■ ^■•'^'■•' KF 2305 R25 r Cornell University Law Library The Moak Collection PURCHASED FOR The School of Law of Cornell University And Presented February 14, 1893 .^ IN HEnORY OF JUDGE DOUGLASS BOARDMAN FIRST DEAN OF THE SCHOOL By his Wife and Daugtiter A. M. BOARDMAN and ELLEN D. WILLIAMS Cornell University Library KF 2305.R25 Car trust securities :a paper read at th 3 1924 018 840 847 Cornell University Library The original of tiiis book is in tine Cornell University Library. There are no known copyright restrictions in the United States on the use of the text. http://www.archive.org/details/cu31924018840847 CAR TRUST SECURITIES. A Paper read at the Eighth Annual Meeting of THE AMERICAN BAR ASSOCIATION SARATOGA SPRINGS, NEW YORK, AUGUST soth, i88s, F^rancls Rawle, Of the Philadelphia Bar. [Bepbinted from the Transactions op the Assd^jATioN.] PHILADELPHIA: Thos, S. DAin)o & Co., 307, Walnut Stbbkt. 1886. CAR TRUST SECURITIES. A Paper read at the Eighth Annual Meeting of THE AMERICAN BAR ASSOCIATION SARATOGA SPRINGS, NEW YORK, AUGUST 20th, i88s, F^rancis Ra ."wle, Of the Philadelphia Bar. [Retrinted feom the Tbansactions of the Association.] PHILADELPHIA : Thos. S. Dando & Co., 307, Walnut Street. 1885. - PAPER READ ET FRANCIS RAWLE. Car Trust Securities. Tlie subject of that class of railroad investments popularly tnown as " Car Trust Securities," has become very important both to the legal profession and to the business world. The amount of money invested in them at the present time is prob- ably not less than forty millions of dollars. A single railroad company, the Pennsylvania, has now outstanding nearly eight millions of dollars in car trusts, and during the laSt eleven years has procured more than thirty thousand cars under con- tracts of this sort, costing nearly sixteen millions of dollars. A very large amount of car trust investments are now in active litigation in connection with the numerous railroads tliat have recently gone into the hands of receivers, but, so far as is known, no writer has treated the subject, and there are but few cases in which the new legal questions involved have been adjudicated. This latter fact is perhaps partly due to the fact referred to in the opinion of the Supreme Court of the United States, in Fosdick vs. Schall, that railroad litigations are more commonly made a matter of compromise and ad- justment between the parties interested and are seldom fought out to an end. The earliest instance of a car trust of the kind now com- monly found was one created by the Lehigh Coal and Naviga- tion Company of Pennsylvania in 1868, known as the " Rail- road Car Trust of Philadelphia." The idea originated in the mind of the president of the company, Mr. Edward (3) 4 CAK TRUST SECUEITIES. W. Clark, and its legal details were worked out by the late- Charles Gibbons, of the Philadelphia bar.* There were serious legal difficulties in the way. Under the- decisions in Pennsylvania, which held the retention of title in the vendor under a conditional sale of a chattel to be invalid as-, against third parties, the contract could not safely be drawn in the form of a conditional sale, and the draftsman was therefore- obliged to base the contract upon the idea of a bailment with an option in the vendee to purchase the cars at the termination of the contract, following, to a certain extent, the case of the- Lehigh Coal and Navigation Company vs. Field, 8 Watts and Sergeant, 232. In that case, a boatman in the employ of the Navigation Company agreed to purchase a canal boat, and to pay for it in installments, but the boat was to remain the property of the company till paid for ; the boatman continued to act as the servant of the company, though in possession of the boat, which he operated on the line of the company's canal. It was held that the title to the boat was both ostensibly and really in the company, and that it was not sub- ject to levy by the execution creditors of the vendee. It may be added, that while the retention of title in the vendor under a conditional sale has always been held invalid as to third parties in Pennsylvania, yet contracts in the nature of a bailment, with an option in the bailee to pur- chase at the termination of the contract, have always been upheld, even though the so-called hire was in reality the- payment of the purchase-money by installments. The " Railroad Car Trust of Philadelphia" proved successfiil in a business point of view, and its plan was followed by other railroad companies in Pennsylvania. In other states numerous rolling stock contracts were afterwards entered into in substantially the same form, even though drawn up in juris-- dictions where conditional sales were valid and the more- appropriate medium of a conditional sale might have been employed with entire safety and greater propriety. * See a note at the end of this paper. AMERICAN BAK ASSOCIATION. O Instances can be found in the books as early as 1871, arising under contracts by which railroad companies obtained rolling stock under agreements for the payment ■of the purchase-money by installments, but these "were contracts with manufacturers of rolling stock, involving com- paratively small amounts and not raising some of the more important questions that have lately arisen. Still these earlier ■cases are important and will be referred to hereafter. The interposition of a trustee and the creation of a trust are by no means essential features of rolling-stock contracts of the kind now under consideration, but they have been resorted to as a matter of convenience, in order to enable a larger number of investors to become interested in a single contract, just as railroad mortgages are usually made to a trustee. This practice has, however, given the popular name to the invest- ment, and has, no doubt, had much to do with making them popular and attractive to investors. Before proceeding to the main topic, a few, perhaps rather ■elementary, remarks may be necessary as to the manner in which car trust contracts are usually arranged and negotiated. A railroad company in need of rolling stock usually nego- tiates with capitalists to form among themselves an association, ■called a " Car Trust Association," or sometimes more briefly, a "Car Trust." The articles of association fix the amount of the capital stock, and provide that those persons who sign the articles of association, and any others that may join it, or hold certificates of its stock, shall constitute its membership ; that neither the death, insolvency or bankruptcy of any stock- holder, nor the transfer of shares, nor the admission of new mem- bers into the association shall work its dissolution ; that when a member ceases to be a stockholder, he ceases to be a member of the association, and shall not afterwards be liable on any contract, and any person purchasing a share, shall thereby become a member of the association ; that only the property of the association shall be liable for its debts, and all its 6 CAR TRUST SECURITIES. contracts shall contain a provision that only its funds and property shall be liable for its debts, and that no member of the board of managers nor any stockholder shall be so liable, personally ; that its entire business shall be transacted and all contracts shall be made only by the board of managers, who are chosen from the stockholders and named in the articles,* with a provision for filling vacancies in the board, and for removing any of its members at a meeting of the stockholders called for that purpose; that upon payment of the stock subscribed, the stockholder shall receive a certificate of his ownership ; that the rolling stock when built shall be delivered to a trustee named in the articles, and that this trustee shall have power to contract for the association with (usually) a specified railroad company to furnish it with rolling stock upon certain specified terms. The board of managers of the association then purchase the rolling stock, and arrange to furnish it to the railroad company through the medium of a trustee. The latter takes the legal title to the property, executes the contract with the railroad company, receives and holds the company's obliga- tion to pay for it, issues certificates to the persons entitled, usually in sums of a thousand dollars each, receives the peri- odical payments under the contract, and pays the amounts of principal and interest due to the certificate holders until the rolling stock has been fully paid for, when it becomes the 'property of the railroad company under the terms of the contract. Formerly it was the practice to pay off the principal of the certificates by successive drawings, but now it has become more *It is not unusual to name as the niembers.of the Board of Managers, directors of tlie railroad company to which the cars are to he furnished. Inasmuch as a " Car Trust" is carried on exclusively by its Managers, and a conflict of interest may at some time arise between it and the railroad company, it might be more for the interest of the former that the Managers- sliould not be too closely identified with the interests of the railroad company. AMERICAN BAR ASSOCIATION. 7 common to execute the certificates in series with a fixed maturity for each, usually running from one to ten years. They are issued either with coupons attached, or as registered securities. In some instances the railroad company issues and sells its own bonds maturing at stated intervals, and the contract under which it obtains rolling stock is assigned to a trustee as col- lateral security for the payment of these bonds ; the trustee receives the payments under the contract, and pays the bonds with interest as they mature. Upon default at any time, the entire bonded indebtedness falls due. What are termed "equipment companies," have also been formed and incorporated ; these companies contract directly with railroad companies to supply them with rolling stock under a car trust contract, and this contract is transferred to a trustee as collateral security for the payment of the bonds of the equipment company, which are then placed upon the market in series, each series representing a specific contract with a particular railroad company.* *A "Car Trust Associalion " would be considered at common law to be, Blrictly speaking, an ordinary partnership, being an association of indi- viduals for gain. Under the usual form of the articles of association a member may, at will, cease to be a member, and any one who chooses may become a member by signing the articles, or by the purchase of a certifi- cate. Under the language of the more recent decisions, this would con- stitute such an associalion an unincorporated joint stock association, in which there is no delectus personce, and the shares are transferable at the will of any partner, without the consent of the other partners. (2 Lindley on Partnership, by Ewell, 1085.) "Unincorporated companies, with trans- ferable shares, are not unlawful at common law." (Pollock on Contracts, 222.) Koberts' Appeal, 92 Pa. St. 407, may be of interest in this connection ; in that case the facts were these : Twenty-three persons formed an associa- tion for the sole purpose of building a certain railroad. Three trustees were appointed to carry out this object, and all the property of the asso- ciation was vested in thera. They afterwards entered into a contract to purchase a competing line of railroad, and obtained the approval of thirteen of the partners. In proceedings on this latter contract against one of these thirteen it was held that the scope of the association was con- fined to a single definite purpose, the building of a railroad, and that the 8 CAR TRUST SECURITIES, As already said, the interposition of a trustee, and the issue 'of certificates of ownership to the persons interested, have no necessary connection with the nature and legal status of rolling stock contracts. There have been frequent instances in which rolling stock has been sold directly by its owners to a railroad company under contracts by Avhich the installments of purchase-money are payable directly to the vendor, and such contracts will fall within the discussion of this paper, though for the more convenient treatment of the subject it will be assumed that the more usual form has been adopted. trustees could not bind the coparinership by a contract to purchase another railroad. The consent of thirteen of the partners was not sufficient ; unless all consented, the partner-'hip was not bound by the contract. An analogy to a car trust association may be found in the mining partnership'? that have been recognized in some of the Western states. "Mining partnerships as distinct association's, with different rights and liabilities attaching to their members from those attaching to members of ordinary trading partnersliips, exist in all raining communities; indeed, without them, successful mining would be attended willi diffioulti>-s and embanissmenls, ranch greater than at present." Field, J., in Kahn vs. Smelting Co., 102 U. S. 645. Such associations have been recognized in England ; Hid. In these partnerships a member has the right to sell his interest in the mine at any time, and the purchaser becomes a member of the partnership, without the consent and even against the wishes of the other partners ; the sale does not dissolve the partnership so as to compel a winding up of its afTairs. Skillman vs. Lachnian, 23 Cal. 206 ; Kahri vs. Smelting Co., 102 D. S. 641 ; Bissell vs. Foss, 114 U. S. 261. They are governed by many of tlie rules relating to ordinary partner- ships, but also by some, rules peculiar to themselves. Kahn vs. Smelting Co., supra. One of these rules is that the law does not imply any authority either in a member of such partneiship or its managing agent to bind the company or it members by a contract in the name of tlie company. Skill- man vs. Lachman, supra. A managing superintendent of such a partner- ship cannot bind it except by such contracts as are usual and necessary in the ordinary prosecution of its work, unle-s specially authorized. Jones vs. Clark, 42 Cal. 180. In Charles vs. Eshleman, 5 Col. 107, it was said that " the powers of members and manageis of such companies are limited to the performance of such acts in the name of the partnersiiip as may be necessary to the transaction of its business, or which are usual in like concerns.'' The same distinction has been applied to ditch companies for the sale of water. McConnell vs. Denver, 35 Cal. 365. AMEfilCAN BAR ASSOCIATION. -9 A rolling stock contract of the kmd now under discussion may be viewed as : 1. A bailment, with an option of purchase in the bailee ; or, 2. A conditional sale ; or, 3. As constituting a lien in the nature of a mortgage. To decide under which class any given contract comes, it is necessary to look at the circumstances surrounding its forma- tion as well as its language. The mere language used, while it may throw somq light on the intention of the parties, is certainly not conclusive of the legal nature of the contract. As was said in Hervey vs. R. I. Locomotive Works, 93 U. S. 664 (which was a case of a rolling stock contract), " nor is the transaction changed by giving it the form of a lease. In de- termining the real character of a contract, courts will always look to its purpose, rather than to the name given it by the parties." In the majority of instances, rolling stock is purchased hj railroad companies in one of the following ways : 1. The simplest case is the one in which the owner of rolling stock contracts with a railroad company, either directly, or through the intervention of a trustee, to furnish it to the company, payment to be made by installments, and the title to remain in the vendor until the contract is fully performed. 2. Another and very common class of cases is where the railroad company enters into preliminary negotiations with a builder for the purchase of rolling stock, and then secures the co-operation of capitalists, who form a "Car Trust Association." The latter then contracts for the rolling stock with the builder, and when it is completed makes a contract to furnish it to the railroad company, through the medium of a trustee. 3. The railroad company itself contracts with the builder of rolling stock, and obtains tlie requisite funds to pay for it from capitalists. The latter form a " Car Trust Association," 10 CAR TKtrST SECURITIES. and appoint a trustee to receive the title to tlie rolling stock from the builder, and to enter into the usual contract with the railroad company. 4. The railroad company builds the rolling stock itself, and is placed in funds for that purpose by a "Car Trust Association." The rolling stock, when completed, is transferred by the company to a trustee who acts for the association and furnishes it back to the railroad company under the usual form of car trust contract. An examination of a large number of different car trust contracts shows that the more important provisions of the con- tract between the trustee and the railroad company are usually these : 1. That the company shall have the possession and use of the rolling stock, and the title to it shall remain in the trustee until the fulfillment of the contract. 2. That it shall make certain periodical payments to the trustee by way of purchase-money, together with interest on deferred payments, the expenses of the trust, taxes, etc. 3. That the trustee shall have the right to make an annual or other periodical inspection of the property, and that each car or locomotive shall be plainly marked or lettered with the name of the trust.* 4. That the company shall keep the property in good repair, replacing any cars or locomotives destroyed (or destroyed by accident), and shall keep it properly insured. In some in- stances it is provided that in case the trustee retakes possession the question of damages for cars injured or destroyed shall b& settled by arbitration. *Under some trusts, the name of the railroad company only is placed on the cars, followed by the word "lessee." If practicable, it might be more prudent to place on the cars only the name of the car trust, and not that of the railroad company. AMERICAN EAK ASSOCIATION. 11 5. That upon payment of the stipulated sums and the per- formance of all the covenants, the rolling stock shall ipso facto become the property of the company, or else (as it is some- times expressed), the company shall have the option of buying it for a nominal consideration. 6. That upon default in the payment of the "rent" (some- times, for more than thirty days), or breach of any covenant of the contract, the trustee, under the direction of the managers of the " Car Trust Association," may retake the rolling stock and dispose of it as the managers may direct; the railroad company thereby forfeiting all interest in the property and in the sums already paid,* and becoming liable to pay to the trustee the apportioned amount due up to the .time at which the cars are taken by the trustee, the repossession not to be a bar to the recovery of the " rent " accruing as long as the possession remains in the railroad company. Another form in -which this clause is sometimes expressed is this : That upon default in the payment of all sums due or breach of any covenant, etc., the trustee may retake the property and sell it, and apply the proceeds to pay the "rent" then due, with interest, and hold the railroad company responsible for any balance of the rent then due, apportioned to the date of the sale, the surplus, if any, to be paid to the railroad cojnpany ; the retaking not to bar the recovery of the rent apportioned to the time of the sale. *A vendor of a chattel under a conditional sale, upon retaking possession of the property for default in payment of the stipulated price, is not, in the absence of agreement, bound to repay the vendee the amounts already received from him before default; Latham vs. Sumner, 89 111. 233 ; Augier m. Paper Co., 1 Gray, 621 ; Brown vs. Haynes, 52 Me. 578 ; Fleck vs. Warner, 25 Kans. 492 ; but it has been held, on the contrary, that he must account on equitable principles for the amounts received, deducting some compensation for the use of the chattel while in the vendee's posses- sion, or perhaps, at his option, the interest on the price; Preston vs. Whitney 23 Mich. 2G0 ; and that on a retaking the vendor cannot recover on a note given for the purchase-money ; Hine vs. Roberts, 48 Conn. 207. 12 CAR TRUST SBOURIXIES. A third form in use is as follows : That in. case of default, etc., in the payment of the stipu- lated sums, or any breach of covenant by the railroad company, the trustee may, on the request of the managers, retake the property and hold and dispose of it at public or private sale, with the approval of the managers, and apply the proceeds to the payment of all expenses, etc , and of the " rent " then due or to become due, and all sums covenanted to be paid, whether due or to become due ; the railroad company to remain liable to the trustee for any deficiency on the sale, and . the re- taking not to be a bar to a recovery. If the sale yields a sur- plus, it is to be paid to the railroad company.* Under the first of these three provisions the trustee, in case of default, becomes the absolute owner of the cars, free from all interest or claim on the part of the railroad company, with the right to recover the purchase-money apportioned to the date of sale, but is under no obligation to sell the property and return the surplus proceeds, if any, to the railroad company. Under the second provision, the trustee, after selling the rolling stock, retains, from the proceeds of the sale, the " rent " due to the date of the sale only, and hands the surplus to the railroad company. No provision appears to be made by which the trustee may recover the remainder of the price of the rolling stock. Under the third provision, the trustee retakes and sells the cars, deducts from the proceeds all the installments due and to become due under the contract, and returns the surplus, if any, to the company, or holds the company liable for any deficiency. This latter provision appears to be much the fairest for both parties. The first would work great hardship to the railroad company where default happened after the property was nearly paid for ; while the second seems to afford very little protection *If tlie contract is ao worded that the "entire rent to become due" includes both the periodical payments on account of purchase-money as well as interest on deferred suras, there should be a clause providing for a rebate of interest on all payments of " rent" falling due after the sale, so that the trustee may recover only the purchase-money and not interest on it which has not really been earned. AMERICAN BAR ASSOCIATION. 13 to the holders of the car trust securities in case of default, the proceeds of a sale going to pay only the " rent " then due and no provision being made for future "rent." 7. That upon the trustee exercising the right of retaking the rolling stock upon default under the contract, the com- pany will deliver jt to the trustee at such reasonable place as he may name. In some instances it is provided that on a law- ful retaking, the railroad company shall " side-track" the rolling stock and hold it as the agent of the car trust or deliver it to the trustee as he may choose. 8. Sometimes a provision is made by which the railroad com- pany gives its notes, payable monthly, or at longer intervals, for the periodical payments falling due under the contract. This plan has obvious advantages for the holders of the securi- ties, which will probably secure its adoption hereafter in all cases. 9 There is usually a clause prohibiting the railroad company from disposing of the rolling stock. In contracts where the property is "leased" to the company directly by the owners, there is a provision that the " lessors " may assign the contract and the title to the rolling stock, the object being to vest them in a trustee for the parties interested. As already said, these contracts have usually been de- nominated " leases," the periodical payments under them have been called "rent," and the parties to them, "lessors" and " lessees." It is suggested that this use of the terms " lease " and "rent," "lessors" and "lessees" is inaccurate and untechnical. Strictly speaking, these terms apply only to contracts relating to lands and tenements, not to chattels. It would appear that many rolling stock contracts have been drawn upon the legal theory of bailments for use with an option of purchase in the bailee at the termination of the contract, and the above terms have perhaps been adopted for want 14 CAR TRUST SECURITIES. of terms more suitable to contracts of bailment. But it is a serious question whether these contracts, even when so drawn, are not, in the eye of the law, conditional sales. The contract of hire has been said to be a contract whereby the use of a thing is stipulated to be given for a certain reward. One essential diiFerence between a sale and a bail- ment for hire is that in the former the " thing itself is the object of the contract ; in hiring, the use of the thing is its object." It is clear that it is the main object of this species of contracts that the railroad company shall ultimately acquire the absolute ownership of the thing itself, paying the purchaser money in installments, with interest, while the other con- tracting party practically sells the thing, with the sole object of receiving the purchase-money with interest. Again, the so-called hire is not in reality a paymenb for the use of the thing, but the payment of the full purchase-money in installments, which is contrary to the technical idea of a bail- ment. The contract contains no provision for the return of the chattel as part of the due performance of the contract, but only as a part of the remedy in the event of a breach of the con- tract.* The usual clause by which the title passes to the rail- road company, ipso facto, upon the final performance of the contract, shows clearly that the ownership of the chattel, and not its mere use, is the main object sought. Even if this pro- vision is drawn, as it sometimes is, in the form of an executory agreement to sell upon the full performance of the contract, but without further consideration, it would seem to make no real difference. Numerous decisions can be found holding, that contracts for the " lease " of chattels, the purchase-mon«y or " rent " to be paid by installments, and the title to remain in *In Wliitcomb vs. Woodworth, 54 Vt. 544, which was the ordinary case of an installment "hire" of an organ, it was said: " The contract was, in legal effect, a conditional sale of the organ from the plaintiff to Weston. The amount stipulated to be paid, as rent, for the use of the organ for one year, was the full value of the organ. There i§ no provision in the con- tract by which Weston could return the organ at the end of the year, or at any other time, an essential element in a lease or bailment." AMERICAN BAR ASSOCIATION. _ 15 the "lessor" until payment, and then to pass to the "lessee," are, in law, conditional sales and not bailments. Thus in the case of such a contract for a piano in Illinois, it was held that the phraseology of a lease was a " mere subterfuge," and that the contract was a conditional sale.* The same point has been decided in the same way in Connecticut, Oregon, Ken- tucky, and Wisconsin. t In Hervey vs. R. I. Locomotive Works, 93 U. S. 664, the contract was for a " lease " of a locomotive, and the title was to pass to the lessee upon payment of the four installments of "rent;" the court held that it was a conditional sale. In Myer vs. Car Co., 102 U. S. 1, the court considered it unnecessary to decide " whether a lease of personal property at a specified rent, with an option in the lessee to buy for a fixed price, is in legal eiFect a conditional sale;" but a similar point was decided in Heryford vs. Davis, 102 U. S. 235. In that case a car company agreed to " loan for hire " to a railroad company two cars ; upon the payment of three purchase-money notes, the former agreed to sell the cars to the railroad company. The Court, by Mr. Justice Strong, said : " Though the contract industriously spoke of loaning the cars to the railroad company for hire for four months, and delivering them for use for hire, it is manifest that no mere bailment for hire was intended. No price for the hire was mentioned or alluded to, and in every bailment or letting for hire a price or compensation for the hire is essential." The use of language tending to show a contrary view may be found in the later Michigan cases, but not in the leading case of Couse vs. Tregent, 11 Mich. 65, upon which the later * Murch vs. Wright, 46 III. 487. See also Lucaa vs. Campbell, 88 /a'. 4^7 ; Latham vs. Sumner, 89 /a". 235. fLoomis OT. Bragg, 50 Conn. 228; Hine vs. Roberts, 48 Conn. 267; Singer Manufacturing Co. vs. Graham, 8 Oreg. 17; Singer Manufacturing Co. vs. Cole, 4 Lea, 439,; Kimball vs. Post, 44 Wis. 471. See also Bean vs. Edge, 84 N. Y. 510. 16 CAR TRUST SECURITIES. cases were decided. The opposite view has been held in Pennsylvania, as will appear hereafter. It may be said that in Yorkshire Railway Wagon Company vs. Maclure, L. R. 21 Ch. D. 309, which was a case of rolling stock furnished to a railway company, Sir George Jessel, M. R., spoke of the transaction as a sale and hiring of the rolling stock, and used the term lease in connection with the transaction. But the exact question did not arise. In the absence of reported cases, it may be deemed proper to cite the recent opinion of the learned Master, Jacob D. Cox, in the case of the Central Trust Company of New York vs. Toledo, Cincinnati and St. Louis R. R. Co., now pending in the United States Circuit Court for the Western District of Ohio and for the District of Indiana, which arose upon rolling stock contracts drawn in the common form of leases. " The Master finds these contracts to be, in fact and in law, conditional sales of the rolling stock, in which the seller intends to retain a lien upon the property as security for the purchase-money, and the purchaser has a valuable equity of redemption increasing in worth as the several stipulated pay- ments may successively be made." Exceptions taken to this specific ruling were dismissed by Gresham and W. A. Woods, JJ., but no written opinion was filed. I have referred above to the different circumstances under which rolling stock, contracts are usually created. If the opinion I have expressed is correct, these contracts when entered into under the circumstances set forth above in the first two classes, are conditional sales, even though drawn in the phraseology of leases or bailments. A brief view of the law of the different states on the sub- ject of conditional sales next claims attention. It is believed that conditional sales with a reservation of title in the vendor till the thing sold is paid for, are binding between the parties in all the states. How far are they good AMERICAN BAE ASSOCIATION. 17 against third parties, and how far are third parties affected by notice of the vendor's rights ? The number of reported cases on the former point is very great, but for the present purpose they can be briefly classified. There are two opposing lines of decision in the different states. In the greater number of states, apart from statute, conditional sales are valid, as they are at common law, and the title of the vendor is upheld against purchasers from the vendee and his creditors. Such is the rule, apart from statute, in New York, New Jersey, Delaware, Ohio, Indiana, Iowa, Michigan, Missouri, Arkansas, Kansas, Nebraska, Wyoming, Utah, Nevada, California, Oregon, Tennessee, Georgia, North Caro- lina, South Carolina, Alabama, Mississippi, Texas, Maine, New Hampshire, Vermont, Massachusetts, Connecticut, and Rhode Island. In some states later statutes provide that these contracts, to be valid against third parties, must be recorded. Among them are New York, Missouri, Virginia, West Virginia, Georgia, Texas, Wisconsin, Minnesota, Iowa, Nebraska, New Hamp- shire, and Vermont.' In the District of Columbia the vendor can protect himself only by recording his contract under the chattel mortgage acts. In Arkansas conditional sales must be recorded, if extending over more than five years. In South Carolina, by statute, a verbal agreement for a conditional sale is invalid. In Arizona, by statute, a sale of a chattel, with- out immediate and continued change of possession, is conclu- sively presumed to be fraudulent as against creditors of the vendor or subsequent purchasers from him in good faith. The Pennsylvania courts have led the opposite line of de- cisions, and uniformly refused to sustain the title of a con- ditional vendor who has delivered possession to his vendee, as against creditors of and purchasers from the vendee without notice ; and the same view has been taken in Illinois, Kentucky, Colorado, and perhaps Maryland. A late statute in Colorado has declared that such sales shall be conclusively presumed to be absolutely void. The strictness of the rule in 18 CAK TRUST SECURITIES. Pennsylvania and the necessities of business have induced the Supreme Court of that state to depart from it in a certain class of contracts, in which a contract is made for the use of a chattel in consideration of the payment of .a certain sum, with the privilege of buying it at the termination of the con- tract. Such contracts have been treated as bailments and, have been held to be valid in that state, and the same rule has been extended even to cases where the " hire " was really the full purchase-money, and the contract was, properly speaking, a conditional sale, according to the authorities cited above. The later cases in Pennsylvania have shown a tendency not to extend the exception. This entire line of cases may perhaps be regarded- as an indirect attempt to harmonize the law of conditional sales in Pennsylvania (which is opposed to the rule at common law), with the necessary requirements of business and the decisions of nearly all the other states of the Union. In England it has been held, in the common case of con- ditional sales of furniture to hotels, commonly called contracts of "furniture hire," that the reservation of title in the vendor until payment of all the installments of the purchase-money, is valid. But as these cases have arisen in bankruptcy upon the statutory doctrine of " reputed ownership," they are perhaps not of great value in this country. Hervey vs. Rhode Island Locomotive Works, 93 U. S. 664, was the first rolling stock case, on this point, in the Supreme Court. The court held the contract to be a conditional sale, and therefore void against the vendee's creditors under the law of Illinois, in which state the case arose. I will next consider rolling stock contracts, which by reason of the language of the contract or the circumstances under which it was entered into, are considered as giving the car trust security holders only a lien or security in the nature of a mortgage on the rolling stock, and not as constituting conditional sales. This is the case when the contract is con- strued to be an absolute sale, with an express or implied "lien AMERICAN BAE ASSOCIATION. 19 for the purcliase-money, or where money is loaned under a <;ar trust upon rolling stock belonging to a railroad company ■which never was the property of those who made the loan, and would probably arise under the last two classes of trans- actions stated above, as those under which rolling stock ■contracts are more commonly negotiated. , In this connection, Heryford vs. Davis, 102 U. S. 235, is an important case. There, a Delaware corporation had built certain cars and contracted to "loan" them to a railroad company " for hire " for four months ; the car company was to receive notes of the railroad company for the full purchase-money, all maturing within four months ; to hold the proceeds of these notes when paid, as security for the safe custody and return of the cars when demanded. It was agreed that the railroad company should have the right at any time within the four months to purchase the cars at a stipulated price, but until the payment of this sum, the cars were to remain the property of the car company. It was also agreed that upon default on any of the notes, the car company might, at its option, retake the cars and sell them, retaining for its own use all proceeds of the notes received up to that time, and keeping the amount remaining unpaid out of' the proceeds, returning the surplus, if any, to the railroad company ; upon the payment of the notes the car company agreed to "relinquish" the cars to the railroad company, and give a bill of sale for them, applying the proceeds of the notes to the payment for the cars. Further, if the notes were paid, it was agreed that the car company might retain the proceed^, and then the cars should belong to the railroad company, in which event the car company agreed to relinquish its title, and execute a bill of sale for them. By an additional agreement the car company received certain railroad bonds which it receipted for as collateral for the notes "given in payment" for the cars. The court below (a trial by jury having been waived), found as a fact that the parties, in the negotiations and subsequent dealings, treated and undertook the contract as a conditional sale. 20 CAR TRUST SECURITIES. None of the notes were paid. An execution levied by a judg- ment creditor of the vendee raised thequestion of the title of the vendor to the cars. The Supreme Court held that the contract was not a conditional sale, but a present sale, under which the title passed at once to the railroad company, the car company re- taining only a lien for the purchase-money. The reasoning of the court was that the contract gave the vendors an absolute title to the notes and to the entire purchase-money, whether obtained from the notes or, on default, by a sale of the cars ; that as the sur- plus arising from the sale was to go to the railroad company, it was clear that it was to be the owner of the cars ; that the lan- guage of the receipt given for the bonds showed that the notes were to be taken in payment and that the railroad company was bound to pay the price. It was held that as the Missouri statutes provided that liens for purchase-money were valid only when recorded, these cars were subject to levy and ■ sale as the property of the railroad company. Mr. Justice Strong said: "In view of these provisions we can come to no other conclusion than that it was the intention of the parties manifested by the agreement that the ownership of the cars should pass at once to the railroad company in con- sideration of their becoming debtors for the price. Notwith- standing the efforts to cover up the real nature of the contract, its substance was an hypothecation ot the cars to secure a debt due to the vendors for the price of a sale." In another place he denominated the interest of the vendors after the sale as " a lien or security for the payment of the price, or what is some- times called a mortgage back to the vendors." Mr. Justice Bradley dissented in part in the following lan- guage : " I think that in the absence of express law to the con- trary, not only has a man the right to make a conditional sale of his property, but that this right is not opposed to sound pub- lic policy, and should be fairly and liberally dealt with. The present case was, in my opinion, clearly a conditional sale and nothing else, and the owners of the property had a right to re- claim it on the terms contained in the agreement." AMERICAN BAR ASSOCIATION. 21 This case is important as showing that rolling stock contracts, apparently drawn in the form of conditional sales, and so in- tended by the parties, may, by the insertion of certain, not only usual but even necessary provisions, become absolute sales, passing the title to the vendee and leaving to the vendor only a lien for his purchase-money. In the opinion of the court, the provisions for the transfer of possession of the cars to the rail- road company for its use; the option of the vendee to buy them within four months ; the right to receive payment of the notes _given for the entire purchase-money ; the retention of title by the vendor, only the right of use being in the vendee, and the right to retake possession of the cars upon default^all these provisions were held to be consistent with a conditional sale. But the features of the contract which led the coart to hold the ^ale absolute were that the notes became the absolute property ■of the vendor (that is, probably that they were taken in actual payment of the price), that the surplus arising from a sale of the cars was to go to the vendee, and that the vendee had no •option to purchase or not. The case may -perhaps have turned to a great extent upon the special language of the contract, and especially of the receipt given for the collateral bonds ; partly, perhaps, upon the short time stipulated for payment of the price. That the "notes became the absolute property of the vendors," and that it "was expected they would be paid," would apply equally to all cases of conditional sales in which notes are given for the purchase-money, and therefor was hardly enough to change what the parties expressly intended as a conditional sale into an absolute sale. Nor, it is suggested, would the fact that the vendee had no option as to purchasing after paying the purchase-money. Conditional sales are sales in which the passing of the title depends, upon the performance of some con- dition precedent, and this may consist merely of the payment of the purchase-money ; it is not an essential considera- tion that the vendee should have an option as to taking the property after he has paid the entire purchase-money. Again, 22 CAR TRUST SECURITIES. a conditional sale which does not provide for a return of the surplus arising from a re-sale upon a default, would be a great hardship in a case where default occurs after the purchase- money is almost paid in full. No prudent vendee would enter into such a contract without a provision of this kind for his protection. There seems to be no valid reason why it should be construed to change a conditional, into an absolute- sale, especially where, as in this case, the contract contained an express reservation of title in the vendor. Upon a careful consideration of the case, there appears to be much force in the- position taken by Mr. Justice Bradley in his dissenting opinion cited above.* In Roger's Locomotive Works vs. Lewis, 4 Dill. 158, notea were given for the purchase of locomotives, the title to which was to remain in the vendor till payment, and then pass to the- vendee. In case of default on the notes, the vendor had the right to retake the property and sell it, and with the proceeds pay the notes and return the surplus, if any, to the vendee, with the right to recover any deficiency that might exist. It was held to be a conditional salfe. The language of Judge Cooley in Lingham vs. Eggleston, 27 Mich. 324, is pertinent: "* * * the question whether a sale is completed or only executory must usually be de- termined upon the intent of the parties, to be ascertained from their contract, the situation of the thing sold and the circum- stances surrounding the sale. The parties may settle this by the express words of their contract, but if they fail to do so, we- must determine from their acts whether the sale is complete." Again, the circumstances surrounding the creation of a roll- ing stock contract may be such as to constitute it nothing more- than a lien or security in the nature of a mortgage for the pay- ment of the purchase-money, and this, too, though the contract be drawn in the ordinary form of a conditional sale. *See Hart vs. Barney & Smith Co., 7 Fed. Kep. 543. AMERICAN BAR ASSOCIATION. 23 Frank et al. vs. Denver and Rio Grande R. R. Co., 23 Fed. Rep. 123 (in the Circuit Court of the United States for the District of Colorado, Hallett, J.,) was a case of this sort. In delivering the opinion, the Court said : " These instruments in the form of leases and having some- •what the aspect of conditional sales, were ^ disguise of the real transaction between the parties. The rolling stock was not at any time owned or held by the parties assuming to lease the same, or by any one represented by such parties. Under the first contract of June 6th, 1878, ' The Philadelphia and Colo- rado Equipment Trust,' an association of shareholders to the amount of five hundred dollars each, furnished money with which the railway company either bought or constructed cars and locomotives for its own use. In like manner under the contracts with the Rio XJrande Extension Company, the rail- way company bought or constructed rolling stock for its own use with money furnished by shareholders through the Guar- antee Trust and Safe Deposit Company, to be returned with interest from the payments made under the contracts by the railway company. Thus it appears that the payees of these instruments can not stand in the character assumed by them of lessors of the rolling stock, and in so far as they may have any position in the law they are to be regarded as mortgagees of the property." This decision may also be taken as an authority in consider- ing the status of contracts of the fourth class mentioned above, viz. : the case in which a railroad company builds the rolling stock at its own shops for a car trust association, and is paid for it by the funds of the association, making only a nominal delivery of it to the trustee, and the latter furnishes it back to the railroad company uilder the ordinary form of car trust contract. Such a transaction would, in accordance with this decision, be cqpstrued as giving the car trust security holders merely a lien or security for the payment of the money loaned, though drawn in the ordinary phraseology of a conditional sale. It would not constitute a strict chattel mortgage, as the defeasible 24 CAR TRUST SECURITIES. legal title is not in the lender ; nor is it a pledge, because the possession remains in the borrower. It would be rather a lien created by contract, which a court of equity will recognize and sustain. It may however be argued with some force that if the parties contract in good faith, there is no good reason why the transfer of the rolling stock by the railroad company to the trustee, at le^st if made under a contract entered into before the rolling stock is built, should not pass the title to it effect- ually, so that its return to the railroad company upon a con- ditional sale could be construed as such, in accordance with the express intention of the parties. It may be that the line would be drawn at the fact of actual and open delivery in fact, and not constructively. Thus in the case of the Ybrkshire Eailway Wagon Co. vs. Maclure, L. R. 19 Ch. Div. 418, and 21 Ch. Div. 309, a railway company in need of money which it had no power to borrow, sold and delivered certain cars to the plaintiff, who immediately resold them to the company upon a conditional sale,, by which the purchase-money was to be paid in four annual installments, and the title was not to pass to the company until the purchase-money was paid. In an action to recover the unpaid installments, Kay, J., held this trans- action to be a mere cover for a loan, and therefore void against the railway company, which had no authority to borrow money, but the Court of Appeal (Sir George Jessel, M. R., delivering an opinion), held that it was not a borrowing, but a bona fide sale and a hiring back of the rolling stock, and valid against the company. In a recent case in Pennsylvania, Wagner vs. Common- wealth, 16 W. N. C. 75, it appeared that one Richards bought certain billiard tables absolutely and took possession of them. Finding that he could not pay for them he made an agreement with his vendor by which the tables were "leased" to him by the original vendor upon installments, the lessor to make a bill of sale when the purchase money was paid. No change of the actual possession of the tables was made. The court held AMERICAN BAR ASSOCIATION. ZO that in the absence of an actual re-delivery of tlie tables, this arrangement was clearly insufficient to divest the title of Rich- ards and pass it to the "lessor" as against Richards' creditors.* As rolling stock contracts may therefore, under certain circumstances, be construed as constiruting liens in the nature of a morta;ao;e, and as liens of this kind^ have sometimes been held to come within the acts for recording chattel mortgages, a brief reference to this branch of the law becomes necessary. Pennsylvania and Louisiana are the only states which have no general system of recording or filing chattel mortgages. Statutes exist in all the other states. They have generally provided that a chattel mortgage shall be recorded in the county of the mortgagor's residence. In Illinois, Kansas, Maine, Massachusetts, Michigan, Montana,' Nebraska, New Hampshire, New Jersey, New York, North Carolina, Ohio, Rhode Island, South Carolina, Tennessee, Texas, Vermont, and Wisconsin, if the mortgagor be a non-resident of the state, the mortgage must be recorded in the county in which the property is situated when the mortgage is executed. In Alabama, Arizona, California, Georgia, Idaho, Nevada, and Minnesota, a mortgage must be recorded not only in the county in which the mortgagor resides but also in the county in which the property is situated. In Colorado, Connecticut, Dakota, Delaware, Florida, Ken- tucky, Mississippi, New Mexico, Virginia, Washington Terri- tory, West Virginia, and Wyoming, the mortgage need be recorded only in the county in which the property is situated when the mortgage is executed. In Alabama, California, Mississippi, and Wyoming, it is further provided that in case the property be afterwards re- moved to another county, the mortgage shall be recorded in that county. *The same point was decided in the same way in Wright vs. Vaughn, 45 Vt. 369. 26 CAR TRUST SECURITIES. In some states recording ceases to have any effect after a limited period. In Colorado and Minnesota this period is two years ; in Montana, one year ; in Nebraska, five years ; in Wyoming, two months after the term for which the mortgage was given. In Illinois a mortgage is good until the maturity of the debt, not exceeding two years from filing. In Arkansas, Kansas, Michigan, Minnesota, New Mexico, New York, Ohio, Nevada and Oregon, mortgages must be refiled at the end of one year ; -in Wisconsin, at the end of two years ; and in Dakota, at the end of three years.* In order to briilg about uniformity, acts in relation to rolling stock contracts have been passed recently in many of the states. The first of these was passed in Illinois, in 1881 ; Kentucky, Maryland, West Virginia, and Ohio passed acts in 1882 ; Delaware, New York, North Carolina, Wisconsin, New Jersey, Dakota, Pennsylvania, and Washington Territory, in 1883 ; Alabama, Virginia, and New Mexico, in 1884 ; and Tennessee, Minnesota, and Colorado, in the present year.f Many of these acts are very similar in language. They pro- vide, in substance, that a contract for the sale, lease, or hire of rolling stock, with a reservation of title in the vendor, etc., until the payment of the price, etc., shall be invalid as to any subsequent judgment creditor or any subsequent purchaser for a valuable consideration without notice, unless it is in writing, duly acknowledged and recorded, etc., and unless each car, etc., is marked with the name of the vendor, etc., or his assignee, followed by the word owner, lessor, etc., as the case may be. * I am indebted for this succinct statement principally to Mr. Jones' valuable work on Chattel Mortgages. As to the effect of chattel mortgage acts on railroad mortgages, it was held in Hammock vs. Loan and Trust Co., 105 U. S. 77, that the statutory provisions in Illinois in regard to chattel mortgages do not embrace mort- gages by a railroad corporation in connection with its real estate an