Fosdick v. Schall
99 U.S. 235 (1878)

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U.S. Supreme Court

Fosdick v. Schall, 99 U.S. 235 (1878)

Fosdick v. Schall

99 U.S. 235

Syllabus

On Feb. 1, 1873, a railroad company in Illinois entered into a contract with A. whereby he agreed to sell and deliver to it, at a price payable in installments, a number of cars which, until they should be paid for, were to remain his property. They, when delivered, were numbered, marked, and lettered as his property, and were thereafter used in the ordinary business of the company. Prior to said contract, the company had mortgaged to B., as trustee, its franchises, issues, and profits, and all the property it then possessed or might thereafter acquire either in law or in equity to secure the payment of certain bonds. B. filed, May 20,1875, his bill for foreclosure. The receiver appointed by the court to take charge of the road, finding that the cars had not been paid for and that they were necessary for its use, entered into an arrangement with A., subject to the approval of the court, by which they were valued at $420 each, and it was agreed that a monthly rent of $7 should be paid for each, with interest on the deferred payments, until the amount so paid should equal the value of the cars. They were then to become the property of the company. A., in January, 1876, intervened in the foreclosure suit, and after averring the payment of the rent during the period the receiver had used the cars, prayed that out of any funds standing to the credit of the cause not otherwise appropriated, he should be paid for the use of the care from October, 1874, when the last installment of the purchase money therefor had been paid, and that the cars be returned to him. B. and certain intervening bondholders, claiming that the cars, the title thereto having passed to the company under the contract, were, as after-acquired property, subject to the lien of the mortgage, denied that A. was entitled to payment for said use from the income of the road or from the proceeds of the sale, or to a return of the cars. The court, Dec. 6, 1878, ordered the sale of the mortgaged property, not including the cars. It was thereupon sold, the sale confirmed, and a conveyance to the purchasers ordered. Subsequently the court decreed that as A. had not parted with his title, the cars should be returned to him, and that the clerk should, out of the funds standing to the credit of the cause, pay to him $14,568.75 as rent for the period the cars were in use before the appointment of the receiver. It does not appear that there were any funds in court to the credit of the cause except such as arose from the sale.

Held:

1. That the lien of the mortgage did not attach to the cars upon their delivery to the company so as to defeat A.'s reclamation of them as against the mortgagee.

2. That the payment out of the earnings of the road for rent of the care for the time they were used by the receiver was proper.

3. That prima facie the fund to the credit of the cause belonged to the mortgage creditors, and that A., being only a general creditor, is not entitled to payment therefrom.

The Chicago, Danville, and Vincennes Railroad Company, an Illinois corporation, on the 10th of March, 1869, executed a mortgage to William R. Fosdick and James D. Fish, trustees,

Page 99 U. S. 236

to secure an issue of $2,500,000 of bonds. This mortgage covered all the franchises, issues, and profits of the company and all the property it then owned or possessed or might thereafter acquire, either in law or equity. Provision was made to the effect that in case of default in the payment of interest on the bonds continuing for six months, the trustees in the mortgage, on demand of the holders of at least one-half the bonds then outstanding and unpaid, might take possession of all the mortgaged property, together with all the books, records, papers, accounts, and money of the company, and enter into the management and control thereof, paying all the expenses of taking, holding, managing, and operating the property from the income and profits thereof, or, if the property should be sold, from the sale thereof. The property might be sold as an entirety, and the proceeds, after deducting the expenses of sale, applied to the payment of the interest and principal of the bonds.

On the 12th of March, 1872, a second mortgage was executed to the same trustees to secure a further issue of bonds to the amount of $1,500,000.

On the 1st of February, 1873, after both these mortgages were executed, the railroad company and Michael Schall entered into a contract in writing, a copy of which is as follows:

"NEW YORK, Feb 1, 1873"

"Sold this day for account of Mr. Michael Schall, of York, Penn.,"

"To the Chicago, Danville, and Vincennes Railroad Co."

"Office 38 Pine Street, New York:"

"Two hundred (200) eight-wheel gondola coal cars, as per specifications and agreement made by J. E. Young, and herewith attached."

"Price, delivered on the track at Pittsburg, at depot of P. C. & St. L. R. R., seven hundred dollars per car. Cars to remain the property of Michael Schall until paid for."

"Delivery to commence, and cars to be taken, on or before March 1, and at least twenty-five (25) cars in each week thereafter until all are delivered, the seller having the option of increasing the number of cars to be delivered per week, if desired."

"Settlement to be made on delivery of each twenty-five (25) cars or more, at the opinion of sellers, with the notes of the Chicago, Danville, and Vincennes Railroad Company, payable in the City of

Page 99 U. S. 237

New York, and adding interest at the rate of ten percent per annum. The first notes are to be drawn at sixty days from date of delivery, and for twenty (20) dollars on each car, and the balance for a like amount and payable monthly thereafter."

"Cars to be lettered and numbered as per directions of Mr. Young."

"Invoice and shipping receipts to be sent to the railroad company's office, No 38 Pine Street, New York."

"It is understood the sellers shall not be responsible for the acts of providence, strikes of workmen, or other causes beyond their control, which may retard and delay the manufacturing and delivery of the said cars as above stated."

"Shipping receipts to be evidence of delivery."

"(Signed) MICHAEL SCHALL"

"I hereby accept the above proposition for the R. R. Co."

"(Signed) J. E. YOUNG, Gen. Manager"

Under this contract, two hundred and twenty-five cars were delivered into the possession of the railroad company by Schall, numbered from 0141 to 0365, both inclusive, and lettered, "This car is the property of Michael Schall, York, Pa." Notes were executed by the company, according to agreement, for the price of the cars as they were delivered. Of these notes, $44,323.43 have been paid by the company and $110,334.04 are outstanding. The cars were used by the company in the usual course of business.

On the 22d of February, 1875, Stephen Osgood, who held $9,000 of the bonds secured by the mortgage of 1869, and $2,000 of those secured by that of 1872, filed a bill in chancery in the Circuit Court of Will County, Illinois, against the railroad company and Fosdick and Fish, trustees, with others, for a foreclosure of the two mortgages and a sale of the mortgaged property for the benefit of the bondholders, according to their respective priorities, and on the same day, the court appointed Henry B. Hammond and John B. Brown receivers in the cause, with authority to take the moneys, property, and effects of the company into their possession and run and operate the railroad under the orders of the court until discharged. In the order making the appointment, it was specially provided that out of the moneys which should come into the hands of the receivers by reason of the operation of the road, the collection of debts,

Page 99 U. S. 238

or the sale of the property, they should pay without further order as to particular demands:

1. The necessary current expenses of carrying out the duties of the trust;

2. "All debts now [then] due and owing by said railroad company for labor and services rendered in operating the railroad within the [then] last three months, and all indebtedness for engines, iron, wood, supplies, cars, or other property purchased within said period of three months for the use of the company;"

3. Taxes, insurance, and charges of litigation; and,

4. Liabilities for animals killed by engines or cars upon the line of the road.

On the 5th of May, 1875, the cause was removed to the Circuit Court of the United States for the Northern District of Illinois on the application of Fosdick and Fish, trustees, two of the defendants, and on the 17th of the same month the receivers appointed by the state court filed in the circuit court an account of their receivership for the months of February, March, and April.

On the 20th of May, Fosdick and Fish, as trustees, filed in the same circuit court of the United States their bill against the railroad company and certain other defendants for the foreclosure of the two mortgages of which they were trustees, and on the same day an order was entered in that court appointing Adna Anderson receiver, with authority to take possession of all the books, papers, vouchers, and evidence of indebtedness, moneys, and assets of the company and all other effects of every kind, name, and nature which belonged to the company, or were held for its use and benefit, or in which it had any beneficial interest. He was also authorized to run, operate, and manage the road and pay the expenses thereof and manage and control all the property and affairs of the company. Authority was also given him to use the moneys of the company for any and all the purposes specified in the order, and he was required, as speedily as possible, to examine into the condition of the property and assets of the company, its contracts, leases, running arrangements, its business affairs, and take an inventory of its movable property and make a schedule of its floating

Page 99 U. S. 239

indebtedness for labor and supplies, and report the same as soon as might be, with his recommendation as to the proper disposition of the same and payment thereof. Under this order, Anderson took possession of the property, and on the 11th of June, the receivers appointed by the state court filed their final accounts and asked to be discharged from their trust.

The cars delivered under the Schall contract were in use by the company when the receivers appointed by the state court took possession. Those receivers also continued to use the cars during all the time they operated the road, and Anderson took the possession of them when he entered upon his receivership. On the 27th of November, 1875, Anderson having ascertained what the claim of Schall was, and finding that they were necessary for the use of the road, entered into an arrangement with him, subject to the approval of the court, by which they were valued at $420 each, and it was agreed that Schall should be paid seven dollars a month for each car as rent. The aggregate of payments at this rate for five years would equal the value of the cars, and it was further agreed that if the rent was paid promptly, and in addition an amount which would be equal to interest at the rate of seven percent per annum on the deferred installments, the cars should, at the end of that time, become the property of the company.

On the 19th of July, 1875, the circuit court denied a motion of Osgood to consolidate his suit removed from the state court with that of Fosdick and Fish, but made an order allowing him and his associates to intervene in the latter suit for the protection of their respective interests, upon taking the necessary steps therefor. Accordingly, on the 6th of January, 1876, Stephen Osgood, Frederick W. Huidekoper, Thomas W. Shannon, John M. Dennison, George W. Gill, Alanson A. Sumner, Chandler Robbins, and William T. Hickok, owners and holders of a large amount of bonds secured by the several mortgages which were in the process of foreclosure, filed, with the permission of the court, their petition of intervention.

On the 27th of January, 1876, Schall filed an intervening petition in which, after setting forth the facts of his claim substantially as they have already been given, and averring that he had been paid at the rate of seven dollars a month as rent

Page 99 U. S. 240

during all the time the cars had been in use by the present receiver, he asked that the balance, his due, might be paid him out of any funds to the credit of the cause not otherwise appropriated, and that the cars might be returned to him.

Fosdick and Fish and the intervening bondholders answered this petition, claiming that the title of the cars had passed to the company under its contract with Schall, and that consequently the lien of the mortgages had attached to the cars as after-acquired property. They denied his right to payment for the cars out of the income of the road or out of the proceeds of the sale, and they denied his right to a return of the cars.

On the 5th of December, 1876, the court entered a decree in the suit of Fosdick and Fish for a sale of the mortgaged property, not, however, including the cars of Schall, and on the 7th of February, 1877, the property was sold in accordance with the provisions of the decree to Huidekoper, Shannon, and Dennison for $1,450,000. On the 12th of April, the sale was approved by the court, and the master ordered to convey the property to the purchasers.

On the 28th of April, 1877, the master, to whom the matter of the intervening petition of Schall had been referred, reported the facts as they have already been stated and also that the cars were necessary for the use of the road, and that the arrangement which had been made by the receiver was a beneficial one, whether the road remained in the hands of the receiver or passed into the possession of other parties.

To this report Fosdick and Fish and the intervening bondholders excepted, in substance, because the master found the title to the cars to be in Schall, and not in the company. Upon the final hearing, the court held that Schall had not parted with his title to the cars, and was entitled to the possession. Accordingly it was ordered that the receiver, if in possession, or the purchasers at the sale, should restore the cars to Schall, and that the clerk of the court, out of the funds standing to the credit of the cause, should pay him the sum of $9,450, as rent for the cars, at the rate of seven dollars each per month for the six months preceding the 22d of February, 1875, the date when the receivers of the state court were appointed and took possession, and the further sum of $5,118.75 for a like rent during

Page 99 U. S. 241

the time the cars were used by the receivers of the state court. It nowhere appears from the record that there are any funds in court to the credit of the cause except such as arose from the sale of the mortgaged property.

From this decree Fosdick and Fish and the intervening bondholders have appealed.

Page 99 U. S. 249

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