Opinion per GRAY, J.

those sources, by the contract of the parties, were made over to and conducted into the hands of the contractors. They had agreed to pay the interest during their possession, and they were to reimburse themslves for that item of outlay, as they had to do for any other expenditures in their undertaking. Nor is the suggestion that they paid these coupons as agents for the company sound in principle; for it would not be in accord with the legal or fair meaning of the undertaking between the parties. It would, also, seem that if agents, yet having the possession of all the principal's estate, a payment of an obligation of the principal of such a nature would be presumed to have been made from the property in the agent's hands, and would extinguish the obligation. But I cannot agree to the suggestion. The contractors, in legal contemplation, and as I think, in fact, assumed the payment of the coupons during construction. The bonds which they received, by reference to the mortgage, carried notice to them of the provisions of the mortgage, which, in its fourth article, provided that, “during the construction of the said railroad hereby mortgaged, the interest on the bonds intended to be secured hereby, shall be paid out of the earnings of the said road and the proceeds of the sales of the first mortgage bonds, and no part of the proceeds of the sale of land embraced in this mortgage, or intended to be, shall at any time be appropriated to the payment of interest on said bonds, unless the general treasury of the company shall be first exhausted."

The arrangement, therefore, which trustees and company united in making, with the object of securing this claim of the contractors for coupons paid by them, by the assignment of the contents of the sinking fund from the possession of the trustees to a third party, was illegal; for the coupons were as absolutely dead in law as though paid directly by the company over its counter, and the assignment was a direct violation of the agreement in the mortgage. Coming to the consideration of the payment of the $150,000 of interest, about maturing in January, 1875, on the bonds, the situation, as between company and contractors, was, that it was a liability which the

Opinion per GRAY, J.

Of course,

contractors were still bound to provide for and which the company could not be supposed to be obligated for. as between the company and third parties holding the bonds, the company was bound for the January interest. But if such had been enforced against the company, and the trustees had simply aided the company by advancing from the land sales proceeds, constituting the sinking fund, the company would have had an offset against the contractors, and the sinking fund would have been protected by the obligation of the company in its income bond, as contemplated in the article of the mortgage referred to. But what was actually done was to help the contractors by assigning over the whole sinking fund, to be held as a security for the payment of their claim for paid coupons and for the advance by one or more bondholders of moneys to meet the coupons to fall due. This was clearly without warrant in the law; and of this illegality the bondholders, who advanced the funds to pay future coupons, had notice through their bonds and the provisions of the mortgage and their knowledge of the facts as to the contractors' claim. It is true the trustees received from the

company an income bond and a second mortgage for this assignment by them of the sinking fund, and hereafter I shall advert to the fact in connection with the facts of the so-called reorganization.

The defendants admit that the contractors were vitally interested in preventing a default and its consequences, and they say that the contractors themselves set about raising the necessary funds to care for the January coupons; but they could not, as counsel claim, use the coupons in their possession, for they were in fact paid as to the company. However, the moneys were raised by the concert of action between contractors, company and trustees, and matters went on until the foreclosure action was commenced by the trustees, upon the default of the company in July, 1875, in December, 1875. Subsequently, and pending the action, the trustees entered upon the property and took possession under that mortgage. While in possession the so-called plan of reorganization was proposed and received the acquiescence of the trustees. It was in reality but a plan

Opinion per GRAY, J.

it was

for refunding the obligations of the company, an attempted to be covsummated without the consent of all of the bondholders, or through the compulsory process of a decree and sale. Under this plan, a new mortgage was executed on the property, and preferred bonds were issued and given in exchange for $100,000 of claims against the company, variously described as consisting in land income notes, in payments to equalize interest on funded and unfunded coupons, under some scheme designated as the scheme of July 1, 1875, and in a sum to cover future accruing interest on these items. The other bonds, secured by this new mortgage, were subsequent obligations to these preferred bonds, and were issued to take up the prior first mortgage bonds; the details of that scheme not being necessary to describe, in view of Judge Finch's fuller opinion. I utterly fail to find any warrant in law, under the mortgage which defined the duties and powers of these trustees, for their consent to and participation in such a scheme, as by their answer is admitted. These claims were not entitled to precedence, or to priority of payment over the first mortgage bonds.

For reasons I have stated, the $280,000 of land income notes, issued against the trust created of the sinking fund proceeds, to aid the contractors, were not preferred debts of the company, and, for reasons stated in Judge Finca's opinion, which I shall not repeat here, the balance of the $400,000 was equally not. At most, and overlooking the questionable legality of the transactions out of which they arose as claims against the company, they were entitled to the security of the fund pledged as collateral. How could they deserve protection to the extent of being secured by a prior lien on the mortgaged property ? The very terms of the mortgage contemplate no such possibility, and expressly provide that the trustees shall receive for their advances from the sinking fund to pay interest, which the company has not the means to pay, and to secure the first mortgage bondholders, whose security is thus impaired, an income bond, to be redeemed by other bonds secured by a second mortgage of the premises. The

Opinion per GRAY, J.

assignment by the trustees of the sinking fund recognizes this distinctly. Nor did the holders of the land income notes, by surrendering the proceeds of the land grant sales in their trustees' hands, thereby become entitled to any priority over the first mortgage bondholders in equity. For, again assuming the legality of the transactions underlying the issue of these notes, the relinquishment of the specific security for their repayment of itself is ineffectual to promote their claim over that of the first mortgage bondholders, in the absence of the consent of all parties. No rule of law recognizes any such right, and I am aware of no principle of equity upon which a party may become preferred as a creditor over another by a voluntary surrender, or relinquishment of his security, and such this must be deemed to be, in the absence of the consent of every prior bondholder, or of proceedings had in invitum.

The trustees should have proceeded with the foreclosure action, and they had no power to waive subsequent defaults and to release the company from its obligations to their cestuis qui trustent and from causes of action, as they did in 1879. In changing the contract by releasing the company and in consenting to a new mortgage, under which the claims of their cestuis qui trustent were deferred in order of payment, the trustees violated their legal duty to this plaintiff and rendered themselves amenable to this action. They were vested with no such discretion as would authorize them to change of impair any legal right of the plaintiff. The mortgage did not confer any such authority, and the consent of every bondholder could not do so. Their duty to the bondholders was to them severally, and they were not at liberty to follow the advice or wishes of the majority, being still liable to the minor ity for a faithful administration of their trust. (Sturges v.' Knapp, 31 Vt. 1.) With the motives of the plaintiff we are not concerned, while he has legal rights which have been disregarded and which his trustees' action threatens to disregard.

The argument that these preferred bonds worked no harm to the original bondholders I do not regard as sound. They do not equitably represent debts which are entitled to priority of

Opinion per GRAY, J.

payment. Their issue, and payments upon them of interest and of principal, are not within the terms of the original first mortgage, which represents the contract between company, trustees and the holders of bonds, and are distinct departures from that contract. All that instrument contemplated, in the event of the application of the proceeds of land grant sales to the payment of interest when needed by the company, was that an income bond should be given by the company to the trustees, ultimately to be redeemed by the issuing of bonds of the company secured by a second mortgage. It is plain that the possession by the trustees of such an income bond, the interest on which was payable before payments to the stockholders, operated as amply as a security for the first mortgage bondholders as they could possibly, in the nature of the exigency, expect.

I have discussed these questions more at length than I had intended and, perhaps, more, in view of the elaborate opinion of Judge Finch, than was absolutely necessary, and I shall add no more. I concur in Judge Finch's opinion upon all matters which I have not touched upon here, and I agree in his conclusion that the judgment and order appealed from should be affirmed.

DANFORTH and PECKHAM, JJ., concur for affirmance of judgment; Ruger, Ch. J., EARL and ANDREWS, JJ., dissent; the two latter on the ground that the point that the contractors were bound by their contract to pay the interest coupons as their own debt is contrary to the specific finding, which is supported by evidence, and that it is manifestly improper to affirm the judgment on a question of fact contrary to the findings.

All concur for dismissal of appeal from order.
Judgment affirmed and appeal from order dismissed.

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