United States Trust Co. v. Wabash Western Ry. Co.
150 U.S. 287 (1893)

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U.S. Supreme Court

United States Trust Co. v. Wabash Western Ry. Co., 150 U.S. 287 (1893)

United States Trust Company v.

Wabash Western Railway Company

Nos. 51, 57

Argued October 23-24, 1893

Decided November 20, 1893

150 U.S. 287

Syllabus

On the 10th of February, 1879, the Council Bluffs and St. Louis Railway Company leased their projected railway from Council Bluffs to the state line to the St. Louis, Kansas City and Northern Railway Company for the term of 91 years. Together, the lines formed the Omaha Division of the Wabash system. On the 15th of February, 1879, the lessee issued bonds to the amount of $2,350,000, secured by a mortgage to the United States Trust Company, to complete and equip the division. In November, 1819, the lessee was consolidated with the Wabash Railway Company under the name of the Wabash, St. Louis and Pacific Railway Company. The new corporation assumed all the obligations of the old ones, entered into possession of all the property, issued bonds to the amount of $17,000,000, secured by a general mortgage to the Central Trust Company, and other bonds, and continued to operate the property down to May, 1884, when it filed a bill alleging its own insolvency and asking the court to appoint receivers of all its property, which was done. A preferential indebtedness was recognized by the court to the extent of $4,378,233.49, which the receivers were directed to pay. The rentals and interest amounted to $2,175,062, of which $82,250 was for the rent of the Omaha Division. These also were ordered to be paid by the receivers. It turned out, practically, that so far from being able to make all these payments out of earnings, they were never enough to pay the preferential debts, and that the Omaha Division was operated at an actual loss without taking the rental into account. These facts were made known to the court by the receivers in March, 1880, whereupon it ordered, in April, 1885, that the subdivisional accounts be kept separately, and that no rent or subdivisional interest be paid where a subdivision earned no surplus. It also ordered the preferential debts to be paid before rentals. The installment of rent or interest on the Omaha Division due in April, 1885, not being paid, a bill was filed to foreclose the mortgage upon it, and when a default took place in the payments due in October, 1885, a receiver was asked for. In the following March, a receiver was appointed

Page 150 U. S. 288

as asked for, and the Omaha Division was surrendered to him by the general receivers of the Wabash system. He intervened in the Wabash suit, praying for payment by the general receivers of the overdue rent on the Omaha Division, amounting to $222,075.77. A decree of foreclosure and sale of the Wabash system under the general mortgage was entered which reserved specially all rights under the Omaha Division, and under this decree a sale was made and the property was transferred to a new corporation culled the Wabash Western Railway Company. The petition for the payment of rent of the Omaha Division, after reference to a master and report by him, resulted in a decree for the payment of one month's rent with interest, instead of 16 months, as prayed for.

Held:

(1) That the court was bound to take into consideration the peculiar circumstances under which the receivers took possession of and operated the Wabash system.

(2) That, following Quincy, Missouri &c. Railroad v. Humphreys,145 U. S. 82, the court did not bind itself or its receivers to pay the agreed rent eo instanti by the mere act of taking possession, but that reasonable time had to be taken to ascertain the situation of affairs.

(3) That the order made by the court below to pay the rents only after the discharge of the preferential debts was correct.

(4) That the owners of the Omaha branch, or the trustees of its mortgage, knowing that that branch was in the hands of the general receivers, might have intervened in that suit for the protection of their property, and were bound by the order for payment of the preferential debts, as it is settled that whenever, in the course of a receivership, the court makes an order which the parties to the suit consider injurious to their interests, it is their duty to file a motion at once asking the court to cancel or to modify it.

(5) That the petition of the receivers of March, 1885, and the order of the court thereupon touching subdivision earnings, was notice to the branch lines that they must not expect payment of their rent, when the subdivision earned nothing beyond operating expenses.

(6) That as the mortgage to the United States Trust Company did not convey the income or earnings of the road to it, but only authorized it to take possession in case of default, the trustee could only secure the earnings by taking possession in such case.

(7) That until the mortgagee asserted its rights under the mortgage to the possession of the road by filing a bill of foreclosure and by demanding possession, it had no right to receive the earnings and profits.

(8) That the judgment of the court below awarding a recovery of only one month's rent was right.

The general rule applicable to this class of cases is that an assignee or receiver is not bound to adopt the contracts, accept the leases, or otherwise

Page 150 U. S. 289

step into the shoes of his assignor if, in his opinion, it would be unprofitable or undesirable to do so.

In such case, a receiver is entitled to a reasonable time in which to elect whether he will adopt or repudiate such contracts.

If a receiver in a suit for foreclosing a railway mortgage elects to adopt a lease, he becomes vested with the title to the leasehold interest, and a priority of estate is thereby created between the lessor and the receiver, by which the latter becomes liable upon the covenant to pay rent.

These were cross-appeals from a final decree entered September 25, 1889, overruling the exceptions of the appellant the United States Trust Company to a master's report, overruling in part the exceptions of the appellant the Wabash Western Railway Company to the same report, and adjudging that the trust company, as trustee under the mortgage of what is known as the "Omaha Division of the Wabash, St. Louis & Pacific Railway," recover from the Wabash Western Railway Company the sum of $13,708.33, with interest thereon from January 6, 1886, amounting in all to $16,765.51, as rental for that division during the period in which it was operated by the receivers of the Wabash Company.

At the time the petition in this case was filed, the Wabash, St. Louis & Pacific Railway Company, a corporation formed by the consolidation of a large number of railway companies, extending from Detroit and Toledo in the east, to Omaha and Kansas City in the west, with a total mileage of 3,600 miles, of which railway the St. Louis, Kansas City, and Northern Railway was a branch, was in process of winding up and reorganizing under two bills, namely: 1. a bill filed May 27, 1884, by the Wabash, St. Louis and Pacific Railway Company itself, wherein it set forth its own insolvency, its inability to meet various pressing debts, including interest due June 1, 1884, on its general mortgage and certain other of its bonds, the consequent danger of a breaking up of its system of railroads, and the irreparable damage that might result from it disruption, and praying for the appointment of receivers to take possession of, preserve, and operate its lines of railroad for the benefit of its creditors according to their respective legal and equitable rights. To this bill the Central Trust Company of New York and James Cheney, trustees under the Wabash

Page 150 U. S. 290

general mortgage, the United States Trust Company of New York, trustee of the Omaha Division mortgage, as well as the trustees in all the underlying and divisional mortgages on the various lines of the Wabash system, were made defendants; (2) a cross-bill filed June 9, 1884, by the trustees of the Wabash Company, under its general mortgage, for the foreclosure of that mortgage and appointment of receivers of the mortgages premises.

The petition in this case was filed April 23, 1886, and the case referred to a master upon a stipulations as to the facts, of which the following is a summary: on February 10, 1879, the Council Bluffs and St. Louis Railway Company, an Iowa corporation, the owner of a projected railway sixty-five miles in length, from Council Bluffs, Iowa, in a southeasterly easterly direction, to a point on the state line between Iowa and Missouri, leased its road to the St. Louis, Kansas City and Northern Railway Company, the owner of another railway extending from that point on the state line about seventy-eight miles to Pattonsburg, Missouri, for the term of ninety-one years. These roads formed a line from Pattonsburg, Missouri, to Council Bluffs, Iowa, and are known in this litigation as the "Omaha Division of the Wabash System." On the 15th day of February, 1879, the said St. Louis, Kansas City, and Northern Railway Company, for the purpose of raising funds necessary to complete and equip the Omaha Division, issued and sold $2,350,000 in bonds, or at the rate of $16,000 for each mile, and, to secure the payment thereof, mortgaged its interest and estate in the whole of such division, being an estate in fee in that portion of the line situated in Missouri and its leasehold estate in that part located in Iowa, to the United States Trust Company.

In November, 1879, the St. Louis, Kansas City, and Northern Railway Company, of Missouri, was consolidated with the Wabash Railway Company, under the corporate name of the Wabash, St. Louis, and Pacific Railway Company. By the terms of such consolidation, the new corporation assumed all the obligations of both the constituent companies. Immediately upon such consolidation, the Wabash, St. Louis, and Pacific Railway Company entered upon the sole use of the

Page 150 U. S. 291

premises demised by said lease, and upon June 1, 1880, issued $17,000,000 of what were known as its "general mortgage bonds," secured by a mortgage to the Central Trust Company of New York and James Cheney, as trustees. This mortgage covered all its railway, leasehold, and other property. By a later mortgage dated May 1, 1883, to the Mercantile Trust Company of New York, 11,089 shares of stock of the Council Bluffs and St. Louis Railway Company were pledged with a large amount of other property of secure $10,000,000 of what were called the "collateral trust bonds" of the Wabash Company.

From 1879 to May 27, 1884, the Omaha Division was successfully and profitably operated, and the terms of the lease were complied with. Upon presentation to the court of the first bill above stated, filed by the Wabash Company, alleging its own insolvency, and on May 27, 1884, an order was entered appointing Solon Humphreys and Thomas E. Tutt receivers of all the property of the said Wabash Company. This order appointing the receivers directed them to take possession of, operate, and preserve all of said lines of railroad, and from their earnings pay their operating expenses; the balance due to other railroad and transportation companies growing out of the interchange of traffic during the preceding six months; all rentals accrued, or which should thereafter accrue, on all leased lines for the use of terminals or track facilities, and for all rentals due or to become due upon rolling stock therefore purchased by the company and partially paid for; likewise, all just claims and accounts for labor, supplies, professional services, salaries of officers, and employees that has been earned or matured during the preceding six months. The receivers were also directed by the order to keep such accounts as might be necessary to show the sources from which all such incomes and revenues were derived, with reference to the interest of all parties to the suit and the expenditures made by them.

On June 26, 1884, within one month after their appointment, the receivers made a report and petition to the court in which they stated to the best of their information and belief that each and all of certain lines of railroad constituting the

Page 150 U. S. 292

consolidated Wabash, St. Louis, and Pacific Railway Company had

"at all times during the five years last past, or ever since their construction, earned more than enough to pay their operating expenses, the cost of maintenance, and interest upon the several series of bonds"

that were secured upon them by their mortgages or deeds of trust, and prayed the court to instruct them as to what they should do with respect to the payment of interest, as the same from time to time matured, on the mortgage bonds on the several lines and divisions of the road as they existed at and before the date of the consolidation. On June 28th, two days after the filing of this petition, the court ordered the receivers, from the incoming rents and profits of the property, after meeting such other obligations as they had been directed to discharge by former orders, to pay from whatever balance might remain in their hands the interest maturing upon the bonds or other mortgage obligations on the several lines or divisions of the Wabash Company before its consolidation. Under this order, the rental for the use of the Omaha Division falling due on October 1, 1884, and amounting to $82,250, was paid by the receivers. Rentals and interest on other lines accruing for the same and various subsequent periods, and aggregating $2,175,062, were paid under the same order.

The record shows that at the time the receivers were appointed, the labor and supply claims and other preferential indebtedness of the Wabash Company, which the receivers were, by their order of appointment, directed to pay, amounted to $4,378,233.49. It also appeared that the net earnings of all the lines operated by the receivers were never sufficient to discharge the preferential debts.

On March 20, 1885, the receivers made another application to the court in which they set forth in detail the earnings and expenses of the various lines of the system up to November 30, 1884, and prayed the court for instruction with respect to the future operation by them of the several branch lines that had failed to earn their operating expenses. Notice was given to the solicitor of the trustee of the Omaha Division that this petition would be called up on the 14th of April. In the

Page 150 U. S. 293

application, it was stated that the expenses of operating the Council Bluffs and St. Louis Railway -- that is, the Omaha Division -- had exceeded its earnings by $5,288.64, not including any charge for rental, and, including such charge, there was a deficit of $87,538.64. On April 16th, the court made an order upon this petition to the effect that subdivisional accounts should be kept separately; that

"where a subdivision earns no surplus, simply pays operating expenses, no rent or subdivisional interest will be paid. If the lessor or 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."

The semiannual installment of interest or rent of the Omaha Division falling due April 1, 1885, being unpaid, a bill for the foreclosure of the mortgage upon that division was filed by the intervener in the Circuit Court of Pottawatomie County, Iowa. The Wabash receivers were made defendants to the bill. This suit was removed to the Circuit Court of the United States for the Southern District of Iowa. Another default occurring October 1, 1885, the intervener filed a second petition, and requested the transfer of the division to a receiver.

On December 2, 1885, the United States Trust Company filed another petition, in which it recited the defaults which had occurred in the payment of interest on the bonds secured on the Omaha Division and prayed that the receivers of the Wabash system, Humphreys and Tutt, be ordered to surrender to the receivers, appointed or to be appointed in the foreclosure suits of the Omaha Division, all its property.

On January 6, 1886, the matter was called to the attention of the court, and the court thereupon entered an order directing the receivers, Humphreys and Tutt, to surrender within thirty days the Omaha Division to the United States Trust Company or to any person or receiver appointed at their instance by the circuit court for the Southern District of

Page 150 U. S. 294

Iowa or by the state courts. There was a further clause in the order which authorized Humphreys and Tutt to retain possession of the Omaha Division for an additional thirty days if the Wabash, St. Louis, and Pacific Railway Company, or anyone on its behalf, would pay to the United States Trust Company $13,708.33, which sum was equal to the interest for one month on the Omaha bonds. That amount was paid by the receivers, and there is no controversy here concerning it.

On March 3, 1886, Thomas McKissick was appointed receiver of the Omaha Division, and on March 6, the division was surrendered to him by Humphreys and Tutt. On April 23, the petition in this case was filed by the intervener for the rental which accrued from October 1, 1884, to February 6, 1886, amounting to $222,075.77.

On the same day, the order of surrender was made -- namely, January 6, 1886 -- a decree of foreclosure and sale under the Wabash general and collateral mortgages was entered. This sale specially reserved all rights under the Omaha Division and other leases and mortgages and adjudged that the receivers' surrender of any leased branch terminated the lease as of the date of the surrender. The sale of the road having been made and confirmed, the receivers were directed to transfer all the property to the Wabash Western Railway Company, a new corporation organized to take the property, the latter company agreeing to pay all claims and demands

"growing out of the operation by said receivers of the railway property lately in their charge, which have been or may be adjudged to be superior in equity to the mortgages foreclosed by said decree."

The transfer of the entire property was thereupon made to that company, and it has since assumed the defense of the intervener's claim.

The master to whom the petition of the trust company for rent was referred made two reports. By the first report, the trust company was allowed a rental of $77,237.06, being a sum equal to the interest on the bonds from October 1, 1884, the date of the last payment, to April 16, 1885, the date on which the court ordered that no rent or subdivisional

Page 150 U. S. 295

interest would be paid on lines that did not earn a surplus.

To this report the receivers filed exceptions, which were sustained by the court, and the case referred back to the master, with instructions to report first whether the Omaha Division has been retained by the receivers at the instance or for the benefit of the mortgagees under the Wabash general mortgage, after the United States Trust Company had demanded possession thereof, and second to ascertain and report what would be a reasonable rental for the line for the time it was so withheld. In his second report, the master reviewed at some length the record in the case, and concluded that the value of the use and occupation of the property during the time it was withheld from the intervener was the pro rata amount of the rental provided for in the lease -- namely, $13,708.33 per month; that the intervener had received the rental for thirty days of the period of detention, and was entitled to receive pay for two months more, or the sum of $27,416.66.

To this report both parties, the receivers and the trust company, excepted, and, these exceptions having been filed, the court, on September 25, 1889, entered a decree that the exceptions should be sustained insofar as the report found that the intervener was entitled to recover two months' rent of the mortgage property at the rate of $13,708.33 per month, but insofar as the report found that the intervener was entitled to recover one month's rent, it was confirmed, and a final decree was entered for $13,708.33, and interest from January 6, 1886, making an aggregate amount of $16,765.51.

Page 150 U. S. 299

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