Georgetown Water Co. v. Fidelity Trust & Safety Vault Co.

78 S.W. 113, 117 Ky. 325, 1904 Ky. LEXIS 184

• Court: Court of Appeals of Kentucky
• Decided: January 15, 1904
• Status: Published

Opinion

Opinion op the court by

JUDGE HOBSON

Reversing.

The Georgetown Water Company was incorporated June 21, 1889. Tbe incorporators were R. A. Mitchell, John Nichols, and E. H. Patterson. The stock of the company was fixed at $100,000, and was issued to the incorporators; they transferring to the corporation a contract madé by them with the city of Georgetown in payment of the stock. They put into the company, each $4,000. They bought ground, erected a plant, and laid mains. They also bought electrical machinery for an incandescent light system. They borrowed from a bank at Pineville $10,000. They owed the Central Thomson-Houston Company of Cincinnati for machinery about $8,000. In January, 1890, they organized the Georgetown Electric Light Company, but no business appears to have been done in the name of this company; everything being transacted in the name of the Georgetown Water Company. On April 15, 1890, the water company executed a mortgage to the Fidelity Trust & Safety Yault Company, as trustee for the bond holders, to secure seventy bonds, of $500 each, with interest at six per cent., having coupons attached, due in twenty years. The mortgage was upon all the property of the company, real and personal, including privileges and franchises then owned or thereafter to be acquired by it; “the said property (as recited in the mortgage) consisting in part of the waterworks plant, pipes, and mains of said first party in the county of Scott and town of Georgetown and its electric plant erected and to be erected with all appliances, machinery, &c., together with all other property of every kind as hereinbefore stated.” The mortgage also provided that, when any of the machinery became worn out, the first party should have the right to replace it with new machinery of equal or better quality, and might then dispose of the old machinery; the clause concluding with these words t “And the lien of this mortgage shall attach to such new machinery or other property that may be acquired and added by said party of the first part.” In July, 1890, they bought out the Georgetown Gas Company, and consolidated the three companies in the name of the Georgetown Water Company. In payment of the machinery bought of the Central Thomson-Houston Company, they delivered to it, according to contract, ten of the mortgage bonds referred to, leaving a balance due it of about $3,000.

•They ran the electric plant in the summer, and the gas plant in the winter; and it would seem from the evidence that the profit from the operation of the plants, including the waterworks, was small. On February 2, 1891, the Central Thomson-Houston Company filed an ordinary action in the Montgomery common pleas court against the Georgetown Water Company to recover the balance of its debt. The case was tried at the September term, 1891, of the court, and the plaintiff recovered judgment for the amount sued for. On November 6, 1891 the Georgetown Water Company borrowed from the Fidelity Trust & Safety Vault Company $10,000, executing therefor its note, due in six months with Nichols, Mitchell, and Patterson as sureties and also securing the note by pledging with the company fifty-four of the mortgage bonds referred to. This $10,000 was used to pay the debt to the Pineville bank, above referred to. They had still in their hands six of th'e seventy mortgage bonds having delivered ten to the Central Thomson-Houston Company, and fifty four to the Fidelity Trust & Safety Vault Company. Of these six bonds-, Mitchell took two, and Nichols four. Nichols turned over the four he had to John L. Cassell, who was his security, and to whom he assigned all his interest in the company. On March 8, 1892, the Central Thomson-Houston Company, having had execution issued on its judgment, and returned “No- property found,” filed an equity action in the Montgomery common pleas court, seeking to subject the property of the water company to fts debt, and to have it placed in the bands of a receiver. In •that case a judgment was entered' directing a sale of the property of the water company, subject to the mortgage above referred to. The sale was had, and, appellants H. P. Montgomery and others were the purchasers at the price of $3,525. The sale was reported to the court and confirmed. A writ of possession was issued in favor of the purchasers, and they were placed in possession of the property. After all this, the water company prosecuted an appeal to this court from the judgment in the ordinary action in favor of the Central •Thomson-Houston Company, and also from the' judgment in their favor in the equity action. The judgment in the ordinary action was reversed for an error in the instructions. Georgetown Water Company v. Central Thomson-Houston Company, 17 R., 1270, 34 S. W., 435, 35 S. W., 636. The case was returned to the circuit court, where it was tried again, the plaintiff recovering as before; and this judgment, on a second appeal, was affirmed by this court. Georgetown Water Company v. Central Thomson-Houston Company, 20 R., 1699, 49 S. W., 1113.

On the original hearing of the equity case the judgment of sale and the confirmation of the sale were both reversed ; but on petition for rehearing, the court’s attention being called to the condition of the. pleadings, the opinion was modified, and it was held that the sale must stand, except as to the trust company, and that, as to it, it should be permitted 'to stand unless the trust company showed that its security had been endangered. The court said: “Evidently the plant brought what it was worth. The purchasers are not .complaining, the water company can not do so, and, in our opinion, the trust company has not shown that its interests are at all prejudiced by the order confirming the sale- The order of confirmation, therefore, will not be disturbed here, and the former opinion is modified to that extent. While this modification is made in the original opinion, the judgment must stand reversed as to the Fidelity-Trust Company, so that the rights of! the bondholders it may represent may not be affected or prejudiced by the sale to the appellees, and any lien it may have in its own right, or for those it represents, on the property of the water comapny, its rights and franchises., will be retained, as if no such judgment had been rendered. On the return of the case, the judgment ■in so far as it affects the Fidelity Trust Company, will be set aside, with the right of the trust company to show, if it can, by appropriate pleadings and proof, that its security has been endangered by reason of the sale to appellees; and, if ■so, the sale will be set aside, and not otherwise.” Georgetown Water Co. v. Central Thomson-Houston Co., 17 R., 1270, 35 S. W., 637.

No steps appear to have been taken by the trust company in the circuit court to- show that its security was endangered, but at the next term of this court a motion- was made that the court withdraw the modified opinion. ■ The motion was overruled. Georgetown Water Co. v. Central Thomson-Houston Co., 18 R., 711, 38 S. W., 137. A year or more ■after this, on January 19, 1898, the Fidelity Trust & Safety Yault Company, as trustee for the bondholders, instituted an equity action in the Scott circuit court, making all parties in interest defendants; and seeking the foreclosure of the mortgage. Montgomery and his associates, who had organized themselves into the Georgetown Water Supply Company, were in possession of the property, and had been since they were put in possession of it under their purchase. The town of Georgetown had nearly doubled in size since the year 1889. The incandescent light system, which was originally put in, was suitable only for lighting residences ■and- the like. To light the streets of the town, they had ■put in an arc light system in addition to the incandescent ■system. There were only about fifty poles up when they took charge. They bought and put up something over 300 more. They extended the lines until now they have about fifteen miles of electric, light line. They also put in additional water, mains, as demanded by the exigencies of the public necessities, in order to preserve the franchises of the company. The machinery of the arc system was separate from the machinery of the incandescent light system, and could be moved without injury to the freehold. They put it in upon the idea that they would have the right to remove it when they were required to give up the-property.

After this suit was brought, the court allowed them to remove all. the machinery from the lot where it stood' to the ■lot of the street railway company, upon their giving bond that they would return it to the original lot when required by the court. After they removed the machinery to the premises of the street railway company, they added other machinery, costing them $4,300.- When the court required ■the machinery which had been removed to be returned to the lot of the Georgetown Water Company, he allowed them to retain the additions which they had purchased and had on the lot of the street railway company, amounting to $4,300, but refused to allow them to remove the arc light system or the other additions which they had made to the plant before its removal from the original lot, and ordered the whole property sold; giving them no compensation for their betterments, which had cost them something over $12,000. He also held that they were responsible to the bondholders for the rent of the property while in their possession from the time that a motion to put the property in the hands of a receiver had been made and overruled in that action at a preceding term.

After the note for $10,000 to the Fidelity Trust & Safety Vault Company fell due, Mitchell, as surety, was forced to ■pay it. The notes and bonds pledged to secure it were then turned over to him. He turned over the bonds to> E. S. Jameson, his brother-in-law, who was his surety, who held them for a while, and finally sent them to Mitchell, who pledged them to various parties to secure loans made in the main to his mother, Ann E. Mitchell. R. A. Mitchell sent one of the bonds to E. H. Patterson, in Philadelphia, to exhibit it to some persons there to whom they were trying to make a sale of the property. Patterson kept this bond, and hypothecated it to D. B. Logan to secure a debt of his own. The money which Patterson put into the concern belonged to his wife, and he transferred to her his interest in the corporation. The court, on final hearing, held that the mortgage included property acquired after it was executed, and ■not owned by the Georgetown Water Company when the •mo|tgage was given; that H. P. Montgomery and his associates, having purchased subject to the mortgage, simplv stood in the shoes of the Georgetown Water Company, and could not question the lien of the mortgaged on the after-acquired property; that $27,000 had been put into the plant, made up of $12,000 contributed by Nichols, Patterson and Mitchell, $10,000 borrowed from the trust company, and $5,000 of the account of the Central Thomson-Houston Company for the machinery furnished, which had been paid in the ten bonds, of $500 each, accepted by that company at par; that Nichols transferred to Cassell and that Patterson transferred! to Logan, the bonds referred to, in due course of trade; and that Cassell and Logan took them free of prior equities. He adjudged the property to be sold, and after the payment of certain prior debts, not here in dispute, five-twenty-sevenths of the proceeds should be paid to the Georgetown Water Supply Company, the assignee of the Central Thomson-Houston Company, as the part of the proceeds coming on the five bonds held by it; that twenty-two-twenty-sevenths' of the proceeds should constitute a fund for the payment of the other bonds; that Cassell and Logan should be paid the part of the proceeds represented by their bonds; that, out of the proceeds of the fifty-four bonds held by the trust company as collateral, Mitchell should be paid the $10,000 he had paid the trust company, with its interest; and that the remainder of the proceeds of these bond belonged equally to Mitchell, Patterson, and Nichols, or their assigns. The water supply company offered to surrender the property to the court when the judgment was entered.The court refused to permit this, and ordered it to retain possession of the plant, and operate it upon the same terms ■as if the company had been appointed a -receiver, until delivered to the purchasers, except the company should receive no compensation for its services as receiver, and keep a full and accurate account of the receipts and expenditures in the operation of the plant, and report them to the court at the next term. From this judgment all the parties have appealed. The property was sold under the judgment, and brought $30,000. The sale was confirmed. The courts ordered Montgomery and his associates to pay their bond (executed upon their purchase of the property, subject to the [mortgage above referred to; this bond having never been ■collected.

It was held by this court in the modified opinion that the order of confirmation of the sale to Montgomery and his associates would not be disturbed here, and that on the return of the case it might be set aside if the trust company showed, by appropriate pleadings and proof, that its security had been ■endangered, but that otherwise the sale should stand. The sale was therefore left in effect by this court. The trust company did not show by pleading or proof that its security had been endangered, and no order was made setting aside the sale. The court therefore properly ordered the purchasers, Montgomery and his associates, to pay their sale bond.

Their sale standing, and they being required to pay the purchase money, they held the property as purchasers, and are not liable to the Georgetown Water Company, or the bondholders, or the trustee for them, for the rents on the prope rty. The mortgagee is only entitled to the rents from the time that he has a receiver appointed to save them for him. When the motion was made for a receiver, and was ■overruled, the remedy of the mortgagee was to appeal. He could not acquiesce in the decision of the court refusing to ■appoint a receiver, and then hold the defendant accountable for the rents. If the Georgetown Water Company had remained in possession, it would have been entitled to the rents up to the confirmation of the sale; and Montgomery and his associates, succeeding to all the rights of the water company, are entitled to the rents of the property while in their possession. This is what they obtained by their purchase. The court had no authority to order them to operate the plant as receiver without compensation. The court might have appointed a receiver for the property if he had seen fit to do so, but he could not require thei defendant to act as receiver, and assume the responsibilities of the position over its objection.

The Georgetown Water Company was incorporated by articles filed in the county court under the General Statutes. It had no power by law to issue coupon bonds which should pass by delivery. The paper issued by it was not placed on the footing of a bill of exchange, as provided by the statute. Although the bonds had coupons attached to them, and were payable to bearer, they were, in legal effect, only promissory notes, and each assignee took them subject to prior equitites. Richie v. Cralle, 108 Ky., 483, 20 R., 160, 56 S. W., 963; Fidelity Trust & Safety Vault Co. v Carr (23 R., 2409) 66 S. W., 990, and cases cited. None of the bondholders, therefore, are protected by the fact that they took the bonds in the due course of business, and without notice. We find no evidence in the record that the corporation ever disposed of the four bonds which Nichols took possession of and delivered to Cassell, or the two which Mitchell took possession of and disposed of as his own.

These bonds were the property of the corporation, and, not having been disposed of by it, remain its- property, and can not be enforced in this action as a lien on its plant. The ten bonds delivered to the Thomson-Houston Company, and the fifty-four bonds delivered to the trust company as collateral to the note of $10,000, are the only bonds which constitute a lien on the property. After the prior claims as adjudged by the circuit court are paid, ten-sixlty-fourths of the fund remaining should be applied to pay the ten bonds sold to the Central Thomson-Houston Company, and fifty-four-sixty-fourths of it to pay the fifty-four bonds pledged to the trust company to secure ^ its note. The trust company had the right to look to the entire proceeds of these bonds ■for the payment of its debt, and, when Mitchell paid the debt as surety, he succeeded to all the rights of the trust company, ■and had the right to look to the entire proceeds of the ■fifty-four bonds for the repayment of his money and inter■est. The remainder of the proceeds of these fifty-four bonds, after the payment of Mitchell’s debt, with interest, is, as between it and Mitchell, the property of the water company, for Mitchell has no claim on them except the lien for the repayment of his money, with interest. If the ten bonds ■held by the Central Thomson-Houston Company are not paid in full by ten-sixty-fourths of the net proceeds of the sale above directed to be paid upon them, the remainder of •the principal and interest of these bonds should be paid in full out of the funds set apart to the water company after the payment of Mitchell’s debt out of the proceeds of the fifty-four bonds, as above indicated. For the water company is the obligor in the bonds held by the Central Thomson-Houston Company, and must discharge its obligation out of the funds coming to it before it can be allowed to withdraw ■any part of the proceeds of the sale. The substance of the situation, as between the Central Thomson-Houston Company •and the water company, is that the former company holds ■the promise of the latter to pay it $5,000, secured by a lien on the property in contest, and, as between the two, the water company’s right to the proceeds of the sale is subordinate to the lien of the Central Thomson-Houston Company.

When all the bonds are thus paid off, so far as they are a valid lien on the property, the remainder of the fund, if nothing else appeared, would be the property of the water •company; and the question arises whether this fund thus remaining should all be adjudged to the water company, or ■whether Montgomery and' his associates should be adjudged ¡compensation out of it to the extent of its enchancement by reason of the betterments placed by Montgomery and his associates on the property. The proof leaves no doubt that Montgomery and¡ his associates pot only kept the plant in repair, replacing what was worn out, but put in- the arc light system, extended -the mains and lines; advancing a large sum of money for this purpose, and putting all the net earnings of the company into it; .thus causing it to bring, when finally sold, $30,000, when it was, at the time they got it, under the evidence, worth very much less. The rule is, as between vendor and vendee or mortgagor and mortgagee, that chattels attached to the realty by the vendee or mortgagor are not subject to the Hen, when they are not intended as a permanent accession to the freehold, and may be removed without substantial impairment of the property.

In Clore v. Lambert, 78 Ky., 224, a steam engine and planing mill, attached to a building by bolts and screws by the vendee, were allowed to be removed after a suit was brought to enforce the vendor’s lien. Under the rule thus declared, the/ arc light system and other machinery bought by Montgomery and his, associates, which might -be removed from the building without injury to it, might, as between vendor and vendee, have been detached and taken away. But it is insisted that the mortgage in this case provides that it should cover after-acquired property placed on the land by the water company, and that, as Montgomery and his associates bought subject to', the mortgage, they stand in the shoes of the water company, and can not be heard to say that after-acquired property which they bought and placed on the land is not covered by the mortgage. ¡Where negotiable bonds have been issued, secured by a mortgage of a railway company on property then on hand or thereafter to be acquired, the mortgage is upheld, in favor of the bondholders, as to after acquired property; otherwise long-time bonds could: not be issued, and money raised upon them. Westinghouse Electric, etc., Co. v. Citizens’ St. R. Co., (24 R., 334) 68 S. W., 463; Porter v. Steel Co., 122 U. S., 283, 7 Sup. Ct., 1206, 30 L. Ed., 1210; Jones on Mortgages, section 436. But where no bondholder is interested, and the controversy is between the bona fide occupants, of the property and the mortgagor after the mortgage debt has been satisfied, a different question is presented. As between them, the occupants should have been allowed to remove from the premises all such fixtures as were removable as between vendor and vendee. To illustrate: If it had turned out in this action that none of the bonds were enforceable against the water company, and that there was no lien on the property under the mortgage, it would hardly be maintained, as between Montgomery and his associates, on the one hand, and the water company on the other, that they would not have the right to remove from the property such fixtures as are removable between vendor and vendee, for the stipulation in the mortgage as to after acquired property is for protection of the mortgagee, and affords no reason for putting into the treasury of the water company the property of the purchasers who bought subject to the mortgage, and placed the chattels on the property on the idea that they might remove them when they were required to surrender possession. If none of the bonds had been sold by the water company, the relation of mortgagor and mortgagee would, in effect, exist between the water company and the parties who bought subject to the mortgage, and held possession under their purchase. The water company would then be entitled to the benefit of the mortgage to the extent of the amount named therein, but this would not enable it to say that the stipulation of the mortgage as to after-acquired property placed on the land by it, made for the benefit of the bondholders, should inure to its benefit as against the purchasers who took subject to the mortgage, and give it a lien on their after-acquired property, which it would not otherwise have. If the water company had paid the note to the trust company, and had taken up the five bonds held by the Central Thomson-Houston Company, and had then filed this suit itself to have the mortgage foreclosed, and the amount of the mortgage debt paid to it, it could hardly maintain that it was entitled to have a foreclosure on anything more than its property, or that Montgomery and his associates could not remove anything in that event from the premises which would be removable between mortgagor and mortgagee. Yet this is, in substance, the case we have as to the surplus left after the payment of the bonds, as the bonds were not negotiable, and are not enforceable against the water company further than as indicated. 2 Jones on Mortgages, section 1491.

We therefore conclude that, out of the surplus left after the payment of the bonds 'which would .otherwise be adjudged to the water company, compensation should be made to Montgomery and his associates to the extent that the price which the property brought at the sale was enhanced by the betterments placed thereon by Montgomery and his as sociates, which were removable by them under the rule laid down in Clore v. Lambert. This will include not only the machinery in the power house, but the additional water mains put in by them and the additional electric lines put up by them, for these could be disconnected from the old mains and lines without any impairment of their value. Nothing will be allowed for repairs on the old plant, or the old mains or lines, or for anything which was put in to supply the place of what was originally mortgaged, but worn out. The amount of compensation to be allowed them is not the cost of the property which they added, but the extent to which these additions enchanced the price which the property brought at the sale, as near as it can be ascertained by proof of what the whole property consisted of, and its value, and proof of the value of the additions above referred to, and such other evidence as may be had. On the return of the case to the circuit court, it will be referred to a commissioner to report in detail what additions were made by Montgomery and his associates, for which they should be allowed as above explained, giving the value of each, the value of the other property covered by the mortgage, and to ascertain, as nearly as can be done, how much of the $30,000 for which the property sold represents the additions made by Montgomery and his associates, for which they should be compensated, as above explained.. After Montgomery and his associates, are paid, the rest of. the fund will be adjudged to Mitchell, Patterson, and Cassell, or their assigns; Mitchell being first paid $296.95, as adjudged by the circuit court. The assignment of the bond to D. B. Logan should be treated as an assignment to Logan ofi $250, with interest from April 1, 1897, out of Patterson’s share of the proceeds. The assignments of the other bonds by R. A. Mitchell or his assignees should be treated as assignments of the proceeds of the bonds as herein adjudged, which should be paid accordingly. Patterson took no title to the bond which Mitchell sent to him simply to show to others, and Patterson’s assignment of this bond to Logan should be treated simply as a transfer by Patterson to Logan of enough of Ms share in the surplus to pay Logan’s debt of $250. The court properly held that this surplus should be equally divided between Patterson, Mitchell, and Nichols, or their assigns.

Judgment reversed, cause remanded for further proceedings consistent herewith.

Chief Justice Burnam and Judge O’Rear, dissent from so much of the opinion as gives Montgomery and his associates compensation for their betterments.