State v. Brown

Robinson, J., delivered the opinion of the Court. Before proceeding to consider the several questions, which have heen argued with so much ability in this case, it is necessary to refer briefly to certain facts connected with the history of the Chesapeake and Ohio Canal Company, out of which this litigation has arisen, and to refer also to the successive steps which have heen taken in the progress of the suit, from the filing of the •original bill down to the final decree, from which this appeal was taken. This company was chartered as far hack as 1824, for the purpose of uniting the waters of the Ohio River with the waters of the Chesapeake Bay. It does not appear that any effort was made to build the canal west of Cumberland; hut its construction from that point to Georgetown, in the District of Columbia, was deemed of great public importance, especially as affording an outlet for the large and valuable coal fields of Alleghany County.

Its estimated cost was about eight millions of dollars, and of this amount the State of Maryland, by loans, and subscriptions to the capital stock, furnished the large sum of seven millions. The work was prosecuted from time to time till the latter part of 1841, when, having exhausted all its available resources, further operations were suspended. The State was unwilling, and was, in fact, it may he said, unable at that time, to furnish any further pecuniary aid; and the company itself being without credit, all efforts to raise money for the competition of the canal were unsuccessful. Its completion to Cumberland, however, was a matter of vital importance, for upon shipment of coal from that point, the tolls and revenues of the canal mainly depended; so it was in this emergency that the Act of ⁵⁰⁴ 1844 was passed, by which the company was authorized to issue bonds to the amount of one million and seven hundred thousand dollars, and in order that these bonds might be negotiated on the best possible terms, the State waived its own liens upon the tolls and revenues of the canal in favor of said bonds, and with the consent of the company pledged the entire net tolls and revenues, for the payment of the interest, and to provide a sinking fund for the redemption of the bonds at their maturity.

And the Act further authorized the company to execute “any deed or mortgage necessary to give the fullest effect to the provisions of the Act.” It was in pursuance of this Act that the mortgage of 1848 was executed; and with the money arising from the sale of these bonds the canal was finally finished to Cumberland. Now it can hardly be necessary to say ' that in this, as in many other like public improvements, the hopes and expectations of its promoters have never been realized. With the exception of a brief interval, the revenues of the canal, during the forty years of its operation, have barely been sufficient to meet its current expenses, and the State to-day has never received a dollar, either on its loans, or subscriptions to the capital stock. The bondholders under the Act of 1844 have shared pretty 'much the same fate, and the company is now indebted to them, interest and principal, exceeding four millions of dollars.

While thus burdened with debt, the freshet of lSII occurred, in consequence of which the canal was badly damaged, and, in ordéi to repair it, the company was obliged to apply to the Legislature for authority to issue bonds to the amount of $500,000, and to mortgage the entire property and revenues of the canal, to secure the payment of the interest and principal of these bonds; and these bonds, known as “the Repair Bonds,” are the first and paramount lien upon the revenues at least of the canal. And then ⁵⁰⁵ again, in the spring of 1889, another and more disastrous freshet happened, and the company, without money and without credit, — in fact, hopelessly insolvent, — has never been able to repair and restore the canal as a water-way, in consequence of which' from that time to the present all business along its entire line has been suspended. Now, in this state of things, the bill of the trustees of the bondholders of 1844 was filed. The bill alleges the insolvency of the company, its long and continued default in- the payment of interest and principal of the bonds now overdue, — its inability to repair the canal, and .the entire suspension of business along its whole line ; and prays for the appointment of receivers to take possession of, and to repair and operate the canal, and to pay over its net revenues to the complainants, until the interest and principal of their bonds were fully paid.

A few days afterwards a bill was also filed by the trustees of the holders of the Repair bonds of 1878, claiming that their mortgage was the first lien upon the property and revenues of the canal, and alleging that a default had occurred on the part of the company, such as, by the terms of the Act and" of their mortgage executed thereunder, entitled them to the appointment of a receiver and foreclosure, and praying for the appointment of receivers and for a sale of the canal. On the petitions of the Attorney-General and Bernard Carter, trustee and executor, the State and Mr. Carter were made parties defendants. To these bills answers were filed by the State, and by the company, each denying that a case had been made out for the appointment of receivers, and both submitting the question as to a sale of the canal to the determination of the Court. Upon the case as thus presented, the learned Judge below decided that the bondholders, under the Act of 1844 were entitled to the appointment of receivers to ⁵⁰⁶ take possession of the canal; and, secondly, that, if there could be any question as to their right in this behalf, there could be none as to the right of the holders of the Repair bonds of 1818, which were the first liens upon the revenues of the canal.

Receivers were thereupon appointed, and directed to make a full and thorough examination as to the condition of the canal, to estimate the probable cost of repairing and putting it in good condition, and whether it was feasible to operate it when repaired, and to report the same, together with the reasons on which their judgment was founded, for such further action in the premises as the Court might deem proper. After an examination in pursuance of this decree, the receivers were of opinion that it was inexpedient to undertake to repair the canal by issuing receivers’ certificates, and further, that, if repaired and put in proper condition, there was no reasonable prospect of its being able to earn revenue applicable to the payment of the bonds of 1844. After the report of the receivers was put on record, an amended answer, in the nature of a cross-bill was filed by the State, praying for a sale of the entire property of the canal, under the mortgages held by the State. Upon the case as thus presented, the Court, after full hearing, decided that it was inexpedient to undertake to repair the canal through the agency of receivers, and that the complainants were entitled toa decree for the sale of the property and franchises of the canal, free and clear of all liens and incumbrances.

The Court further decided that the lien of the bondholders of 1844 extended only to the revenues and tolls, and that in the event of a sale, they stood in the relation of simple unsecured creditors, merely as to the proceeds of sale. Before a decree was signed in conformity with the opinion of the Court, a petition was filed by the trustees under the mortgage of 1848, claiming the right to ⁵⁰⁷ redeem the Eepair bonds of 1818, and the mortgage executed to secure the payment of the same, and which constituted the first lien on the revenues of the canal; and upon the payment of interest and principal to he subrogated to all the rights and remedies of the holders of said bonds. In answer to this petition, the trustees of the bondholders of 1818 aver their willingness to accept the interest and principal of the bonds held by them, and to transfer the same to the petitioners, so that they may be subrogated to all the rights to which the holders of the bonds are entitled under the Act of 1818. Upon the filing of this petition a final decree was passed, by which the Court decreed that the entire property and franchises of the canal should be sold at public auction, hut at the same time directed a suspension of the sale upon the following, among other, conditions set forth in the decree: 1st.

That the trustees of the bondholders under the Act of 1844, shall within sixty days bring into Court the Eepair bonds of 1818, or pay into Court an amount equal to the interest and principal of said bonds. 2nd. Upon a compliance with this condition, the trustees shall be subrogated to all the rights and remedies of the holders of the Eepair bonds of 1818, and shall be entitled-to the possession of the canal, with full power to operate the same. 3rd. That the trustees shall by the first of May, 1891, at their own expense, to be reimbursed out of the net revenues of the company, put the canal in good repair and condition. And after prescribing the manner in which the revenues shall be applied, the decree further provides, that if, at the end of four years, the revenues shall be insufficient to pay the operating expenses, and the cost of restoring it as a water-way, and such liens as may be adjudged preferred liens for labor, then such failure of ⁵⁰⁸ tolls and revenues shall be conclusive evidence that the canal cannot be operated, so as to produce revenue with which to pay its funded indebtedness.

It is from this decree that this appeal has been taken. Now, it will be observed, that, although the Court had decided that the lien of the bondholders of 1844 was upon the tolls and revenues, and not upon the corpus of the canal, yet this question is by the decree reserved for final determination, when the proceeds of sale shall have been brought into Court for distribution. So the real question after all, is whether the Court was right in suspending the sale} and in decreeing that the trustees of the bondholders of 1844 were, upon compliance by them with the terms and conditions of the decree, entitled to the possession of the canal, with authority to repair and operate it, with the view of ascertaining whether under their management, it could be made to produce any revenue applicable to the payment of its bonded indebtedness. And this depends, first, upon the rights of the trustees under the Act of 1844, and the mortgage of 1848 executed in pursuance thereof; and secondly, upon their rights as purchasers of the Repair bonds of 1878.

We have already referred to the circumstances under which the Act of 1844 was passed — to the fact that the canal was finished with the money arising from the sale of the bonds issued under it, and to the further fact, that the value of the large amount of stock held by the State, and the security of its loans by way of mortgage, absolutely depended upon the canal’s being finished to Cumberland. And to induce persons to invest their money in these bonds, the State by this Act waived its own liens, and declared that these bonds should be preferred liens on the tolls and revenues of the canal. It was to carry out the provisions of this Act that the mortgage of 1848 was executed, by which the company mortgaged its entire revenues to secure the payment of ⁵⁰⁹ the interest, and to provide a sinking fund to pay the principal upon the maturity of the bonds, with power and authority on the part of the grantees, to enter and take possession of the canal and receive its revenues “upon the default of the company to fulfil its engagements in the premises. ’ ’ The right to enter is however subject to the following condition: “That so long as the Canal Company shall comply with its agreement by paying all the interest upon said bonds as the same falls due, and by pi'oviding an adequate sinking fund for the redemption of said bonds, it shall retain the management of the canal and its works, and collect and receive the revenues and tolls, but if they fail to comply with these conditions from any cause except a deficiency of revenue arising from a failure of business, without fault on the part of said company, then the grantees may demand, and shall thereupon receive possession, and shall appropriate all said tolls and revenues in the manner herein before provided.” But for this covenant for possession on the part of the mortgagor, the right of the trustees to enter and take possession of the canal upon “the default of the company to perform its engagements in the premises” could not be questioned. Not only is this right conferred by the terms of the mortgage, but independent altogether of an express grant, it is a right to which they would be entitled by operation of law.

So the inquiry comes to this: In what manner and to what extent is this right qualified by the covenant ? . The appellant contends, that it is to be