equipment obligation, retaining title to the rolling stock holds it back from the lien of any such prior mortgage,20 and makes it

*The yields computed for the premier securities of roads in the hands of receivers are not as reliable as the previous calculations, because based only on one or two separate securities. These are, however, the old underlying first mortgage bonds on the main line trunk stem. Such securities have their values but little affected by the receivership of the whole system.

+The general credit securities were in default and no computation of investment yield is possible. They were quoted all the way from 44 per cent of par for the debentures of the Rock Island road down to 6 per cent of par for the debentures of the Pere Marquette.

20 Leading early case United States v. N. O. Railroad. 79 U. S. 12 Wall. 362.

possible to use the rolling stock as the basis of its own purchase money loans.

In addition to these two main reasons there are, as has been said, others which sometimes influence the issue of equipment obligations. The tax laws of a state may subject bonds to a personal property tax, while the equipment certificates, being certificates of part ownership in physical property, escape. Again the bankers of the road may believe there is a better demand for the road's obligations with banks than with private investors, and equipment obligations are especially favored by banks. Still again the car and locomotive manufacturers are often willing to accept an equipment obligation in part or for nearly the whole payment of railway purchases on cheaper terms than the railroad can obtain by selling its own bonds and using the proceeds to reimburse the manufacturers. This is especially true at a time of slack business activity combined with high interest rates.

In substance, all equipment obligations are direct liens on rolling stock, but as now issued they may be divided into two great classes -those issued under the Philadelphia plan of a lease and those issued under a direct mortgage, sometimes, without reason, called the New York plan. As the Philadelphia plan is at once the most individual and the most complex, giving rise to the strongest kind of railroad obligation, it will be described first in considerable detail.

The Philadelphia plan"1 of issuing equipment obligations, as it has now been crystalized into more or less regular practice, consists of a device whereby the railroad makes an initial payment towards the purchase of a definite number of cars or locomotives, but does not acquire the title to the property until it has met the unpaid

21 Certain specific reasons explain the association of equipment obligations with Philadelphia and Pennsylvania. (1) They originated among Pennsylvania corporations. (2) The conditional sale is not a legal basis for a direct equipment obligation. (3) Car trust certificates, although having mortgage bond security, yet as certificates of part ownership in physical property, have been considered non-taxable when held by Pennsylvania holders. (The best legal opinion now is that this question has never been finally adjudicated.) (4) The location in Pennsylvania of large equipment companies. (5) The example of the Pennsylvania Railroad, although this reason has been effective only a short time.

balances.22 The road uses the equipment under a lease but never obtains even conditional ownership until it has paid the entire purchase price. The procedure is made clear by observing the steps of a typical case. A railroad desires to acquire some new cars. It enters into a contract with the manufacturer, who builds the cars according to the specifications of the road. When the equipment is ready for delivery, the road then enters into an elaborate agreement with some individual, a trust company, or association created for the purpose, under which the latter shall acquire and pay for the equipment nearing completion and lease it to the road.23 The individual, trust company or association becomes the actual and legal owner of the equipment, not merely the trustee. About one tenth of the necessary money is supplied by the road and the other nine tenths is obtained from bankers and ultimately from investors through the sale of participation certificates based on the security of the equipment itself and the pledge of the lease. This lease involves at least five provisions." First the railroad or lessee promises to pay the owners or lessors each year an amount of money necessary to meet all the interest on the notes or participation certificates then outstanding together with a certain instalment on the unpaid portion of the entire issue. Secondly, the railroad promises to keep the equipment repaired and insured, and also to replace any cars burnt or destroyed. Thirdly, the railroad promises to put a name plate on each car describing it as the property of the owner or lessor and to use no lettering so as to imply that the road is itself the actual and legal owner of the rolling stock. Fourthly, the road promises that, in case it fails to meet any part of its obligation,

22 The best and clearest account of the course of the procedure is, in the opinion of the present writer, an editorial in the Commercial and Financial Chronicle, vol. LXXXII (1906), p. 839.

23 In very rare cases there is no trustee, the manufacturing company leasing the equipment directly to the road-as in St. Louis and San Francisco R. R. Series M (1907) the Pullman Company leased the cars directly to the road.

24 The Committee on Railroad Bonds and Equipment Trusts of the Investment Bankers Association found that trustees had been negligent in insisting that the provisions of the lease be fully lived up to. The committee suggested certain reforms. Chamberlain gives an outline of these in a recent popular article. He also summarizes certain clauses that should be present in an equipment trust agreement. Moody's Magazine, vol. XVIII, p. 135. The suggestions on the part of the committee are excellent, but its effects are likely to be frustrated by one difficulty-Who shall pay the trustee for continuously checking up its trust?

especially if it fails in its payments, it will assemble at one point the entire equipment covered by the lease and deliver it over to the lessor or owner. Lastly, the lessor agrees that on the payment of the last instalment it will execute a bill of sale to the road conveying to it the title of the rolling stock. From this description it is clear that the whole purpose of the agreement is to avoid giving the railroad even a semblance of a title to the equipment while it is using it but at the same time provide an arrangement which shall enable the road to pay gradually for it and ultimately to own it. The security is never the credit of the road but the merchantable value of the rolling stock itself; yet the road has the full and free use of the rolling stock while it is paying for it as if it were its own. When equipment obligations are not issued under the Philadelphia plan the railroad acquires the rolling stock and then deeds it in trust to a trustee as in any other mortgage. Or the trustee acquires the equipment directly and delivers it to the road under a conditional sale agreement. Such obligations, being based directly on the credit of the issuing road, with the collateral pledge of the equipment, are called equipment bonds.25 They are an outgrowth

25 Unfortunately the nomenclature on this subject is by no means clear. The railroads and especially the investment bankers have seemingly sought to befog the public mind. If issued under the straight Philadelphia plan, the obligation is not that of the railroad (although it may be and is often guaranteed by the road), but merely of the trust estate of the equipment. The trustee may be represented by a private person, a trust company, a car manufacturer, an association, or all these acting together. The point is, the certificate is the right to participate in certain property held under trust, which includes (1) the equipment, (2) the legal instrument or lease under which the owners or trustees look forward to the final sale to the railroad. An equipment bond, on the other hand, is merely the promise of the road to pay the bearer or registered owner a certain sum, a promise resting on the pledge of equipment with a trustee. An "equipment bond" is not issued under the Philadelphia plan, except by the use of a misnomer. There have been and are today many attempts to combine the two ideas, but, on analysis, it will appear that the obligation is reducible to one or the other class. The term "equipment note" is sometimes used, and may refer either to the Philadelphia plan certificates or to the bond. Also various roads have tried to combine the two forms by acquiring the equipment, deeding it to a trustee, and then leasing it. This is an unfortunate subterfuge. Some roads, too, have issued an out and out equipment bond, but have sought to give it the appearance of a Philadelphia plan certificate by bringing in the lease idea. An editorial in the Commercial and Financial Chronicle (vol. LXXXII, p. 361) succinctly reviews the confusion in names, and attempts to clarify the essential differences in form. The statement given there is the clearest in print.

of the original Philadelphia car trust certificates26 and represent a distinct emasculation of the strength of the earlier obligations. The road has some kind of a provisional title to the equipment" whereas in the Philadelphia plan it has not the slightest semblance of a title. Therein lies the strength of the Philadelphia form of obligation.28 Except in legal details the two methods of issue are based on the same idea-a mortgage on equipment to be liquidated by the road through instalment payments.

The issue of equipment obligations seems to be a matter of individual policy among the roads. Before 1892 it could be said with considerable show of evidence that their issue was, with a single exception, confined to weak roads, but since 1900 roads of the strongest credit have resorted to this means of borrowing. Among the strong roads, the Pennsylvania had in 1915 over $40,000,000 of equipment obligations, and the New York Central over $50,000,000.29 On the other hand the roads under the management of J. J. Hill had not a single dollar of equipment obligations 30 nor had the Delaware, Lackawanna and Western, nor the Union Pacific

28 The extensive issue of straight equipment bonds, without even the form of the Philadelphia plan, is comparatively recent. It is to be traced to the adoption of the use of equipment loans by the roads of strong credit, outside of the Pennsylvania system, and would not go back more than ten or twelve -years. It is true that some of the coal roads were using equipment bonds before 1890 but the instances are rare. There were probably no straight equipment bonds prior to 1885.

27 Even then under the conditional sale, except in Pennsylvania and possibly one or two other states, the title is considered to remain with the trustee. One of the latest decisions covering this point states: "The title to the equipment sold under the contracts here involved remained in the vendors until fully paid for. The interest of the railroad companies and their mortgages was but an equitable interest, and subject to the terms of the conditional sale." Metropolitan Trust Company v. Railroad Equipment Company, 108 Fed. 918 (1901). 28 An excellent illustration of the difference of strength in the two kinds of issues is afforded by the reorganization of the Norfolk and Western Railroad. There were at the time of the failure two groups of equipment obligations: (1) Equipment mortgage 5 per cent bonds of 1888, $4,114,000 outstanding. These were not issued under the regular Philadelphia plan. (2) Car trust obligations, various issues and maturities, $3,125,000 outstanding. These were issued under the Philadelphia plan in its simple form or with certain unimportant modifications. In the reorganization, the equipment bonds were disturbed, the holders receiving new bonds and stock, whereas the car trust obligations were paid in cash, although it required over half the $5,555,000 of money raised for immediate needs. Plan given in Com. & Fin. Chron., vol. LXII, p. 641. 29 See note 12.

30 Except about $1,400,000 of the Colorado and Southern.