Diggs v. Fidelity & Deposit Co.

Schmucker, J., delivered the opinion of the Court. The proceeding before us is an ex parte one instituted in Circuit Court Eo. 2 of Baltimore City by the Fidelity and Deposit Company of Maryland (hereinafter called the Fidelity Company) as trustee under a mortgage deed of trust made to it by the Consolidated Gas Company of Baltimore City (hereinafter called the Gas Company). The purpose of the proceeding is to procure the execution of the trusts of the mortgage under the direction and supervision of the Court. There is no question that in cases of express trusts the trustee, if in doubt, may, for his protection, apply to a Court of equity for a construction of the instrument creating the trusts and for their execution under the Court’s direction and supervision.

Cases of that class form an exception to the general rule that Courts of equity will not declare future rights but will leave them to be determined when they come into possesson. As was said in Cross v. Del Valle, 67 U. S. 1 : “In such cases, from necessity and in order to protect the trustee, the Courts are compelled to settle questions of the validity and effect of contingent, limitations in a will (which was the form of instrument creating the trusts there involved) even to persons not in esse in order to make a final decree and give proper instructions in relation to the execution of the trusts, Bowers v. Smith, 10 Paige, 200 . It is this necessity alone which compels a Court to make such cases an exception to the general rule.” Even in such oases, however, where the ⁶⁴ persons whose rights are to be affected' by the Court’s action are in ess.e and within the reach of its process the fundamental principles of equity jurisdiction require that they must be made parties to the suit in person or by representation in order to bind them by the decrees or orders to be passed therein.' Keeping these principles in view we will proceed to the consideration of the issues presented by the present appeal, which is not from the decree assuming jurisdiction over the trust estate but from an order subsequently passed directing the trustee to certify and deliver certain bonds in performance of its duties under the mortgage creating the trusts. The material allegations, of the trustee’s petition on which the Court took jurisdiction in the case, may be briefly stated as follows: The Gas Company was created on May 5th, 1888, by the consolidation, under the provisions of the general corporation laws of this State, of three pre-existing corporations which may be designated as having been the “Baltimore,” the “Chesapeake” and the “Equitable” gas companies.

On April 1st, 1904, the corporation thus formed made the mortgage deed of trust, already mentioned, to the petitioner to secure a proposed series of bonds amounting in the aggregate to $15,000,000, to be issued for the purposes, at the times and upon the terms and conditions in the mortgage set forth. On June 20th, 1906, after that mortgage had been made but before all of the bonds to be secured by it had been issued, the Gas Company was, itself, consolidated under the general corporation laws of the State, with another Maryland corporation known as the Consolidated Gas Electric Light and Power Company (hereinafter called the “Power Company”) thus forming the now existing corporation, the Consolidated Gas Electric Light and Power Company of Baltimore which we will hereinafter call the “Consolidated Company.77 One of the terms of the last mentioned consolidation was that, immediately upon its completion, “all the property and franchises of the Gas Company” should pass, “subject only to ⁶⁵ such Hens on sneh property as existed prior to this consolidation,” to the Continental Trust Company as trustee under a mortgage which had theretofore, on February 14th, 1905, been executed to it by the Power Company and also under a supplemental mortgage which had been executed to it by the Power Company on May 15th, 1905, to secure the payment of $15,000,000, of bonds of that company referred to in said original and supplemental mortgages. The Consolidated Company, the now existing corporation, in pursuance of the terms of its incorporation executed on November 19th, 1906, a supplemental mortgage, of aH of its ■property of every kind and description, except certain specified parcels of land, subject to existing Hens thereon, and also all properly and franchises which it might thereafter acquire, to the Continental Trust Company as trustee under the above mentioned mortgage and supplemental mortgage, which had been made to it by the Power Company on February 14th and May 15th, 1905, to be held subject to' the terms and for the purposes of said mortgages. - The mortgage of April 1st, 1904, from the Gas Company to the petitioner, conveyed in terms not only the property of every kind then owned by the Gas Company but also such as it might thereafter acquire and both that company, during its existence, and since then the Consolidated Company have from time to time executed conveyances of property thereafter acquired to the petitioner upon the trusts of said mortgage of April 1st, 1904. Certified copies of the deeds, mortgages, and instruments of consolidation mentioned 'in the petition were filed with it as exhibits and appear in the record.

The petition, after making the allegations of facts aforesaid, states that “by reason of the various mortgages or deeds of trust prior to and subsequent to the mortgage or deed of trust to your petitioner as trustee, and by reason of the consolidation”' by which the Gas Company was formed “your petitioner has been in doubt as to its duties, rights and obligations as trustee and more especially your petitioner has been ⁶⁶ in doubt as to its rights i and duties with reference to the certification of further bonds under said mortgage deed of trust” at the request of the Consolidated Company, and it is therefore desirous of executing its trusts under the direction and supervision of the Court. It then prays the Court to take jurisdiction of the trusts of the mortgage and their execution and of the trust property and for further relief. Upon the filing of the petition and accompanying exhibits the Court passed a decree declaring “that relief be granted as prayed in said petition and that the Court do hereby assume jurisdiction over the trust” created by the mortgage of April 1st, 1904, from the Gas Company to the petitioner and over the property now or hereafter to be held in trust under it and over all of the acts of the petitioner as trustee under it. As the allegations of the petition are of a general nature it is necessary to refer to the contents of some of the exhibits in order to arrive at an accurate understanding of the questions presented by it.

An inspection of the mortgage of April 1st, 1904, from the Gas Company to the petitioner, for the execution of whose trusts the aid of the Court is invoked, shows that it was made to secure the payment of 15,000 bonds for $1000 each which were to be executed by the Gas Company and on each of which the trustee was to endorse a certificate that it was one of the series of bonds secured by the mortgage. Of these bonds 1015 were to be forthwith certified by the trustee and delivered to the Gas Company upon its order. Of the remainder 1,500 bonds were to be applied to the redemption of outstanding certificates of indebtedness of the company,— 6,895 bonds were to be used to take up and retire, as they matured, outstanding bonds which were secured by underlying mortgages on the company’s property, and 5,500 bonds were from time to time to be issued to pay eighty per cent, of the cost of property to be thereafter acquired by the company. ⁶⁷ Before any bonds conld be issued for the purchase of after-acquired property the trustee must be furnished with the certificate of an engineer appointed by the Gas Company, and also, at its option, of an engineer to be appointed by it. stating that the plant or property proposed to be purchased is desirable for that company to acquire in the profitable conduct of its business and also stating the actual cost of the property, and the trustee must also be furnished with a resolution of the directors of the company reciting the engineers’ certificates and requesting the trustee to deliver the bonds. The mortgage also contains covenants on the part of the mortgagor to make all needed and proper betterments and improvements, to keep the mortgaged’ property and appliances in such thorough repair that their efficiency shall at no time become impaired, to pay off all taxes, prior lien bonds, liens and incumbrances and to convey to the trustee upon the trusts of the mortgage all property thereafter acquired by the company whether the same be appurtenant to its business or not.

Among the other provisions of the mortgage is to be found one exempting the trustee from liability or responsibility for any acts or defaults of the Gas Company its servants or agents and further providing “nor shall the trustee be held liable for any acts, defaults or misconduct of any agents or persons employed by it, unless chargeable with gross negligence in the selection or continuance of tliijefr employment, nor shall the trustee be answerable except for its own wilful default or gross misconduct From an examination of the agreement and certificate of June 20th, 1906, for the consolidation of the Gas and Power Companies it appears that not only did the property of those two companies pass to the Consolidated Company subject to the then existing liens thereon, but that in the process of consolidation all of the property of the Consolidated Company was subjected to the further liens of $700,000, of Prior Lien Preferred Stock and $11,616,774 of preferred stock of that company which were to have priority over all subsequently created mortgages or incumbrances, but to be subject to ex ⁶⁸ isting mortgages upon the properties of the consolidating companies and to the lien of the bonds thereby secured whether theretofore issued or thereafter to be issued in accordance with the provisions of said mortgages. The agreement of consolidation further declares in that connection that the right is thereby “expressly reserved by the Consolidated Company as the successor of the Gas Company and the Power Company to issue said bonds,” but does not attempt to modify the conditions fixed by the mortgage as the only ones upon which bonds can be issued for the respective' purposes therein mentioned. As neither the Power Company nor the Continental Trust Company, trustee under the Power Company’s mortgages of February 14th and 15th, 1905, nor any of the holders of bonds secured thereby are parties to this proceeding and we therefore shall not pass upon their rights if any they have in the premises. We forbear to further comment upon the terms of those mortgages than to mention the fact that they distinctly provide for a possible consolidation of that company. • They declare that, if in that event the Consolidated Company assume the payment of the mortgage debt, and the performance of the mortgage covenants, it shall succeed to and be substituted for the Power Company with the same effect as if it had been named therein as niortgagor and may cause to be signed and issue either in its own name or that df the Power Company any or all of the mortgage bonds which shall not theretofore have been issued and that the trastee shall certify and deliver such bonds as if they had been exécuted by the Power Company before the consolidation.' No such provisions nor any of like tenor and effect appear in the Gas Company’s mortgage of April 1st, 1904, to the petitioner whose 'trusts are now being executed in this case.

Under the operation of the conveyances to which we have refei-red, the Consolidated Company at the time of the institution of the present suit held the property acquired by it from the Gas Company in the process of consolidation sub ⁶⁹ ject first to the liens created thereon by the Gas Company, secondly to the lien of the $15,000,000 mortgage from the Power Company to the Continental Trust Company, trustee, and thirdly to the lien of its own prior lien and preferred stocks amounting to over $12,000,000. The Consolidated Company had also conveyed in broad terms to the Continental Trust Company, as trastee under the Power Company’s mortgages, all property to he thereafter acquired hy it, “subject only to liens existing thereon prior to June 20th, 1906.” On July 3rd, 1907, the Consolidated Company filed a petition in the proceeding before ns stating that, since the making of the Gas Company’s mortgage of April 1st, 1904, that company and the Consolidated Company as its successor had acquired certain property, without designating the respective portions thereof acquired by the several companies, and asserting a right on the part of the Consolidated Company to hold the property as the successor of the Gas Company. The petition further stated that the Consolidated Company had furnished to the Fidelity Company as trustee under the moi’tgage in pursuance of the terms thereof a cerifícate of an engineer and a copy of a resolution of the directors of the Consolidated Company touching such after-aequirc d property and had requested the trustee to certify and deliver-on account thereof two hundi’ed and twenty-five of the bonds called for by the mortgage, but that the trustee’ expressed doubts as to its right to certify the bonds under the circumstances and declined to do so without an instruction from the Court to that effect. Copies of the engineers’ certificate, and the resolution of the directors were filed as exhibits with the petition.

The petition then prayed for an order on the trustée tó show cause why it should not certify and deliver the bonds. On the same day an order was granted as prayed for and the Fidelity Company as trustee, answered the petition asserting as grounds for its refusal to issue the bonds, first doubts as to whether under the terms of the consolidation of the Gas and Power Companies, the Power Company mort ⁷⁰ gage, to the Continental Trust Company was or not a prior lien on the property in question over any bonds issued under Gas Company’s mortgage after the consolidation; secondly as to whether, since the Gas Company has gone out of existence, property acquired by the Consolidated Company can be regarded as property of the Gas Company within the meaning of its mortgage of April 1st, 1904, and thirdly because the articles of consolidation do not make any express provision for determining how future bonds under that mortgage should be issued and certified. On the same day on order was passed by the Court, upon the petition, exhibits and answer, directing the trustee to certify and deliver the bonds. On September 30th, 1909, the Consolidated Company filed in the case a second and similar petition saying that it had from time to time acquired, as successor of the Gas Company additional property and that under orders of Court similar to the one just mentioned bonds under the Gas Company’s mortgage had been' issued and certified on account thereof and that it had acquired still further property as successor of the Gas Company and had also acquired five of the underlying bonds secured by the mortgage of April 1st, 1904, and that it desired to have bonds certified and delivered to it by the trustee to whom it had tendered the said five bonds for exchange for bonds so to be certified and delivered.

An engineer’s certificate and resolution of directors of the Consolidated Company touching the last mentioned acquisition of property were filed as exhibits with that petition. The petition further alleged in general terms that all of the property acquired by the Consolidated Company on account of which bonds had been certified and delivered to it by the Fidelit-j Company as trustee under the Gas Company’s mortgage as well as the property for which it then asked an issue of bonds to it, consisted of either additions or improvements to real estate which had been already subjected to the Gas Company’s mortgage, or of new property which the Consolidated Company had after its acquisition conveyed to the Fidelity ⁷¹ Company as trustee for the uses and purposes of the Gas Company’s mortgage by which the bonds so issued were secured. The Fidelity Company as trustee under the Gas Com pany’s mortgage answered that petition admitting its allegations, but before it was acted on by the Court, Albert Diggs, as holder of five bonds which had been issued under the Gas Company’s mortgage and acquired by him while that company was still in existence, intervened in the case by filing a petition opposing the further issue of bonds asked for. Mr. Diggs’ petition after reciting at considerable length the terms and provisions of the Gas Company’s mortgage and the events of the subsequent consolidation of that company with the Power Company, insisted that the Consolidated Company was entirely without power to issue bonds so as to come within the operation of the Gas Company’s mortgage which was a valid security for only such of the bonds therein described as were outstanding at the time of the consolidation.

That assertion was based mainly upon the provision in the articles of consolidation that immediately upon the consolidation all of the property of the Gas Company was to pass to and vest in the Continental Trust Company as trustee under the Power Company’s mortgage subject only to such liens thereon “as may have existed prior to the consolidation,’' which Mr. Diggs insisted amounted to a prohibition of the issue after the consolidation of any further bonds as liens upon the Gas Company’s property. He also contended that the alleged unlawful issue of such bonds would, if permitted to be made, dilute and impair the security and diminish the value of his bonds which had been issued prior to the consolidation. The Fidelity Company as trustee answered Diggs’ petition denying the soundness of his contention and calling in question his right to assert the claims of the Power Company. The Court passed an order directing the trustee to certify and deliver the bonds prayed for in the Consolidated Com ⁷² pany’s petition.

From that order Diggs took the present appeal. Turning now to the consideration of the legal and equitable questions presented by the record it is to be observed that neither the form nor scheme of the Gas Company’s mortgage is of doubtful validity or unusual in character. It has been settled by decisions in this State and elsewhere that an owner of property may, by a deed of trust in the nature of a mortgage, subject it to a lien for the payment "of future debts or obligations. Bank v. Lanahan, 45 Md. 396 ; Conard v. Atl.

Ins. Co., 26 U. S. 387 ; 27 Cyc. 1069-1071; 20. A. & E. Encycl., 923; Jones v. N. Y. Guarantee & Indemnity Co., 101 U. S. 626 . . The recent cases generally hold that railroad and other corporations have the power to mortgage future acquired property and that in such cases as soon as the property is acquired by the mortgagor company the lien of the mortgage will be regarded in equity as fastening upon it. 33 Cyc. 487; 27 Cyc. 1141; Trust Co. v. Kneeland, 138 U. S. 414, 419 ; R. R. Co. v. Hamilton, 134 U. S. 296 ; Brady v. Johnson, 75 Md. 455 ; Butler v. Rahm, 46 Md. 548 .

If the Gas Company had not gone out of existence after making the mortgage all. of the bonds contemplated by it would doubtless have been issued without difficulty or question. The destruction of that company which occurred in its consolidation with the Power Company has, by removing some of the agencies requisite for the further issue of bonds, introduced into the situation its present embarrassing features. The first step to be taken for relief from that embarrassment is to ascertain the time nature and effect of .such a consolidation. Both the statute under which this consolidation was made and the decisions of this Court in construing similar consolidations require us to hold that the corporate existence and powers of both the Gas and the Power Company perished in the process of consolidation and that the resultant Consolidated Company was a new and separate corporation and thac ⁷³ the rights then conferred on it were acquired by a new and special grant from the State and did not accrue to it by way of transfer from the constituent corporations or either of them.

Section 46 of Art. 23 of the Code under which the consolidation