Story Case

The Fort Kennedy Log and Lumber Railroad Company owned, in fee simple, ten miles of railroad track and equipment, worth $100,000. In the year 1890 it conveyed the title to this land to the Chicago Trust Company to secure a bond issue. The conveyance was a lengthy document, reciting its purpose to secure the payment of bonds to be issued, not exceeding $6,000 per mile of the road, and designated as the "First Mortgage Land Sinking Fund Bonds." Each bond was for $1,000, which the company promised to pay to bearer, with interest at seven per cent, payable semiannually, and the principal to be paid in the year 1920. It was further agreed between the trustee and the company, that the company should negotiate these bonds with which to build extensions and improvements; that the railroad company should remain in possession until it should be in default on payments. In case of default, the trustees were, after a certain length of time and in a certain manner, authorized to sell and convey the lands and equipment to satisfy the amounts payable under the bonds. But, in case there should be no default, and the company should fully perform, then "the estate, right, title and interest" of the trustee was to "cease, determine and become void."

Affairs did not prosper with the railroad company and in 1910 it was in arrears on its state taxes, so that under the tax laws of the State of Florida that part of the property lying in Price County was sold for taxes previously assessed and finally came into the possession of the Indian Rivers Land Company by purchase under the tax deed.

In the year 1914 the railroad company investigated the original tax sale and found that it was void for want of the requisite notice. It appeared positively that the county treasurer did not post a notice at the treasurer's office, nor at four public places, as was required. The railroad company thereupon brought an action in ejectment against the land company to secure possession of the land. The land company conceded that its title was defective, but defended on the ground that the railroad company had no title, since this had been conveyed to the Chicago Trust Company. It contended that in an action of ejectment the claimant for possession can never claim possession because of the weakness of the defendant's title; he must claim it on the strength of his own title. The railroad company decided that it had conveyed the legal title, but contended that the legal title belonged to it nevertheless, since this conveyance to the trustees was a mere mortgage, amounting to nothing more than a lien. Can the railroad company recover possession?

Ruling Court Case. Southern Pacific Railroad Company Vs. Doyle, Volume 8 Sawyer's Reports, Page 60; Volume 11 Federal Reporter, Page 253

In an action to recover the possession of certain land, the defendant, Doyle, set up as his defense that the plaintiff, the Southern Pacific Railroad Company, was not entitled to the possession because it had therefore conveyed the land to other persons, Mills and Tevis, who were now the owners and who were, as defendant alleged, the only ones who were entitled to the possession.

The company had made a deed of all its land, including that in question in this suit, to Mills and Tevis, as trustees, to secure an issue of its bonds. The deed reserved in the company the right to retain the possession and control of the lands until such time as it should default in the payment of the interest or principal of the bonds, and reserved the right to sell parts of the land. In case of default, the trustees were to have power to enter and take possession and sell the land, holding the proceeds to pay the bonds. If the bonds were paid at maturity, the interest and estate of the trustees were to cease and determine, and the whole ownership to revert to the railroad company.

The court held that such an instrument was no more in effect than a mortgage, and that it did not, therefore, deprive the grantor of the right to hold the possession and to seek the protection of the court for that purpose. Mr. Chief Justice Sawyer said: "Mortgages may be made in various forms. The sole purpose of the instrument in question appears in every part to be to secure the payment of certain bonds, which are constantly and always in the instrument itself called 'first mortgage bonds.' The parties evidently supposed it was a mortgage, and it doubtless is a mortgage in substance, in law and in fact, though it creates a trust."

The Southern Pacific Railroad Company, therefore, has the right to the possession of the land.

Ruling Law. Story Case Answer

A trust deed is a form of mortgage given to secure creditors whose rights are usually evidenced by instruments called bonds. The deed in form conveys the title to the property to some third person, often a trust company, to hold for the benefit of the creditors until the obligation has been paid. The mortgage deed is in effect a contract between the corporation making it and all persons who may become holders of bonds secured by it, and they are entitled to the same benefit they would have had if parties to the deed. The bonds are made negotiable, so that they may be conveniently disposed of in the market. Thus the bondholders are constantly shifting. The intervention of trustees to take and hold the title for the benefit of the bondholders is necessary, because of the magnitude common with the issue of these securities.

A mortgagor, in most states, still conveys the title to the mortgagee, but the conveyance is recognized as security to protect a debt. In substance, title remains in the mortgagor, and the mortgagee has a mere lien. So stringent is this rule that it has often been held by the courts that a deed in fee simple absolute, which was not apparently intended as a mortgage, but was in fact given to secure a debt under a parole understanding, is therefore a mortgage, leaving the title in the grantor and giving the grantee a mere security for his debt, to be enforced like an ordinary mortgage. Defense of land company, in Story Case, is not good. Except as between railroad company and trustee and bondholders, title is in railroad company. It has right to possession, and can maintain its action of ejectment.