thereby. The deed of trust recites at length the terms and conditions under which the bonds are issued and under which the property for their security is held. (See Form 44.)

A modern deed of trust is usually a very comprehensive and formidable instrument. A brief form may occupy perhaps from ten to twenty pages of printed matter. More extended forms frequently occupy one hundred pages or more.

In the bond itself reference is always made to the deed of trust by which it is secured, and in the deed of trust the bond is recited in full. The bond by express terms is subjected to the conditions of the deed of trust. Accordingly the statements of the bond are controlled by the explanations and any non-conflicting conditions of the deed of trust. If, however, the terms of the bond and of the deed of trust conflict, the bond prevails.2

If the deed of trust fails for any reason, the bonds then become the unsecured obligation of the corporation and take their place on a parity with the other unsecured corporate debts.

§ 361. Recitals of Deed of Trust.

In the deed of trust usually employed the preamble recites the conditions precedent to the issue, the form of bond in full, and the form of coupon and trustee's certificate, also in full, followed by the granting clauses, including description of property covered, and by the trust reservation with stipulation for equal participation of all the bonds of that issue in the protection afforded by the mortgaged property.

Following this come the "covenants, conditions, uses and trusts" subject to which the bonds are issued and the mortgaged property is held. These have a wide range. Some of the more usual are as follows: (1) Procedure for execution, certification and delivery of bonds; (2) enjoyment of property by mortgagee until default; (3) payment of principal and

2 Railway Co. v. Sprague, 103 U. S. 756 (1880).

interest without deduction for taxes, and in "gold coin," "legal tender" or otherwise, as the case may be; (4) payment of all taxes and assessments on property held under the deed of trust and, if the nature of the property is such as to require it, maintenance of the same in repair, under due insurance and free from liens; (5) provision that the deed of trust shall be a first mortgage-if such is the case-and be duly executed, recorded and maintained; (6) provision for any necessary additional assurances for protection of bondholders; (7) provision for trustee to enter upon property and conduct business without foreclosure under certain conditions; (8) sinking fund for retirement of bonds; (9) procedure for foreclosure in case of default; (10) provision that bonds shall be matured by failure to pay interest; (II) stipulation that loans, advances or payments made on coupons for account of the mortgagee shall not keep such coupons alive; (12) provision for redemption of bonds; (13) provision for discharge of deed of trust; (14) provision for substitution or appointment of new trustee; (15) disclaimer of responsibility on part of trustee; (16) interpretation of terms used in deed of trust; (17) provision that deed of trust may be executed in duplicate parts.

In addition to these common provisions, others are often dictated by particular conditions. Thus if both registered and coupon bonds are issued, provision must be made for registration and for the exchange of one for the other if this is prescribed; also provisions may be inserted for the issue of temporary certificates, or for replacement of destroyed or mutilated bonds, or for discrimination against coupons detached or assigned before maturity, or for exemption of the stockholders and officers of the issuing company from all liability under the deed of trust or for the bonds issued thereunder; or in a mortgage on realty it may be provided that upon payment to the trustee of a certain specified price, parts of the property may be sold free from the incumbrance of the mortgage, or that under prescribed conditions properties may be

withdrawn from the mortgage and new properties substituted in their place.

The duties of the trustee under a deed of trust are usually few but may be onerous. He certifies each bond issued. At times the recording of the deed of trust is made one of his duties. In case of default he is usually required either to take possession of the property and operate it or sell it, according to the conditions of the deed of trust, for the benefit of the bondholders. If called upon to operate the property, his duties and liabilities may be heavy. If the property is operated at a loss, he may be responsible for the deficit.

§ 362. Execution and Filing of Deed of Trust.

The deed of trust is executed with the same formality as a deed of land. It must be signed and sealed both by the corporation and by the trustee, and be duly acknowledged before a notary public or other duly authorized officer. The corporate signature is usually affixed by the president and the corporate seal is affixed and attested by the secretary. The acknowledgment is also usually made by the president of the corporation, but is of equal force if made by the secretary, treasurer or any other duly authorized executive officer. It is immaterial whether the deed of trust be executed within the state in which the corporation was organized or elsewhere. If realty is included the deed of trust must be filed in the office of the county clerk in every county in which the real estate is situated.

§ 363. Sinking Fund.

A sinking fund as applied to bond issues is a fund created for the purpose of redeeming the bonds when due, or prior thereto, as may be provided by the deed of trust. Thus bonds may be retired from time to time as the sinking fund accumulates, or the fund may be allowed to remain intact until the

maturity of the bonds, when, if properly constituted and maintained, it is sufficient for the retirement of the issue.

Sinking fund requirements will vary with the conditions. Sometimes a stated annual amount is paid into the fund. At other times the income from a certain source will be devoted to this purpose. Coal mining companies frequently reserve a certain amount for each ton of coal mined. Lumber companies sometimes reserve a certain amount on each thousand feet of lumber cut.

In the smaller corporations the sinking fund is usually informal and is kept in the custody of the corporation. For the larger bond issues, a sinking fund is usually established in the hands of a special trustee, who holds it subject to the conditions of the deed of trust.

The wisdom of a sinking fund is, in the case of most bond issues, apparent. Reserving as it does a moderate amount each year for the payment of the bonds, their final redemption is effected with comparative ease. Without such a fund another bond issue to retire the maturing bonds, or a default, would be the probable result.

In the case of railroads there is a tendency to dispense with sinking funds when bonds are issued for permanent additions or improvements, the bonds when due being replaced by a second issue. This is based upon the principle that the additions or improvements being permanent and being maintained out of earnings, are as much for the benefit of subsequent as of present stockholders and that the present stockholders should not be deprived of their dividends merely to provide a more valuable property and larger dividends for those who come after.

§ 364. Sale of Bonds.

Unless prevented by statutory enactment, bonds may be sold at any price that can be obtained. In most of the states there are provisions that bonds may only be issued for value

actually received, but, in the absence of some more specific limitation, bonds may still be issued below par if in good faith. In some few states more specific provisions exist. (See § 352.)

The sale of bonds below par by the issuing corporation may, however, constitute an infraction of the laws against usury. Thus if a 5 per cent. bond of the face value of $1,000 be sold for $500, the rate of interest paid on the money so secured is 10 per cent. If, then, this exceeds the legal rate of interest in the state in which the sale was made, the transaction is usurious and illegal, and for this reason the original purchaser, or subsequent purchaser knowing the conditions, might be unable to enforce the payment of his bond. This could not, however, be the case if the bonds were in the hands of an innocent holder for value, nor in states in which the statutes are silent as to usury, nor in states where bonds may by statute provision be sold below par, nor in states where corporations are not allowed to avail themselves of the defense of usury.

365. Liabilities of Vendor.

The vendor of a bond does not warrant the legality of the issue nor in any way guarantee payment of the bond. All he undertakes is that as far as he has knowledge the bond is legally issued and what it purports to be, that it has come into his hands in due course and for valuable consideration and that he is legally competent to transfer it to the purchaser. In this the bond differs from a note, draft or check, which the vendor is held to guarantee unless assigned "without recourse."

$366. Rights of Holders.

A bond as a negotiable or quasi-negotiable instrument, is not subject to the defenses that might exist between the original parties. In practice, "the courts go very far in protecting bona fide holders of corporation bonds, and will uphold and enforce such bonds under nearly all circumstances. The