CHAPTER XII Car or Equipment Trusts § 65. Derivation and Need of Equipment Trusts. The idea of a car trust appears to have been suggested by an early case in Pennsylvania,' which instanced a contract made prior to 1833, whereby boats were built by plaintiff and delivered under a form of printed contract. These vessels were for contractors to "boat coal" thereby in the Lehigh and Delaware canals at certain prices per ton, taking on their return only such freight as would not cause interruptions in their regular trips. These boats were to be sold to contractors for specified prices and the boating of coal was to be according to printed regulations made a part of the contracts. The question before the court was whether, under the installments being paid, the contractor or "boatman,” to whom possession was delivered, had any title which could be levied on by his creditors. In an opinion by Gibson C. J. it was said: "By the regulations, which were part of the contract, the persons who had the boat in charge were the company's servants acting under its control. The company was to pay the tolls and the contractor was to take freight from no other quarter except 1. Lehigh Coal & Nav. Co. v. Field (1844), 8 Watts & S. 232. as back loads. Thus the ostensible as well as the actual ownership was in the company and the possession in its servants." The attachment levied thereon and sale thereunder was held to confer no title to purchasers. This thought as to boats developed into "Car Trust Associations," which began as unincorporated joint stock associations, as to which the writer has given his views in another work. By analogy they are found within the principles underlying mining partnerships, of which Mr. Justice Field said: "Mining partnerships as distinct associations, with different rights and liabilites attaching to their members from those attaching to members of ordinary trading partnerships, exist in all mining communities; indeed, without them, successful mining would be attended with difficulties and embarrassments, much greater than at present." So railroads need car trust and equipment associations to supply the rolling stock to utilize the rails of steel or iron capital has laid on rights of way. Manufacturing concerns must have ready cash for the supplying of railroads with locomotives and cars, so voluntary associations or trusts were organized to purchase and sell on credit to the railroads, the rolling stock they needed. § 66. Protecting Legislation. The necessity for protecting sales of equipment on credit was early recognized by legislation, and the variant views of courts as to whether thereby rolling stock contracts amounted to absolute or conditional sales, and as to what were the rights of creditors, both general and mortgage were sought to be made clear. To this end statutes have been enacted in nearly all of the states on the subject of com 2. Trust Estates as Business Companies. 3. Kahn v. Smelting Co. (1881), 102 U. S. 641, 645, 26 L. Ed. 266. panies selling to railroads and street railways the rolling stock they should need providing for the recording of contracts of sale and constructive notice therefrom to subsequent creditors of the road." While this legislation is far from being uniform among the states, it is seen by decision that such legislation is considered apart from general statutes regarding conditional sale contracts.* It was said there of a sale made under the Ohio act for the purchase and sale of railroad equipment, that: "The title to the equipment * ** remained in the vendors until fully paid for." I do not say precisely this result would be attained under all state statutes, though, presumptively, this is intended as generally they authorize conditional sale contracts where there is retention of title as security for purchase money. § 67. Status of Equipment Under After-Acquired Property Clauses. It was long ago settled that mortgages as to property which passes to the mortgagor subject to a lien thereon remains so subject, any after-acquired property clause in the mortgage to the contrary notwithstanding." In this case it was said: "A mortgage intended to cover after-acquired property can only attach itself to such property in the condition in which it comes into the mortgagor's hands. If that property is already subject to mortgages or other liens, the general mortgage does not displace them, though they may be junior to it in point of time. It only attaches to such interest as the mortgagor acquires; and if he purchase property and give a mortgage for the purchase money, the deed which he receives and the mortgage 4. Metropolitan Trust Co. v. R. R. Equipment Co. (1901), 108 Fed. 913, 48 C. C. A. 135. 5. United States v. N. O. R. Co. (1871), 12 Wall 362, 20 L. Ed. 434. which he gives are regarded as one transaction, and no general lien impending over him, whether in the shape of a general mortgage or judgment, or recognizance, can displace such mortgage for purchase money, and in such cases a failure to register the mortgage for purchase money makes no difference. It does not come within the reason of registry laws. These laws are intended for the protection of subsequent, not prior, purchasers and creditors." In a case in the Sixth Circuit Court of Appeals,' there was a contract, in form of a lease, with obligations thereunder called "lease warrants," and Judge Lurton spoke of it as follows: "It is too obvious for discussion that the arrangement under which the railroad company acquired the 10 locomotives in question was no ordinary letting of property for a fixed rental, and that no such thing was really contemplated. * **The real transaction was a bargain and sale, the title being retained as security for the purchase money. Being property susceptible of separate ownership and separate liens, it passed under the after-acquired property clause of the existing mortgage, subject to the lien of the vendor; the existing mortgages not being purchasers for value in respect of such after-acquired property." This ruling is fortified by much authority and I think it cannot seriously be disputed. § 68. Safety of Investments in Car Trusts. While it may be admitted, that for all legal purposes investments in equipment or car trusts associations are safe, yet it is very apparent that they need more of atten 6. See, also, Fosdick v. Schall (1878), 99 U. S. 235, 25 L. Ed. 339; Myer v. Western Car Company (1880), 102 U. S. 1, 26 L. Ed. 59. 7. Contracting & Bldg. Co. v. Continental Trust Co. (1900), 108 Fed. 1, 47 C. C. A. 143. tion by trustees to protect the interests of investors, than where the security is a railroad itself. It may be said that the value of the securities depends upon divers considerations. These may be enumerated as follows: (1) The purchasing railroad company must be looked to as to its general solvency; (2) The real value of the rolling stock sold is to be considered; (3) The duration of the trust and the depreciation that ensues upon use; (4) The probability that a road equipped for traffic in prosperous times may throw back on the sellers what it may not need in periods of depression. It may be true that where railroads go into the hands of receivers, the courts, customarily deal quite liberally with equipment trusts, but then it is readily seen, that it is its duty to look first to realizing the utmost for bondholders in a mortgage on the road itself. And besides this in contracts authorizing cars not paid for to be retaken by sellers, there might be a great practical difficulty. The right to retake might be freely acknowledged, but the court, looking only to the interest of bondholders whom a receiver represents, might not regard itself bound to assist the seller in retaking. The cars may have been scattered through many states, and be difficult to trace, to say nothing of being retaken and placed in proper custody. The security is not only upon personal property, but upon a class of personal property, which, if thrown back on sellers, would involve not only great expense in being cared for, but ruinous sacrifice in its sale. § 69. Criticism of the Form and Security of Car Trusts. Clauses for Reports to Trustees. In 1885, Mr. Francis Rawle spoke of this form of invest 8. VIII Reports American Bar Association 277-322. |