
    James T. McClelland, App’lt, v. The Norfolk Southern R. R. Co., Resp’t.
    
    
      (Court of Appeals,
    
    
      Filed October 2, 1888.)
    
    1. Bonds—Rights of holders of coupons.
    Holders of coupons may recover thereon without having any interest in the bonds from which they are detached.
    8. Same—Action mat be maintained upon coupon—Upon what recovery BASED.
    An action may be maintained upon a coupon without the production of the bond, but a recovery must be based upon the obligation contained in the bonds, and no recovery can be had contrary to the agreement therein expressed. The holder of the coupon has no equities superior to the holder of the bond.
    3. Same—Statute of limitations.
    A coupon whether detached from the bond or not, partakes of the nature of the higher security of the bond, and does not outlaw until the statutory time has run against the bond.
    4. Same—Negotiability of coupons.
    The reference in the coupons to the mortgage and bonds, and in the bonds to the conditions of the mortgage charges the coupon holders with notice of the provisions contained in each of such instruments; and the power given in the bonds to a majority of the bondholders to waive defaults in the payment of the coupons and bonds, subjects the payment of the coupons to a contingency over which the holder has no control, and destroys the negotiability of such coupons.
    5. Same—Essentials to negotiability of such paper.
    It is essential to the negotiability of such paper that it shall provide for the unconditional payment to a person or order or bearer of a certain sum of money at a time capable of exact ascertainment.
    6. Same—Waiver of defaults. ■
    Where the bond confers power upon a majority of the bondholders to waive defaults in the payment of interest after default has been made and has continued for the space of six months after payment has been demanded, the bondholders cannot anticipate a default and provide for the operation of their action upon a further event. They can only act after the default has occurred. All the conditions of the bond, as far as they are material for the protection of the rights of the minority, must he fully and exactly complied with.
    7. Same—Effect upon suits already commenced.
    As to the effect upon suits already commenced and pending where the ■bondholders after a default has occurred have taken action pursuant to the terms of the bond and postponed or waived the payment of the interest, Quwre?
    
    Appeal from the judgment of the general term of the court of common pleas of New York county affirming the judgment of the general term of the city court of New York, filed September 18, 1886, reversing the judgment in favor of the plaintiff entered by the trial court.
    The nature of the action and the material facts are stated in the opinion.
    
      Albert Gallup, for app’lt; George W. Wingate, for resp’t.l
    
      
       See 3 N. Y. State Rep., 250.
    
   Ruger, Ch. J.

The complaint counts upon fourteen several interest coupons for the sum of thirty dollars each, and alleged the liability of the defendant thereon by virtue of its assumption of the obligations of the Elizabeth and Norfolk Railroad Company, who were the makers of sudh coupons.

The answer sets up as a defense that the time for the payment of the coupons for a period of five years, covering those in question, had, for a good consideration, been extended by a majority of the holders of bonds issued simultaneously with those from which such coupons had been detached, according to provisions contained in the bond and mortgage given as security therefor. The case was submitted to the trial court upon an agreed statement of facts from which, among other things, it appeared that the bonds, from which such coupons were detached, formed a series of nine hundred for one thousand dollars each with coupons attached, providing for the payment of interest semi-annually, issued by the Elizabeth City and Norfolk Railroad Company, in 1880, and secured by a first mortgage upon its property and franchises executed and delivered to trustees for such bondholders, and that the defendant had lawfully assumed the payment of the obligations of such company.

The coupons or interest warrants were in the following form: “ On the first day of (blank month and year) the Elizabeth City and Norfolk Railroad Company will pay to the bearer, at its financial agency in the city of New York, thirty dollars in gold ($30) being six months’ interest then due upon its first mortgage bonds, Number—, W. Gr. Dominick, Treasurer,” The bonds each contained a statement that “ full payment of the principal and interest of * * * the said series of bonds is secured by a deed of trust or mortgage ” upon the property and franchises of said railroad “ upon the terms and conditions fully set forth in the said or deed of trust,” and, also, that “this bond shall pass by delivery” and “in case default shall be made in the payment of any of the half-yearly instalments of interest on this bond, * * * and if such interest shall remain unpaid for the period of six months * * * the principal of this bond shall, at the option of the holder, * * * become forthwith due and payable immediately upon the terms and with the effect mentioned in said deed of trust or mortgage.”

For the purpose of securing “the payment of said bonds and interest coupons ” the company executed a mortgage whereby it granted, bargained and sold to the trustees therein named all of the property “ now held, or which may hereafter be acquired for, or in connection with the construction, operation, maintenance, reparation or replacement of the said railroad or its several branches; * * * and also all rights, powers, privileges and franchises now held or hereafter acquired by the said party of the first part.”

It further provided that “in case default shall be made in the payment of any of the interest warrants hereby secured to be paid, and such default continue for six months after payment shall have been duly demanded,” then, at the option of said trustees, the whole principal sum secured to be paid shall become due and payable, and upon request of one-half in interest of the holders of said bonds it is made the duty of said trustees to declare such principal sum due as aforesaid; “but, nevertheless, a majority in interest of said bondholders may, in case of such default, by an instrument in writing, signed by them, instruct the said trustees to declare said principal sum due, or waive their right so to do, upon such terms and conditions as such majority shall deem proper, or may annul or reverse the election made by the trustees, anything herein contained to the contrary notwithstanding; but the action of the trustees or bondholders in case of any default, shall not affect any subsequent default on the part of the party of the first part, or impair any right resulting therefrom.” It was further provided that ‘ ‘it is hereby declared and agreed * * * that it shall be the duty of, and it is hereby made obligatory upon the said trustees. * * * to execute powers of sale or entry hereby granted, or both, or to take appropriate proceedings at law or in equity to enforce the rights of bondholders under these presents upon requisition in writing, as hereinafter specified, to wit: * * * But in every case in which the default shah be in the payment of the money hereby secured, or any part thereof (in respect of any covenant or agreement in said bonds, or herein contained) such duty of the said trustees, and also their power to make elections in the premises, are hereby declared to be subject to the right and power of a majority in interest of the holders of the bonds hereby secured and then outstanding, to instruct the said trustees to waive such default or to enforce their rights thereunder, and no action of the said trustees or bondholders in case of any default shall affect any subsequent default or any right arising therefrom.”

Previous to the 1st day of September, 1884, more than four-fifths of said bondholders had united, by signing an instrument in writing, in requesting the trustees to postpone the payment of any interest accruing on the bonds during the succeeding five years, to enable the company to use the funds thereby to be acquired in the improvement of the track and rolling stock of the railroad, and requested the company to issue to the bondholders in place of the postponed coupons, certificates for the amount of the same payable at a future time without interest. The trustees assented to such request and immediately gave notice to the company to that effect, and, also, gave a formal extension upon all coupons which had matured up to the time of the trial after they became due respectively. Relying upon such extension, the defendant executed and delivered its certificates for the payment to the trustees of such postponed interest, and they were distributed to and received and accepted by upwards of nine-tenths in amount of the bondholders who, thereupon delivered up their respective coupons to the trustees.

The defendant, also, upon the faith of such arrangement proceeded to lay out and pledge the funds received and anticipated from this arrangement, in the improvement of its road and the extension of its facilities for the transportation of freight and passengers.

Several quuestions arise upon this statement of facts, the most material of which we conceive to be those which refer to the meaning and intent of the provisions in the mortgage relating to the waiver by the trustees and bondholders of defaults in the payment of moneys secured thereby, and as to the negotiability of the coupons attached to said bonds.

In determining the character of the coupons, in respect to their negotiability, the court is required, we think, to examine each of the securities simultaneously executed by the defendant, viz.: the mortgage, the bonds and coupons, for the purpose of discovering the intent and meaning of the contract thereby made. The reference in the coupons to the mortgage and bonds, and in the bonds to the terms and conditions of the mortgage, clearly, we think, charges the holders of both coupons and bonds, with notice of the provisions contained in each of such instruments. If,, therefore, according to the plain intent and meaning of the provisions in the mortgage, it was designed to invest a majority of the bondholders thereunder with power, at their option, to waive defaults in the payment of moneys,, secured by shid mortgage, we do not see how the claim that these coupons were negotiable instruments can be supported.

If such coupons were negotiable instruments invested with the qualities pertaining to such securities, the mortgage and bonds to which they were attached when issued, cannot be resorted to to qualify, limit or explain the agreement therein expressed. In that event their holders, having purchased them in good faith for value and without notice of any defense existing thereto, would be entitled to maintain an action thereon and recover according to well settled principles of commercial law,

If, however, these coupons contained notice to the holders of any facts or circumstances showing that the time of their payment was subject to a contingency over which the holder had no control, and which might postpone their payment indefinitely, then they could not be said to be bona fide holders thereof, as the negotiability of the paper would be thereby destroyed. It is, undoubtedly, the general rule that the bonds of railroad, manufacturing, municipal, and other like corporations, payable to bearer, issued for the purpose of securing loans of money, are in this country deemed negotiable, and coupons thereto attached partake of the same character. Rorer on Railroads 250; Evertson v. Bk. of Newport, 66 N. Y., 14; Thompson v. Lee County, 3 Wall, 327; Commissioners v. Aspinwall, 21 How. U. S., 539. But when such instruments contain special stipulations and their payment is subject to contingencies not within the control of their holders they are, by established rules, deprived of the character of negotiable instruments, and become exposed to any defense existing thereto as though still held by the original parties to the instrument. It is essential by such rules that such paper should provide for the uncondiional payment to a person, or order, or bearer, of a certain sum of money at a time capable of exact ascertainment. 3 R. S., 2243, (7th ed.) Daniels’ Negotiable Instruments, §§ 27 to 104. Evertson v. Bk. of Newport (supra). Frank v. Wessells, 64 N. Y., 155. Dinsmore v. Duncan, 57 N. Y., 580.

It would seem, therefore, if these coupons were subject to the condition that the time of their payment could be changed, altered and postponed from time to time at the option of a majority of the holders of the series of bonds simultaneously issued therewith, it would deprive them of one of the essential characteristics of negotiable paper.

It was held in McClure v. Township of Oxford (94 U. S., 429), in an action upon coupons detached from the bonds of a municipal corporation, which were substantially similar in form to the coupons under consideration, that the bonds “carried upon their face unmistakable evidence that the forms of law under which they purported to have been issued had not been complied with. This suit was brought upon coupons detached from the bonds purchased by the plaintiff in error before maturity, but upon their face they refer to the bonds, and purport to be for the semi-annual interest accruing thereon. This puts the purchaser upon inquiry for the bonds, and charges him with notice of all they contain.”

The City v. Lamson (9 Wall., 478), was an action brought upon coupons detached from the bonds of a municipal corporation, and it was there held that the action was not barred by the lapse of time which would outlaw a simple contract debt, but that there was “but one contract, and that evidenced by the bond, which covenanted to pay the bearer $500 in twenty years, with semi-annual interest, at the rate of ten per cent per annum. The coupon is simply a mode agreed on between the parties, for the convenience of the holder in collecting the interest as it becomes due. Their great convenience and use in the interests of business and commerce, should commend them to the most favorable view of the court; but even without this consideration, looking at their terms, and in connection with the bond of which they are a part, and which is referred to on their face, in our judgment it would be a departure from the purpose for which they were issued, and from the intent of the parties, to hold, when they are cut off from the bond for collection, that the nature and character of the security changes, and becomes a simple contract debt, instead of partaking of the nature of the higher security of the bond which exists for the same indebtedness.” It was, therefore, held that the coupons did not outlaw until the statutory time had run against the bond.

The clear implication from the doctrines of this case seems to be that although an action may be maintained upon the coupons without the production of the bond, a recovery must be based upon the obligation contained in the bond, and that no recovery can be had contrary to the agreement therein expressed. Clark v. Iowa City, 20 Wall., 583.

If, therefore, the act of the trustees in postponing the payment of the interest becoming due on September 1, 1884, and the five years succeeding, was authorized by the provisions of the mortgage, it must follow, that the holders of coupons are bound by their action and are not entitled to maintain actions at law upon such coupons.

The solution of this question requires an examination of the provisions of the mortgage. This case has been argued upon the assumption by both parties, that the mortgage did provide for a postponement of the time of payment of both the principal sum and interest by the action of a majority of the bondholders. It is, however, claimed by the appellant that the bondholders could not anticipate" and provide for a default in the payment of interest before such default had actually occurred.

We shall consider the case, therefore, upon the assumption that it. contains authority for action upon the part of a majority of the bondholders to postpone the time for the payment of the interest coupons, and the only question arising thereon is whether, under a reasonable construction of the terms of the mortgage, this can be done before default has occurred. This mortgage, in accordance with .familiar rules, must be construed according to the intent-of the parties in making it, and that intent, if its language is plain and unambiguous, must be derived from an examination of the instrument itself. That contains the measure of the liability of the mortgagor, as well as a definition of the power, duties and rights of the trustees and bondholders named therein.

We can find nothing in this instrument which confers-, any power upon the trustees of their own motion, to waive-defaults in the payment of interest or to anticipate such defaults and postpone the time of payment thereof. That power, if conferred at all, is given to a majority of the bondholders, and the trustees have no authority to act in the premises except under the instructions of the bondholders.

The provisions of the mortgage relating to this subject are substantially contained in the fourth and seventh paragraphs hereinbefore recited. The conditions under which-power is conferred upon the trustees and bondholders to waive defaults contained in the fourth paragraph, relate-exclusively to defaults already made and which have con-, tinued to exist for the space of six months after payment of such interest ,has been duly demanded.' The trustees, are then vested with the option of declaring the principal sum due and payable, and their action in respect thereto is made subject to review and correction by a majority of ther bondholders; but the exercise of any power on the part of either trustees or' bondholders is conditioned upon the existence of a default which has continued for the prescribed period.

It is quite clear that the defendant has not brought the-case within the contingency provided for in this provision. It must therefore rely upon the provision contained in the seventh paragraph, if its contention can be sustained at all upon the facts of this case.

That paragraph relates wholly to the duties imposed upon the trustees, upon the contingencies arising under the-mortgage authorizing them to enforce the remedies therein provided, and the circumstances under which the performance of that duty may be compelled, or waived by the: bondholders. Certainly no duty can rest on the trustees to enforce the mortgage until a default has occurred, and it is only in case of such a default and the omission of the trustees to perform “such duty,” that the bondholders are .authorized to act under the paragraph in question, and even in the event of any such action, it is expressly provided that “no action of the trustees or bondholders, in case of .any default, shall affect any subsequent default or any right arising therefrom.” It is quite impossible to reconcile this provision with the claim that the bondholders can anticipate a default and provide for the operation of their action upon a future event. Such action is expressly prohibited by the terms of the agreement, and in the face of such prohibition such a power cannot be implied from other language of the instrument. The plain meaning of the provision contemplates action by the bondholders upon an existing condition of things, and the exercise of their judgment upon a situation which has already occurred. Not only the obligor, but each bond and coupon holder is interested in the exercise of the powers referred to, and has the right to insist that the conditions of its exercise provided by the contract, so far as they are material, shall be fully and exactly complied with. Any other construction would place the rights of a minority at the discretion or caprice of a majority, and leave it practically powerless to avail itself of the security provided for it by the plain language of the contract. Assuming the right of bondholders, after a default has occurred, to waive defaults in th.e payment of interest and postpone the time of their payment, a question might arise as to the effect of such action upon suits then pending for the recovery of interest coupons; but that question is not now before us, and it would be improper to express any opinion thereon.

Action taken by a majority of bondholders in waiving default which has already occurred, we have not considered as the facts of the case do not present that question; but we are of the opinion that no action by the trustees or bondholders, is authorized by the mortgage, in anticipation of such default.

The action of the trustees in granting a formal extension of time for the payment of the coupons in question, after ■default had been made thereon, would, we think, have barred this action, except for the omission of a direction to do so given by a majority of the bondholders after the default occurred. We think this is made by the contract a condition precedent to the right of the trustees to postpone the time for the payment of interest.

In view of the fact that the mortgage in question covers all of the property of the corporation and must eventually be enforced for the benefit of its beneficiaries equally, it wouldseem to subject the motives of the plaintiff in bringing this suit to the imputation of attempting to extort payment of his coupons from the company to the detriment of his associates; but this constitutes no defense to the action. The remedy of the bondholders against such an effort, if any there is, must be found in the exercise by the trustees of the power conferred upon them by the mortgage, to take possession of the property covered thereby and applying its proceeds for the common benefit of bond, and coupon holders.

The judgments of the common pleas and general term should, therefore^ be reversed and that of the trial court affirmed, with costs.

All concur.  