Quincy, Missouri & Pacific R. Co. v. Humphreys
145 U.S. 82 (1892)

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U.S. Supreme Court

Quincy, Missouri & Pacific R. Co. v. Humphreys, 145 U.S. 82 (1892)

Quincy, Missouri and Pacific Railroad Company v. Humphreys

No. 223

Argued March 23, 1892

Decided April 25, 1892

145 U.S. 82

Syllabus

A receiver appointed by order of a court of chancery is obliged to take possession of a leasehold estate if it lie included within the order of the court, but he does not thereby become the assignee of the term, or liable for the rent, but holds the property as the hand of the court, and is entitled to a reasonable time to ascertain its value before he can be held to have accepted it as lessee.

The Wabash Company controlled 3,600 miles of road, made up by the consolidation and leasing of many different railroads, upon nearly every one of which there existed one or more mortgages. Among them was the Quincy road, 77 miles in length, which was leased by the Wabash in August, 1879, for a term of 99 years, with privilege of renewal, acquiring with the lease a majority of the stock. The Quincy road at the time of the lease had issued mortgage bonds to the amount of $2,000,000, on which there was a large amount of interest in arrears. To provide for this and other floating debts and to extend the road, a new issue of mortgage bonds was provided for as part of the arrangement, which were issued, and the road was completed, and entered into and formed part of the Wabash system. In May, 1884, the Wabash company filed a bill in equity, alleging that it was insolvent and could not procure the means to pay its floating debts and interest due, and praying the court to take possession of its property and administer it as a whole. Receivers were thereupon appointed, who took possession. They were

Page 145 U. S. 83

directed to pay out of the income which should come into their hands rental which had accrued or which might accrue upon all the company's leased lines, but to keep accounts showing the source of income and revenue with reference to expenditure. In June, 1884, the trustees under a general mortgage which the Wabash company had made of its whole system, filed a cross-bill praying for the foreclosure of their mortgage and the appointment of receivers, but the court declined to appoint receivers other than those already appointed. On the 26th of January, 1854, the receivers informed the court of their inability to pay interest falling due on certain classes of bonds and interest on certain stocks, and made a statement in regard to several of the consolidated and leased roads from which it appeared that the earnings of the Quincy road had at no time since its acquisition been sufficient to pay its operating expenses, the cost of its maintenance, and the interest upon its mortgage bonds. The receivers further petitioned the court for its advice, and they were thereupon ordered to keep separate accounts of the earnings, incomes, operating expenses, cost of maintenance, taxes, etc., of each of such lines, and to make quarterly reports thereof. These reports, when made, showed as to the Quincy Company that in May, 1885, there was a deficit of $20,251.09 in nine mouths' working. The court thereupon made a general order as to all the properties which provided in substance that where there was no income, rental claims were not to be paid by the receivers. On the 15th of July, 1885, the trustees of the Quincy mortgage petitioned the court to direct the receivers to transfer that road and its rolling stock to them, and an order was made to that effect. No possession was taken under that order, but the leased property was retransferred before the sale under the foreclosure of the general mortgage of the Wabash Company. The proceedings under the cross-bill resulted in a decree for such foreclosure of the 6th of January, 1886. No surplus was realized from the sale under that decree. The receivers' accounts on surrendering the property showed the net earnings to be 3,304,633.61 less than the amount of the preferred debts with whose payment they were charged. On the 8th of December, 1885, the intervening trustees of the Quincy mortgage filed a petition praying the court to order the receivers to pay arrears of interest, taxes, cost of repairs and rental, aggregating $114,380, and to decree them to be liens superior and paramount to all mortgages on all the property of the Wabash Company. On the 19th of March, 1888, the court denied this prayer and dismissed this petition from which the Quincy Company and the trustees took this appeal.

Held:

(1) That the occupation of the Quincy road by the receivers under the order of court created no relation which obliged them to pay rent therefor under the lease.

(2) That no equities existed which called upon the court to divert the proceeds of the sale or the net earnings of the property while in the receiver's hands and apply them to the payments prayed for by the intervenors.

Page 145 U. S. 84

(3) That the action of the court in appointing receivers on the application of the mortgagor could not be successfully challenged in this appeal.

The Court stated the case as follows:

The Quincy, Missouri and Pacific Railroad Company of Missouri owned in 1879 about seventy-seven miles of road extending westward from West Quincy toward the Missouri River; had issued mortgage bonds to the amount of $2,000,000, and owed, in addition to the principal of said bonds, a large amount of overdue interest accrued thereon. By an indenture made August 21, 1879, the railroad of this company was leased to the Wabash Railway Company for a period of ninety-nine years, with the option to the lessee to renew the same perpetually. By the terms of this contract, a majority of the common stock of the Quincy Company was to be transferred to the Wabash Company, so as to give the latter control of the former, and a majority of directors in its board was to be elected in the interest of the Wabash Company. The Wabash Company was to supply $125,000 to the Quincy Company to enable it to complete the construction of its road to Milan, to a connection with the line of the Burlington and Southwestern Railroad, and was itself authorized to extend the road from Milan to its contemplated terminus at Brownville, on the Nebraska state line. A new mortgage was to be made, covering all the property of the Quincy Company, and securing bonds at the rate of $9,000 per mile, which was to be used in retiring the bonds then outstanding, and providing for future construction. Preferred stock of the Quincy Company was also to be issued and used in connection with the new bonds to liquidate its outstanding indebtedness, then estimated to be about $600,000.

The Wabash Company agreed to set aside certain percentages of the gross earnings derived from the operation of the Quincy Company's road, and to apply these percentages first, to the payment of interest on the new bonds, and second of dividends on the stock. The company guaranteed to pay interest on the bonds in the event that the said percentage of

Page 145 U. S. 85

gross earnings should be insufficient for that purpose, to maintain and operate the railroad of the Quincy Company, keeping the same in good condition and repair for the full term of the lease, and to pay all taxes.

It was further provided that if the principal of the bonds secured by the mortgage should become due in consequence of default in the payment of interest, the Quincy Company should have the option to forfeit the lease and reenter without process of law.

Under date of October 1, 1879, a mortgage was made by the Quincy Company to Humphreys and Browning as trustees whereby all its property, including leases and leasehold interests, was conveyed to the trustees to secure the payment of bonds to be issued at the rate of $9,000 per mile, and the mortgage provided that a default of six months in the payment of interest might be availed of by the bondholders as a cause for declaring all the bonds forth with due.

November 10, 1879, the Wabash Company was consolidated with other railroad companies, the consolidation forming the Wabash, St. Louis and Pacific Railway Company. This company received possession of the railway of the Quincy Company on July 1, 1880, and by the first of July, 1881, had extended the road from Milan to Trenton, a distance of about thirty-one miles.

On the 27th of May, 1884, the Wabash, St. Louis and Pacific Railway Company filed its bill in equity in the Circuit Court of the United States for the Eastern District of Missouri, stating that it was insolvent, that it had accumulated a floating debt for its maintenance of $4,784, 145, that it was about to make default in interest payments, that such default would be ruinous to all parties interested in its maintenance and its revenues, and that the interest of all the creditors and bondholders would be thereby imperiled.

The bill made various persons and corporations parties defendant having interests in the lines of the Wabash Company as lessors, mortgagors, or trustees under deeds of trust covering the lines or portions thereof, including the Central Trust Company and Cheney, trustees in a general mortgage, the

Page 145 U. S. 86

trustee in a collateral trust mortgage, the Quincy Company, and others, and prayed the court to appoint successors to trustees deceased or to make such other order with respect thereto as would cause the respective trusts to be properly represented in the matters of the litigation, and to require the defendants to set up their several interests, so that the same might be fully represented.

The bill alleged that by their terms, nearly all, if not quite all, the mortgages and trust deeds, whether executed by complainant or other companies on any portions of the line prior to the time when complainant acquired the same, not only embraced the roads and tangible property of the companies executing the instruments, but also the revenues and incomes to be derived from the use of the parts of the roads so mortgaged; that the bondholders had always insisted upon their right to look to the revenues of the sections of the road upon which their mortgages rested as a means of paying and discharging their bonds; that all, or nearly all, of the mortgages embraced all rolling stock to be thereafter acquired by the companies executing the mortgages; but, as the lines of the original companies had been absorbed into complainant's system, the rolling stock on the entire system had become so intermingled as to be incapable of division according to the ownership of the several lines of road or according to the several mortgages, and that any attempt to control or dispose of portions of such rolling stock by courts not having jurisdiction of the whole and not competent to deal with the entire property as a unit would produce great confusion and uncertainty, and result in great loss to all persons interested in the rolling stock or in complainant's property or securities.

The bill further averred that the complainant's directors and officers had thoroughly considered and already resorted to all proper means for obtaining the funds by which to pay the floating indebtedness of the company and meet the accruing interest falling due at the beginning of the month of June then next, and continuing to mature by installments at very short intervals, but had wholly failed to provide the means with which to discharge the floating indebtedness and meet

Page 145 U. S. 87

the interest, and the company was powerless to accomplish such purpose, and was practically insolvent, and it was certain that a default would occur in June, and complainant be also without means of meeting the floating indebtedness.

It was further stated that complainant's interest in the road and the interests of all its creditors and bondholders were greatly imperiled by the existing prospect of the disruption of the road on the happening of the default, and that if the lines of railroad were broken up and the fragments thereof placed in the hands of various receivers, and the rolling stock, materials, and supplies seized and scattered abroad, the result would produce irreparable injury and damage, not merely to complainant, but to all persons having any interest in the road and the securities thereof. Complainant therefore "to prevent the breaking up of said lines of road, and the scattering abroad of its assets," and

"in order to the preservation of the interests of large numbers of persons, stockholders, and creditors unknown to orator, and in order to the protection of the interests of all concerned, and to prevent a great multiplicity of suits,"

prayed the court to appoint one or more receivers,

"and empower and direct such receiver or receivers to take possession of said entire property and to preserve, operate, and manage and control the same, collect all indebtedness due or to become due to orator, and otherwise to discharge all the duties ordinarily imposed by courts of equity on the receivers of railroad property by such courts appointed; that on a final hearing of said cause, your honors will, under this bill, or under such amendments as may be made thereto, or such supplemental bills as shall be filed herein, or such cross-bills as parties in interest may also file, decree the sale of said entire property, whether such decree shall judicially foreclose said general mortgage or any of the other mortgages aforesaid, or whether such decree shall dispose of said property as a trust fund on general equitable principles; that your honors will cause all the liens upon said property, or any part thereof, and all rights, claims, and equities of all persons interested therein to be ascertained, defined, and determined, and that the proceeds arising from the sale of such property, or any part

Page 145 U. S. 88

thereof, be applied under the orders and decrees of this Court, according to the rights, interests, and equities of parties or persons interested in said fund;"

that all persons and all corporations having possession of complainant's property or any part of it be directed to surrender the same to such receiver or receivers as might be appointed, or to hold such property or portions of property under such receiver or receivers, if the latter shall elect to pursue such course, and that such order may be made

"as will insure the protection of the interests of orator and its creditors, giving an opportunity to all the defendants not served with notice to be heard hereafter, and orator avers that no injury can arise to any creditor or person in interest from the appointment of the said receivers with or without notice, as such receivers' possession will inure to the benefit of all the persons concerned."

Upon the filing of the bill, an order was thereupon made on the same day appointing Solon Humphreys and Thomas E. Tutt receivers of the railroads and property of the company, and it was ordered

"that the said receivers, out of the income that shall come into their hands from the operation of said railroad or otherwise, proceed to pay all balances due to other railroads or transportation companies, or balances growing out of the exchange of traffic accruing during six months prior hereto; that said receivers also in like manner pay all rental accrued, or which may hereafter accrue, upon all leased lines of said complainant, and for the use of all terminals or track facilities, and all such rentals or installments as may fall due from said complainant for the use of any portion of road or roads or terminal facilities of any other company or companies, and also for all rentals due or to become due upon rolling stock heretofore sold to complainant and partially paid for; that said receivers also pay in like manner, out of any incomes or other available revenues which may come into their hands, all just claims and accounts for labor, supplies, professional services, salaries of officers and employees that had been earned or have matured within six months before the making of this order; . . . that such receivers keep such accounts as may be necessary to show the source from which all such

Page 145 U. S. 89

income and revenues shall be derived with reference to the interest of all parties herein and the expenditures by them made."

The receivers qualified on May 29, 1884, and took possession of all lines of railroad which at that date were held or operated by the Wabash Company. On June 9, 1884, the trustees in the general mortgage appeared and filed their cross-bill, in which they prayed for the foreclosure of their mortgage and for the sale of the property, and also asked for the appointment of receivers; but the court refused to make such appointment. These trustees afterwards filed an amended cross-bill, and at a still later date an original bill in one of the state courts of Missouri, which was removed to the United States court and consolidated with the original suit. These bills contained prayers for the foreclosure of the mortgage and the appointment of receivers.

June 26, 1884, the receivers petitioned the court for advice, stating that from the incoming rents and profits of the property they were unable to pay on the first day of June, 1884, the interest falling due on certain classes of bonds and dividends on certain specified stock. And they further stated, in respect of twenty-eight other classes of bonds enumerated in the petition, that the earnings of the lines upon which these bonds were secured had until this been sufficient to meet the operating expenses, cost of maintenance, and interest payments; but in respect to ten other classes of bonds, of which the bonds of the Quincy Company constituted one,

"that the earnings of none of the lines or divisions last above described have at any time since their acquisition been sufficient to pay their operating expenses, the cost of their maintenance, and interest on the several series of bonds, and other obligations above described, and secured upon each of them, respectively, by mortgage or deeds of trust."

The petition was referred to a master, who reported thereon June 28, 1884, and recommended the entry of an order directing the receivers,

"from the incoming rents and profits of said property, after meeting such other obligations as they have been directed to discharge by the former orders of this court,

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pay from whatever balance may remain in their hands the interest, as the same shall from time to time mature, upon the following bonds or other obligations secured by mortgage on the several lines or divisions"

enumerated, whose earnings had been sufficient to pay the interest. The order further provided

"that the receivers herein, until otherwise directed, keep the accounts of all the earnings and incomes from, as well as the accounts of all the operating expenses, cost of maintenance, and taxes upon, the following lines or divisions of said property separately, to-wit,"

and here follow the lines which had not earned interest, including the Quincy Company,

"and that said receivers make quarterly reports thereof, showing not only the income and expenses of each of the lines aforesaid, but also the methods by which the incomes and expenses of said lines were respectively ascertained,"

and this report was confirmed.

On September 20, 1884, the receivers filed a petition for instructions as to interest due on bonds of the Havana division, and on October 15, 1884, the court stated, upon the matter being again brought up, that money that belonged to the underlying mortgages would not be taken to pay interest on non-earning branches.

December 16, 1884, the Quincy Company filed an intervening petition, in which it set forth that interest on its bonds was in default, and

"that it has no means, property, or moneys, aside from what is covered by said mortgage, and that it is without any means of paying said overdue and defaulted interest;"

that it believed that, if default in the payment of interest should continue, the bondholders would require the sale of the mortgaged property under the terms of the mortgage; that it had applied to the president of the Wabash Company and others of its officers for information, but had been unable to obtain any of an intention on the part of the company, or anyone for it, to make such payment, and it prayed that the company or defendants, or some one of them, should pay the interest on the bonds in default July 1, 1884, or that such interest be paid out of the funds of the Wabash Company in the charge or under the control of the court or

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the receivers, or that the court order that the lease between the petitioner and the Wabash Company be transferred to the St. Joseph and Quincy Railroad Company, which latter company would pay the interest coupons in arrears, and would either pay or give security to pay the interest coupons about to mature January 1, 1885, and would assume any and all liabilities resting upon the Wabash Company, or to which it was subject by reason of the existence of or under said lease. This petition was answered by the receivers and the Central Trust Company and Cheney, trustee, and April 16, 1885, it was ordered that whenever within sixty days from that date the St. Joseph and Quincy Railroad Company should pay to the trustees on the first mortgage an amount equal to the coupons on the first mortgage of the Quincy Company due July 1, 1884, and January 1, 1885, in payment of said coupons, and should assume by proper agreement in writing the liabilities and obligations to be performed by the lessee under said lease, then said lease should become assigned and vested in the St. Joseph Company, freed from any liens or rights of the Wabash Company or the trustees under the general mortgage.

On January 8, 1885, the receivers reported the incomes and earnings from, as well as the operating expenses, cost of maintenance, and taxes of, the Quincy Company from May 29 to September 30, 1884, showing a deficit of $1,416.78, and on the second of March, 1885, made a similar report, showing a deficit of $9,021.82 from October 1 to December 31, 1884, and on May 15, 1885, a report showing a total deficit up to February 28, 1885, for 9 Months, of $20,251.09. On March 20, 1885, the receivers filed a petition setting forth in detail the earnings and operating expenses of all the branch and leased lines of the Wabash Company from May 29 to November 30, 1884, and prayed orders with respect to the future operation of the lines, and concerning the payment of the respective rentals which the Wabash Company had agreed to pay. Upon this petition, the court made an order April 16, 1885, which was entitled: "In the matter of the application of the receivers for the cancellation of certain leases." By this order, the

Page 145 U. S. 92

court directed

"(1) That subdivisional accounts must be paid separately."

"(2) Where any subdivision earns a surplus over expenses, the rental or subdivisional interest will be paid to the extent of the surplus, and only to the extent of the surplus."

"(3) Where a subdivision earns no surplus, simply pays operating expenses, no rent or subdivisional interest will be paid. If the lessor or the subdivisional mortgagee desires possession or foreclosure, he may proceed at once to assert his rights. While the court will continue to operate such subdivision until some application be made, yet the right of a lessor or mortgagee whose rent or interest is unpaid to insist upon possession or foreclosure will be promptly recognized."

"(4) Where a subdivision not only earns no surplus, but fails to pay operating expenses, as in the St. Joseph and St. Louis branch, the operation of the subdivision will be continued, but the extent of that operation will be reduced with an unsparing though a discriminating hand -- that is, if a subdivision does not earn operating expenses, and receivers are running two trains a day, then lop one of them off; if they are running one train a day, and still it does not pay, then run one train in two days. While the court will endeavor to keep that subdivision in operation, it will make the burden of it to the consolidated corporation, and to all the other interests put into that consolidated corporation, a minimum."

These directions were given in an opinion which was ordered to stand as the order of the court in respect to the matters therein referred to. 23 F. 863. July 15, 1885, Gilman and Bull, trustees under the mortgage of the Quincy Company, petitioned for the possession of its property. The petition was granted by the court, and the receivers were ordered to surrender and transfer said property to the trustees on or before August 1, 1885, which was done.

On July 1, 1884, an installment of interest on the bonds of the Quincy Company for $36,120 became due and was not paid. On January 1, 1885, another like installment became due and was not paid. On July 1, 1885, another like installment became due and was not paid. The rent due for the month of July amounted to $6,020, and was not paid. The

Page 145 U. S. 93

foregoing installments aggregated $114,380. The taxes on the railroad of the Quincy Company for the year 1884 amounted to $16,000, and were not paid by the Wabash Company or the receivers, but by the trustees for the Quincy Company, who also made repairs upon said railroad at an expense of $15,000.

December 8, 1885, the trustees, Gilman and Bull, filed a petition, in which application the Quincy Company united June 12, 1886, by a separate petition. These petitions prayed that the court would order the receivers to pay the Quincy Company or the trustees, for the bondholders, the sum of $114,380 for interest, $16,000 for taxes, and $15,000 for necessary repairs, "being the rental due on account of the said lease of the property" of the company, and that the court would decree that said sums "are liens superior and paramount to all mortgages on all the property of the said Wabash, St. Louis and Pacific Railway Company." The prayer of the trustee's petition was confined to the sum of $114,380.

January 6, 1886, a decree was entered foreclosing the mortgages upon the property of the Wabash Company known as the "general mortgage" and the "collateral trust mortgage." The court found due upon the general mortgage the principal sum of $17,000,000, and for interest, $2, 132,753.40, up to December 1, 1885, and upon the collateral trust mortgage the principal sum of $10,000,000, and $1,109,268.80 interest. In default of payment of these sums, the court directed the sale of the mortgaged property, excluding, however, the property of the Quincy Company. The court decreed that the sale and conveyance of the mortgaged property should not have the effect of discharging any part of said property from the payment of claims that had been or might be charged against the same or the receivers by the court making the decree, or any other circuit court exercising ancillary jurisdiction, or by any other court to which any of the parties to said decree had been remitted, and that the property should be subject to be retaken, and, if necessary, resold, if the sums so charged or to be charged against it or said receivers should not be paid within a reasonable time after being required by order of court. The

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mortgaged property was thereupon sold, but no surplus realized.

The net earnings of the Wabash system from the time the receivers took possession to the time when they surrendered the road of the Quincy Company was $1,012,857.39, which was $3,304,633.61 less than the amount of preferred debt existing when the receivers took possession. The petitions of the trustees, Gilman and Bull, and of the Quincy Company were referred to a master, who reported against the claims therein set forth. Exceptions were argued before the circuit court and overruled, the report confirmed, and the petitions dismissed, whereupon the petitioners brought the case by appeal to this Court. The opinions of Brewer, Circuit Judge, and Thayer, District Judge, will be found reported in 34 F. 259.

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