Louisville & N. R. R. v. Schmidt

66 S.W. 629, 112 Ky. 717, 1902 Ky. LEXIS 210

Opinion

Opinion- of the court by

JUDGE HOBSON —

Affirming.

In the year 1879 an arrangement was made by which the Louisville, -Cincinnati & Lexington Railway Company took a lease for 30 years upon the Northern Division of the Cumberland & Ohio Railroad, which was then unfinished, and the latter company, executed a mortgage to secure $250,000 of bonds. The bonds were delivered by the Cumberland & Ohio Railroad Company to the Louisville, Cincinnati & Lexington Railway Company for sale, and the proceeds of the sale were to be used by it in the construction of the railroad. It was stipulated in the lease to the Louisville, Cincinnati & Lexington Railway Company that it should take all the property of the Cumberland & Ohio Company, and operate the road for 30 years; and, as additional security fob the bonds, it mortgaged to the trustee for th'e bondholders certain earnings on its own lines from business coming to it from the leased line. The lease from the Cumberland & Ohio, the mortgage made by it, and the mortgage made by the Louisville, Cincinnati & Lexington Company to the trustee for the bondholders, were all executed for the same purpose, and were delivered simultaneously. It has been held by this court several times that these three papers, executed cotemporaneously, not only for the benefit of the lessor and the lessee, but also for the benefit of the bondholders, must be read together, ■as one contract. Schmidt v. Railroad Co., 95 Ky., 290 (15 R., 785) (18 R., 65) 25 S. W., 494, 26 S. W., 547; Schmidtz v. Same 101 Ky., 441 (19 R., 666) 41 S. W., 1015; Railroad Co. v. Schmidt, 52 S. W., 835 (21 R., 556); Louisville & N. R. Co. v. Northern Division of Cumberland & O. R. Co., 21 R., 1126, 54 S. W., 5. The three papers are copied in full in the case of Schmidtz v. Railroad Co., 101 K., 441, supra, and need not, therefore, be set out here.

After the contract was made, the Louisville ’& Nashville Railroad Company bought out the Louisville, Cincinnati & Lexington Railroad Company, and so succeeded to all its rights under it.

By the fourth clause of the lease the read is to be constructed a first-class, single-track railway. See 101 Ky., 445 supra. By the sixth clause of the lease (101 Ky., 446), it is stipulated that the lessee will make to the lessor quarterly returns, giving full details of earnings and. operating expenses, including the expense of keeping the roadbed in order; and. the net profits arising therefrom shall be applied to the payment of interest, and the creation of a sinking fund for retiring the mortgage bonds. 101 Ky., 446, supra. By the tenth claiuse, at the termination of the lease the leased premises -were required to be restored to the lessor i'n good repair, unless prevented by unavoidable casualty, legal proceedings, or operation of law. See 101 Ky.,-448, supra. By previous clauses of the lease, the issue of the bonds, the making of the mortgages, and the purpose for which the money was tn be used, are specifically set out.

It has been held in the cases above referred to that, bondholders might maintain an action against the lessee to recover tihe net earnings under the lease which had not been paid over pursuant to its terms. This action was brought by them against appellant, the Louisville & Nashville Railroad Company, the successor of the original lessee, to recover the damages for the failure by it to turn over the property in good condition at the termination of the lease. Judgment was recovered in the trial court for $25,000. It is not insisted that the verdict is excessive, nor is tliere any complaint .of any of the instructions of the court, if the action can be maintained. It is insisted that a peremptory instruction should have been given the jury to find for the defendant on the ground that the tenant is not liable to the mortgagee for damages for noncompliance with his contract to repair contained in the lease between him and his landlord. The same point was made on demurrer to the peti lion, and numerous authorities are eited to 'sustain the rule relied on. Teal v. Walker, 111 U. S., 248, 4 Supt. Ct., 420, 28 L. Ed., 415; Price v. Smith, 2 N. J. Eq., 516; McKircher v. Hawley, 16 Johns., 289; Patton v. Robinson, 4 Ky., 285. The rule is undoubtedly sound. The only question to be decided is whether the case comes within it. The .three contracts referred to have been called by this court a “trip-, artite agreement.” The object was to raise money- to complete the road.' To do this, the bonds must be so secured as to be salable in the market. For the security of the bonds •th‘e tripartite contract plédged, in the first place, the net earnings of the road in the hands of the lessee; also the net earnings of the lessee’s own road from business coming over the mortgaged road. These, it was assumed; would meet the interest, and create a sinking fund for the payment of the principal, of the bonds. But as a further security to the bonds it was important that the corpus of the property which was leased for 80 years should be kept in repair, and that at the termination of tire lease it should be restored to the lessor in good repair. No stipulation of the tripartite contract was more essentially for the benefit of ■the bondholders than the clauses which provided for-the preservation of the mortgaged property. For, if the- corpus of the property was wrecked or ruined, the-security upon which the bonds were sold might be in a great measure destroyed. The rule in this State is that a party may sue •upon a contract made with another for his benefit. Garvin v. Mobley, Bush, 48; Allen v. Thomas, 3 Metc., 198, 77 Am. Dec., 169; Smith v. Smith, 5 Bush, 625; Paducah Lumber Co. v. Paducah Water Supply Co., 89 Ky., 340 (11 R., 738) 12 S. W., 554, 13 S. W., 249, 7 L. R. A., 77, 25 Am. St. Rep., 536. The bondholders were allowed to'.sue for the profits • which had been earned. and not paid, Over, on the ground that these covenants were for their benefit, and, being for their benefit, they should be allowed to enforce the contract by action. The covenant to repair stands on the same ground; the mortgage to the bondholders and the lease being all one transaction, and the lease being as much for their security as the mortgage. We do not think the lease is properly susceptible of the construction that the lessee was not to turn over the property in good repair in case the lease was terminated by the sale of the property under foreclosure proceedings. For the foreclosure proceedings were provided for in the tripartite agreement, and the sale of the property thereunder would be a termination of the lease, within the meaning of its provisions. The covenant being for the benefit of the bondholders, the fact that the Cumberland & Ohio Railroad Company fell in debt to the lessee does not exclude it from liability to them, for the injury to them is in the destruction of the security on the faith of which their money was borrowed. The insolvency 'of the mortgagor makes the preservation of the mortgaged property the more important to the mortgagee. If the contract to turn over the mortgaged property in good repair was purely between the lessor and lessee, then the action for the nonperformance of the contract would have to be brought in the name of the lessor, and a set-oh against him would be available. But where the mortgagee is a party to the contract between the lessor and lessee, and the stipulation is made for his benefit, and his money has been obtained upon the faith of it, a different rule must apply; for in such a case he is not a stranger to the contract, and the lessor and lessee can not, after his rights have been acquired, destroy his security without his consent.

It is shown for appellant that in January, 1895, it obtained a judgment against the Cumberland & Ohio Railroad Company by which it was, in effect, adjudged that it had not, up to that time, failed to keep the property in repair. This is no defense to the action, which is for failure to turn over the property in good repair at the termination of the lease in March, 1900. The question is not in what repair the property was in the year 1S9S, or in any previous year. The only question is, was it in proper repair when turned over in March, 1900? The action is not for failure to keep in repair during the running of the lease, but for failure to turn over the property, in repair at its termination.

Judgment affirmed.