1. In August, 1870, a first mortgage on a railroad was made. In
January, 1873, a second mortgage on the same railroad was made.
Both mortgages covered after-acquired property. A default on the
first mortgage occurred in November, 1873, and on the second
mortgage in January, 1874. In August, 1874, the second mortgagee
filed a bill to foreclose the second mortgage, making the first
mortgagee a party, acknowledging the priority of the first
mortgage, not praying any relief against the first mortgagee, and
praying for a receiver, and for the payment of his net revenue to
those entitled to it. On the same day, an order was made appointing
one Schuyler receiver and directing that a copy of the order be
served on the first mortgagee, a corporation, requiring it to
appear "on or before" the first Monday of November then next, and
authorizing the receiver to pay the arrears due for operating
expenses for a period in the past not exceeding ninety days. A copy
of the order was served on the first mortgagee three days
afterwards, and proof of that service was filed two days after the
service. In October following, the receiver, on his petitions
filed, was authorized by order to purchase certain rolling stock
and to pay indebtedness not exceeding $10,000 to other connecting
lines for materials and repairs and for ticket and freight
balances, a part of which was incurred more than ninety days before
the order appointing the receiver was made, and to expend a sum
named in building six miles of road and a bridge, which were part
of the main line of the road, and the expenditures were charged as
a first lien on the earnings of the road. The first mortgagee
appeared and answered on the first Monday of November, and not
before. The answer objected to the creation of fresh indebtedness.
Nothing more was done in the suit for eleven months. Then the
receiver reported that he had built the six miles and the bridge
and purchased rolling stock and incurred debts therefor. He also
filed a petition showing that his trust owed $232,000, and asking
leave to borrow that amount and $90,000 to put the road in order,
on receivers' certificates, to be made a first lien. The petition
set forth a meeting of both classes of bondholders at which, on the
report of a committee, the receiver was directed, by a resolution
passed, to obtain authority to borrow $322,000 on receivers'
certificates. An order was made authorizing him to borrow $201,000
on receivers' certificates, payable out of income, and to be
provided for in the final order of the court in the suit, if not
paid out of income. Soon after, four holders of first mortgage
bonds were made defendants, with leave to answer and to file a
cross-bill. They answered and filed a cross-bill, in November,
1875, to foreclose the first mortgage. The cross-bill claimed that
the six miles of road, and the bridge and the rolling stock, and
the other property acquired by the receiver, were subject to the
lien of the first mortgage, and that the mortgagor had been
insolvent from October, 1873, and affirmed the foregoing statement
as to the meeting of the bondholders and their resolution, and
stated that the plaintiffs in the cross-bill had desired and sought
for more than a year to leave the first mortgage foreclosed; that
the $201,000 ought not to be borrowed and made a first lien on the
road, and that the receiver ought to be removed, and
Page 106 U. S. 287
another receiver appointed under the cross-bill. In December,
1875, a reference was made to take evidence on the subject of the
appointment of a new receiver. More than four months after that the
first mortgagee answered the cross-bill, and the two suits being
ready for hearing, they were consolidated and heard. One decree was
made in them in May, 1870, declaring that both mortgages covered
all the property held by the mortgagor when the original suit was
brought and all subsequent additions thereto, and providing for a
foreclosure of the right of the second mortgagee to redeem, and for
the presentation to a master of claims against the property and the
receiver. In July, 1870, one Claybrook was appointed additional
receiver in the original suit. He acted, after Aug. 11, 1876, as
sole receiver until Aug. 25, 1876, after which he and Schuyler were
joint receivers, until December, 1876, when Schuyler resigned.
Claybrook, on Aug. 12, 1876, took possession of the entire property
which Schuyler had, including a railway twenty-three miles long,
used under a lease from another company. The master reported as to
claims against the property and the receiver from time to time. The
plaintiffs in the cross-bill interposed objections to making any of
the claims prior in lien to the lien of the first mortgage. In
January, 1879, the court, by order, allowed certain claims, many of
them not over $5,000, specifying the names of the claimants and the
amounts allowed, and giving the claims allowed preference in
payment out of the income and proceeds of sale, over the claims of
the mortgagees. In this order, the plaintiffs in the cross-bill
prayed an appeal to this Court. In July, 1879, the court made a
decree for the sale of the road as an entirety, and for the payment
out of the proceeds of sale of the claims allowed, before paying
any principal or interest on the mortgage debts. In this decree the
plaintiffs in the cross-suit prayed an appeal from it to this
Court. On a hearing of the appeal,
held:
(1) The appeals were appeals in open court, not requiring
citations, and the order and the decree appealed from sufficiently
designated all the appellees by name.
(2) The first mortgagee was a proper party to the original bill
of foreclosure, because a receiver was prayed for; and, the order
appointing the receiver having been served on the first mortgagee
three days after it was made, such mortgagee was bound to protect
promptly the interests of the first mortgage bondholders.
(3) The original bill did not seek to create a receivership for
the sole benefit of the second mortgage bondholders.
(4) The property in court under the original bill was the entire
mortgaged property, and not merely the equity of redemption of the
mortgagor, as against the second mortgagee.
(5) The exclusive right of a second mortgagee to the income of a
receivership created under a bill filed by him is limited to a case
where the first mortgagee is not a party to the suit.
(6) The first mortgagee having been entitled, by the terms of
the first mortgage, to take possession of the mortgaged property
and operate the road, and the cross-bill not having been filed for
more than a year after the receiver was appointed and the first
mortgagee had appeared and answered in the original suit, and it
having been, in judgment of law or in fact fully known, all the
time to the first mortgage bondholders, what was doing by the
receiver in creating the claims; it was inequitable for the
appellants to lie by and see the receiver and the court dealing
with the property in the manner complained of and merely protest
generally and disclaim all interest under the receivership, and yet
assert in the cross-bill that the property acquired by the receiver
was subject to the lien of the
Page 106 U. S. 288
first mortgage, and claim the proceeds of that property without
paying the debts incurred for acquiring it.
2. A court has the power to create claims through a receiver, in
a suit for the foreclosure of a railroad mortgage, which shall take
precedence of the lien of the mortgage. It may therefore provide
that the receiver shall pay the arrears due for operating expenses
for a period in the past not exceeding ninety days, and pay
indebtedness, not exceeding $10,000, to other connecting lines, for
materials and repairs, and for ticket and freight balances, a part
of which had been incurred more than ninety days before the order
appointing him was made, and purchase rolling stock, and build six
miles of road and a bridge, part of the main line of the road, and
making such expenditures a lien prior to the lien of the mortgages,
upheld.
3. The mortgagor held a leased road, under a written lease,
providing for rent and for payment for depreciation, and for the
payment of a monthly rent by the lessor to the lessee for the use
of a part of the road. The successive receivers took possession of
the leased road and operated it as a continuation of the mortgaged
road. Part of the rent which accrued before Claybrook became
receiver was unpaid. Claybrook, after he became receiver, paid the
rent as it accrued. The successive receivers collected the rent
monthly from the lessor for the use of a part of the road. The
court allowed to the lessor, as a claim preferred to the first
mortgage, a sum based on the actual value of the use of the road by
the receivers, and for depreciation, and allowed, with a like
preference, claims for supplies and materials furnished for the
road, while so operated.
Held that the allowances were
proper, and that the final decree was not erroneous in not
requiring the accounts of the receiver to be settled before paying
out of the proceeds of sale the debts allowed against him, nor in
ordering the sale of the property as an entirety without separating
that acquired by the receiver.
4. The question of the jurisdiction of this Court in respect of
the claims not over $5,000 was not considered.
The case is stated in the opinion of the Court.
MR. JUSTICE BLATCHFORD delivered the opinion of the Court.
On the first of August, 1870, the Logansport, Crawfordsville and
Southwestern Railway Company, an Indiana corporation, executed to
the Fidelity Insurance, Trust and Safe Deposit Company, a
Pennsylvania corporation, located at Philadelphia, as trustee, a
mortgage to secure the payment of bonds to the amount of
$1,500,000, covering the railway of the mortgagor from Logansport
to Rockville, in length about ninety-two
Page 106 U. S. 289
miles, with all its franchises and property used in or connected
with the operation of said railway which the mortgagor then owned
or might thereafter acquire. The bonds were coupon bonds, payable
in gold in the year 1900, with interest at eight percent per annum
in gold, payable quarterly on the first days of November, February,
May, and August. The mortgage provided that in case of default in
the payment of the principal or interest of any of the bonds the
mortgagor would, within six months after the default should occur,
it still continuing, surrender to the trustee, on its demand, the
possession of the mortgaged property and all management and control
thereof; that if possession should be so taken, all expenses of
managing and operating the property should be paid from the income,
and if the property should thereafter be sold, from the sale; that
the trustee, having taken possession, might manage and operate the
road and property, and receive all the income and apply it to pay
the interest in default, first paying all expenses of management
and all charges on the property; but that the trustee should not
demand possession until required in writing to do so by the holders
of at least one-half of all the said issue of bonds then unpaid and
outstanding. The mortgage also provided that in case of such
default and its continuance, the trustee might, after such entry or
other entry, or without entry, sell the mortgaged property as an
entirety at public auction, having first demanded of the mortgagor
payment of all money then in default, and convey title to the
franchises and property to the purchaser, and first pay out of the
proceeds of sale all advances or liabilities of the trustee in
operating and maintaining the railway and property and managing its
business and affairs while in possession, and then apply the
proceeds to paying first, the interest on the bonds and then the
principal, such payment to be made on the bonds whether they should
have become due or not at the time of the sale. The mortgage also
provided that if there should be a default continuing for six
months after demand for the payment of any half year's interest,
the principal of the bonds should immediately become due, and the
trustee might so declare and notify the mortgagor, and on the
written request of the holders of a majority of the bonds, should
proceed to
Page 106 U. S. 290
collect the principal and interest of the bonds by foreclosure
and sale of the property, or otherwise, as therein provided. Up to
and including August 1, 1873, the Logansport company paid the
interest on the bonds. On November 1, 1873, and thereafter, it
failed to pay any interest.
On the first of January, 1873, the Logansport Company executed
to the Farmers' Loan and Trust Company, a New York corporation
located at the City of New York, as trustee, a mortgage to secure
the payment of bonds to the amount of $500,000, covering the entire
railroad of the mortgagor, with all the property which it had or
might at any time thereafter acquire in the same, extending from
Logansport to Rockville, about ninety-two miles in length, with all
branch roads extending from said main line, built or to be built,
with the right of way, and all the property used for operating and
maintaining said road and branches, whether then owned or
thereafter to be acquired, and all the corporate franchises of the
mortgagor. The bonds were coupon bonds, payable in gold, in the
year 1903, with interest at eight percent per annum, in gold,
payable semiannually, on the first days of July and January. The
mortgage provided that in case of default in the payment of any
principal or interest, the mortgagor should, within six months
after such default, the default continuing, surrender to the
trustee, on its demand, the possession of the mortgaged property,
and that the expense of managing the property should, if possession
should be taken, be paid from the income, and, if necessary, from
the sale of such personal property as the trustee might deem
proper. The mortgage also contained a warrant of attorney by which,
in case of default by the mortgagor to pay any principal or
interest for six months after the same should become due, it
authorized any attorney or solicitor of the State of Indiana, after
notice to it as thereinafter provided, to enter its appearance
without process in any court of competent jurisdiction, to any bill
filed by the trustee to foreclose and sell the mortgaged premises,
and, if requested by the trustee, to consent, on behalf of the
mortgagor, that a receiver be appointed forthwith, by order of said
court, to take possession of said railway or any part thereof, and
of all or any of the mortgaged property, on such terms as the court
should
Page 106 U. S. 291
prescribe, and to consent that a decree forthwith pass for the
sale of the whole or any part of the mortgaged property, without
appraisement, but under the direction of the court, provided that
the trustee should not demand a surrender of possession, or file a
bill to foreclose and sell, unless requested in writing by the
holders of a majority in interest of the bonds at par. The mortgage
also provided that in case of default in the payment of any
interest for six months after the demand of payment after due, the
whole principal money named in the bonds should become due, and
that in case of a sale, the proceeds should be applied first to
paying the trustee all reasonable expenses, second to paying the
principal and interest of the bonds, and third to paying the
surplus to the stockholders. The mortgage declared that it and its
lien were subordinate to the mortgage to the Fidelity Company. The
mortgagor did not pay any of the interest which fell due January 1,
1874, and July 1, 1874, respectively.
On the 26th of August, 1874, the Farmers' Loan Company filed, in
the Circuit Court of the United States for the District of Indiana,
a bill for the foreclosure of the second mortgage, making as
parties the mortgagor and the Fidelity Company and certain judgment
creditors of the mortgagor. The bill set forth that the mortgage to
the Fidelity Company covered the same property as the second
mortgage, and that the latter was subordinate to the lien of the
former. It alleged facts showing that, by the terms of the second
mortgage, the entire indebtedness secured by it had become due;
that a majority in interest of the holders of the second mortgage
bonds had, in writing, requested the plaintiff to foreclose the
mortgage, and it had, more than thirty days before filing the bill,
given notice to the mortgagor of its purpose to file the same; that
the mortgagor was insolvent and unable to pay its debts; that its
entire property and franchises were not equal in value to the
amount of the two series of bonds; that its earnings, after paying
current expenses and necessary repairs, were inadequate to the
payment of interest on the two series of bonds; that the only
possibility that it would in the future be able to pay the interest
on the mortgage debt depended on its, or some person's, as its
representative, being permitted to operate the road untrammeled
Page 106 U. S. 292
by the embarrassments under which it labored; that it had a
large floating debt, partly in judgment, and that executions had
been levied on the property covered by the second mortgage and used
by it in the operation of the road, and such property had been
carried off by the officers of the law, whereby the operations of
the road had been crippled, and the expense of its management
increased, while its revenues were diminished. The bill prayed a
foreclosure of the rights of the mortgagor and of the judgment
creditors, and a sale of the mortgaged property, and the
application of the proceeds to the payment of the plaintiff's
claims according to law. It also prayed the appointment of a
receiver to take into his custody and control the mortgaged
property during the pendency of the suit, to operate the railroad,
receive its revenues, pay its expenses, make repairs, and manage
its entire business, and any surplus revenues, after paying said
expenses, to bring into court and pay out, under the order of the
court, "to such persons or corporations as shall be adjudged by the
court to be entitled thereto."
On the day the bill was filed, the Logansport Company put in an
answer admitting all the material allegations of the bill, and that
the plaintiff was entitled to the relief demanded.
On the same day, on the bill and said answer, the court made an
order that the Fidelity Company appear and plead, answer, or demur
to the bill on or before the first Monday of November then next,
and that a copy of said order be served on it not less than thirty
days prior to that day, and directing that Spencer D. Schuyler be
appointed receiver, on filing a bond, to take into his custody and
control the mortgaged property, and all the property of the
mortgagor of every kind and wherever situate, and empowering him to
operate and manage said road, receive its revenues, pay its
operating expenses, make repairs, and manage its entire business,
and to pay the arrears due for operating expenses for a period in
the past not exceeding ninety days, and to pay into the court all
revenue over operating expenses.
On the 29th of August, 1874, a copy of said order was served on
the Fidelity Company by being given to its president, and proof of
such service was filed on the 31st of August, 1874.
Page 106 U. S. 293
The receiver having filed his bond and entered on his duties,
the court, on his petition, made an order on the 23rd of September,
1874, giving him leave to sell an unserviceable car and buy a new
one provided that, in the purchase, no lien should arise for the
money expended against the interest of the first mortgage
creditors.
On the 9th of September, 1874, the receiver filed a petition
representing that the rolling stock of the road was insufficient to
meet the demands of business on the same; that the line of the road
was about eighty-seven miles long; that the company owned only six
locomotive engines, on one of which was a lien for its full value,
and was paying a rental of $200 a month for another; that it would
be for the interest of the trust for him to purchase four more
locomotive engines, and to make an adjustment in regard to the one
hired and the one on which there was a lien; that the company owned
only two first-class passenger cars and one second-class, and had
in use one passenger car on lease; that it owned but one baggage
car and had one on lease; that it needed four more passenger cars;
that one of its main branches of business was transporting coal,
and its rolling stock suitable to be used in transporting coal was
inadequate to meet the then demands of said business; that it owned
only twenty coal cars free from lien, and about one hundred and
thirty on which there was a lien to their full value; that he ought
to be authorized to make an adjustment respecting the latter, and
to purchase not over one hundred additional coal cars; that the
business of the road was greatly crippled for the want of such
additional rolling stock; that the company was indebted to other
and connecting lines of road in about $10,000, for materials and
repairs, and for ticket and freight balances; that a part of said
indebtedness was incurred more than ninety days prior to the order
of the court appointing him receiver and making provision for the
payment of certain claims, but the payment of that class of claims
was indispensable to the business of the road, and it would suffer
great detriment unless he was authorized to provide for them at
once; that about five miles of the road between Clymer's Station
and Logansport, including a bridge across the Wabash River at
Logansport, had never been built; that the City of
Page 106 U. S. 294
Logansport had recently appropriated $80,000 to aid the railroad
company to build said track and bridge, which appropriation had
been placed in the hands of a trustee, to be appropriated as the
work progressed, and that, as the completion of said work would
very largely increase the value of the property under his control,
and materially aid the present and future business of the road, he
asked for leave to expend such sums of money as might be necessary
to complete the railway between the points named.
On the 30th of September, 1874, the receiver presented to the
court a supplemental petition setting forth that the $80,000 for
building the five miles of road was raised; that the bridge would
cost about $30,000; that the Detroit, Eel River and Illinois
Railroad Company, with which the receiver's road would form an
advantageous connection by the building of the bridge and the five
miles of road, agreed to give to the Logansport Company the
one-half of the $30,000, so that that company would be the sole
owner of the bridge on paying one-half of the cost of its
construction; that five acres of valuable land at Logansport had
been given to the Logansport Company on condition that the five
miles of road should be built, said land being worth $2,500, and
suitably located for a yard and shops of the company; that the
total cost of the five miles of road and the bridge would not
exceed $30,000 -- about the amounts given by the City of Logansport
and the Detroit Company; that the necessary expenditure could be
met by anticipating the earnings of the railway for a comparatively
short time; that the increased business that would accrue to the
railway by the connections made by completing said five miles of
road would soon reimburse all moneys expended in constructing the
same; that the building of the five miles and the bridge would be
greatly to the advantage of the bondholders of the company and
would add a large amount to their security, because the five miles
and the bridge, when completed, would become part and parcel of the
property and covered by its mortgages; that the road, without the
completion of said five miles, had no terminus connecting it with
other lines, but ended at a point where there was no business of
importance, and that said five miles was a part of the original
line of the railway and covered by both mortgages.
Page 106 U. S. 295
On the 3d of October, 1874, the court, on the said two
petitions, made an order empowering the receiver to buy four new
locomotive engines, four new passenger cars, and one hundred new
coal cars, and to make an adjustment respecting the liens on and
rentals of rolling stock, and to pay the indebtedness to other
connecting lines for the purposes set forth in said petition, not
exceeding $10,000, notwithstanding said limitation of ninety days,
and to expend $30,000, in addition to said gifts and advances, to
complete said five miles of road and said bridge, and to enter into
the contracts required therefor. The order provided that, as to all
the moneys that might be expended, and all liabilities incurred by
the receiver in carrying out the provisions of the order, the
earnings of the road were charged "as with a first lien prior to
all encumbrances upon said road."
On the 3d of November, 1874, the Fidelity Company filed an
answer to the bill, setting up the mortgage to it and its priority
to the second mortgage. It admitted that the earnings of the road
had been inadequate to pay current expenses and necessary repairs
and the interest on the two series of bonds. It denied that the
appointment of a manager or receiver to operate the road would
enable the company to pay the interest on its mortgage
indebtedness, and alleged that to appoint a manager or receiver of
the road, with authority to incur expense and create fresh
indebtedness, for which the road or its earnings could in any way
be made responsible, would only perpetuate its past condition of
embarrassment, and be unjust to the respondent and the holders of
the first mortgage bonds; that the first mortgage could not
rightfully and ought not to be affected, or its lien impaired, by
any proceedings on the second mortgage; that any decree that might
be made on the bill should be made expressly subject to the first
mortgage, and that no order ought to be made in the cause that
might or could lessen the paramount lien of the first mortgage on
the property and franchises of the company, or impair the right of
the holders of the first mortgage bonds to proceed against the
company when entitled so to do under the mortgage.
No further proceedings in court of any materiality appear to
have taken place for eleven months. On the 4th of October, 1875,
the receiver filed a report and statement showing that
Page 106 U. S. 296
he had constructed six miles of new road from Clymer's Station
to Logansport, including the bridge, and had the same in running
operation as a part of the main line; that the cost had been
$104,651, of which he had paid and was to pay $29,015.64, and that
he had purchased rolling stock under said order of the court for
$110,260.46, on which there was unpaid $79,536.68. On the same day,
he filed a petition showing that there was due from his trust
$232,000 -- being $80,000 on rolling stock, $30,000 on the five
miles of road and the bridge, $25,000 for taxes, $25,000 for rights
of way, $43,000 for back pay and supplies in operating the road,
$20,000 for rental due to the Evansville and Crawfordsville
Railroad Company for that portion of the line extending from
Rockville to Terre Haute, twenty-three miles, and $9,000 to the
Missouri Car and Foundry Company on rolling rock and in operating
the road, and that $90,000 was required to place the road in proper
running order. The petition prayed for authority to borrow $322,000
for said purposes, on receiver's certificates made a first lien on
the property, as for the best interest of the trust property. It
set forth the grounds for asking such authority. As bearing on the
interests of the first mortgage bondholders, it contained the
following statement:
"The receiver went to New York City in May last to consult with
the first mortgage bondholders with the view of their taking steps
for the financial relief of the road. While there, he met with
parties holding and representing large numbers of the bonds in
Boston, New York, Baltimore, Philadelphia, and other cities and
their vicinities, and, as a result of his consultation with them, a
meeting was advertised and held at the Fifth Avenue Hotel, in New
York City, on May 24th. At that meeting, a committee was appointed
to examine the road and ascertain its condition, its original cost,
its present liabilities, and what amount would be necessary to
place it in working order, etc., and to report at a subsequent
meeting, to be called by the chairman. That committee afterwards
inspected the road, and at a meeting held in New York City,
September 3, made their report. To that meeting the original
holders of the first mortgage bonds were each invited by timely
notice, naming the time and place of the meeting, to hear the
report of the committee,
Page 106 U. S. 297
and to take part in the deliberations of the meeting. A large
representation of the first mortgage bondholders was present. A
letter from the Hon. John Baird, chairman of the meeting, to the
receiver states that from $800,000 to $1,000,000 were represented.
A copy of the minutes of that meeting, duly certified by its
president and secretary, together with a copy of the report of the
committee previously appointed, is filed herewith. By reference to
the report of that committee, the court will observe that three
propositions were suggested to the bondholders,
viz., 1st,
foreclosure of first mortgage and sale of the road; 2d, an
assessment of not less than twenty percent upon the par value of
the bonds held by them to pay off debts and repair the road; 3d, to
devise some means for borrowing not less than $300,000. These
propositions were all fully discussed, and the discussions resulted
in the passage of a resolution directing the receiver to obtain
from the court authority to borrow, upon receiver's certificates,
the sum of $322,000. The receiver was present and heard the
discussions, and but repeats what was there many times positively
asserted, that it would be impossible to collect in time for the
pressing necessities of the hour an assessment of the requisite
amount of money from the bondholders. Many of the bonds are held in
small amounts by people of limited means who must have a lengthy
previous notice of an assessment to be able to meet it, if at all.
He would show to the court that, as he has observed the condition
of the bondholders, he believes that an immediate foreclosure of
the first mortgage bonds, or any other steps requiring the early
payment of any considerable sum by the holders of bonds, would
result in the complete destruction of their interests, whereas if
the court will make some present provision for these pressing
necessities, their interests will be preserved to them."
Thereupon the court, on the same day, made an order setting
forth that it appeared to its satisfaction that under its orders,
the receiver had purchased for the use of the road, and then had in
use on it, as part of its property, rolling stock on which there
was due $79,536.68, and that there was danger of losing the
property by reason of the forfeiture of the contract under which
the same had been purchased, unless provision was made for the
payment of that sum, and that under its orders he had incurred
Page 106 U. S. 298
liabilities, in constructing and completing the five miles of
road and the bridge to the amount of $29,015.64, and that said part
of the road was a part of the line of the road, and contributed
materially to its value, and that there were the said amounts due
for taxes and rights of way and back pay and supplies, making in
all $201,552.32, and that it appeared that those several sums could
not at that time be paid or provided for out of the current
receipts of the road, and then authorizing the receiver to raise
money for that purpose by issuing and negotiating receiver's
certificates, due in one year from that date, bearing interest not
to exceed eight percent per annum, and payable out of the income of
said road, to bearer or order,
"which certificates are to be provided for by this court in its
final order in said cause unless paid by the receiver out of the
income of said road as aforesaid."
The order further set forth that, it appearing to the court that
there were other liabilities which had accrued "in connection with
the operating of said road," being the $20,000 due for rental to
the Evansville Company, and the $9,000 due for rental to the
Missouri Car Company, and that $90,000 was required to place the
road in proper running order, and the same could not be provided
for out of its income, it was therefore further ordered that in
case the plaintiff and the Fidelity Company, on due notice given to
them of such application by the receiver, should file a memorandum
therein consenting to that part of the order or stating that they
had no objections thereto, the receiver should be authorized to
issue receiver's certificates and negotiate and sell them to raise
money to pay said indebtedness and make said improvements, such
certificates to be of like tenor and date and to be provided for in
the same manner as those first authorized, and not to be sold or
used at less than their par value. No certificates were ever issued
under the second branch of this order.
On the 27th of November, 1875, the court, on the petition of the
appellants in this appeal filed on the part of themselves and all
other holders of the first mortgage bonds, made the appellants
parties defendant to said suit and gave them leave to file an
answer and a cross-bill. On the same day, their answer was filed.
It contained substantially the same allegations and denials as the
answer of the Fidelity Company and in addition admitted that the
mortgagor was insolvent and unable to pay its debts and that its
entire property and franchises were not equal in value to the
amount of the two series of bonds, and that the appointment of a
manager or receiver to operate and run the road was necessary.
On the same day the appellants filed a cross-bill, on their own
behalf and on behalf of all holders of the first mortgage bonds who
should choose to join in the prosecution of the suit, making as
defendants the Logansport Company, the Farmers' Loan Company, the
Fidelity Company, and sundry judgment creditors. The cross-bill set
forth the filing and the contents of the original bill, and the
proceedings in the original suit, including the petitions of
September 9, 23, and 30, 1874, the order of October 3, 1874, the
report of October 4, 1875, and the petition and the order of the
same date. It set forth the first mortgage and averred that before
August 26, 1874, the mortgagor built a line of road from Rockville
to Clymer's Station, a point between five and six miles
southwesterly from Logansport, being a portion of the line
contemplated by its charter and by said first mortgage, and
acquired certain property which it used in constructing said road,
and in connection with operating it, and certain other property
intended for the purpose of building the remainder of the road from
Clymer's Station to Logansport, all of which were within the terms,
and covered by the lien, of the first mortgage; that since the
appointment of said Schuyler as receiver, he had built and
completed said line of road from Clymer's Station to Logansport,
and said bridge, and had acquired a large amount of personal
property connected therewith, including certain lands intended to
be used for machine shops at Logansport and certain rolling stock
and other property for use on said railroad, and had, in so doing,
used much of the property subject to the lien of the first
mortgage, and that all of said property acquired by the mortgagor,
and that so acquired by the receiver, and the road built by him,
were equitably subject to the lien of the first mortgage. The
cross-bill set forth the failure of the mortgagor to pay the
interest on the first mortgage bonds on and after November 1, 1873,
and averred that on and always after October 20, 1873, it was
Page 106 U. S. 300
insolvent; that its entire property had not been and was not of
sufficient value to pay the first series of bonds, and that its
income had not been and was not more than sufficient to pay its
necessary expenses incurred in operating and managing its property,
and making necessary and proper repairs. The cross-bill also set
forth that a meeting of the bondholders was held May 24, 1875 at
which the holders of a considerable number of the bonds of both
series were present, and a committee was appointed to examine the
road and ascertain its condition, original cost, and present
liabilities, and the amount which would be necessary to place it in
working order, and to report at a subsequent meeting, and that on
the 3d of September, 1875, said committee reported to an adjourned
meeting its views respecting the property, to the effect that
repairs and other expenditures to put the road in fair condition
for use were needed, to the amount of several hundred thousand
dollars; that additional rolling stock to the amount of $168,000
was needed for the efficient conduct of its business; that liens to
the amount of $322,000, being the items above mentioned, superior
in dignity to the bonded debt, existed; that there were claims
against the road and the receiver aggregating $25,000; that the
income of the road over actual operating expenses and repairs,
brk:
for 1874, was about $20,000, and that there had been a deficit
of $79,800.87 during the same time by reason of what were called
extraordinary expenses, and during the six months next preceding
July 1, 1875, a like deficit of $43,883.50, and an income of
$3,000, after deducting what were called extraordinary expenses.
The cross-bill averred that said statistics and statements were
substantially correct, but it denied that there were any prior
liens to the lien of the first mortgage. It averred that the
committee in substance recommended that the first mortgage should
not be foreclosed, and that the receiver should apply to the court
for leave to borrow $322,000, payable in one year, to relieve the
road from its present necessities, and said sum should be made a
first lien upon said property, prior to the lien of either
mortgage; that said report was made at the instance of said
Schuyler and of the holders of the second mortgage bonds; that the
holders of first mortgage bonds, including the plaintiffs, to the
amount
Page 106 U. S. 301
of $148,700, had not consented to said scheme for borrowing
money, and had joined in the cross-bill; that the plaintiffs
desired, and had for more than a year last past desired and sought,
to have the first mortgage foreclosed and the property sold; that
they elected that the principal and interest should be due; that
the Fidelity Company had refused, after request, to take measures
to foreclosure the first mortgage; that under pretense of improving
the property and increasing its value and earnings and acquiring
additional property, the entire property was being destroyed, and
liens were being attempted to be created to take precedence of the
first mortgage lien; that the Fidelity Company refused to take any
means to preserve the property; that no material part of the sum of
$201,552.32, which the said receiver had been authorized to borrow,
could be paid from the income of the road, and it was not probable
the interest on it could be paid from said income; that the
borrowing of it for one year was not in the interest of the first
mortgage bondholders, and it ought not to be made a first lien upon
the property, and that said Schuyler did not own any of the first
mortgage bonds, but was interested only in the second mortgage
bonds and the stock, and, for various reasons assigned, was not a
proper person to have charge of the property. The cross-bill prayed
for the sale of the mortgaged property to pay the first mortgage
bonds, and for the appointment of a receiver to take possession of
the property and operate the road, and for the removal of Schuyler
as receiver.
On the 18th of December, 1875, the plaintiffs in the cross-bill
moved for a receiver thereunder, and for the discharge of Schuyler
as receiver. A reference to a master was ordered to take evidence
on the subject.
Nothing further of importance appears to have been done in the
suit until the 1st of May, 1876, when the Fidelity Company filed an
answer to the cross-bill, averring that it had declined to take
proceedings to foreclose the first mortgage because it had not been
requested to do so by the holders of a majority of the first
mortgage bonds, and that their true interests would be best
subserved by an early foreclosure of said mortgage. On the same
day, the Farmers' Loan Company and the mortgagor filed separate
answers to the cross-bill. These answers denied
Page 106 U. S. 302
all allegations made against Schuyler in the cross-bill and
alleged that all improvements had been made in good faith, for the
benefit of the property, and had added largely to its value.
On the 3d of May, 1876, the original suit and the cross-suit
were brought to a hearing together on the bills and the answers
therein and certain stipulations, and one decree was made in both
suits, on the 17th of May, 1876, consolidating the suits, adjudging
what was due on each mortgage, and declaring that the properties
covered by the two mortgages were one and the same, and that the
lien created by them respectively covered all the property held by
the mortgagor at the time of the bringing of the original suit and
all subsequent additions made thereto. The decree described said
property as being the railroad from Logansport to Rockville,
ninety-two miles, with all branch roads extending from said line
which had been built or acquired by the mortgagor, or for its use,
with all its franchises and property which had been acquired for
the purpose of operating said road and its branches, and all
leases, contracts, and agreements made with the mortgagor, or for
its use and benefit. It declared that the lien of the first
mortgage was superior to that of the second mortgage upon all of
said property. It provided for a redemption of the first mortgage
lien by the second mortgagee, and, on failure, for a foreclosure of
all its rights in said property except in the proceeds of a sale.
It provided for the presentation before a master of claims by the
holders of first mortgage bonds and coupons, and of claims to an
interest in the property, and of claims against the receiver
arising out of his actings and doings as such, allowing any parties
interested in the funds to be derived from a sale to dispute and
contest such claims. It reserved all questions concerning priority
of liens except as between persons entitled under the first and
second mortgages, and declared that it should not be necessary to
pass on said claims before having a sale.
On the 25th of July, 1876, the court appointed Joseph P.
Claybrook joint receiver with Schuyler in the original suit,
without prejudice to the right of the plaintiffs in the cross-bill
and of the Fidelity Company to claim that the receivership of
Schuyler was not in their interest and by their consent, as
fully
Page 106 U. S. 303
as they might have done if no such joint receiver had been
appointed, and the order declared that it should not be held to
entitle the first mortgage bondholders, or their trustee, to any of
the income of the property which might be realized by the
receivers, until said Claybrook should qualify as receiver, or
until Schuyler should requalify, which he was ordered to do by a
day named. Claybrook qualified on the 11th of August, 1876, and
after that acted as sole receiver, until Schuyler requalified on
the 25th of August, 1876.
Under the decree of May 17, 1876, the master made reports, from
time to time, as to claims, allowing some wholly or in part and
rejecting some. Various questions arise on this appeal in respect
to those of said claims which were allowed.
On the 20th of October, 1876, Claybrook filed a report, stating
that, as receiver, he took possession, on the 12th of August, 1876,
of the line of railway from Logansport to Rockville, 92 87/100
miles, and a line of railway from Rockville to Terre Haute, 23
miles, said to belong to the Evansville and Crawfordsville Railway
Company, and 4 90/100 miles of side tracks at stations between
Logansport and Rockville, and a hand railway, 1 3/4 to 2 miles,
from Sand Creek to the coal mines, and certain station buildings
and other property, and certain rolling stock, some owned by the
mortgagor and some leased by it.
On the 22d of November, 1876, the court suspended Schuyler from
his position as receiver. On the 1st of December, 1876, an order
was made, on the consent of Schuyler and the plaintiffs in the
cross-suit, vacating said order of suspension and accepting
Schuyler's resignation as receiver, and allowing him $500 for
services and expenses as joint receiver, and $15,330.29 for salary
as separate receiver, without prejudice to the rights of the
parties to contest any matter connected with the accounts of
Schuyler as receiver, except as therein expressed, or any claims
made under said accounts and asserted against said trust estate, or
the claim that the receiver's indebtedness should have priority
over the first mortgage.
On the 19th of February, 1877, the plaintiffs in the cross-suit
filed a paper setting forth that any fund derived from the property
covered by the first mortgage, or from any property acquired for
the use of said railway, which was or should be
Page 106 U. S. 304
subject to the lien of said mortgage, ought not to be charged
with any indebtedness whatever, whether incurred by the mortgagor
or by Schuyler, as receiver, under the prayer of the original bill,
also objecting to certain items in Schuyler's account because
credited or paid out without the authority of the court, or upon
accounts or contracts and debts which accrued or were made and
matured more than three months before Schuyler became receiver, or
because for indebtedness which Schuyler, as receiver, had not
lawful authority to incur or pay, or because for his personal
indebtedness, or unnecessary or excessive; also alleging that the
receiver's certificates and certain notes were issued improvidently
and improperly, and without the authority of the court. Afterwards
further objections of like tenor were filed to other items. The
plaintiffs in the cross-suit also filed various exceptions to the
reports of the master allowing various claims.
On the 22d of January, 1879, after a hearing as to the claims,
on the reports, the evidence, and the exceptions, the court made an
order allowing certain claims, many of them not over $5,000,
specifying the names of the claimants and the amounts allowed, and
referring back the claim of the Evansville Company for further
evidence, and a report based on certain specified rulings then
made. The order also contained this provision:
"All claims allowed by the court, by this order of this day,
against the receiver are adjudged to be valid claims, to be paid
out of the funds in the possession of the court, as well from the
income of the road as from the proceeds of any sale hereafter made,
and prior in equity to any claims of the mortgagees of the
railroad, the court reserving to the mortgagees the right to object
to any order hereafter to be made in distributing the whole or any
part of the funds which may be in court arising from the income of
the railroad, or from the sale of the same."
In the order, the plaintiffs in the cross-suit prayed an appeal
to this Court.
On the 25th of June, 1879, the master filed a special report as
to the claim of the Evansville Company, to which, two days
afterwards, the plaintiffs in the cross-suit filed exceptions. On
the 3d of July, 1879, the court allowed the claim at $35,318.62 in
preference to the mortgage liens. On the same day it made
Page 106 U. S. 305
a decree for the sale, as an entirety, by the master, of the
road from Logansport to Rockville, together with all the branch
roads of the mortgagor extending from said main line, which had
been built or acquired by it or for its use, together with all its
franchises and property owned by it, or which had been acquired for
the purpose of operating said road, together with all contracts and
agreements made with it or for its use or benefit, giving a
particular description of the property in schedules. The decree
provided that out of the net proceeds of sale, the master should
pay first, the costs of suit and the allowances made to the
trustees and the solicitors; second, the taxes; third, the claims
against the receivership and fund in court allowed by the order of
January 22, 1879, and the claim of the Evansville Company as so
allowed, and all other claims against said receivership and fund
which might thereafter be allowed, and which might remain unpaid
after the funds in the hands of the receiver, not otherwise
disposed of, should have been exhausted; fourth, the surplus to be
applied, first, to the payment of the first mortgage bonds and
coupons
pro rata, and the remainder, if any, to be
distributed as the court might thereafter direct. The decree
contained a prayer for an appeal from it to this Court by the
plaintiffs in the cross-suit. That appeal was perfected.
This chronological history of the proceedings in the case is
given because a full understanding of those proceedings conduces to
an easy solution of the questions involved in the appeal
herein.
The appellees insist that the appeal should be dismissed for the
alleged reason that the parties have not been named as either
appellants or appellees on the docket of this Court or in the
transcript. But the order of January 22, 1879, allows the claim,
specifying the persons to whom allowed and the amounts, and the
body of the order states that the plaintiffs in the cross-suit pray
an appeal to this Court, and the decree of July 3, 1879, orders the
payment of the claims allowed by the order of January 22, 1879, and
contains a prayer by the plaintiffs in the cross-suit for an appeal
from said decree. These were appeals in open court, not requiring
citations, and the order and the decree appealed from sufficiently
designated all
Page 106 U. S. 306
the appellees by name, and the appeals were appeals from the
whole of the order and the whole of the decree. The decision in
The Protector,
11 Wall. 82, does not apply to a case of this kind.
As a general proposition, applicable to the whole case, the
appellants insist that the mortgagee under the second mortgage
carried out a fraudulent scheme to obtain a priority over the lien
of the first mortgage for the claims allowed without giving the
mortgagee under the first mortgage an opportunity to resist it
until after the orders had been obtained and acted on. As evidence
of this, the fact is urged that the first mortgagee was made a
party to the original foreclosure suit without any relief's being
asked against him. It is contended that the first mortgagee was not
a proper party to the bill. The appointment of the receiver without
notice to the first mortgagee, although a party to the suit, is
commented on, coupled with the fact that its day of appearance was
fixed as being on or before the first Monday of November then next.
It is further suggested that under the receivership originally
created, the second mortgage bondholders alone were entitled to the
income from that receivership, and that the trust fund under the
control of the court was only that which the second mortgagee could
put there -- namely the mortgagor's right to an equity of
redemption as against the second mortgagee, and not the entire
property.
We see no warrant for the charge of fraud. The second mortgagee,
in filing its bill, made the first mortgagee a party, though
admitting the priority of the lien of the first mortgage, and not
asking any direct relief against the first mortgagee, evidently
because a receiver was prayed for. This was proper. Although the
order of August 26, 1874, appointing the receiver, was made without
notice to the first mortgagee, it was served on the first mortgagee
three days after it was made, and its broad terms, as to the powers
conferred on the receiver, called upon the first mortgagee to
appear in the suit promptly, to protect the interests of the first
mortgage bondholders, and not to wait, as it did, until the first
Monday of November following. It was required by the order to
appear and answer "on or before" that day. It waited until that day
before appearing or answering. The original bill evinced no
intention to create
Page 106 U. S. 307
a receivership for the sole benefit of the second mortgage
bondholders. On the contrary, it asked that the net revenue of the
receivership should be paid to such persons or corporations as
should be adjudged by the court to be entitled to it. This was in
substance saying to the first mortgagee that it too had an interest
in the receivership. The receiver's petitions, filed September 9
and September 30 following, respectively, were not acted on till
October 3 after the first mortgagee had had ample time to appear.
These petitions showed the pressing necessity of the road. The
authority conferred by the order of October 3 was intended to
benefit the
res in the hands of the court, which was the
entire mortgaged property, as covered by both mortgages, and not
merely the equity of redemption of the mortgagor as against the
second mortgagee. Whatever may be the rule as to the rents and
profits of a mortgaged estate, under a receivership, on a bill
filed by a second mortgagee, where the first mortgagee is not made
a party to the suit, that rule has not been applied to such a
receivership where the first mortgagee was made a party, especially
on a bill such as that in this case. The authorities limit the
exclusive right of the second mortgagee to the income of a
receivership created under a bill filed by him, to a case where the
first mortgagee is not a party to the suit.
Howell v.
Ripley, 10 Paige 43; High on Receivers sec. 688.
It is further to be observed that the mortgagor, having
defaulted in paying its interest on the first mortgage bonds on the
1st of November, 1873, the first mortgagee was entitled, by the
terms of its mortgage, to take possession of the mortgaged property
and operate the road. Moreover, the cross-bill was not filed for
more than a year after the receiver had been appointed, and it was,
in judgment of law or in fact, fully known all the time to the
first mortgage bondholders what was being done by the receiver in
creating the claims now sought to be disputed; nor was it filed for
more than a year after the first mortgagee had appeared and
answered in the original suit. It was at all times competent for
the first mortgage trustee, as a party to that suit, to have asked
the court to protect the interests of the bondholders in case the
receiver was disregarding them, and the cross-bill could as well
have been filed earlier as later by the plaintiffs in it or by
other bondholders.
Page 106 U. S. 308
On these views, the charge of fraud made by the appellants has
no basis. On the other hand, it did not comport with the principles
of equity for the appellants to lie by and see the court and the
receiver dealing with the property in the manner now complained of,
and content themselves with merely protesting generally and
disclaiming all interest under the receivership, and yet assert, as
they did in the cross-bill, that the piece of road from Clymer's
Station to Logansport, and the bridge and the land and the rolling
stock, and the other property acquired by the receiver and now
alleged to have been acquired by him without authority, were
subject to the lien of the first mortgage, and now claim the
proceeds of all that property without paying the debts incurred for
acquiring it. A court of equity, however it might act on the
question of original authority or discretion if presented in season
and under circumstances of good faith, will not visit upon innocent
parties dealing with a receiver within the authority of its orders
consequences which result from the inequitable negligence and
supineness of a party to the suit, or of those represented by him.
The cross-bill alleges that the plaintiffs in it had desired for
more than a year to have the first mortgage foreclosed.
The original bill set forth ample grounds for appointing a
receiver promptly. The payment of interest on the second mortgage
bonds ceased January 1, 1874. That mortgage gave a warrant of
attorney for the appointment of a receiver forthwith, after six
months' default -- a provision not in the first mortgage.
The order of August 26, 1874, is questioned by the appellants
because it empowered the receiver "to pay the arrears due for
operating expenses for a period in the past not exceeding 90 days."
They also object to the order of October 3, 1874, because it
authorized the receiver to purchase rolling stock and to adjust the
liens on rolling stock, and to pay indebtedness, not exceeding
$10,000, to other connecting lines of road, in settlement of ticket
and freight accounts and balances, and for materials and repairs,
which had accrued in part more than ninety days before August 26,
1874, and to construct the piece of road from Clymer's Station to
Logansport, and the bridge across the Wabash River, and to enter
into contracts necessary
Page 106 U. S. 309
therefor, and because it provided that as to all moneys that
might be expended and all liabilities incurred by the receiver in
carrying out the provisions of the order, the earnings of the road
were charged "as with a first lien prior to all encumbrances upon
said road." They also object to the order of October 4, 1875,
because it provided that the certificates which might be issued by
the receiver under that order were to be provided for by the court
in its final order in the cause, unless paid by the receiver out of
the income of the road. They also object to the order of January
22, 1879, because it adjudged all claims allowed by it against the
receiver to be valid claims, to be paid out of the funds in the
possession of the court, as well from the income of the road as
from the proceeds of any sale to be thereafter made, and prior in
equity to any claims of the mortgagees of the railroad. They also
object to the decree of July 3, 1879, because it directed the
master to pay out of the proceeds of the sale of the mortgaged
property the several claims against the receivership which had been
allowed by the order of January 22, 1879, in preference to the
amount due by the mortgagor to the holders of the first mortgage
bonds and coupons, and because it directed the master to pay the
claim of the Evansville Company, and all other claims against the
receivership which might thereafter be allowed, and which might
remain unpaid after the funds in the hands of the receiver, not
otherwise disposed of, should have been exhausted, in preference to
the amount due on the first mortgage indebtedness, and because it
did not order that the accounts of the receiver should be adjusted
and settled before the master should pay out of the proceeds of the
sale of the property any of the amounts allowed as debts against
the receiver, and because it directed a sale to be made of the
property covered by the first mortgage and that acquired by the
receiver, under the orders of the court, as an entire property, and
did not separate the two classes of property or the funds to be
realized from them respectively.
The question of the power of a court to create claims through
receivers in a suit for the foreclosure of a railroad mortgage
which shall take precedence of the lien of the mortgage was
considered by this Court in
Wallace v.
Loomis, 97
Page 106 U. S. 310
U.S. 146. There, in a suit for the foreclosure of the first
mortgage on a railroad, to which the trustees of a second mortgage
were parties, the court, on notice, appointed receivers with power
to put the road in repair and operate it, and complete any
uncompleted portions, and procure rolling stock, and for these
purposes to raise money by loan to an amount named in the order,
and to issue their certificates of indebtedness therefor, which
should be a first lien on the property, payable before the first
mortgage bonds. Wallace, a holder of second mortgage bonds,
afterwards became a party to the suit. The final decree declared
that the moneys raised by loan, or advanced by the receivers, and
expended on the road, pursuant to their order of appointment, were
a lien paramount to the first mortgage, and it directed them and
such receivers' certificates or other indebtedness as might
thereafter be ordered by the court to be paid, to be paid out of
the proceeds of the sale of the road before paying any of the first
mortgage bonds or coupons. On an appeal to this Court by Wallace,
this Court, by MR. JUSTICE BRADLEY, said:
"The power of a court of equity to appoint managing receivers of
such property as a railroad, when taken under its charge as a trust
fund for the payment of encumbrances, and to authorize such
receivers to raise money necessary for the preservation and
management of the property, and make the same chargeable as a lien
thereon for its repayment cannot at this day be seriously disputed.
It is a part of that jurisdiction, always exercised by the court,
by which it is its duty to protect and preserve the trust funds in
its hands. It is undoubtedly a power to be exercised with great
caution, and if possible with the consent or acquiescence of the
parties interested in the fund."
Wallace had not become a party to the suit until several months
after the order complained of was made. This Court sustained the
decree.
The principle thus recognized covers most of the objections here
urged. The facts set forth in the petitions of September 9 and 30,
1874, on which the order of October 3, 1874, was based show ample
reasons for making that order in respect to the purchases of
rolling stock and the adjustment of liens on rolling stock and the
construction of the Clymer division and the bridge. The contents of
those petitions have been set forth.
Page 106 U. S. 311
In respect to the $10,000 due other and connecting lines of road
for materials and repairs, and for ticket and freight balances, a
part of which it was stated was incurred more than ninety days
before the 26th of August, 1874, the first petition stated that
payment of that class of claims was indispensable to the business
of the road, and that unless the receiver was authorized to provide
for them at once, the business of the road would suffer great
detriment. These reasons were satisfactory to the court. In the
examination by the master of the accounts of the receiver, evidence
was taken as to the payment by him of items due, when he took
possession, for operating expenses and of moneys due other and
connecting lines for the matters named. The report of the master
shows that he disallowed several items in the receiver's accounts,
claimed under the above heads, where the claims were made on the
ground that the creditors threatened not to furnish any more
supplies on credit unless they were paid the arrears. His action,
sanctioned by the court, in allowing items within the scope of the
orders of the court, appears to have been careful, discriminating,
and judicious so far as the facts can be arrived at from the
record. It cannot be affirmed that no items which accrued before
the appointment of a receiver can be allowed in any case. Many
circumstances may exist which may make it necessary and
indispensable to the business of the road and the preservation of
the property for the receiver to pay preexisting debts of certain
classes out of the earnings of the receivership, or even the corpus
of the property, under the order of the court, with a priority of
lien. Yet the discretion to do so should be exercised with very
great care. The payment of such debts stands,
prima facie,
on a different basis from the payment of claims arising under the
receivership, while it may be brought within the principle of the
latter by special circumstances. It is easy to see that the payment
of unpaid debts for operating expenses, accrued within ninety days,
due by a railroad company suddenly deprived of the control of its
property, due to operatives in its employ, whose cessation from
work simultaneously is to be deprecated, in the interests both of
the property and of the public, and the payment of limited amounts
due to other and connecting lines of road for materials
Page 106 U. S. 312
and repairs, and for unpaid ticket and freight balances, the
outcome of indispensable business relations, where a stoppage of
the continuance of such business relations would be a probable
result, in case of nonpayment, the general consequence involving
largely, also, the interests and accommodation of travel and
traffic, may well place such payments in the category of payments
to preserve the mortgaged property in a large sense, by maintaining
the goodwill and integrity of the enterprise, and entitle them to
be made a first lien. This view of the public interest in such a
highway for public use as a railroad is, as bearing on the
maintenance and use of its franchises and property in the hands of
a receiver, with a view to public convenience, was the subject of
approval by this Court, speaking through MR. JUSTICE WOODS in
Barton v. Barbour, 104 U. S. 126. The
appellants furnish no basis for questioning any specific amounts
allowed in respect of the arrears referred to, but object to the
allowance of anything out of the sale of the corpus for such
expenditures. Under all the circumstances of this case, we see no
valid objection to the provisions of the orders complained of.
The objections made to the orders of October 4, 1875, and
January 22, 1879, and to certain provisions in the decree of July
3, 1879, fail for the reasons before stated.
Specific objection is made to the allowance of the claim of the
Evansville Company to be paid in preference to the first mortgage
bonds. The Evansville road ran from Rockville to Terre Haute,
twenty-three miles. The mortgagor had, in June, 1872, hired that
road by a written lease, the term of which was for one year, and
until one year's notice of its termination should be given by
either party, after that term. The rent was $2,012.50 per month,
and the lessee was to maintain the road in as good condition as
when received, and permit the Evansville Company to use six miles
of it at a stipulated price. Provision was made in the lease for
initial and subsequent inspection of the road to ascertain its
condition, and any improvement or depreciation the lessor or the
lessee was to pay the other party for, in accordance. The lessee
used the road from July 1, 1872, until the receiver was appointed.
He took possession of it and ran it while he was receiver, as a
Page 106 U. S. 313
continuation of his road, and so did he and Claybrook
afterwards, and subsequently Claybrook, as sole receiver, did the
same. The rent was paid to September 1, 1874, then for a year it
was not paid, then it was paid for four months, then it was unpaid
to August 12, 1876, and after that Claybrook, as receiver, paid it
as it accrued. During all the time from September 1, 1874, the
successive receivers collected from the Evansville Company, every
month, $262.50 for the use of the six miles. In the winter of 1876
there was found, on inspection, a depreciation of $19,346.82. The
Evansville Company made a claim against the receiver for the unpaid
rent, the amount of the depreciation, the value of certain
supplies, and the rent of an engine. The master reported as due
$56,036.21. On exceptions, the court directed the master to
ascertain what would be a fair rental value for the use of the
leased property by the receivers and to take into consideration any
dilapidations. On this basis, a new report for $35,318.62 was made,
and this amount was allowed, with a preference. We see no valid
objection to this allowance. It is on the basis not of the lease,
but of the actual value of the use of property used by the
receivers, with the clear assent, under the circumstances, of all
parties interested, which use the first mortgage bondholders and
their trustee, chargeable with full knowledge, never sought to
prevent, such use being founded on the lease, which was property in
the hands of the mortgagor. The line was used for the benefit of
the mortgagor's road, and of the holders of the bonds under the
mortgages, with their acquiescence. Whatever the court would have
done as an original question, if called on to determine whether the
receiver should use and run the Evansville road, these appellants
must now be held, in view of all the facts, to have consented to
treat the right to run that road, and take its income, as if that
right were a part of the mortgaged property and subject to the same
rules as the other mortgaged property. This leads to the allowance
also of the claims for operating supplies and materials, including
steel rails, furnished for that road while so run.
As to the objection that the decree of July 3, 1879, was
erroneous in not requiring the accounts of the receiver to be
settled before any payment should be made out of the proceeds
Page 106 U. S. 314
of sale of any amounts allowed as debts against the receiver,
the contention is that items may yet be disallowed to the receiver,
which will leave in the fund derived from income moneys applicable
to pay debts incurred by the receiver, and so decrease the
deficiency of income, and that the final decree of July 3, 1879,
was erroneous in going beyond all prior orders and not keeping the
income separate from the proceeds of sale, and in directing the
debts allowed to be paid wholly at once, out of the proceeds of
sale. This view rests entirely on the mistaken idea that the first
mortgage bondholders and their trustee had no interest in any
income of the receivership created under the original bill. If
hereafter there shall arise any receiver's net fund, the court must
apply it to pay, in the same order of rank as in the final decree,
the four sets of creditors therein mentioned, and which is the
proper order, as we hold. The creditors having these claims against
the receiver were
bona fide creditors, and have waited
long to receive their due. It was very proper, under the correct
view of the law taken by the court below, that it should not compel
them to wait longer for the settlement of the receiver's accounts,
in which they have no interest.
Under the foregoing views, the objection that there was error in
ordering the sale of the property as an entire property fails.
Many points were urged by the counsel for the appellants which
are either disposed of under the views we have announced or are
not, though they have been considered, deemed of sufficient
importance for special remark. The decree of the circuit court must
be affirmed. In reaching this conclusion, we have assumed that the
appeal has brought before us the claims which are not over $5,000,
and have not considered the question as to whether this is or is
not a case in which our jurisdiction as to those claims could be
successfully challenged.
Decree affirmed.