Union Trust Co. v. Illinois Midland Ry. Co. - 117 U.S. 434 (1886)
U.S. Supreme Court
Union Trust Co. v. Illinois Midland Ry. Co., 117 U.S. 434 (1886)
Union Trust Company v. Illinois Midland Railway Company
Submitted January 12, 1886
Decided April 5, 1886
117 U.S. 434
Three railroad companies in Illinois, with roads, one from Peoria to Decatur, one from Paris to Decatur, and one from Paris to the Indiana line in the direction of Terre Haute, Indiana, each, before September, 1874, issued bonds secured by a mortgage on its road. In September, 1874, each of the other two companies conveyed its road to the Peoria and Decatur Company, the latter assuming "all the bonded and floating indebtedness" of the other companies. In November, 1874, it changed its name to that of the Illinois Midland Company, and in January, 1875, issued bonds secured by a mortgage covering all its property, original and purchased, with the view of exchanging them, dollar for dollar, for the bonds of the sectional roads. In September, 1875, the owner of a majority of the stock of the companies, with judgment creditors of the Paris and Decatur Company, brought a suit in equity in a state court in Illinois against the Illinois Midland Company to have a receiver of all its property appointed and an account taken of all the claims and liens of its stockholders and creditors, and of those of the sectional companies, and to have them paid and adjusted according to equity. Such a receiver was immediately appointed, with power to run the road. In December, 1876, the Union Trust Company, trustee in the mortgages on the Paris and Decatur road, the Paris and Terre Haute road, and the Illinois Midland road, filed a bill in the proper circuit court of the United States in Illinois to foreclose those three mortgages, and in September, 1877, it was made a defendant in the state court suit on its own petition, alleging a default by October 1, 1875, in the payment of interest on the bonds embraced in all three of the mortgages. In February, 1878, it filed two bills in the same federal court, each for the foreclosure of one of the two railroad mortgages held by it. In April, 1878, it removed into that court the state court suit.
In August, 1881, holders of Paris and Decatur bonds filed a bill in the same federal court to foreclose the Paris and Decatur mortgage. By an order made in June, 1882, that court consolidated all the suits. Successive receivers, each replacing the prior one, were appointed by the state court in August, 1816, and by the federal court in December, 1878, and April, 1882. In June, 1882, a special commissioner was appointed to report as to the certificates of indebtedness issued by the receivers. He made his report in April, 1883, and, on exceptions to it, an interlocutory decree was made in June, 1881, making specific adjudications as to various receiver's certificates and other receiver's debts, and directing the commissioner to report as to other matters. He did so in January, 1885, and exceptions were filed to the report. A final decree in June, 1885, disposed of the litigated questions and provided for a sale of the mortgaged property and the distribution of the proceeds. Holders of Paris and Decatur bonds appealed because the decree gave to sixteen receiver's certificates priority over those bonds. When the first order was made under which six of the certificates were issued, neither any of the Paris and Decatur bondholders nor their trustee was party to the suit, but before any other order was made under which any of the certificates were issued, the trustee was made a party, and the Paris and Decatur interest had been in default for ten months when such first order was made:
(1) Certificates issued for necessary repairs must be allowed priority.
(2) It is no objection to this rule that the suit in which the first receiver was appointed was not brought by the bondholders or their trustee.
(3) The bill in that suit was sufficient to enable a court of equity to administer the property and marshal the debts.
(4) It was sufficient if the bondholders and their trustee were, after they were made parties, heard as to the merits of such first order and the application of the money for which the certificates were issued.
(5) The certificates issued to pay tax liens are to have priority.
(6) Persons having no connection with the case or the parties, who take directly from the receiver receiver's certificates issued to pay for necessary repairs, are not bound to see to the application of the proceeds.
(7) The holders of interest-bearing receiver's certificates taken within the limit of discount allowed by the court in the order authorizing the certificates to be issued are entitled to the face of the certificates and the interest.
(8) Receiver's certificates issued to replace earnings diverted from paying for operating expenses and ordinary repairs, to pay for replacing worn-out parts of the road, while large debts had been incurred for the operating expenses and ordinary repairs, are to be allowed priority.
(9) It was not necessary to have the express consent of the bondholders, to create a lien prior to the bonds on the corpus of the property, on the facts of this case, and in view of the neglect of their trustee to interpose all the while the road was openly in the charge of the receiver, and being run, with the interest on the bonds in arrear.
(10) Items for wages due employees of receiver, debts due from them to other railroad companies and for supplies and damages, wages due employees
of the road within six months immediately preceding the appointment of the first receiver, and debts incurred for the ordinary expenses of the receivers in operating the road may be allowed priority out of the corpus of the property if there is no income fund after scrutiny and opportunity for those opposing to be heard.
(11) The terms of the first order appointing the receiver did not impair or exclude the authority of the court to give priority to the claims above mentioned.
(12) It is proper to apportion among the three sectional roads, in proportion to their lengths, the items so allowed priority of lien, which include the terminal expenses and track rentals of the three sectional roads, although such expenses and rentals were different for each of them.
(13) The objection that there was no authority to buy the Paris and Decatur road cannot prevail, because the nonaction of the bondholders and their trustee, in allowing the court and the receivers to go on contracting debts in respect to the line operated as a unit under circumstances where no separation can be made as to the matters questioned and where important rights have accrued on the faith of the unity of the interests, amounts to such acquiescence as should operate as an estoppel.
As to 994 Paris and Decatur bonds, surrendered and exchanged absolutely for Illinois Midland bonds and marked "cancelled," they cannot be reinstated and put on a footing with bonds not exchanged, because the contracts under which they were exchanged were complied with, and the transaction was completed, no surrender of any of the bonds having been made dependent on the surrender of any other bonds or of the whole.
There being five several properties to be sold, it is proper to put up for sale each of the five separately, and then all five in gross, and, if the highest bid for the five in gross exceeds the aggregate of the highest separate bids, to strike off and sell the whole as an entirety to the person making the bid, and divide the proceeds into five parts, in proportion to the separate bids, and make distribution accordingly.
Certain debts due by the receivership to other railroads for rent of track, materials, and stores supplied, labor performed, and traffic balances, the debts having been purchased by other parties, are to be allowed priority.
Debts for large sums of money borrowed by the receiver without previous authority from the court are not to be allowed priority, although the moneys were applied to pay expenses of the receivership, repairs, supplies, and payrolls, and to replace moneys which had been so applied, because there never could be any difficulty in obtaining an order of the court, if one were proper, to borrow money to a specified total amount for specific purposes.
Rents due for use of rolling stock, and money due for extraordinary depreciation of rolling stock, and certain other items, were not allowed priority in this case.
No priority or preference among the debts and claims, whether receiver's certificates or other debts, given precedence over the mortgage bonds, was allowed (except as to debts for taxes and receiver's certificates issued to
borrow money to pay taxes, or to discharge tax liens), although, in the orders under which some of the certificates so given precedence were issued, it was declared that each certificate should be a lien on the property in respect of which it should be issued superior to all mortgage bonds and receiver's debts except receiver's debts theretofore declared by order of court to be special liens on such property.
Each one of the two principal appellants having succeeded in part on his appeal, no costs were allowed in this Court for or against any party, and the expense of printing the record was charged equally on such two appellants.
The case is stated in the opinion of the Court.