Equitable Trust Co. of New York v. Denver & R. G. R.

250 F. 327, 162 C.C.A. 397, 1918 U.S. App. LEXIS 1889

• Court: Court of Appeals for the Second Circuit
• Decided: January 3, 1918
• Docket: No. 99
• Status: Published

Opinion

HOUGH, Circuit Judge

(after stating the facts as above). The summary prefixed hereto is thought tO' present, not only the facts and acts relevant to- the legal issues involved, but most of the surrounding circumstances showing motive (as the parent of intent) in so far as, and probably farther than we are permitted, in discovering intent, to go beyond the ordinary meaning of the words employed in contract making.

Plaintiff has a money decree in an amount representing on actuarial principles the present value at date of decision below, of the security whereof the trustee asserts its bondholders have been deprived, namely, the Denver Companies’² obligation to pay or effect payment of interest on a bond issue until such time as the same should be paid in full; and the reason why such decree should run against defendant, is said to be its total breach of contract B.

It outlines argument and will perhaps render our position clearer, to state appellant’s reasons as we understand them, for declining responsibility in respect of this matter. It is said:

(1) The obligation assumed by the Denver Companies under article 2, §§ 4 and 5, of contract B, was contingent only, i. e., dependent upon an ascertainment of insufficient earnings by Pacific Company; and no independent direct liability to the trustee can be found in that document.

(2) But if any liability of any kind can be found therein, it must be limited to such interest accruals, as arose before (a) the trustee declared the mortgage debt due for defaults, or before it began foreclosure; or before (b) the actual sale in foreclosure of the mortgaged estate; or before (c) the purchasers by their creature the present Pacific Company abrogated contract B.

(3) Unless contract B is construed as imposing a contingent liability only, dependent on acts long since rendered impossible by the conduct of plaintiff or its privies or cestuis que trustent, it is ultra vires.

(4) Under any view of defendant’s liability, the principles on which the amount decreed was liquidated, were erroneous.

[1] 1. It may be admitted that the form of a contingent, secondary, or dependent obligation affecting the Denver Companies, is carefully preserved in every section, separately considered, of the agreement in suit. But liability cannot depend on one phrase, nor to be limited to one section; what a party is bound to do is the resultant of all his promises as collected from the entire statement of purpose; it is the legal total of his assumptions. Further if mutual promises are made, the nature and extent of one party’s obligation may frequently be learned from, if not stated in terms of the other’s engagements.

Contract B declares that Pacific Company will devote to the payment of interest a proper part of its net income, if any it has. But it also presupposes a possible, indeed probable, deficiency in such income, and it recognizes possible refusal or neglect to pay out the same; whereupon arises a liability on the part of the Denver Companies to purchase notes of Pacific Company at par to an extent sufficient to produce (inter alia) the interest moneys. Pacific Company, to the extent of its ability, is to put its fiscal agent in funds to pay interest at appropriate dales; and Denver Companies are to pay to the trustee out oi the fund produced from the Pacific Company’s notes, enough to make up any deficiency in the moneys semiannually furnished for interest payments by Pacific Company; yet Denver Companies cannot wait to get notes before making up the full interest semiannually due, although such advance without notes is not to diminish their absolute right to enforce the delivery of the same, namely, of obligations which Pacific Company was to pay substantially when it was possible.

If one had nothing but the words of contract B to study, what conditions are suggested by that instrument under which the Denver Companies did not promise to furnish the interest moneys, as and when they fell due, and to the trustee? Rack of earnings, delay, refusal, open breach of its own covenants on the part of Pacific Company — ■ none of these things affected the promise of Denver Companies to pay out of a fund, perhaps nonexistent at date of promised payment, an amount measured or measurable only by the extent of Pacific Company’s inaction. The fund (so-called) Denver could then sue for, or otherwise obtain. It was no business of the trustee whether or when or how the fund derived from notes and measured by Pacific Company’s poverty or dishonesty was obtained; that lay between the other parties to the contract.

Thus when the stated obligations assumed by Denver Company are totaled, the only contingency or condition to liability for a deficiency of perchance 100 per cent, was the bald fact that Pacific Company did not hand over the money on lime to its fiscal agent. That the promised money is always described as coming out of a fund derived from notes is true; but when it is expressly provided that the payment is due and owing, whether the notes are existent or not, and no duty rests on the payee to get notes, the net or resultant obligation of the Denver Companies is contingent only in name- — on the face of the contract itself — and how completely this formal or paper contingency was under Denver control has been sufficiently indicated in the statement of facts. There was no contingency, there was nothing on which payment depended, that did not depend on Denver Companies’ will.

For these reasons, we regard contract B as plainly, though by a most circuitous and involved method, imposing a direct duty on Denver Companies to pay to or through the trustee, whatever part of each semiannual interest installment Pacific Company did not timely provide, and charge such payment or payments to a sort of note account they were to keep with said company. This' is our interpretation of the words of the contract, without any reference to the occurrences preceding this suit.

[2] 2. The contention that, whatever may have been the Denver Companies’ obligations under contract B, they were terminated by the act of plaintiff, of of some person or entity for whose action plaintiff is responsible, or must suffer, is another matter requiring a view of the whole contractual scheme, father than single or detached paragraphs. For if each act or event said to terminate liability is singly considered, express authority for it’ is discoverable in the written agreements. Thus the makers of contract B stated their cognizance of and satisfaction with the mortgage^ and every step of the foreclosure was in accord with that instrument; so was prematurity of debt on default; while abrogation, cancellation, or repudiation, of the contract by some party or parties, was contemplated, and provided against by the clause that no one could in any way get rid of article 2, §■§ 4 and 5. As for the effect of judicial sale, since the sale itself was a necessary part of foreclosure, was at a price fixed after notice to defendant and with its full knowledge, and is not suggested as being tainted with fraud, we fail to see how the disparity between cost and selling price affects this litigation in any way. It is not, we apprehend, the amount realized by sale, but the fact that there was a sale, which is relied on to terminate liability, though it may be noted that the market prices of new Pacific bonds seem to justify the upset price, if the matter be of any importance.

But upon the whole scheme of financial assistance, as elaborated through contracts and mortgage, it is confidently asserted that since nowhere is it definitely and clearly said that Denver Companies were to be forever tied to a financial corpse, since they nowhere agreed to do more than help a fellow corporation by loaning it money for certain purposes — even if they also promised to see to the application of said money to those purposes — such an obligation and liability must terminate when the person to be aided is to all intents and purposes dead, and the conditions assumed a.s the basis of and reasons for the obligor’s liability no longer exist.

The contention at once suggests one retort, or reply, which will be considered when treating of damages, namely, was the pecuniary death of Pacific Company caused by any of the acts complained of, or was defendant itself the proximate cause of decease? But still considering only the language of contract, we are of opinion that, amazing as is the machinery of words employed, it was within the expressed contemplation of the parties that Pacific Company might in any way, and for any purpose, neglect or refuse to pay its interest; that default, foreclosure, and sale might ensue, and yet Denver Companies agreed to keep on paying interest, and hopefully looking to Pacific Company, by suit perhaps, to furnish the notes out of which the interest was theoretically to flow. Nothing better illustrates this than the singular provision that the obligations of the. contract are to follow lines of rail, like covenants running with land. But this legal curiosity did not affect the trustee, to whom was promised money; the other parties might arrange among themselves as to how it was to be obtained and in what way charged or accounted for.

We therefore conclude that none of the acts or facts in question operated to terminate or abrogate sections 4 and 5 of article 2, nor (in and of themselves) to release defendant from whatever measure of liability contract B imposes, for each was clearly within the contemplation of parties, as discovered by or from words employed, and so was their aggregate effect — which is rvhat defendant complains of.

[3] 3. The phrase “ultra vires” as used in this case rather suggests , the nature of a defense, than describes it with technical accuracy.

Since the Old Denver did not “connect” with the Pacific, there was no statutory power to guarantee the latter’s bonds, either as to principal or interest; but the Western did so connect, and the present defendant is as much and as fully the successor in interest and obligation of the Western as of the Old Denver; the covenants of contract B are several as well as joint on the part of the two corporations now merged or united in this defendant. Therefore it would be of no avail to urge that the contract is an illegal guarantee, for the New Denver as the inheritor of the Western would be liable, and does physically connect with the Pacific by virtue of the Western’s connection.

Consequently it is urged that every endeavor was made by the contracting parties to avoid anything that in law could be called a guaranty. We think this quite true, and the reason for it was that the Old Denver which was the strong partner in the enterprise could not guarantee. Therefore contract B is (and here there is agreement in argument) a plain effort to create some kind of obligation equally effective against both Denver Companies, and resting for statutory validity on the authority found in both Colorado and Utah, to purchase and hold the obligations of a railroad situated as was the Pacific. Thus a question of statutory construction is reached, and it is maintained that the acts quoted above (1) do not authorize an agreement compelling the purchase of obligations for a period of nearly 30 years, but (2) if so extreme a power can he found, it can only be validated by limiting such promise to paying for obligations given by a concern capable of making earnings, i. e., a going railway, not a mere corporate name. Thus the contention is that any construction of contract B producing a liability greater than the defendant is substantially ready to concede results in a statutory violation.

We have already found in the language of the parties plain and definite statements of purpose to do the very things now said to be against the statute properly construed, and we think it quite as plain that such purpose was to give a security that was just as good as a guaranty. The result aimed at is shown by numerous minutes of directors’ and shareholders’ meetings, and is also proven by the direct guaranty indorsed by the New Denver on all bonds offered as soon as statutory authority was conferred. That act perfectly expressed original desire.

Thus we are brought to what we regard as the crux of this discussion: Did a power to buy obligations justify or authorize a covenant to buy the same, at recurrent intervals stretching over many years, irrespective of their value, or of conditions unthought of when contract made, and productive of radical change of relation between the contracting parties?

While the point is barren of direct authority in the states of the statutes, yet we consider it solved by some general principles of corporate action, as applied to the admitted facts herein.

A corporation may within the boundaries of legal action make any contract for its corporate benefit upon proper consideration; its agreement may be conditional as well as direct, and the lawful end to be obtained is often if not .usually the test of corporate power. Ellerman v. Chicago, etc., Co., 49 N. J. Eq. at page 248, 23 Atl. 287; Railway Co. v. Keokuk Bridge Co., 131 U. S. at page 385, 9 Sup. Ct. 770; 33 D. Ed. 157; Tod v. Kentucky, etc., Co. (C. C.) 57 Fed. at page 58.

It was apparently _an advantageous thing for the Denver to create and use Pacific Company. It was plainly within statutory corporate authority to buy the notes of the latter corporation. If one note could have been bought, so could thousands, and, -within the strictest letter of the statute, Denver could at one time have bought enough notes from Pacific to provide for mortgage interest during the mortgage term, after complying with certain California requirements as to relation between obligations and stock. The illustration is a practical absurdity, but it serves to show that the objection advanced goes only to the quantum of the liability, and on this the statute is silent. It cán malee no difference as to quantum that the amount is spread out over a generation instead of being expended at once. The arrangement made was but a detail of business.

The argument that purchasing anything reasonably called obligations implies a solvent or going obligor is but a variant of the first objection. If an agreement to purchase in futuro is no more than the splitting up of a present power to purchase, the question cannot be of the advantage to the purchaser when the time of buying arrives, but of the sufficiency and legality of the consideration when agreement made. An agreement valid when made is unaffected by the subsequent insolvency of one party, and that there was apparent advantage and legal “value” in the consideration of contract B needs no more than mention.

It follows that we do not regard the liability imposed on defendant as forbidden by the statute.

[4] 4. By the foregoing discussion, it is shown that we think contract B an obligation to buy at par enough Pacific notes to pay interest on a certain debt, until that debt should be discharged; also-, an obligation within statutory authority, made on valuable consideration, and enforceable by the trustee under the pledge of the mortgage, but wholly independent of said mortgage, and unaffected by any act done pursuant to the terms of mortgage.

This action is to recover damages for breach of such a contract, and in order to assess the same it is as always necessary to inquire as to the nature of the breach, by whom committed, what if anything has been clone to minimize damages, and what amount will compensate the injured party; compensation being the invariable object of assessment, except in respect of punitive recoveries.

It is to us plain that defendant committed breach of contract by (pursuant to threat of September, 1914) refusing “to continue financial support” of Pacific Company on March 1, 1915. If thereafter that company financially died, defendant inflicted the blow proximately causing decease, however moribund Pacific Company may then have been.

The reasons for such action are illuminating as to the intended extent of breach. By 1915 Pacific owed Denver oyer $50,000,000 practically unsecured, and was doing a business poor and apparently getting worse under the rivalry of the Panama Canal. Denver Company could be no worse off by meeting its fate at once, than by being bled for decades. Therefore it refused longer to observe its contract, and invited .suit to ascertain the nature of its agreement and extent of liability.

It is now held that its agreement was to pay all the semiannual mortgage interest (if necessary) until some one paid the principal; that, while defendant did not and does not deny some liability, it denied that liability, and denied it utterly; therefore its breach was total. It is true that by no form of words uttered or sent to plaintiff did defendant say, “We will never pay any more interest on Pacific bonds,” but that idea was conveyed to all inquirers and published widely. There was an admitted refusal to pay on March 1, 1915. We think that the circumstances of that refusal warrant a finding of refusal to pay anything more, and Roehm v. Horst, 178 U. S. 1, 20 Sup. Ct. 780, 44 D. Ed. 953, is fully applicable.

The obligation of contract B being wholly independent of the mortgage, the total breach thereof could only be compensated by the value of the repudiated security, less any solatium received from other sources. The present value of an agreement to secure the payment of 5 per cent, a year on a given sum for nearly 30 years is greater than the sum itself, but, since the obligation was terminable by paying the debt (the Pacific bonds could have been called long before maturity), the principal debt was the limit of liability, and that was diminished by what plaintiff’s bondholders got in foreclosure. The damages below were assessed substantially on this principle, and as we find correctly on reason and authority. Central Trust Co. v. Chicago, etc., Co., 240 U. S. 581, 36 Sup. Ct. 412, 60 L. Ed. 811, E. R. A. 1917B, 580; In re Fitz George, 1 K. B. (1905) 462; Marbury v. Kentucky, etc., Co., 62 Fed. 335, 10 C. C. A. 393; Penna. Steel Co. v. New York, etc., Co., 198 Fed. 721, 117 C. C. A. 503; Ches. & Ohio R. R. v. Kelly, 241 U. S. 485, 36 Sup. Ct. 630, 60 L. Ed. 1117, L. R. A. 1917F, 367 — which cases cover admeasurement of recovery, without necessary reference to presence or nature of “breach.”

[5] Believing that a liability on the part of defendant and to plaintiff was established in the amount found by the lower court, we should affirm the decree as it stands were it not for a jurisdictional question too apparent to avoid.

The court below had jurisdiction of the subject-matter, the defendant waived its right to be sued in its own district (if suda right ever existed), and plaintiff’s pleading purported to set forth a cause of action cognizable in equity; that is, it asserted a lien upon the defendant’s property, or a priority amounting to a lien over certain obligations created by defendant.

. No such lien or priority was found by the trial court because none was proven, and it is plain to us from the record that none existed or exists. Assuming that the case as pleaded was one in equity, the case as proven was no more than an action at law for damages occasioned by the total breach of a contract summarily but correctly described by plaintiff as one to maintain Pacific Company as a going concern — an active railway capable of earning if not profitable. The decree is in effect a judgment at law, and the case should have been transferred to the law side of the court under the Act of March 3, 1915, c. 90, 38 Stat. 956 (Comp. St. 1916, §§ 1251a-1251c). Nor was this suit in any way “dependent” in the sense of jurisdiction arising only out of some other jurisdictional power.

This question of jurisdiction was never raised, and it is evident to us that by consent and at the desire of both plaintiff and defendant an action at law was tried as a suit in equity, for what reason we know not. This record is that of a law action tried by consent without a jury, except for the paper required by Rev. Stat. §§ 649 and 700, Jud. Code, ,§ 291 (Comp. St. 1916, §§ 1012,. 1668, 1268), namely a consent to waive a jury. As this defect is not jurisdictional and is not assigned for error or otherwise complained of, we disregard it.

This action was brought into this court by an appeal. As it was really from a judgment at law, a-writ of error would have been proper, but under section 4 of the Act of September 6, 1916 (39 Stat. 726, 448, Comp. St. 1916, § 1649a) we may, and indeed must, disregard this procedural oversight. The power of transferring a case to the proper side of the court exists in our opinion at any stage of the litigation, and we may give the direction as well as the District Court.

This matter, which we .consider of our own motion, is not merely formal, but substantial, though, as just pointed out, it does not go to the root of the case under the statutes cited.³ The error was this: Plaintiff brought in equity that which was not an equity action, and thereby obtained injunctive relief, which when considered in the light of the case actually made amounted to a use of the writ of injunction as the substantial equivalent of a warrant of attachment. For this there was no warrant, in that it gave rise to an appearance of lien or priority, not justified by the evidence.' Plaintiff has a money judgment for breach of contract and thatj is all. It is entitled to no further or greater priority than any other owner of a judgment on contract of the date of the entry of the so-called decree. This fact may become important, if it be true, as alleged in plaintiff’s pleading, that the liability asserted against the defendant and now established by the judgment of the courts of this circuit is so great as to render the New Denver Company utterly insolvent.

Apparently such asserted, if not hoped for, insolvency (hoped for in the sense of attempting to establish the liability), was one of the reasons for plaintiff’s attempt to draw a bill in equity. That attempt has failed, and the failure must be definitely marked.

it is therefore ordered that this cause be remanded, with directions to the district court to transfer the same to the law side of the court, and as so transferred, that the judgment entered herein on June 14, 19IT, be affirmed without costs. And it is further ordered that the several injunctions issued in the course of this litigation shall be iorth-v ith vacated and set aside.

2 This phrase is used to designate the Old Denver and Western Companies as joint and several parties to contract B, and the New Denver as their successor in obligation.

3 Cf. Jackson v. Strong (N. Y. Ct. App.) 118 N. E. 512.