The opinion of the court was delivered by: FULLAM
The Debtor is the corporate successor to the New York Central Railroad which, in turn, was the corporate successor of, inter alia, the Mohawk and Malone Railway Company. The petitioner, Irving Trust Company, is the successor indenture trustee of the first mortgage of the Mohawk and Malone Railway Company, dated July 1, 1892, securing an issue of $2,500,000 4% Gold Bonds due September 1, 1991. The petitioner seeks to impress a constructive trust, or impose an equitable lien, upon certain of the former Mohawk and Malone assets.
Under the provisions of the first mortgage, "any lands which, in the judgment of the said railway company, it has become expedient to disuse for the purposes of the road" may be sold, with the consent of the indenture trustee, and the proceeds paid over to the railway company "for the express purpose of investing the said proceeds in other lands, which new lands, when acquired by the said railway company, shall likewise be covered by, and subject to, the lien of this mortgage."
With respect to property other than "lands," the mortgage provides:
"And it is further agreed between the parties hereto that until default as aforesaid the said railway company may sell, exchange or otherwise dispose of such materials, rolling stock and other property as may have become old, worn out, disused or undesirable, or are not needed for the purposes of the road, renewing the same or substituting therefore other property of equal or greater value, the said new materials or property thus substituted being covered by and subject to this mortgage."
In practice, transactions involving the disposal of assets of the Mohawk and Malone were handled, over the years, as follows: In the case of real estate, the proceeds of the sales would be deposited with the indenture trustee in a "release of property account." From time to time, these funds would be paid over to the railroad, in exchange for either (a) certification that additions and betterments to property remaining subject to the lien had been made in the amount of such payments; or (b) deposit by the railroad with the indenture trustee, as substitute collateral, Gold Bonds, the cost of which to the railroad had been equal to or in excess of the amount of such payments.
In about the year 1961, pursuant to certain abandonment proceedings, the New York Central totally dismantled the Adirondack branch, formerly the property of the Mohawk and Malone Railway Company and subject to the first mortgage. The railroad salvaged and reused, or sold for scrap, materials having a total value of $511,044.82. The cost of dismantling and disposal was $132,674.16, leaving a net amount realized by the railroad in the sum of $378,370.66. Thereafter, New York Central merged into and became part of the Debtor. It was not until early in 1970, upon checking the records, that the Debtor discovered that no accounting had ever been made to the first mortgage trustee for the Adirondack branch salvage.
Under date of March 5, 1970, the Debtor sent the indenture trustee an accounting of this salvage transaction, together with Gold Bonds in the face amount of $379,000, for deposit as collateral. The only difference between this deposit and those which had preceded it on other occasions was that, instead of depositing bonds which had cost the railroad the sum to be accounted for the Debtor on this occasion deposited bonds having a face amount equal to the sum to be accounted for. The cost to the Debtor of these bonds was $251,776.22; as of March 5, 1970, the bonds had a market value of $168,655.
Except for acknowledging receipt of the accounting and of the bonds, the indenture trustee took no further action until June 22, 1970, the day after the Debtor filed its reorganization petition, when the indenture trustee wrote to the Debtor as follows:
"* * * We have reviewed this matter with our counsel and they have advised that in their opinion cash in an amount equal to the fair market value of the salvaged property should be deposited with Irving Trust Company as trustee under the above captioned indenture.
"Irving Trust Company, as trustee, has, in the past, invested monies so deposited in Mohawk and Malone bonds at the cost thereof to your company. Under present circumstances we do not feel that the purchase of Mohawk and Malone bonds would be in the best interests of the bondholders, hence we are unable to follow the procedure you have suggested.
"We would appreciate your arranging for the necessary remittance for deposit in the release of property account ...