Commonwealth v. Chesapeake & Ohio Canal Co. , 1871 Md. LEXIS 97 ( 1871 )

Bartol, C. J.,

delivered the opinion of the Court,

The object of the petition filed in this case by the Canal company, is to obtain the judgment of this Court upon certain questions which were not distinctly decided upon the former appeal, in order that the respective rights of the appellant and other creditors may be definitely ascertained, and the company may appropriate the funds now in its hands, and hereafter to accrue, in accordance with the just rights and priorities of its several creditors.

There are two distinct questions presented by this appeal, which will be disposed of in their order.

1st. What are the rights of the appellant and other holders of the certificates of indebtedness issued by the Canal company under the resolution of the board, passed on the 29th day of July, 1853?

The circumstances under which they were issued are fully stated in the petition of the company and need not be here repeated, except to say that they represent the aggregate amount of coupons for interest upon preferred bonds issued under the Act of 1844, ch. 281; and which coupons fell due on the 1st of July, 1852, 1st of January, 1853, 1st of July, 1853, and 1st of January, 1854.

The appellant contends that the holders of such certificates are entitled to the same liens and priorities for their payment, as if they held the original coupons. On the other hand it is contended by the appellees that the effect of surrendering the coupons and accepting in lieu thereof the certificates of indebtedness, was to destroy the liens and priorities before held under the Act of 1844; and that the certificates are mere contracts of the company for the payment of money unsecured by any lien upon the net tolls and revenues; and.not entitled to any priority whatsoever in the distribution of the fund. In support of this position it has been argued that the question was so decided upon the former appeal, 32 Md., 501; in which it was held that the appellant, as assignee of Selden, Withers & Co., occupied the position, in respect to that claim, of a contract creditor only; and was entitled to no lien or priority whatever. But an examination of the opinion of this Court will show that the cases are not analogous, and that the question here presented was not involved in the decision of the rights of the appellant as assignee of Selden, Withers & Co. Our judgment in that case rested not upon the legal effect of the acceptance of certificates of indebtedness in lieu of the interest coupons, but upon the distinct ground that the transaction between Selden, Withers & Co. and the Canal company was a loan of money by the former to the latter, for the purpose of enabling the company to pay the interest upon its bonds, and when so applied the debt for interest was cancelled. The Court say, on page 545 : “ The money so applied was in fact the money of the company, borrowed for that purpose.” The consequence of this decision followed inevitably that Selden, Withers & Co., or their assignee, could not claim to be subrogated to the rights of the original bond holder; because the debt pro tanto had been discharged by the company; and so Selden, Withers & Co. never in fact or in law occupied the position of holders of the preferred bonds of the company secured by liens and entitled to priorities as such. Here a very different case is presented. The appellant as holder of preferred bonds was entitled to the liens and priorities for the principal and interest thereon, secured by the Act of 1844, ch. 281, and expressed in the body of the bonds. Eor convenience the interest payable semi-annually, was evidenced also by notes or certificates called “ coupons” annexed to the bonds.

Under the resolution of the 29th day of July, 1853, the appellant surrendered certain coupons representing interest due on the bonds, and accepted in lien thereof certificates of indebtedness from the company purporting to bear interest.

It is contended that the effect of this transaction was to destroy the lien and priority before held by the appellant, in respect to the funded interest represented by the certificate of indebtedness; because it is alleged that the certificate being under seal is a security of a higher nature than the coupons, which were mere parol contracts, and operated as a payment or extinguishment of the latter, and thus destroyed the preexisting lien of the creditor.

A conclusive answer to this argument is found in the fact that by the terms of the bonds themselves, and by force of the Act of 1844, the lien and priority were secured to the bond holder, both for the principal sum expressed in the bond and the semi-annual interest thereon; so that by accepting the certificates of indebtedness, the bond holder in fact received a security of no higher nature than he before held; there was therefore no merger or extinguishment of the preexisting debt for interest by operation of law. The transaction in itself could not operate as a payment of the debt, in the absence of proof of some agreement between the parties that the certificates were accepted as payment. It has been argued that the acceptance of the certificate operated as payment of the interest funded, because by its terms the coupon holder obtained the obligation of the company to pay interest upon interest, which- it is alleged' created a new and different contract between the parties. This argument we think, like the other, is based upon erroneous premises. There was in fact no change in the terms of the contract.

It was expressly decided on the former appeal, (32 Md., 547, 548,) that as between the bond holder and the company, the former would be legally entitled to interest upon the coupons from the time of their maturity. The certificate of indebtedness merely secures the same thing in express terms: it gives no new rights to the creditor, nor does it impose upon the company any greater obligation than before existed.

It is manifest when we consider the facts and circumstances accompanying the transaction, as showing the real intention of the parties, that neither party contemplated such consequences from the transaction as have been contended for by the appellees.

It was clearly not the intention of the coupon holders to waive or surrender their lien upon the tolls and revenues; and as they have done nothing which either expressly, or by operation of law works such surrender, it follows that their lien remains to the same extent as before.

In our opinion the holders of the certificates of indebtedness are entitled to the same lien and priorities for their payment, as they would have for the payment of the original coupons which they represent.

This priority exists however only to the extent of the principal sum named in the certificate, and does not include the interest thereon. This results from the terms of the Act of 1844, ch. 281, which was construed by this Court on the former appeal; in which it was decided that the waiver of the State’s priority of lien by that Act in favor of the holders of the bonds thereby authorized, extends only to the principal sum secured by the bonds, with simple interest thereon; and do.es not include interest on interest. (32 Md., 547 to 550.) The application of that rule to the holders of the certificates of indebtedness places them in the same position as if they continued to hold the original coupons for which the certificates were substituted.

This brings us to the consideration of the second question presented by this appeal which arises in this way. It appears that the Canal company has heretofore paid out of its net revenues certain sums of money for and on account of interest upon the certificates of indebtedness, which accrued from April, 1853, to April, 1867; and the question arises as to the effect of such payments. Are the certificate holders entitled to retain the money so paid? or are they bound to account for it as for money erroneously received? If this question were one exclusively between them and the Canal company, there would be no doubt of the correctness of the position assumed by the appellant’s counsel on this branch of the case: but the rights and priorities of other lien creditors are involved; these could not be defeated or impaired by the act of the Canal company, which occupies the position of a stakeholder, receiver or trustee holding the common fund upon which the liens exist. In such case if there has been a misapplication of the fund in favor of one creditor, which defeats or impairs the equitable rights and priorities of others, these are entitled to demand that the money be re-paid, or applied according to the equitable rights and priorities of the parties. Under the decision rendered by this Court on the former appeal, to which we have before referred, it is clear that all payments made by the Canal company on account of interest upon the certificates of indebtedness, though made honestly and in good faith, were made erroneously, and so far as the appellees are concerned, was a misapplication of the fund: inasmuch as the holders of the certificates were not entitled to any priority of payment of interest upon them, any more than they would have been upon the coupons for which the certificates were substituted. In order therefore to protect the rights of other lien creditors, and to secure justice and equality among the bond holders, the appellees are in our opinion entitled to insist that the money received by the appellant and others, on account of interest upon the certificates of indebtedness, shall be applied in extinguishment of the principal sums therein named — thus placing the holders of the certificates on the same footing as the holders of coupons outstanding and unfunded.

(Decided 21st December, 1871.)

In making this application of the payments we do not think that interest ought to be charged upon the moneys so. erroneously paid. The holders of the certificates were entitled to a lien and priority for the payment of the principal sums named in them, and were entitled to apply in that way any moneys received from the Canal company. By making that application now, the just rights of the appellees and other lien creditors are protected. It would be in our judgment inequitable to charge interest upon the sums so paid — and we accordingly decide that no such interest is chargeable.

We will pass a decree reversing the pro forma decree of the Circuit Court from which this appeal was taken, and remanding the cause for further proceedings in conformity with the opinion of this Court; and will direct the costs in this Court and in the Court below to be paid out of the fund.

Reversed and remanded.