
    (Second Circuit — Montgomery Co., O., Circuit Court
    Dec. Term, 1888.)
    Before Stewart, Shauok and Shearer, JJ.
    The Dayton & Union Railroad Company v. R. M. Shoemaker’s Executors.
    1. Where in bonds issued by a railroad company, and in the deed of trust securing them, it is stipulated that interest not exceeding a fixed rate shall be payable at stated periods out of the net income of the company, interest for a period in which there is no net income applicable to its payment will accumulate and become a charge upon income subsequently realized, unless it affirmatively appears from the instruments that this would be contrary to the intention of the parties.
    2. The company having agreed to apply net income in its possession to the payment of such interest, a court of equity will, at the suit of a bondholder, interpose to prevent the diversion of such fund and compel its application to the payment of interest.
    Error to Court of Common Pleas of Montgomery County.
    In the court of common pleas the executors of the last will of R. M. Shoemaker, deceased, sued for themselves and for other holders of the outstanding income bonds issued by the Dayton & Union Railroad Company, dated December 1,1879, to enjoin the diversion of the income of the defendant to other purposes and to direct its application to the payment of the installments of interest on said income bonds due June 1,1882, December 1, 1882, June 1, 1883, and December 1, 1883.
    The following are the material facts, as shown by the pleadings and the agreed statement, on which the cause wa¡s submitted in the court below :
    On the first of December, 1879, the company issued bonds of that date amounting to two hundred and twenty-five thousand dollars, of which fifty-two thousand dollars, face value, it has redeemed. The bonds, by their terms, are payable to Charles E. Drury, or bearer, at the pleasure of the company after the first day of December, 1910, “ payable only out of net surplus earnings, after satisfying the interest upon prior liens, and all taxes and other fixed charges upon said company’s property, and the operating'expenses and repairs of said railroad, at such rate not exceeding six per cent, per annum, payable semi-annually, as the said net earnings of the company will reach to pay, after full payment of the interest, charges and expenses aforesaid of the Dayton & Union Railroad Company, such interest on this bond for each six months being payable at the office or agency of the said Dayton & Union Railroad Company, in the city of New York, on the first days of June and December in each year, only out of the net surplus earnings, after satisfying said prior liens, charges and expenses.” Each bond describes the issue to which it belongs, and recites the contemporaneous execution of a deed of trust conveying the railroad and its equipments to Charles E. Drury to secure the payment of this and another issue of bonds according to priorities established in said deed.
    The deed of trust, after a pertinent description of other bonds to which priority is given, contains the following stipulations with reference to the bonds in controversy: “And, whereas it was further resolved by said board of directors at the date aforesaid, that income bonds should be issued to the amount of $225,000.00, for the purpose of paying, retiring and canceling the income bonds of said company, now outstanding, said bonds containing the recital of the pledge of all the net income of said company, after providing for the payment of the interest of the said first mortgage bonds, during the running thereof, and the principal at maturity, to an amount equal to six per centum per annum upon said income bonds, payable semi-annually. * * * It is a further condition of this agreement, that a sinking fund shall be established -by said party of the first part (the grantor), into which shall be paid semi-annually, any and all net earnings of said company, after payment of the interest on said first mortgage bonds and said income bonds, which funds shall be invested by said company in first mortgage bonds when the same can be secured at or under par, and if the same cannot thus be secured, said funds shall be invested in said income bonds, at the lowest rate at which they can be purchased, not exceeding their par value. * * * Investments of said fund shall be made from time to time, whenever there shall be an amount exceeding $999.00 in said fund. * * *
    
      “ It is a further condition of these presents, that, after the payment of the interest of the said first mortgage bonds during the running thereof, and the principal at maturity, the remaining net income of said party of the first part shall be paid to the holders of the said income bonds hereinbefore recited, pro rata, to the amount of six per centum per annum, upon the par value of said bonds, payable semi-annually, at the office of the agency of said company in New York, and that, in default of the just application of said net income, as aforesaid, for a period of ninety days after the maturity of any semi-annual installments thereof, the said party of the second part may, upon request of the holders of one-fourth of the whole issue of said income bonds, enforce the same by the same methods herein provided for the enforcement of the lien of the first mortgage bonds. * * * And said party of the. first part hereby covenants $* * * , that if-any default should be made in the covenants, agreements and provisions herein contained, or in any or either of them, a decree of specific performance may be obtained * * * , and such other or further’equitable relief as shall be proper and adequate in the premises.”
    There were no net surplus earnings of the company in 1882 or 1883, applicable to the payment of interest on the income bonds, and no interest thereon has ever been paid for those years. At the close of the year 1881, after payment of interest on all the company’s indebtedness, there remained in its hands $53,000 of net surplus earnings, $50,000 of which it expended March 1, 1882, in the purchase of fifty-two of said income bonds, although on January 1, .1882, it was apparent that large and necessary repairs, renewals and betterments were needed and would have to be made thereon in the years 1882 and 1883, to put the same in good condition-for the then present and prospective business of the road, which repairs and betterments were made out of the earnings of the road for 1882 and 1883, and if these had been made out of the surplus earnings on hand January 1,1882, there would have been a net surplus of the earnings of 1882 and 1883, applicable to that purpose, sufficient to pay the interest on said income bonds for both of those years. Since the year 1883, interest on these bonds has been paid by-the company, and there remains in its treasury, of net surplus, money sufficient to pay six per cent, interest on the unredeemed income bonds for the years 1882 and 1883. The directors refuse to make such application of this money, and have passed a resolution placing the same in its sinking fund.
    The plaintiffs, as executors, hold twenty-eight of said income bonds, amounting to $28,000.
    In the common pleas judgment was rendered in favor of the plaintiffs as prayed for; and a reversal of that judgment is the object of this proceeding.
   Shauck, J.

In seeking the intention of the parties the provisions of the bond and of the mortgage are to be considered together, not only because they are contemporaneous instruments between the same parties touching the same subject matter, but because each instrument in terms refers to the other.

The trustee is not a necessary or proper party here, because no relief is sought against him. Although, in view of the defaults complained of, he might proceed to exercise the powers conferred upon him by the deed, that does not exclude the right of the plaintiffs to sue upon the covenants of the company with the holders of its bonds for the purpose of subjecting any fund which, by agreement, has been devoted to the fulfillment of such covenant obligations.

If the plaintiff, and those for whom they sue, are entitled to interest for the two years referred to, they have instituted a proper suit for the enforcement of that right; not only because it is peculiarly the duty- of courts of equity to compel the proper application of trust funds, but because the relief sought is provided for., in the contract. Boardman et al. v. Lake Shore & Michigan S. Ry. Co., 84 N. Y. 157.

The fact that “ repairs, renewals and betterments ” of the road were made in the years 1882 and 1883, and paid for out of the earnings of those years instead of the $50,000.00 of surplus remaining from previous years after payment of interest on income bonds, does not warrant a decree for the plaintiffs. It was in plain pursuance of the contract that the sum of $50,000.00 was passed into the sinking fund and used in the redemption of bonds. The undertaking of the company was to pay interest on these bonds only out of surplus earnings after all operating expenses and repairs were paid. That renewals and betterments were made does not compel the conclusion that the company used the income of those years for a purpose not contemnlated in the contract. If that conclusion were necessary the record does not show what amount of money was used for purposes beyond mere repairs.

The inevitable and controlling question is: Did interest accumulate upon the bonds during the years 1882 and 1888, and become a charge against the subsequent surplus earnings of the road? Counsel for the plaintiffs below concede that they could not resort to prior surplus earnings, and the concession is required by the unequivocal language employed by the parties to indicate the intention that semi-annually all earnings remaining after payment of interest should pass into the sinking fund and be used in the redemption of bonds. In this regard the parties agreed: “ That a sinking fund shall be established by said party of the first part, into which shall be paid, semi-annually, any and all net earnings of said company, after payment of the interest upon the said first mortgage bonds and said income bonds.” While this language forbids the inference that any earnings were to be withheld from the sinking fund to pay interest that might subsequently accrue, it does not' provide that any earnings shall be passed into that fund until payment has been made of all previously accruing interest. This seems to answer the argument of the company’s counsel, that earnings made after a default in interest are upon the same footing as those made before such default.

Nor does a conclusion favorable to the company result from giving its full distributive effect to the word “each” in the phrase “such interest on this bond for each six months;” for it refers only to the interest for the period, and not to the income. There is no provision in either the bond or the deed which limits- the interest of a semi-annual period to the income of the same period; nor does any of the language employed indicate the intention that interest on the bonds should not accumulate.

It seems to us that the contrary intention is inferable from the purposes which the parties had in view, and implied in the stipulations of the instruments. The purpose was to secure money for the use of the company by a pledge of its income. The deed in terms shows that the parties understood this to be a “ pledge of all the net income of said company * * to an amount equal to six per cent, per annum upon said income bonds, payable semi-annually.” Unless the natural scope of this provision is limited by other portions of the deed or bond, it devotes the entire net income of the company to the payment'Of interest on these bonds, but not exceeding the rate fixed. It is not limited by any provision of either instrument except the clause relating to the sinking fund. Full effect, as we have seen, is given to that clause by the conclusion that a bondholder cannot resort to previous surplus for the payment of interest.

The entire future income is pledged to secure interest on the bonds “to an amount equal to six per cent, per annum.” The use of these words seems quite at variance with the view that in the minds of the parties each semi-annual period was segregated. If income realized in one period was in no event to be applied to interest accruing in another there would have been no need to provide for equalizing interest.

We conclude that in the instrument before us the parties have agreed that interest shall accumulate; and that no earnings are to be passed into the sinking fund for the redemption of bonds until all arrears of interest on the income bonds have been paid.

But if the intention that interest shall accumulate is not expressed by the parties, that result will follow by inference, there being no stipulation to the contrary. As to the question of accumulation there seems to be no difference between contracts to pay interest out of income, and to pay dividends to preferred shareholders. Whether the transaction assumes one form or the other, the result is that the company raises funds by pledging its income. Indeed, “ interest” and “ preference dividend” are sometimes used as equivalent terms. In the language of Lord Cranworth in Henry v. The Great N. Ry. Co., a preferred dividend “ is substantially interest chargeable exclusively on profits.” In such cases, unless there is a stipulation to the contrary, courts will infer the intention that the dividends or interest shall accumulate. The inference is quite consistent with the purposes of the parties to a transaction in which the company gets the use of money, and it responds to a consideration of policy which forbids placing the interest of the directors in conflict with the duties which they owe to shareholders and creditors. These views are sustained by numerous authorities, among which are Burt et al. v. Rattle et al., 31 Ohio St. 116; Jones on Railroad Securities, sec. 620; Henry v. The Great Northern Ry. Co., 1 De G. & Jones, 606; West Chester & Philadelphia Ry. Co. v. Gray's Executrix, 77 Pa. St. 321, and Boardman et al. v. Lake Shore & Mich. South. Ry. Co., 84 N. Y. 157.

H. H. Poppleton and R. D. Marshall, for plaintiffs in error.

John W. Warrington, Q. B. Matthews, and George O. Warrington, contra.

The contrary opinion found in a note on page 147 of Green’s Brice’s Ultra Vires is not sustained by any of the cases cited by the editor. Such of them as are relevant hold only that the accumulation will not be inferred against the expressed intention of the parties.

The judgment is consistent with these views, and it will be affirmed.  