We may look at the questions as they arise upon the master's report.
1. As to the account of Mr. Elliot as treasurer: When his active duties as treasurer were suspended, and his active duties as trustee began, January 1, 1861, he had in his hands, in the former capacity, funds of the corporation which were not afterwards used in discharging the functions of either office. From that time forward he held those funds as their trustee, and I see no good reason why the ordinary rule as to interest should not apply. My opinion is, that he should be *Page 430 charged with the sum found in his hands by the master, January 1, 1861, with simple interest from that time to the date of the decree.
2. He should account for the Levi Chamberlain bond, according to the report.
3. No sufficient reason is shown for making any change in the statement of Elliot's account as trustee, made by the master, and I think he should be charged with the balance reported; — also, that he should be charged with the amount on deposit to pay coupons, in case the plaintiffs redeem or furnish proper security for the payment of the bonds.
4. I think the statement of account between the Ashuelot Railroad and the Cheshire Railroad, from January 1, 1861, to January 1, 1874, should stand as returned by the master, for reasons which will be given at length by my brother FOSTER.
5. Should Mr. Elliot be held to account for the profits he made by dealing in the mortgage bonds? Upon this point the views of counsel differ widely. The plaintiffs contend that he ought to hand over to the corporation all his profits, not only on bonds bought after his active duties under the mortgage began, but on $14,000 of those obtained by him before; while the defendant contends that the corporation have no such right, and that he ought not in equity to account for any profits made by dealing in the bonds, even while he was running the road in the active exercise of his duties under the mortgage. This question has been argued with great ability and much at length on both sides, — the contention on one side being, that Elliot sustained the relation of trustee to the corporation and the stockholders, and that this fiduciary relation incapacitated him to speculate in the securities which were the foundation of his legal title and right of possession; — on the other, that he was acting and was bound to act wholly in the interest of the bondholders; that his relations and duties to them necessarily made his position antagonistic to that of the plaintiffs, and such as to negative all idea of a trust in their favor.
Not much has been found in the books bearing directly upon this point. The usual practice in England is to mortgage only the tolls, accruing profits, or future calls, of the corporation — Perry on Trusts, sec. 750; and in this country, where the practice has been different, the legal character of the relation sustained by such trustee to the corporation and the stockholders, and the rights and liabilities dependent on and growing out of that relation, do not appear to have been much considered by the courts. Perry on Trusts, sec. 754, et seq. The facts of the relation sustained by Mr. Elliot to this corporation and its stockholders are within a narrow compass, and easily understood. He was, in the first place, their treasurer and clerk. Then they executed to him a mortgage of their property and franchise, not to secure a debt they owed to him, but to hold as security for the payment of their bonds, whoever might hold and own them. After the execution of the mortgage, for the ten years which elapsed between the issuing and maturity of the bonds, the corporation remained in possession of their mortgaged property, with all the rights and subject to all the duties incident to *Page 431 their franchise. Mr. Elliot continued to act as their clerk and treasurer during this time the same as before, and in the latter capacity paid the interest on the bonds as the warrants were presented. So long as the interest was paid there was no breach of condition, and nothing for him to do in the way of an active performance of any trust under the mortgage. Thus far it was a dry and naked trust. But the bonds were not paid at maturity. By the terms of the mortgage it thereupon became the right of the trustee to enter and hold possession of the property for the purpose of realizing upon the security and enforcing payment of the debt. Mr. Elliot took possession of the road according to his right, and in the undoubted discharge of a duty he owed to the holders of the bonds. An act of the legislature was soon after obtained, which it was supposed on all hands had the effect to foreclose the mortgage, and so extinguish the interests and rights both of the corporation and the stockholders, and to invest the holders of the bonds, who thus became absolute owners of the road and franchise, with the substantial attributes of a corporation. The whole conduct of Mr. Elliot in managing the property from that time until the decision of the court in this case, reported 52 N.H. 387, was based upon this supposition, and, so far as regards any moral aspect it may present, is to be looked at with that fact constantly in mind. But the court held the statute, which was designed to operate as a foreclosure of the mortgage, ineffectual for that purpose; and so it turns out that Mr. Elliot has been in possession all this time, not as agent for the absolute owners of the road, but under and by virtue of the original mortgage as the representative and trustee of those beneficially interested as mortgagees. During all this time the corporation had the right to redeem by paying off the bonds, and for his services as trustee Mr. Elliot charged, and has been allowed by the master, compensation against the corporation.
It is not necessary to discuss the nature of his legal relations to these parties during the period from 1851 to 1861, while the interest was paid by the corporation and there was no breach of the condition of the mortgage. As has been said, the trust created in him by the mortgage was in the nature of a naked trust, and, under the circumstances, imposed no active duty whatever. The moment he took possession all this was greatly changed. His duty to the bondholders was plain and cogent. He must act promptly and efficiently on their behalf. He is their representative and agent, and is bound to take care of their interests with fidelity, and with such skill as he may possess. Their right is to be paid the mortgage debt, or, in default of payment, to have their title to the property and franchise made absolute by a foreclosure. These are the rights which he, as their agent and trustee, is to enforce and protect. He must manage the property judiciously, according to his best skill, in order that its earnings may go as far as possible towards paying the debt. Of course, prudent and efficient management of the property would have a tendency to maintain the credit of the corporation and enhance the market value of the bonds; and thus much he is bound to do, not especially because it may have *Page 432 the effect indicated, but because such is the obligation imposed by the trust he has undertaken on their behalf. But here I think his duty to the bondholders in that direction ends. It clearly was no part of that duty to buy a large quantity, or a small quantity, of those bonds on his private account, for the purpose of carrying up their market price. It does not follow, because this was an act not required by his duty to the bondholders, that it was certainly inconsistent with that duty. We need not now deny his right, so far as regards the other bondholders, to buy the bonds fairly in open market, taking no advantage of his position and the knowledge gained therefrom to overreach the seller; although a court of equity would undoubtedly scrutinize such a transaction pretty carefully, even when the purchase is made before the active duty of the trustee begins, and no interests are involved but those of the bondholders. Mr. Perry says as much: "Doubtless they can purchase the bonds for which the mortgage stands as security in the open market; but they could not go among the bondholders and solicit the purchase of the bonds, for, holding the security for the bonds, their position and influence would be such, and the danger of fraud so great, that a court of equity would not allow the bargain to stand." Perry on Trusts, sec. 749.
The idea, that it was any part of his duty to the bondholders to purchase one third or one half the bonds, more or less, for the purpose of enhancing their market value, and so, to all practical intents, adding to the sum for which the corporation may procure the extinguishment of the debt, cannot be supported. He was bound, as already remarked, to manage the property well, and apply the earnings to the payment of the debt, and there, so far as regards any action for the purpose of enhancing the value of the bonds, his duty to the bondholders ended.
What was his relation to the corporation and its stockholders after he took possession of the road? Undoubtedly he was the representative of the beneficial mortgagees. In his relative character of trustee he was mortgagee, and, in all matters arising between him in that capacity and the corporation, he is to be regarded as a mortgagee in possession. But it is as trustee of the bondholders, and no otherwise, that he is mortgagee in possession. He does not act as an individual at all. The question we are to decide does not arise between the bondholders and the corporation, or between Dr. Elliott [Elliot], as trustee of the bondholders, and the corporation, but between Dr. Elliot, in his individual capacity, and the corporation; and I do not see how it is affected one way or the other by the fact that as trustee of the bondholders he was a mortgagee in possession. Grant that in that capacity his interest and duty were antagonistic to that of the mortgagors, it is only in protecting and enforcing the rights of his cestuis que trust that his conduct is to be governed by the duty thus imposed. He certainly cannot justify an individual act, otherwise inadmissible, on account of his relations with the plaintiffs, on the ground that such act would have been admissible had it been done in his representative capacity. Suppose, as is said, a mortgagee in possession may buy in other incumbrances on the same property, or other demands secured by the same mortgage, for less *Page 433 than their face, and then hold them against the mortgagor at par: what application has that to this case? What other incumbrances were there to be bought? Mr. Elliot, as trustee of the bondholders, and so mortgagee in possession, represented all the bondholders. It is plain that, as such trustee, he could not buy in any other incumbrances for a variety of reasons, among which, in addition to the one already give (that there were no others), may be mentioned the fact that he had no authority, express or implied, from his cestuis que trust to do so, and none of their money with which to make the purchase.
The simple statement of the matter is, that Elliot, in his representative capacity of trustee and mortgagee, bought no bonds. He bought them as an individual, and as an individual he was not mortgagee. So this is not the case of a mortgagee dealing in the incumbrances upon the estate.
What duties, if any towards the corporation and the stockholders did Elliot's act in taking possession of the road impose upon him? It was the deed of the corporation that made him trustee and agent of the bondholders, and clothed him with the character of mortgagee. It must be very clear that he cannot, as an individual, or as mortgagee in trust, owe any duties to the mortgagors inconsistent with the duty he owes under the deed to the bondholders. Full effect must be given to the deed through him, and the legal rights of the beneficial mortgagees are not to be impaired by any act done by him, whether in the interest of the mortgagors or in his own individual interest. It may be admitted that, as trustee of the bondholders, he owes the mortgagors no duties except those which the law imposes upon mortgagees in possession; but, at the same time, I think it cannot be denied that as an individual he stands in a relation to them of great delicacy as well as responsibility. Without any personal interest he is in possession of their property and franchise, holding under the deed, primarily for the benefit of the bondholders, ultimately, when the bonds are paid, for the corporation and the stockholders. The corporation created the trust in favor of the bondholders. He was selected and appointed by them, and in view of the very important duties that all knew might eventually arise, he must have been chosen on account of his known or supposed ability to do well what by the provisions of the deed might in the end be required of him. Such a selection on the face of it implies high personal confidence and trust. By accepting the position and entering upon the active performance of its duties, he took upon himself, as it seems to me, an implied obligation to protect and preserve the interests and rights of the corporation, just as much as he did to enforce the rights of the bondholders under the mortgage; — nor were his duties to these parties really at all repugnant or incompatible. With respect to the management of the property, which was in reality the main thing to be attended to, their interests were identical. The legal interest of the bondholders was, that the bonds be paid; the interest of the mortgagors was clearly the same. Each interest alike called for a wise and efficient management of the road. The legal rights of the *Page 434 mortgagors were the exact counterpart and complement of the rights of the mortgagees. His duty to one commenced just where his duty to the other ended. There was no clashing, but still no open ground which any other interest could be permitted to invade. Nothing was called for but a just and disinterested administration of the affairs entrusted to him, with a single eye to the rights of the two parties, whose interests were thus placed in his care. Any act done by him in this situation of things, whereby his own private interest as an individual should be brought into antagonism and hostility to the interests of the mortgagors, would, in my judgment, be just as much a renunciation of his implied obligations to them, just as much a breach of the duty and trust he had undertaken on their behalf, as would an act bringing his individual interest into hostility to those of the bondholders be a breach of his duty to them.
Sturgis v. Knapp, 31 Vt. 1, was a case where there had been a mortgage of a railroad and its franchises to A and B, as trustees for bondholders. The questions in that case did not rise until after there had been a foreclosure of the mortgage; but some observations in the opinion of the court, delivered by Chief-Justice REDFIELD, are quite pertinent, and I quote them. He says (p. 52), — "The first and the great inquiry in the case is in regard to the nature of the estate in the trustees created by the mortgage, the forfeiture, and the foreclosure.
"It is obvious that the estate must depend very much upon the implications growing out of the relations of the parties and the duties consequent thereon; and that these may change from time to time, as circumstances change. That which begins as an active responsible and fiduciary trust, may, by lapse of time and intervening relations, become merely a naked, dry trust, and vice versa. The nature and character of all trusts depend almost exclusively upon the implications growing out of the state of the property, and the purposes desired to be accomplished, and the mode provided for that end. And it is one of the most important, and at the same time one of the most delicate and difficult, offices of a court of equity, to raise these implications, with wisdom and justice, so that the full purpose and object of the trust shall be effected without violence or forced construction of the instrument under which the trusts are created. * * *
"There are extensive trusts connected with the whole subject of corporate action, which come under the class of what in the books are denominated constructive or implied trusts. In one sense, the corporation itself is a mere trustee, holding all its funds and all its powers and franchises in trust for the shareholders, who are the ultimate cestuis que trust.
"The persons to whom these mortgage bonds are payable have not only the express trusts to perform, which are created by the terms of the deed under which they are made trustees, but they are also constructively trustees (after the forfeiture and taking possession of the road, which they may always do after condition broken) for subsequent incumbrancers, for the corporation, and ultimately for the shareholders themselves. * * * *Page 435
"After the forfeiture occurs, either by non-payment of interest or principal, or both, as in the present case, the duties of the trustees became not only active and responsible, but critical and delicate. It not only is not a dead, dry trust, but is one of the most active and momentous responsibility. We presume no man who had ever been placed in such a position, and who had any proper sense of his position, would ever think of regarding or treating it as in any sense a trust of a nominal or indifferent character. * * *
"After the surrender and before foreclosure, as we have before intimated, while the control of the road for the benefit of the bondholders might fairly be presumed to be temporary, it could not with the least show of propriety be expected that any change in the principle of their mode of action should be attempted. Any one who accepted the office of trustee under a contract of this character must be supposed to look directly at the reasonable probability of the occurrence of this contingency — the failure to pay promptly — and to have assumed his position with reference to the new duties resulting from the occurrence of such contingency, and would consequently be bound to perform the duties arising from it; and all the parties in interest — the bondholders, the creditors of the corporation in the order of their priority, the corporation itself, and, ultimately, the shareholders — will have a vested interest in having these duties performed by such trustees under the security of their responsibility and capacity, both pecuniary and personal."
It is true, as the defendant says, that the legal liability of the corporation upon the bonds has all the time been to pay their full amount, with interest, to the holders. It is at the same time true, that when the bonds are selling in the market or otherwise at fifty cents on a dollar, the debt might be extinguished by the corporation for one half the amount they are legally liable to pay. The actual value of the bonds was all the time measured by the amount for which they could be sold, and this would depend upon the understood ability of the corporation eventually to pay them in full. Now, when Mr. Elliot, after he had taken possession of the road under the mortgage, became the owner of $46,000 of the bonds secured thereby, his individual interest lay strongly in the direction of enhancing their salable value, and so of increasing the amount for which the corporation might procure the extinguishment of the debt and remove the mortgage. The master finds that his buying up the bonds was in part the cause of advancing their price from about fifty per cent. to about par. His duty to the bondholders did not call for any such private speculation for such a purpose; and even though it should be said that a legal wrong was not thereby done the mortgagors, inasmuch as their undertaking was to pay the full face of the bonds, the proceeding nevertheless, strikes my mind as quite inconsistent, in an equitable point of view, with the relation of confidence and trust in which he stood to them.
The reasons for scrutinizing with considerable care the acts of one situated as this trustee was, and applying the equitable rules relative to the conduct of trustees with a reasonable degree of strictness, seem to *Page 436 me, indeed, strong and imperative. He has the whole control and management of the road. His position necessarily gives him means of knowing its present resources and future prospects, possessed by no one else. By accepting that position he assumed obligations to all the real parties in interest altogether inconsistent, as it seems to me, with the interposition of any private and personal interest of his own. With respect to the duties thus voluntarily assumed, the individual was absorbed as it were in the trustee. The interest of the corporation, which he was bound to protect so far as he could without infringing the legal rights of the bondholders (also in his keeping), lay in the direction of extinguishing the debt. In his relative capacity he represented the debtor and creditor both. A purchase of bonds by him on behalf of the corporation would be an extinguishment of the debt pro tanto. In doing that he would not be buying of his cestuis que trust, because as purchaser he would represent the debtor. If as an individual he may buy the bonds that would be, in the first place, a purchase by a trustee of his cestuis que trust, and, in the second place, would to that extent change his position from that of a trustee with no interest but to preserve the just and legal rights of both debtor and creditor, to that of a creditor having in his control and management the property of the debtor wherewith to pay himself. In this view his purchase of bonds ought to be and must be treated by a court of equity as an act done by him in the line of his duty to the corporation and on their behalf, and so an extinguishment of the debt to that extent. That brings us practically to the same result as holding him to account for profits, — for it is clear that his assignment of the bonds, long after maturity, to the Cheshire Railroad, of which corporation he was at the time a director, could give that corporation no greater or different rights with respect to them than he possessed himself, for the reason that in making such transfer he undertook to act as buyer and seller both; and hence it follows that it makes no difference so far as regards his account as trustee, whether he be charged with the profits realized, with interest, or held to procure the surrender of the bonds upon payment of the sum advanced by him in their purchase, with interest on that sum.
Upon the best consideration I have been able to give the subject, and an examination of all the authorities to which we have been referred, I am of opinion that the purchase by Mr. Elliot on his private account of the $46,000 bonds was not compatible with the duty he owed the corporation in the performance of his trust under the mortgage, and that he ought in equity to account to them for the profits realized in that transaction. And I base my conclusion upon the broad ground that the moment he entered upon the active duties of that trust his relation and his duties to both parties became fixed, so that he could not, by buying up all the bonds, for example, throw off the character of trustee for bondholders with which he was invested by the deed of the corporation, and in which he began to act, and assume that of owner of all the bonds, and so of actual beneficial mortgagee in possession. This could not have been contemplated when the corporation selected *Page 437 him (their own treasurer and clerk) to act in that capacity, and, as I have already said, would be entirely inconsistent with the implied obligations which he thereby assumed. It need not be said that to hold a different rule would be to hold out the most direct encouragement to trustees in such a situation to mismanage the property for the purpose of depreciating the bonds in the market, so that they may be able to buy them for less than their actual worth.
I think Mr. Elliot's duties to the Ashuelot Railroad Corporation and its stockholders assumed the character which should forbid a purchase of the bonds for his own individual gain the moment he took possession of the property under the deed; and, in the absence of all bad faith or actual wrong intent, I think he should not be held to account for profits on the bonds owned by him at that time; — but as to the $46,000 purchased afterwards, he should be held to account for the profits actually realized, according to the report of the master, with simple interest from the time they were exchanged for the Cheshire bonds to the date of the decree. In estimating the amount of these profits, there should be deducted simple interest on the sum paid for the bonds, from the time it was thus advanced by him in their purchase to the time of the exchange.
The next question is, What are the Cheshire Railroad entitled to receive upon the bonds held by them? What has been said with reference to the duty of the trustee, in my judgment shows the basis upon which this matter must be determined. In procuring and making over those bonds to the Cheshire Railroad, Mr. Elliot was acting as their agent, and one of their directors. That corporation were chargeable with all his knowledge in the premises. In fact, his knowledge was their knowledge, the same as his action was their action. It seems to follow quite conclusively that they are entitled to receive the same that Mr. Elliot would have been entitled to receive, had he procured all the bonds for himself personally, and retained them in his own hands. What is the result? As to the $24,000 owned by Mr. Elliot at the time he took possession, the Cheshire Railroad are entitled to the full face of the bonds, with interest from January 1, 1861. As to the remaining $136,000, they are entitled to the amount they paid for them, with interest from the time it was paid.
I think all interest on these bonds after January 1, 1861, should be reckoned at six per cent., without rests; and I put this on the ground that by a true construction of the contract, interest after the breach — after all the interest warrants had been presented and paid — is recoverable, not upon and by virtue of the original contract, but as damages for the detention of money due.
Of course the representative of Mr. Haile, Mr. Faulkner, and other holders of bonds if there are any, are entitled to the face of their bonds, with simple interest, from the time of their maturity to the time of payment.
I do not see but that the lease of land in the Y must be declared void *Page 438 after the surrender of the mortgaged property, in accordance with the finding of Judge HIBBARD; but I think equity requires that the decree should be shaped in such way as not to deprive the Cheshire Railroad absolutely of their betterments. I see no legal objection to the course proposed by my brethren, and agree to the result reached by them on this point.
As to the land in Winchester purchased by the trustee, I am of opinion that the plaintiffs are not bound by that purchase, and need not take and pay for the land unless they choose.