If holders of notes of a corporation, secured by a mortgage of
its realty, agree to convert their notes into stock upon a
condition which fails, the right to foreclose the mortgage is not
affected by the agreement.
This was a bill filed on November 26, 1875, by Thomas Hare and
Jonathan H. Pugh, trustees, to foreclose a mortgage executed to
them on August 22, 1870, by the Fairmount Gold and Silver Mining
Company, to secure the bond of the company for $17,000. It appears
from the record that at the date of the mortgage the mining company
was indebted to various persons, who held its promissory notes or
certificates of indebtedness, given and bearing date between August
4, 1868, and May 20, 1870, and amounting in the aggregate to
$16,387.05, all bearing interest at the rate of six percent per
annum. To secure the payment of this indebtedness to the holders of
the notes, the mining company, on August 22, 1870, executed a bond
of that date to Hare and Pugh in the penal sum of $34,000,
conditioned for the payment to them at the expiration of one year
from date of the sum of $17,000, with interest at the rate of six
percent per annum, payable half yearly in gold. This bond was
secured by the mortgage which the suit was brought to foreclose,
bearing the same date, and conveying to Hare and Pugh certain
mines, a mill site, mill and machinery in Clear Creek County,
Colorado. Contemporaneously with the execution of the bond and
mortgage, Hare and Pugh executed a declaration of trust to the
effect that they held the bond and mortgage in trust for the
benefit of the holders of the notes of the mining company above
mentioned, and that if the mining company should pay off the notes
the bond and mortgage should be taken as paid and satisfied, and
should be cancelled. The bill averred that the bond was due and
wholly unpaid, and prayed a foreclosure of the mortgage.
Page 112 U. S. 239
John W. Thackara, Gilbert B. Reed, and others, who, it was
alleged, claimed some interest in the mortgaged premises as
judgment creditors or otherwise, were made defendants to the
bill.
It appeared from the record that the defendant Thackara had been
superintendent of the mine and general agent of the mining company
in Colorado, and was a stockholder. He held by purchase some of the
notes or certificates of indebtedness secured by the mortgage
issued to other parties, and held other notes issued subsequent to
the mortgage to himself for his salary, etc. Prior to the
institution of this suit, to-wit, on the 22d day of March, 1873,
Thackara began suit against the mining company on his notes and a
book account, caused a writ of attachment to be issued against the
mining company, and on the 13th day of January, 1875, recovered a
judgment for $23,442.12. Upon a sale under execution issued on this
judgment, all the real and personal property of the mining company,
including that covered by the mortgage, was sold to Thackara for
the sum of $24,873.01, and he assigned the certificate of purchase
to the defendant Reed, to whom a sheriff's deed was executed
December 15, 1875. It was conceded that Reed had succeeded to all
the rights and interests of Thackara. The bill was dismissed as to
Thackara, and Reed substituted as defendant in his place.
Reed, by his answer, admitted the execution of the mortgage
mentioned in the bill to secure the payment of notes made by the
mining company, the sum secured by the mortgage not to exceed
$17,000. He set up title to the mortgaged premises, claiming under
the sheriff's deed executed to him under the sale made to Thackara.
He averred that all the notes which had been secured by the bond
and mortgage executed to Hare and Pugh, except two held by Samuel
Nelson one for $25 and the other for $150, and one held by W. B.
Wharton for $100, had either been transferred to Thackara, and were
included in the amount of his judgment against the mining company,
or had been converted into stock of the mining company and
surrendered and were thus satisfied. Neither the mining company nor
any of the other defendants made any defense to the suit,
Page 112 U. S. 240
and decrees
pro confesso were taken against them. The
answer of Reed was put in issue by replication. Upon final hearing
on the pleadings and evidence, the circuit court dismissed the bill
and the complainant Pugh, Hare having died pending the suit,
appealed.
MR. JUSTICE WOODS delivered the opinion of the Court. He stated
the facts in the foregoing language and continued:
It is clear that the complainant was entitled to a decree of
foreclosure unless the grounds of defense alleged by the respondent
Reed were well taken.
The first of these was that the directors of the mining company,
who executed the bond and mortgage, did so without authority, and
the bond and mortgage were therefore null and void. It is a
sufficient reply to the defense to say that no issue is taken by
the answer upon the averment of the bill that the bond and mortgage
were executed and delivered by the proper officers of the mining
company. On the contrary, the answer admits that "the said mining
company, by its officers, on the date aforesaid, made, executed,
and delivered to complainants, as trustees, a certain bond,"
describing the bond mentioned in the bill,
"and that to secure the said sum of seventeen thousand dollars
mentioned in said bond, the said Fairmount Gold and Silver Mining
Company, by its officers, made the mortgage in said bill mentioned
and upon the property in the bill of complaint described to the
complainants."
These admissions preclude the defense set up for the first time
at the hearing, that the officers were not authorized to execute
the bond and mortgage. The defendant having admitted the execution
of the mortgage by the officers of the company, the complainant had
the right to rely on the admission, and was not bound to prove
it.
Page 112 U. S. 241
The other defense relied on was based on the allegation that the
notes which the mortgage was given to secure had been satisfied,
except those held by Nelson and Wharton, and these the defendant
Reed offered to pay. The facts upon which this defense rests are as
follows:
On February 8, 1873, the board of directors of the mining
company passed the following resolution:
"
Resolved that the board of directors authorize the
conversion of certain outstanding and unpaid certificates of
indebtedness of the Fairmount Gold and Silver Mining Company, being
numbered from 1 to 87, both numbers inclusive, and Nos. 89 to 100,
both numbers inclusive, into stock of the said company at the par
value thereof, upon the surrender of the said certificate of
indebtedness by the holders thereof, provided that the holders of
the said certificates of indebtedness convert the same into stock
of the said company at the par value thereof, within ten days from
the date of the passage of this resolution, and all the holders
convert."
The certificates of indebtedness mentioned in this resolution
were the notes which the mortgage was given to secure. It is
insisted by the defendant Reed that all the notes of the company,
except those held by Thackara, Nelson, and Wharton, were converted
into stock under the provisions of the foregoing resolution and
were thereby satisfied, and that the notes held by Thackara, being
merged in the judgment recovered by him, were satisfied by the sale
of the company's property under execution, and as he offers to pay
the notes held by Nelson and Wharton, there should be no decree of
foreclosure.
The record does not sustain the assumption of the defendant. On
the contrary, it appears that there never was any conversion of
notes secured by the mortgage into the stock of the company. It was
a condition of the resolution passed by the directors, under which
the conversion is alleged to have taken place, that none of the
notes were to be converted unless all were converted. The purposes
of the resolution were plain -- namely to relieve the company of
its embarrassments by providing for the conversion of its debts
into stock. In order that this might be done and no advantage taken
by one creditor
Page 112 U. S. 242
over the others, the conversion of notes into stock was to take
effect only on the condition that all the creditors consented and
that the conversion was made within ten days. This provision in the
resolution was necessary to prevent a part of the creditors, after
some had converted their notes into stock, from seizing the
property of the company and applying it to the payment of their own
debts, to the exclusion of other creditors. A large part of the
creditors surrendered their notes and took stock in their stead.
But this conversion was conditional, and the notes so exchanged
were not cancelled, because the conditions upon which the
conversion was to take place were never complied with.
Other holders of notes, among whom was Thackara, refused to
convert their notes into stock, and thus the whole scheme fell
through. The defendant Reed, who claims under Thackara, insists
that all the creditors who surrendered their notes shall lose their
debts, and that the notes held by Thackara shall take the entire
property of the company. He thus insists upon a result which the
resolution of the directors was cautiously framed to prevent. As
soon as the ten days prescribed by this resolution had expired and
it appeared that all the holders of notes secured by the mortgage
of the mining company had not converted them into stock, those who
had offered to convert were remitted to their rights as creditors
of the company. A mortgage creditor who had refused to convert
could not, by assuming that the property of the company was
released from the mortgage, seize it for the satisfaction of his
own debt to the exclusion of all the other mortgage creditors. By
refusing to convert his notes into stock, he left the notes of the
other creditors and the mortgage which secured them in full force
and effect. The contention of a creditor who did not offer to
convert that the conditional offer of the other holders to convert
is in effect a conversion and satisfies their notes and leaves the
property of the company unencumbered and liable to seizure and
applicable exclusively to the satisfaction of his claim is without
support in reason or justice.
It appears from the record that a number of the creditors of the
mining company, who had surrendered their notes conditionally,
Page 112 U. S. 243
required the complainants Hare and Pugh, who were the
mortgagees, to proceed to enforce the mortgage by suit to
foreclose, and, in compliance with this demand, the present suit
was brought.
There is no ground upon which their right to the relief prayed
can be denied. There is no support for the contention of Reed that
it was the duty of the holders of notes, who had offered to convert
them into stock, to rescind, within a reasonable time, the contract
of conversion, and that, by delaying to do so for three years, they
had lost the right to rescind. The answer to this contention is
that there never was any conversion of notes into stock, and no
binding contract to convert. The most that can be claimed is that
the holders of the notes secured by the mortgage offered to convert
them upon the conditions expressed in the resolution. The
conditions were never complied with. There was therefore no
conversion and nothing to rescind. The conditional surrender of the
notes secured by the mortgage did not cut off the right to
foreclose the mortgage for their satisfaction.
Howe v.
Lewis, 14 Pick. 329;
Davis v. Maynard, 9 Mass. 242;
Stover v. Wood, 26 N.J.Eq. 417.
The notes which were filed for conversion remained the property
of their holders respectively, and the stock the property of the
company. It does not appear that any holder of the notes had
disposed of stock which he had received conditionally. If there is
such a one he will be compelled to account for the stock. Those in
whose names the stock still remains will be entitled to their notes
and to the security for their payment afforded by the mortgage, and
the mining company will be entitled to a retransfer of the
stock.
It being clear that the notes held by the parties for whom the
present suit to foreclose was brought have not been satisfied, the
right of the complainants to maintain the suit is put beyond
question. The sale upon the judgment at law recovered by Thackara
could not affect that right. It has been held by many courts that a
mortgagee cannot, upon a judgment recovered for a debt secured by
his mortgage, levy the execution upon the mortgaged property.
Atkins v. Sawyer, 1 Pick. 351;
Washburn v.
Goodwin, 17 Pick. 137;
Tice v. Annin, 2 Johns.Ch.
Page 112 U. S. 244
125;
Camp v. Coxe, 1 Dev. & Bat. 52;
Waller v.
Tate, 4 B.Mon. 529;
Powell v. Williams, 14 Ala. 476;
Carpenter v. Bowe, 42 Miss. 28;
Linville v. Bell,
47 Ind. 547.
But whether this be the established rule or not, it requires no
authority to show that a sale of the mortgaged premises upon a
judgment recovered on a part of the notes secured by the mortgage
does not preclude the holder of other notes secured by the same
mortgage from proceeding to foreclose it. A sale on such a judgment
could only affect the equity of redemption, and would leave the
rights of the holder of other notes secured by the mortgage
unaffected.
We are of opinion that the circuit court erred in dismissing the
bill.
The decree must therefore be reversed and the cause remanded
for such further proceedings in conformity with this opinion as the
case may require.
