St. Louis &c. R. Co. v. Cleveland &c. Ry. Co.
125 U.S. 658 (1888)

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U.S. Supreme Court

St. Louis &c. R. Co. v. Cleveland &c. Ry. Co., 125 U.S. 658 (1888)

St. Louis, Alton, and Terre Haute Railroad Company v. Cleveland, Columbus,

Cincinnati, and Indianapolis Railway Company

No. 192

Argued March 22, 1888

Decided April 16, 1888

125 U.S. 658

Syllabus

The rule charging operating expenses of a railroad, debts due from it to connecting lines growing out of an interchange of business, debts due for the occupation of leased lines, and, generally, debts created under special circumstances which make an equity in favor of the unsecured debtor, upon the gross income of the road before a fund arises for the payment of mortgage interest is not applicable to a fund realized from a sale of the road under foreclosure of a mortgage, and, as a general rule, unsecured debts of the company cannot in such case take precedence

Page 125 U. S. 659

over debts secured by prior and express liens in the distribution of the proceeds of the sale of the mortgaged property.

The court holds on the proof in this case (1) that no gross earnings which should have been applied to the payment of the rent due the appellant were diverted to the payment of interest upon bonds of mortgage bondholders represented in this suit and interested in the distribution of the fund, and (2) that the appellant has no equitable right, as against the appellees, to priority of payment out of the fund.

The decree appealed from in this case was rendered upon an intervening petition of the St. Louis, Alton, and Terre Haute Railroad Company, filed October 30, 1882, in a suit then pending in the Circuit Court of the United States for the District of Indiana wherein Hinman B. Hurlbut was complainant and the Indianapolis and St. Louis Railroad Company defendant, the object of which suit was to foreclose the second and third mortgages, in which Hurlbut was the surviving trustee, upon the railroad and other property of the defendant. A decree of foreclosure and sale had been rendered therein on May 22, 1882, in pursuance of which the mortgaged premises were sold on July 28, 1882, for the sum of $1,396,000, subject to the outstanding first mortgage, and at the date of the filing of the intervening petition of the present appellant, they had become by purchase the property of the Indianapolis and St. Louis Railway Company. The proceeds of the sale were under the control of the court for purposes of distribution, and the matter had been referred to a master in chancery to hear evidence in support of the claims of any creditor claiming the right to share in that distribution, and to make report thereon.

The petition alleges, and it so appears, that by a decree of the Circuit Court of the United States for the District of Indiana, rendered July 26, 1882, in a certain suit in equity, in which said petitioner was complainant and the said Indianapolis and St. Louis Railroad Company and others were defendants, he obtained a decree against said Indianapolis and St. Louis Railroad Company for the payment of the sum of $664,874.70, besides costs, which decree remains unsatisfied and unreversed. This amount, it is claimed by the petitioner, is a lien upon the proceeds of the sale of the Indianapolis and

Page 125 U. S. 660

St. Louis Railroad, prior in equity to that of the bondholders secured by the second and third mortgages.

The indebtedness for which this decree was rendered arose under an agreement entered into between the petitioner and the Indianapolis and St. Louis Railroad Company on September 11, 1867, whereby it was provided that the Indianapolis and St. Louis Railroad Company should manage, operate, and carry on the business of that portion of petitioner's road known as its principal or main line, extending from Terre Haute, in the State of Indiana, to East St. Louis, in the State of Illinois, a distance of 189 miles, and of the Alton branch thereof, extending from Alton Junction, in the State of Illinois, to Alton, in said state, a distance of four miles, for the period of ninety-nine years from the 1st day of June, 1867; that said Indianapolis and St. Louis Railroad Company should pay annually during said term to the petitioner thirty percent of the gross earnings of the said main line and Alton branch until such gross earnings for the year should amount to $2,000,000, and twenty-five percent of any excess over $2,000,000, until the whole earnings for the year should amount to $3,000,000, and twenty percent of any excess over $3,000,000 of gross earnings for such year; and further that the said payment should amount in each and every year to at least the sum of $450,000, which amount was agreed upon as a minimum rental, to be paid absolutely without reference to the percentage which if formed of the gross earnings of any year, and without leaving or creating any claim or charge upon the earnings of any future year. The petition further shows that at the time of the execution of the said operating contract, the Indianapolis and St. Louis Railroad was not built, and that the Indianapolis and St. Louis Railroad Company was organized and created for the express purpose of furnishing to the Cleveland, Columbus, Cincinnati, and Indianapolis Railroad Company and the Pittsburg, Fort Wayne and Chicago Railway Company a through line to the Mississippi River by means of its connection with the petitioner's road, the St. Louis, Alton, and Terre Haute Railroad, under the foregoing contract, and that while the Indianapolis and St. Louis Railroad Company

Page 125 U. S. 661

nominally under that contract was the lessee of the petitioner's road, yet in fact it was leased and operated for the benefit of the other two companies named, who furnished the money to build the said Indianapolis and St. Louis Railroad, and who entered into a contract with the petitioner, guaranteeing performance of said agreement on the part of the Indianapolis and St. Louis Railroad Company, and who had entered into a contract between themselves for the management and operation of the continuous line of railroad from Indianapolis, in the State of Indiana, to East St. Louis, in the State of Illinois, including the Indianapolis and St. Louis Railroad and the petitioner's road. It was further alleged in the petition that the Pennsylvania Railroad Company, which, together with the Cleveland, Columbus, Cincinnati, and Indianapolis Railway Company, are made defendants to the petition, had succeeded to the rights and obligations under these several contracts and arrangements of the Pittsburg, Fort Wayne and Chicago Railway Company; and that the Pennsylvania Railroad Company and the Cleveland, Columbus, Cincinnati, and Indianapolis Railway Company were equal owners of the capital stock of the Indianapolis and St. Louis Railroad Company, and that the Cleveland, Columbus, Cincinnati, and Indianapolis Railway Company is the holder, substantially, of all the second mortgage bonds of the Indianapolis and St. Louis Railroad Company.

The petition further alleges that the eastern terminus of the St. Louis, Alton, and Terre Haute Railroad is the western terminus of the Indianapolis and St. Louis Railroad, the two thus forming a continuous line from Indianapolis to East St. Louis on the Mississippi River, the road of the petitioner being the only outlet for the Indianapolis and St. Louis Railroad west of Terre Haute; that a very large proportion of the earnings of the Indianapolis and St. Louis Railroad Company are derived from business received by it from the petitioner's leased line; and avers that the earnings of the leased road over and above the amount authorized to be retained by the Indianapolis and St. Louis Railroad Company for the purpose of operating the same at all times have been and are the property of the petitioner.

Page 125 U. S. 662

The petitioner further claims that the rental for the use and occupation of said continuous line constituted a part of the operating expenses of the Indianapolis and St. Louis Railroad Company; that the operating contract was executed before any of the bonds of the Indianapolis and St. Louis Railroad Company were issued and sold; that it was the duty of the Indianapolis and St. Louis Railroad Company to pay all of its operating expenses, including the rental of the petitioner's road, out of its earnings before it paid any interest on said bonds; but that the said Indianapolis and St. Louis Railroad Company, instead of paying its operating expenses as thus defined, diverted and appropriated its earnings to improvements of its property in better equipment and new construction, and to the payment of interest upon its bonds, and neglected and refused to pay the rental accruing to the petitioner for which it had obtained a decree, as above stated. And the petition alleges that during the time the Indianapolis and St. Louis Railroad Company has been in possession of the petitioner's road, the amount of such misappropriation and diversion of funds that should have been applied to the payment of operating expenses amounts to the sum of $1,000,000.

The petition further showed that on May 1, 1878, the Indianapolis and St. Louis Railroad Company made default in the payment to petitioner of the rental then due under the terms of said contract, and so continued to make default from and including April 1, 1878, up to and including October 26, 1878, during which time it was in possession and use of the leased road, receiving the profits and income thereof, and paid over no part of the gross earnings of said road to the petitioner whatever, but appropriated the whole of the same to its own use, thirty percent whereof during said time amounted to the sum of $164,052.82, which, it is alleged, was appropriated by the Indianapolis and St. Louis Railroad Company to improvements, betterments, and new construction upon its own line of railroad, in the purchase of rolling stock and equipment, and in the payment of interest upon its bonds.

It was further alleged in the petition that when the Indianapolis and St. Louis Railroad Company took possession of the

Page 125 U. S. 663

leased road in 1867 it received from the petitioner supplies of the value of $91,860.05, which, by the terms of the lease, the lessee contracted and agreed to return or account for to the lessor at the termination of the lease; that said supplies have long since been consumed by the lessee; that by the terms of the decree and sale in the principal cause the lease has been assigned and transferred to the Indianapolis and St. Louis Railroad Company, and it is claimed that said amount is a charge upon the proceeds of the sale of the leased road in the possession of the court for distribution.

The petition therefore prays for a decree awarding priority in payment in its favor out of the proceeds of the sale of the two sums of $664,874.70 and $91,860.05.

To this petition answers were filed by the Cleveland, Columbus, Cincinnati, and Indianapolis Railway Company, and by the Pennsylvania Railroad Company, in which the allegations of the petition in regard to the diversion of the earnings of the St. Louis, Alton, and Terre Haute Railroad Company to the purposes of the Indianapolis and St. Louis Railroad are denied, as well as the general equity set up by the petitioner.

On June 27, 1884, the cause having been fully heard upon the petition and the answers and proofs, a final decree was rendered awarding to the petitioner an amount found due to it for rental accrued while the road was in the possession of the receiver appointed under the foreclosure proceedings and directing payment thereof, but so far as the petition sought to establish a claim for rental prior to the date when the receiver took possession of the property, as against the proceeds arising from its sale, and so far as it sought to recover the value of the supplies turned over to the Indianapolis and St. Louis Railroad Company in 1867, at the time of the execution of the lease, the petition was dismissed. It is from that decree that this appeal is prosecuted.

Page 125 U. S. 667

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