by this deed or by anything herein contained.” Assuming, then, that the contention of the State is correct, namely, that the appellees representing the bonds of 1844 have a lien only on the net revenue and tolls, and have no claim whatever by virtue of said bonds on the proceeds of sale of the canal, its property and franchises, it would necessarily follow, unless the canal is worthless and cannot be operated to any advantage for said bondholders, that a sale would not only impair and lessen their lien, but would absolutely destroy it. But so far from the canal being in such a hopeless condition, we think enough can be found in the record before us to demonstrate that under its present management by the officers appointed by the Court, and who are under its control and supervision, the business, as well as the earning capacity of the property, has been largely increased. Notwithstanding the fact that the appellees, after restoring the property to a condition for earning revenue, had to build up the business and .win back the tráfñc which had been diverted to other routes of transportation, they appear to have met with success. For during the few months of the year 1891, during which the canal was in working condition, there were carried by it 50,533.14 tons. The next year, although there was a scarcity of boats, over 250,000 tons were carried. And in 1893 the tonnage arose to 336,295, which has not been equalled during the past ten years. Under these circumstances we are not disposed, even if we had the power, to decree a sale at this time, and thereby destroy the only source from which, as contended by the State, the bonds of 1844, or any part of them, can ever be paid, and at the same time, perhaps, deprive the public of one of fhe means of cheap transportation of coal and farm products which the canal now affords. For it will be remembered that the State had been careful, in order to protect itself and its citizens, as well as those who should advance their money to complete the work, to provide in the charter granted to the company “ that the said canal and the works to be erected thereon in virtue of this Act, when completed, shall forever thereafter be esteemed and taken to be navigable as a public highway.” When, therefore, it appears, and not till then, that the property cannot be operated so as to produce revenue applicable to the payment of the bonded indebtedness of the company, then, under the provisions of the decree affirmed by this Court, the Court may be asked to decree a sale under the State’s mortgage. Until that time, in other words, until it “ clearly appears ” that the liens of the appellees are valueless and can therefore neither be lessened nor impaired, a sale under the conditions demanded by the State, as was said in 73 Md., State v. Brown, can be supported upon no ground, either legal or equitable. We have already indicated our opinion that it has not yet been made clearly to appear that the said lien of appellees has become valueless ; and, therefore, it would follow that no such decree of sale would be valid, because neither the State, acting by its officers, the Courts, nor through the Legislature, can destroy or impair liens which exist by virtue of contract.

We have thus far assumed, as contended by the State, that the appellees have no claim upon the corpus of the canal or the proceeds of its sale, in case a sale should be ordered, but that the only source from which they can look for repayment of the bonds of 1844 is from net revenue and tolls. This question has been during this term most ably and elaborately argued. But, inasmuch as we have come to the conclusion that there can be no sale at present, under existing circumstances, the question as to the distribution of the proceeds of such sale, ceases to have that commanding importance which would otherwise attach to it. We think, however, there cannot be any doubt as to the correctness of the views upon this question expressed by Judge. Alvey, former Chief Justice of this Court, while presiding in the Circuit Court for Washington County in the former trial of this case. We can add nothing to the force and fullness of the convincing arguments so cogently presented by him in that able opinion, and upon the views therein expressed we are content to rest our conclusion that the lien of the bondholders of 1844 is limited to the net revenue and tolls of the canal. Opinion of Alvey, C. J., Appendix 73 Md. 590-600.

According to the provisions of the decree the amount expended by the appellees in restoring the canal, to-wit: the sum of $430,764, with interest, is to be paid from the tolls and revenue, after paying certain other expenses as set forth in the decree. This decree stands affirmed by this Court, and is the law of this case, so far as applicable. If we had come to the conclusion to decree a sale upon the conditions asked by the State, and the source, namely, the revenue, from which this sum is decreed to be paid, had been thus destroyed, another question, not now before us, might be presented.

During the argument at this term in reference to the question of priority of liens, some reference was made to what are known as the labor claims “for labor and supplies furnished the company before the freshet of 1889 to keep the canal in repair and operation.” These claims, however, were not before the Circuit Court for Washington County at the time of the former appeal, and they are not before us now. Hence no definite determination can be made in regard to them.

To a contract such as that proposed to be made by the appellees with the Chesapeake and Ohio Transportation Company, and approved by the Court .below, we can see no valid objection. The rights of both parties, as well as those of the public in relation to the canal appear to be carefully guarded. By means of this contract the appellees will secure a guaranteed fixed income of not less than $100,000, and an increased number of boats, thus increasing facilities for transportation, and providing means for increasing the revenue and tolls. Without further reciting the various provisions of the contract, we agree with the learned Judge below that there is no good reason why a contract similar to the one proposed should not be authorized by the Court. It provides that “ nothing therein shall be taken to give the Transportation company any exclusive rights whatever on the said canal, or to prevent the appellees from making with any other person or corporation a contract or contracts similar to the one proposed in whole or in part, or that the use of electrical power, if it be found practicable, shall interfere with the use of animals or steam by individual boat owners.”

It will be seen that we are of opinion, first, that under the circumstances disclosed by the record the appellant is not now entitled to a decree for sale of the canal, its property and franchises, and that, therefore, the order of the Court below extending the time for operating the canal by the appellees under the order and control of that Court, should be affirmed ; second, that the bondholders of 1844 are entitled to payment out of and have a lien only on the net revenue and tolls ; third, that although the State has waived its lien on the canal and its revenue and tolls in favor of the labor claims, as they were not before the Circuit Court for Washington County, nor in any manner passed upon by the order appealed from, we cannot on this appeal dispose of them; and fourth, that the contract proposed to be made between the appellees and the Transportation company is proper and appropriate to enable the former to operate the canal advantageously.

(Decided June 17th, 1896).

And in conclusion we may say, as we substantially said in the opinion from which we have already quoted (State v. Brown, 73 Md. 503), that we have nothing to do with the alleged ulterior purposes of any of the parties to this controversy. We have endeavpred to dispose of the questions considered in accordance with what appear to us to be the clearest principles of law, equity and justice. But, if by reason of the conclusion we have reached, the appellant shall be prevented from enforcing its claims by a sale, and if it is thus prevented from destroying the canal as a waterway, it may be some satisfaction to remember that the view we have expressed is in strict accordance with' the solemn declaration the State has made, that the canal shall forever be taken and esteemed as a navigable highway. It has, however, been doubted whether the property in question could under any circumstances be sold for enough, so that, after the payment of all-claims which are conceded to have legal priority over that of the State, there would be anything left to go towards a reduction of its claim of many millions. But whether this be so or not, whether the sale would produce much or nothing towards the paying the State’s claim, her contract that the liens of the appellees created by the Act of 1844, should not be lessened, impaired, or interfered with by her under her mortgage, must be recognized and enforced, and her good faith impliedly, at least, pledged for the maintenance of the canal as a waterway by the declaration in the charter she granted that the canal should forever thereafter be esteemed and taken to be a navigable highway, must be maintained at any cost.

Order affirmed.

Bryan, Briscoe and Page, JJ., dissented, and Bryan, J., delivered the following opinion, in which Page, J., concurred :