Three railroad companies in Illinois, with roads, one from
Peoria to Decatur, one from Paris to Decatur, and one from Paris to
the Indiana line in the direction of Terre Haute, Indiana, each,
before September, 1874, issued bonds secured by a mortgage on its
road. In September, 1874, each of the other two companies conveyed
its road to the Peoria and Decatur Company, the latter assuming
"all the bonded and floating indebtedness" of the other companies.
In November, 1874, it changed its name to that of the Illinois
Midland Company, and in January, 1875, issued bonds secured by a
mortgage covering all its property, original and purchased, with
the view of exchanging them, dollar for dollar, for the bonds of
the sectional roads. In September, 1875, the owner of a majority of
the stock of the companies, with judgment creditors of the Paris
and Decatur Company, brought a suit in equity in a state court in
Illinois against the Illinois Midland Company to have a receiver of
all its property appointed and an account taken of all the claims
and liens of its stockholders and creditors, and of those of the
sectional companies, and to have them paid and adjusted according
to equity. Such a receiver was immediately appointed, with power to
run the road. In December, 1876, the Union Trust Company, trustee
in the mortgages on the Paris and Decatur road, the Paris and Terre
Haute road, and the Illinois Midland road, filed a bill in the
proper circuit court of the United States in Illinois to foreclose
those three mortgages, and in September, 1877, it was made a
defendant in the state court suit on its own petition, alleging a
default by October 1, 1875, in the payment of interest on the bonds
embraced in all three of the mortgages. In February, 1878, it filed
two bills in the same federal court, each for the foreclosure of
one of the two railroad mortgages held by it. In April, 1878, it
removed into that court the state court suit.
Page 117 U. S. 435
In August, 1881, holders of Paris and Decatur bonds filed a bill
in the same federal court to foreclose the Paris and Decatur
mortgage. By an order made in June, 1882, that court consolidated
all the suits. Successive receivers, each replacing the prior one,
were appointed by the state court in August, 1816, and by the
federal court in December, 1878, and April, 1882. In June, 1882, a
special commissioner was appointed to report as to the certificates
of indebtedness issued by the receivers. He made his report in
April, 1883, and, on exceptions to it, an interlocutory decree was
made in June, 1881, making specific adjudications as to various
receiver's certificates and other receiver's debts, and directing
the commissioner to report as to other matters. He did so in
January, 1885, and exceptions were filed to the report. A final
decree in June, 1885, disposed of the litigated questions and
provided for a sale of the mortgaged property and the distribution
of the proceeds. Holders of Paris and Decatur bonds appealed
because the decree gave to sixteen receiver's certificates priority
over those bonds. When the first order was made under which six of
the certificates were issued, neither any of the Paris and Decatur
bondholders nor their trustee was party to the suit, but before any
other order was made under which any of the certificates were
issued, the trustee was made a party, and the Paris and Decatur
interest had been in default for ten months when such first order
was made:
Held:
(1) Certificates issued for necessary repairs must be allowed
priority.
(2) It is no objection to this rule that the suit in which the
first receiver was appointed was not brought by the bondholders or
their trustee.
(3) The bill in that suit was sufficient to enable a court of
equity to administer the property and marshal the debts.
(4) It was sufficient if the bondholders and their trustee were,
after they were made parties, heard as to the merits of such first
order and the application of the money for which the certificates
were issued.
(5) The certificates issued to pay tax liens are to have
priority.
(6) Persons having no connection with the case or the parties,
who take directly from the receiver receiver's certificates issued
to pay for necessary repairs, are not bound to see to the
application of the proceeds.
(7) The holders of interest-bearing receiver's certificates
taken within the limit of discount allowed by the court in the
order authorizing the certificates to be issued are entitled to the
face of the certificates and the interest.
(8) Receiver's certificates issued to replace earnings diverted
from paying for operating expenses and ordinary repairs, to pay for
replacing worn-out parts of the road, while large debts had been
incurred for the operating expenses and ordinary repairs, are to be
allowed priority.
(9) It was not necessary to have the express consent of the
bondholders, to create a lien prior to the bonds on the corpus of
the property, on the facts of this case, and in view of the neglect
of their trustee to interpose all the while the road was openly in
the charge of the receiver, and being run, with the interest on the
bonds in arrear.
(10) Items for wages due employees of receiver, debts due from
them to other railroad companies and for supplies and damages,
wages due employees
Page 117 U. S. 436
of the road within six months immediately preceding the
appointment of the first receiver, and debts incurred for the
ordinary expenses of the receivers in operating the road may be
allowed priority out of the corpus of the property if there is no
income fund after scrutiny and opportunity for those opposing to be
heard.
(11) The terms of the first order appointing the receiver did
not impair or exclude the authority of the court to give priority
to the claims above mentioned.
(12) It is proper to apportion among the three sectional roads,
in proportion to their lengths, the items so allowed priority of
lien, which include the terminal expenses and track rentals of the
three sectional roads, although such expenses and rentals were
different for each of them.
(13) The objection that there was no authority to buy the Paris
and Decatur road cannot prevail, because the nonaction of the
bondholders and their trustee, in allowing the court and the
receivers to go on contracting debts in respect to the line
operated as a unit under circumstances where no separation can be
made as to the matters questioned and where important rights have
accrued on the faith of the unity of the interests, amounts to such
acquiescence as should operate as an estoppel.
As to 994 Paris and Decatur bonds, surrendered and exchanged
absolutely for Illinois Midland bonds and marked "cancelled," they
cannot be reinstated and put on a footing with bonds not exchanged,
because the contracts under which they were exchanged were complied
with, and the transaction was completed, no surrender of any of the
bonds having been made dependent on the surrender of any other
bonds or of the whole.
There being five several properties to be sold, it is proper to
put up for sale each of the five separately, and then all five in
gross, and, if the highest bid for the five in gross exceeds the
aggregate of the highest separate bids, to strike off and sell the
whole as an entirety to the person making the bid, and divide the
proceeds into five parts, in proportion to the separate bids, and
make distribution accordingly.
Certain debts due by the receivership to other railroads for
rent of track, materials, and stores supplied, labor performed, and
traffic balances, the debts having been purchased by other parties,
are to be allowed priority.
Debts for large sums of money borrowed by the receiver without
previous authority from the court are not to be allowed priority,
although the moneys were applied to pay expenses of the
receivership, repairs, supplies, and payrolls, and to replace
moneys which had been so applied, because there never could be any
difficulty in obtaining an order of the court, if one were proper,
to borrow money to a specified total amount for specific
purposes.
Rents due for use of rolling stock, and money due for
extraordinary depreciation of rolling stock, and certain other
items, were not allowed priority in this case.
No priority or preference among the debts and claims, whether
receiver's certificates or other debts, given precedence over the
mortgage bonds, was allowed (except as to debts for taxes and
receiver's certificates issued to
Page 117 U. S. 437
borrow money to pay taxes, or to discharge tax liens), although,
in the orders under which some of the certificates so given
precedence were issued, it was declared that each certificate
should be a lien on the property in respect of which it should be
issued superior to all mortgage bonds and receiver's debts except
receiver's debts theretofore declared by order of court to be
special liens on such property.
Each one of the two principal appellants having succeeded in
part on his appeal, no costs were allowed in this Court for or
against any party, and the expense of printing the record was
charged equally on such two appellants.
The case is stated in the opinion of the Court.
MR. JUSTICE BLATCHFORD delivered the opinion of the Court.
The Peoria, Atlanta, and Decatur Railroad Company was
incorporated as an Illinois corporation in 1869 to construct a
railroad from Peoria, in Tazewell County, in a general
southeasterly direction, through Atlanta, in Logan County, to
Decatur, in Macon County. Such of the road as was constructed was
built in 1873 and 1874 from a point five miles east of Peoria, on
what is now the Wabash, St. Louis and Pacific Railroad, to a place
called Maroa, on the Illinois Central Railroad, thirteen miles
north of Decatur. It did not reach either Peoria or Decatur, and
the company owned no station grounds or terminal facilities at
either place, but used, by lease, five
Page 117 U. S. 438
miles of what is now the Wabash, St. Louis and Pacific Railroad,
to reach Peoria, and thirteen miles of the Illinois Central
Railroad to reach Decatur. On the 25th of April, 1872, the company
executed a mortgage to James F. Secor, as trustee. The mortgage
recited that the company had commenced to construct a railroad
to
"extend from Cunningham's Crossing, five miles from the City of
Peoria, on the Toledo, Peoria and Warsaw Railway, thence southeast
to a point at or near the City of Decatur, . . . a distance of
about sixtyseven miles,"
and it covered the company's franchises, and its road and
property, as constructed and to be constructed, acquired and to be
acquired,
"commencing at Cunningham's Crossing, five miles from the City
of Peoria, on the Toledo, Peoria and Warsaw Railway, to the City of
Decatur, . . . a distance of sixtyseven miles."
It was given to secure 1,300 coupon bonds of the company of
$1,000 each, payable to bearer, amounting to $1,300,000, carrying
semiannual interest at seven percent per annum and payable May 1,
1902. The mortgage provided that on default continuing more than
sixty days in the payment of any interest on any bond, the trustee,
on the request of the holders of a majority of the bonds, might and
should take actual possession of the mortgaged property and operate
the road and receive its income to pay the bonds or, on the written
request of the holders of at least onehalf of the outstanding
bonds, cause the mortgaged property to be sold at public auction
and convey it to the purchaser and, "after deducting from the
proceeds of said sale the costs and expenses thereof, and of
managing such property," apply the proceeds to pay the principal
and interest of the bonds. The mortgage also provided that the
trustee should
"be entitled to have proper compensation for every labor or
service performed by him in the discharge of this trust in case he
shall be compelled to take possession of said premises and manage
the same."
This mortgage was delivered and duly recorded.
The Paris and Decatur Railroad Company was incorporated as an
Illinois corporation in 1861, to construct a railroad from Paris,
in Edgar County, westwardly to reach Decatur. This road was
constructed in 1871 and 1872, from Paris to a point
Page 117 U. S. 439
on the Illinois Central Railroad about two miles south of
Decatur, and, although it had its own station and grounds at
Decatur, it entered them by using, by lease, about two miles of the
track of the Illinois Central Railroad. On the first of July, 1871,
the Paris and Decatur Company executed a mortgage to Joseph U.
Orvis and William Adams, Sr., covering its franchises, and its line
of road and property, constructed and to be constructed, acquired
and to be acquired, extending from Paris to Decatur, "a distance of
seventyfive miles," to secure 800 coupon bonds of $1,000 each, and
800 coupon bonds of $500 each, in all $1,200,000. The mortgage was
delivered and recorded, and the bonds were put into the hands of
the trustees, and some of them were issued but afterwards retired,
and all of them were destroyed, but the mortgage remains on record,
not released. On the 1st of July, 1872, the Paris and Decatur
Company executed a mortgage to the Union Trust Company, a New York
corporation, covering its franchises, and its road and property,
constructed and to be constructed, acquired and to be acquired,
extending from Paris to Decatur, "a distance of seventyfive miles,"
to secure 2,400 coupon bonds, of $500 each, payable to bearer, in
all $1,200,000, carrying semiannual interest at seven percent per
annum, and payable July 1, 1892. The mortgage provided that, in
case default in paying any interest on any bond should continue for
six months after demand, the principal of all the bonds should
forthwith become due, and the lien might be at once enforced, in
which case it should be lawful for the trustee to enter on the
mortgaged property, and to use and operate it until it should be
sold under the power contained in the mortgage, or under the decree
of a competent court,
"and until such time, and from time to time, to make all needful
repairs and replacements, and such useful alterations, additions,
and improvements, to said railroad as may be necessary for the
proper working of the same, and to receive the tolls, freights,
incomes, rents, issues, and profits thereof, and, after deducting
the expenses of operating and managing the said railroad and other
property, and of the said repairs, replacements, additions, and
improvements, as well as just compensation for its own services,
and for the services and disbursements
Page 117 U. S. 440
of such attorneys and counsel as it may employ, to apply the
moneys accruing as aforesaid to the payment of said bonds
pro
rata."
The mortgage also provided that in case default should be made
and should continue as aforesaid, the trustee might, and, upon the
written request of the holders of at least 1,000 of the bonds
outstanding, should, foreclose the mortgage by legal proceedings,
or should sell the mortgaged property at public auction at New York
or at Paris, and convey it to the purchaser, and that, in case of
such sale, the trustee should deduct from the proceeds its just
allowances for the expenses thereof, including attorney's and
counsel fees and disbursements,
"and all expenses which may be incurred in operating, managing,
or maintaining the said railroad, or in managing the business
thereof, as well as just compensation for the services of said
trustee,"
and thereafter apply the proceeds to pay the principal and
interest of the bonds pro rata. This mortgage was delivered and
duly recorded.
The Paris and Terre Haute Railroad Company was organized as a
corporation, under the general railroad laws of Illinois, in 1873,
and the road was built in 1873 and 1874. It runs eastwardly from
Paris to Farrington, in Illinois, a point on the St. Louis,
Vandalia and Terre Haute Railroad, seven miles west of Terre Haute,
and the company uses, by lease, the track of the latter road to
reach Terre Haute. On the first of April, 1874, the company
executed a mortgage to the Union Trust Company, covering its
franchises and its road and property, constructed and to be
constructed, acquired and to be acquired, extending from Paris to
the junction with the St. Louis, Vandalia and Terre Haute railroad,
a distance of about fourteen miles, to secure 280 coupon bonds, of
$1,000 each, payable to bearer, in all $280,000 carrying semiannual
interest at the rate of seven percent per annum, and payable April
1, 1894. The mortgage contained provisions with the Paris and
Decatur mortgage as to what might be done after six months default
in interest, and as to taking possession of the property, and as to
the powers of the trustee, and as to foreclosure of sale and
disposition of the proceeds. This mortgage was delivered and duly
recorded.
Page 117 U. S. 441
On the 19th of September, 1874, the Paris and Decatur Company
conveyed by deed to the Peoria, Atlanta, and Decatur Company, in
consideration that the latter company thereby assumed "all the
bonded and floating indebtedness" of the former company, the
railroad then in operation, described as extending from Paris to
Decatur, "passing into and through the counties of Edgar, Coles,
Douglass, Moultrie, and Mason," including the franchises of the
former company, and all its property acquired and to be
acquired.
On the same day, the Paris and Terre Haute Company conveyed by
deed to the Peoria, Atlanta, and Decatur Company, in consideration
that the latter company thereby assumed the payment of "all the
bonded and floating indebtedness" of the former company, the
railroad then in operation, described as extending from Paris to
the line between Indiana and Illinois, "passing into the Counties
of Edgar and Clark," including the franchises of the former
company, and all its property acquired and to be acquired.
These purchases on these terms were authorized by the
stockholders and directors of the purchasing company, and by the
respective stockholders and directors of the selling companies, and
the deeds were delivered and duly recorded.
On November 2, 1874, the Peoria, Atlanta, and Decatur Company,
under the provisions of the general law of Illinois, changed its
name to that of the "Illinois Midland Railway Company." On the
first of January, 1875, that company executed to the Union Trust
Company a mortgage covering all of its property, including that so
purchased, to secure 8,350 coupon bonds, of $500 each, in all
$4,175,000, bearing semiannual interest at seven percent per annum,
and payable January 1, 1905. This mortgage was delivered and
recorded.
On the 11th of September, 1875, Robert G. Hervey and two other
parties filed a bill in equity in the Circuit Court of Edgar
County, Illinois, against the Illinois Midland Railway Company. It
set forth that Hervey owned a majority of the stock of the
corporations above named and that the other plaintiffs were
judgment creditors of the Paris and Decatur Company,
Page 117 U. S. 442
with executions returned unsatisfied; that there were judgments
to the amount of about $200,000 against the Illinois Midland
Company on account of the construction and operation of the various
corporations and pending suits against it for about $100,000 on
like account and executions out against it for over $100,000 on
debts of the various corporations, on which its property was
advertised for sale; that certain creditors and stockholders of the
Paris and Decatur Company, a minority in number and amount, where
threatening to have the Illinois Midland Company and its property
placed in the hands of a receiver; that the plaintiffs represented
a majority of the stock in all of the corporations, and desired to
have a receiver of the franchises, railways, and rolling stock of
the corporations appointed immediately, and without further notice,
or the rights of the creditors and stockholders would be
irreparably prejudiced; that negotiations were pending, which the
plaintiffs believed would be successful, to raise sufficient money
to pay off all judgments, liens, and claims against the company, if
left under the present control, or under that of the holders of a
majority of the stock; that, to effect such loans or advances of
money, it was absolutely necessary that the respective debts of the
various corporations should be ascertained, and, when their
respective liabilities to each other and to their respective
creditors were fixed, they could on their joint stock and assets,
raise sufficient money to relieve them from their embarrassments
and pay all their creditors; that if a receiver was appointed to
take charge of them and settle their affairs, their credit would be
restored as soon as their condition should be adjudged by the
court; and that they had ample assets, if not sacrificed by sales
on execution and construction liens, to pay all indebtedness, and
leave a sufficient surplus to run the road for the benefit of the
stockholders. The prayer of the bill was that a receiver be
appointed of all the rights and franchises of the Illinois Midland
Company, and of all the property in its control, and that an
account be taken of all the claims, liens, and liabilities of its
stockholders and creditors, and of those of the corporations above
named, and they be ordered to be paid and adjusted as the
respective rights and interests
Page 117 U. S. 443
of such stockholders and creditors should appear, and for
further and other relief according to equity.
On the same day, the Illinois Midland Company appeared to the
bill by attorney and waived notice and submitted itself to the
court for such order in the premises as might in equity be right
and proper, and the judge of the court, at chambers, made an order
appointing as receiver George Dole, of Paris, and requiring him to
give a bond for $75,000, with security, and then to
"forthwith take possession of all the personal, real, and mixed
property of every kind belonging to or in the possession of said
Illinois Midland Railway Company, including the property formerly
owned and possessed by the Peoria, Atlanta, and Decatur Railroad
Company, the Paris and Decatur Railroad Company, and the Paris and
Terre Haute Railroad Company, and, if necessary, to sue for, in the
name of said receiver, and recover, all the property of said
company or companies, whether real, personal, or mixed, and whether
in possession or in action."
The order also provided as follows:
"It is further ordered, adjudged, and decreed that said receiver
be, and is hereby, empowered and directed to carry on the business
of said railway companies until the respective rights of the
parties in interest can be fully ascertained and determined, under
and subject to the revision and direction of this court, and until
otherwise ordered by this court; and to use and employ the
property, franchises, rights of way, roadbed, tracks, locomotives,
rolling stock, machinery, fixtures, and property of whatever kind
or nature, and said receiver shall be, and hereby is, invested with
all the rights and franchises vested by law in said railway company
or companies in the execution of the duties and trusts aforesaid.
Said receiver shall have authority to employ all necessary and
proper agents, attorneys, officers, and laborers, and to fix and
alter the compensation of said agents, attorneys, officers, and
laborers, subject to the revision of this court. Said receiver
shall also have authority, subject to the revision of this court,
to make such repairs and necessary additions to said railway or
railroads and property as may be essential to the interests and
safety of the same, and proper in his judgment for carrying on said
business;
Page 117 U. S. 444
also to make all contracts that may be necessary in carrying on
he business of said company or companies, subject to like
supervision of this court; also to collect in his own name, as
receiver aforesaid, all debts, claims, or demands, of whatever kind
or nature, owing, or that may become due and owing, to the said
company or companies, or to said receiver, from any and all
sources. Said receiver is also ordered to make a full, true, and
correct inventory of all the property that may come into his hands
as such receiver. It is further ordered, adjudged, and decreed that
out of the moneys that shall come into the hands of said receiver
from the operation of said railway, he shall
first pay all
current expenses incident to the creation or administration of this
trust, and to the operating of said railway or railroads;
second, pay all sums due, or to become due, connecting or
intersecting lines of railroads, arising from the interchange of
business, and for track service of other railroads used by said
Illinois Midland Railway Company in the operation of its lines, and
all amounts now legally due from said railway company or companies
for taxes;
third, pay all amounts due to all operatives
and employees and attorneys and agents of said company or
companies, for any service rendered said company or companies since
the 11th day of March, A. D. 1875;
fourth, pay all amounts
due for supplies purchased and used in operating said railway or
railroads by said company or companies, for supplies furnished to
laborers and credited against their labor, since the 11th day of
March, A. D. 1875;
fifth, and all amounts due from said
railway company for or on account of the rental of rolling stock;
and the money belonging to said railway company, except as
heretofore directed, shall be held by said receiver until he is
authorized to disburse the same under the order or decree of this
court;
sixth, and said receiver is further authorized, in
case it is proper in his judgment, with the sanction of the court,
to use any balance of funds arising from the operating of said
railway or railroads, for the purpose of protecting such of the
real or personal property of said corporation or corporations,
under lien, sale, pledge, mortgage, or contract, from sacrifice, by
the payment of interest or principal, or otherwise, or by the
renewal of such pledge or lien, mortgage or contract. It is further
ordered that, upon demand, the said
Page 117 U. S. 445
company or companies, their officers or agents, shall forthwith
deliver over to the receiver all the property aforesaid; and that
neither said company or companies nor any officer or agent or
employee of said companies shall interfere with or molest the
possession or enjoyment of any of said property in the possession
of, or placed under the control of, said receiver. It is further
ordered that said receiver shall retain possession and continue to
discharge the duties and trusts aforesaid until the further order
of this court in the premises, and that he shall from time to time
make report of his doings in the premises, and may from time to
time apply to this court for such other and further order and
direction in the premises as he may deem necessary and requisite to
a due administration of said trust, and said receiver is hereby
vested, in addition to the powers aforesaid, with all the general
powers of receiver in cases of this kind, subject to the
supervision of this court."
The bond was given, and was approved by the court, and at
September term, 1875, an order was made entering of record the
order at chambers, and the receiver's bond and oath, and directing
him to proceed as before ordered.
On the 16th of October, 1875, an amended bill was filed, the
plaintiffs in which were Hervey, and also William Waring, Henry
Waring, and Charles Waring, partners, as Waring Brothers, and
thirty-one other persons. It set forth that Hervey then owned
27,500 shares, or $1,375,000, of the 32,000 shares, at $50 each, or
$1,600,000, of the capital stock of the Paris and Decatur Company;
and 14,200 shares, or $1,420,000, of the 20,000 shares, at $100
each, or $2,000,000, or the capital stock of the Peoria, Atlanta,
and Decatur Company; and 4,500 shares, at $100 each, or $450,000,
being the entire capital stock of the Paris and Terre Haute
Company. It also set forth that Waring Brothers then owned
onefourth, or $500,000, of the capital stock of the Illinois
Midland Company; and 1,543 of the bonds of that company; and 885
others of its bonds which they had taken in exchange for 885 bonds
of the Paris and Decatur Company, of like amount. The other
plaintiffs were judgment and general creditors of the four
corporations, whose debts were stated at $108,112.23, on account of
the
Page 117 U. S. 446
construction and operation of the various companies. The amended
bill averred that in consequence of the facts set forth in the
original bill, and which were repeated, the Illinois Midland
Company was unable to transact its necessary business; that the
executions and levies referred to had removed from its use a large
portion of its rolling stock; that the suits and judgments had
seriously impaired its credit, and it was unable to procure the
necessary supplies, materials, and labor to successfully operate
the road, and that some of the hands employed in maintaining its
track had declined to labor further, whereby its track had become
unsafe. The prayer of the amended bill was the same as that of the
original bill.
The further action of the court in regard to the receiver and
his successors and their proceedings will be referred to hereafter
as questions in regard to those proceedings shall be
considered.
On the 15th of February, 1876, Albert Grant and Maurice Grant,
partners, as Grant Brothers & Co., of London, and also James F.
Secor, petitioned and were admitted to be defendants, and on the
same day they filed their respective answers to the amended bill.
Grant Brothers & Co. claimed to own 1,200, or onehalf, of the
Paris and Decatur bonds, 1,200 of the 1,300 Peoria, Atlanta, and
Decatur bonds, and all (280) of the Paris and Terre Haute bonds,
and that the lien of their bonds was superior to the claims of any
of the plaintiffs. The answer of Secor set up his mortgage, and
alleged that none of the interest due May 1, 1875, on the bonds of
the Peoria, Atlanta, and Decatur Company had been paid, and he had
been requested by the holders of a majority of those bonds to take
steps to protect their interests, and that by the terms of the
mortgage he was entitled to take possession of the road for the
benefit of the bondholders. He asked that the court would order the
receiver to turn over to him the property covered by the mortgage
of the Peoria, Atlanta, and Decatur Company.
On the 4th of October, 1876, the Paris and Decatur Company and
the Paris and Terre Haute Company were made defendants to the bill,
and they severally appeared on October 10, 1876, and at the March
term, 1877, put in answers.
Page 117 U. S. 447
On the 5th of December, 1876, the Union Trust Company filed a
bill in the Circuit Court of the United States for the Southern
District of Illinois, against the four corporations and Hervey and
Secor, to foreclose three mortgages made to the Union Trust
Company; but this suit does not appear to have been further
prosecuted, except that by the interlocutory decree of June 11,
1884, hereafter mentioned, it was consolidated with the other
causes.
At September term, 1877, the Union Trust Company was, by order,
made a party defendant in the Hervey suit, "with all the rights and
privileges as though it had been an original defendant," on its
petition setting forth a default July 1, 1875, in the payment of
interest on the Paris and Decatur bonds, and that it had demanded
and been refused payment of such interest, and that the principal
and interest of the bonds had become due, and that a majority of
the holders of the bonds had required it to proceed to foreclose
the mortgage; and that the same was true as to a default October 1,
1875, in the payment of the interest on the Paris and Terre Haute
bonds, and as to a default July 1, 1875, in the payment of the
interest on the Illinois Midland bonds.
On the 15th of February, 1878, the Union Trust Company filed a
bill in the Circuit Court of the United States for the Southern
District of Illinois against the Paris and Decatur Company and the
Illinois Midland Company, to foreclose the Paris and Decatur
mortgage, alleging a default January 1, 1876, in the payment of
interest on the Paris and Decatur bonds, that the Illinois Midland
Company, in issuing its 8,350 bonds, intended to exchange them,
dollar for dollar, for the bonds of the other three corporations,
and that more or less of the Paris and Decatur bonds were
exchanged, and some were, on exchange, marked "cancelled;" but the
persons who exchanged them claimed that the purchases by the
Peoria, Atlanta, and Decatur Company of the other two roads were
void, and that the bonds issued by the Midland Company were void,
and that the exchange and cancellation of the Paris and Decatur
bonds were void, and that those bonds remained the property of
their former owners.
Page 117 U. S. 448
On the same day, the Union Trust Company filed a bill in the
same federal court against the Paris and Terre Haute Company and
the Illinois Midland Company to foreclose the Paris and Terre Haute
mortgage, alleging a default October 1, 1875, in the payment of
interest on the Paris and Terre Haute bonds and containing, in
regard to the exchange of those bonds, like allegations with those
above set forth as to Paris and Decatur bonds in the bill to
foreclose the Paris and Decatur mortgage. On the same day, Secor
filed a bill in the same federal court against the Illinois Midland
Company to foreclose the Peoria, Atlanta, and Decatur mortgage,
alleging a default May 1, 1875, in the payment of interest on the
Peoria, Atlanta, and Decatur bonds.
On the 6th of April, 1878, by an order of the state court, the
Hervey suit was, on a petition filed by the Union Trust Company,
removed into the Circuit Court of the United States for the
Southern District of Illinois. On the 13th of August, 1879, the
last two suits brought by the Union Trust Company and the suit
brought by Secor were consolidated by the federal court. On the
31st of August, 1881, Abe Freidenberg, on behalf of himself and
other holders of Paris and Decatur bonds, filed a bill to foreclose
the Paris and Decatur mortgage in the same federal court.
The last two suits brought by the Union Trust Company, the suit
brought by Secor, the Hervey suit, the Freidenberg suit, and a suit
which had been brought in the same federal court, by the Kansas
Rolling Mill Company, in January term, 1879, against the Illinois
Midland Railway Company and others, were consolidated by an order
made June 23, 1882.
Many of the contested questions in these cases arise out of the
transactions of the receiver originally appointed and his
successors, especially in issuing receiver's certificates, and the
contest as presented to this Court is substantially one between the
Paris and Decatur bondholders, on one side, and those who claim a
priority of lien over the bonds on the other.
On the 31st of August, 1876, Richard J. Rees was, by an order
made at chambers by the judge of the state court, in
Page 117 U. S. 449
the Hervey suit, appointed receiver in the place of Dole,
resigned, and the order was confirmed by the court at the September
term, 1876. On the 10th of December, 1878, Louis Genis was, by an
order made by the federal court in the Hervey suit, appointed
receiver in the place of Rees, resigned. On the 4th of April, 1882,
by an order made in the Freidenberg suit, David H. Conklin was
appointed receiver in the place of Rees, resigned, and on the 13th
of April, 1882, a like order was made in the Hervey case. Genis
having filed his final report, the court made an order, on May 13,
1882, appointing a special commissioner to examine and report
thereon, and on the correctness of Genis' accounts. By an order
made June 13, 1882, power was given to the commissioner to examine
witnesses as to the contents of the report and the acts of Genis as
receiver. By an order made June 22, 1882, the commissioner was
directed to investigate and report in detail the number and amount
of certificates of indebtedness issued by the several receivers,
and for what purpose they were issued, and to whom, and the number
and amount of such as were special liens on any of the property,
and the character of the charge of all which were not specific
liens. By an order made June 23, 1882, it was ordered that the
issues in the consolidated causes be made up by a day named, and
that by that day the commissioner report the amount of receiver's
certificates outstanding, for what they were given, and by whom
held, and the amount of the receiver's indebtedness, and to whom
due.
On the 18th of April, 1883, the commissioner made a report as to
the matters referred to him, to which exceptions were filed by
Freidenberg, by the Union Trust Company, and Secor, and by judgment
creditors of the Paris and Decatur Company, and by Adams and Orvis.
On the 7th of June, 1884, the commissioner filed a supplemental
report. He also reported the testimony taken before him. The cases
were brought to a hearing in the circuit court before Mr. Justice
Harlan (all orders made in them prior to that time in the federal
court having been made by the district judge), and he passed on the
various questions raised in an opinion filed February 29,
Page 117 U. S. 450
1884. An interlocutory decree was entered June 11, 1884,
confirming the report of the commissioner in all things and making
specific adjudications as to the validity and status of eighteen
different series of receiver's certificates and of other debts
incurred by the receiver and referring it to the same commissioner
to take certain accounts and to report the amounts due on the
various outstanding bonds and the numbers and amounts of the bonds
of the sectional mortgages which had been surrendered and exchanged
for Illinois Midland bonds, and what Paris and Decatur bonds
remained outstanding which had not been exchanged for Illinois
Midland bonds, and the amount due from one to the other of the
three sectional roads, making proper allowance for the use by them
respectively of rolling stock or terminal facilities belonging to
the others, and for moneys paid by one for expenses or debts
properly payable by another, and to report a proper distribution of
the liens or obligations on or of the different roads to pay any of
the receiver's certificates or indebtedness, and as to which road
should pay for terminal facilities, and what indebtedness the
receivers had incurred therefor, and for rent of rolling stock,
motive power, and other matters, and to take and report all other
testimony offered by any party pertinent to the issues. The
commissioner was also directed to take an account of all the
indebtedness of the receivership, and of all claims of employees
which accrued within six months before the first appointment of a
receiver, and of all claims for rights of way or lands used for
railroad purposes not paid for, and of all bonded indebtedness of
the four corporations, properly classified, and to report as to all
contested claims, with the testimony thereon.
The commissioner made his report on the 15th of January, 1885,
accompanied by the additional testimony he had taken. Freidenberg
and other holders of Paris and Decatur bonds filed exceptions to
it, as did Waring Brothers and certain judgment creditors of the
Paris and Decatur Company and of the Illinois Midland Company.
The case was heard in the circuit court by Mr. Justice Harlan,
and on the 3d of June, 1885, a final decree was entered
Page 117 U. S. 451
disposing of the questions litigated and providing for a sale of
the mortgaged property and the distribution of the proceeds.
Freidenberg appealed to this court from specified parts of the
decree of June 11, 1884, and from specified parts of the decree of
June 3, 1885, as representing holders of Paris and Decatur bonds,
but this appeal was not perfected, and in place of it Simon Borg,
Leo Speyer, and Samuel Lichtenstadter were admitted as parties to
the consolidated causes as holders of Paris and Decatur bonds, and
by leave took and perfected an appeal from specified parts of both
decrees. Waring Brothers and the Union Trust Company have taken
separate appeals from the last decree; and Stoughton J. Flecher and
Francis M. Churchman, partners as S. A. Fletcher and Co., have
appealed, as holders of receiver's certificates, from that
decree.
It will be proper to first consider the question of the
receiver's certificates.
The final decree declares that the lien of the Paris and Decatur
bonds is subject to certain receiver's certificates of the 8th,
12th, 14th, 16th, 17th, and 18th series, which are to have priority
in payment to the Paris and Decatur bonds, out of the proceeds of
sale of the Paris and Decatur road, and which amount, with interest
to January 15, 1885, to $200,408.87.
There are six certificates of $5,000 each of the eighth series,
bearing ten percent interest. They were issued under an order made
October 9, 1876, which states that the court finds that the entire
line from Peoria to Terre Haute is in great need of immediate
repair, and in an unsafe condition to be operated, and that the
line between Paris and Decatur is in a worse condition than any of
said line, and requires an immediate outlay, for iron, ties, and
other materials, ballasting, and labor, to put in a safe condition,
of $34,076, and authorizes the receiver to borrow $34,360, to be
expended in repairing the Paris and Decatur road, and to issue
receiver's certificates therefor in sums of $5,000 each, bearing
ten percent interest; and declares that the certificates "shall be
a first lien on the right of way, iron, ties, bridges, and entire
railway property on said portion of the line between Paris and
Decatur." The
Page 117 U. S. 452
commissioner finds that the moneys were expended in accordance
with the order.
There is one certificate of the 12th series, for $32,475.20,
with ten percent interest, issued under two orders to borrow money
to pay off tax liens, the orders declaring that it should be a lien
on the Paris and Decatur lien superior to the mortgage and to all
prior certificates. It was taken at par. When it was issued, the
legal rate of interest was eight percent, ten percent having been
the legal rate at the time of the first order, and having been the
rate specified in that order, and the authority conferred by the
first order being made part of the second. The commissioner states
that the only dispute was as to the rate of interest; that the
money was advanced under the first order, made July 26, 1878,
before the issue of the certificate, and at a time when the legal
rate of interest was ten percent; that that order authorized the
sale of the certificate at ninety cents on the dollar; that the
mortgagees and bondholders waive any plea of usury, and the
corporation itself could not plead usury; and that that defense was
made only by the trustee for the holders of surrendered bonds and
by judgment creditors. The commissioner reported it as his opinion
that the certificate should have effect, as to its amount and lien
and rate of interest, as authorized, and according to its purport.
The circuit court confirmed this view.
There is one certificate of the fourteenth series for $4,376,
and eight percent interest, issued under the beforenamed order of
October 9, 1876, and a subsequent order made January 29, 1881, for
money to repair the Paris and Decatur road, being for the balance
of money authorized by the first order, the second order declaring
the like lien as the first order.
There is one certificate of the 16th series, for $9,505, and
eight percent interest, and three certificates of the seventeenth
series, two of them for $10,000 each, and one for $5,495, all with
eight percent interest, issued under an order made June 29, 1881,
which set forth that it was necessary to the protection of the
railroad property that an outlay should be made forth with for the
betterments; and authorized the receiver to expend in betterments,
on the line between Paris and Decatur, $35,000, and to
Page 117 U. S. 453
issue certificates to procure money for that purpose, and sell
them at not less than ninety cents on the dollar; the same to be a
special charge on the line and railroad property between Paris and
Decatur, superior to all liens and debts, except receiver's debts
before declared by order of court to be special charges or liens on
that portion of the railroad. The commissioner states that these
certificates were sold, some at four and some at six percent
discount, and that the holders of the certificates, when they
bought them, had no connection with the case or with the
parties.
There are four certificates of the eighteenth series, three of
them for $10,000 each, and one for $8,288.98, all at eight percent
interest, issued under another order made June 29, 1881, which set
forth that the receiver had expended on the Illinois Midland road,
for side tracks and other betterments, $80,037.98, of which
$42,664.98 had been expended on the line between Paris and Decatur;
that, of the $80,037.98, $63,037.98 had been paid out of the
earnings of the line, of which $38,288.98 was expended on the line
between Paris and Decatur; that the earnings of the whole line had
not been sufficient to meet the usual expenses of operation and the
ordinary repairs of the permanent way; and that the receiver had
incurred unpaid debts to a larger amount than $63,097.38, in the
usual operation of the line and in ordinary repairs of the
permanent way. The order approved and confirmed the appropriation
of the $63,037.98 out of the earnings in payment for betterments;
declared that that sum was a special charge and lien on the several
portions of the line in proportion to the amounts expended on the
respective portions; and authorized the receiver to issue
certificates to the amount of $38,288.98, at eight percent
interest, as representing so much of the $63,037.98 as was expended
for betterments on the line between Paris and Decatur, the same to
be a special charge and lien on the line and railroad property
between Paris and Decatur, superior to all liens and debts except
receiver's debts before declared by order of the court to be
special charges and liens upon that portion of the railway; and the
certificates to be sold at not less than ninety cents on the
dollar. The certificates were sold at a discount within that
permitted.
Page 117 U. S. 454
Simon Borg and others appeal because of the priority awarded to
the abovenamed sixteen receiver's certificates.
When the order of October 9, 1876, was made, under which the six
certificates of the eighth series were issued, neither the trustee
nor any of the bondholders of the Paris and Decatur Company were
parties to the suit. But before any other order was made under
which any of the sixteen certificates referred to were issued, the
Union Trust Company had become a party to the Hervey suit as
trustee in the Paris and Decatur mortgage, and the default in the
payment of the interest on the Paris and Decatur bonds had occurred
by January 1, 1876.
The certificates of the 8th and 14th series were issued for
necessary repairs; that of the 12th to pay tax liens; those of the
16th and 17th for betterments; and those of the 18th to replace
earnings diverted from paying for operating expenses and ordinary
repairs to pay for betterments, while debts to a larger amount had
been incurred for the operating expenses and ordinary repairs.
In regard to the certificates issued for necessary repairs there
can be no doubt either on authority or on principle. In
Wallace
v. Loomis, 97 U. S. 146, on
the filing of a bill by the trustees of the first mortgage on a
railroad to foreclose it, the court appointed receivers
"with power to put the road and property in repair, and to
complete any uncompleted portions thereof, and to procure rolling
stock, and to manage and operate the road to the best advantage, so
as to prevent the property from further deteriorating, and to save
and preserve it for the benefit and interest of the first mortgage
bondholders, and all others having an interest therein,"
and with power also for those purposes to raise money by loan to
an amount limited in the order, by issuing certificates "which
should be a first lien on the property." The final decree declared
that the moneys raised by loan, or advanced by the receivers and
expended on the road pursuant to the order, were a lien paramount
to the first mortgage, and should be paid out of the proceeds of
sale before the first mortgage bonds were paid. A holder of second
mortgage bonds objected to such priority. On that subject, this
Court said, by MR. JUSTICE BRADLEY:
"The
Page 117 U. S. 455
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."
It is true that the second mortgage trustees in that case were
parties to the suit when the order was made, and had due notice of
the application, and made no objection. As to that, the Court said
that the bondholders were represented by their trustees, and must
be regarded as bound by their acts, at least so far as concerned
"the power of the court to act, in making the order, and so far as
the interest of third persons acting upon the faith of it might be
affected." It also said that, when the appellant became a party, he
suggested no objection to the terms of the order appointing the
receivers, and that there was no just exception to the order or the
decree.
Property subject to liens and claims and debts, of various
characters and ranks, which is brought within the cognizance of a
court of equity for administration and conversion into money and
distribution is a trust fund. It is to be preserved for those
entitled to it. This must be done by the hands of the court through
officers. The character of the property gives character to the
particular species of preservation which it requires. Unimproved
land may lie idle, with only payment of taxes. Improved property
should be rented. Movable property that is not perishable may be
locked up and kept; but if perishable, it must be sold by way of
preservation. A railroad and its appurtenances is a peculiar
species of property. Not only will its structures deteriorate and
decay and perish if not cared for and kept up, but its business and
goodwill will pass away if it is not run and kept in good order.
Moreover, a railroad is a matter of public concern. The franchises
and rights of the
Page 117 U. S. 456
corporation which constructed it were given not merely for
private gain to the corporators, but to furnish a public highway,
and all persons who deal with the corporation as creditors or
holders of its obligations must necessarily be held to do so in the
view that if it falls into insolvency and its affairs come into a
court of equity for adjustment, involving the transfer of its
franchises and property by a sale into other hands, to have the
purposes of its creation still carried out, the court, while in
charge of the property, has the power, and, under some
circumstances, it may be its duty, to make such repairs as are
necessary to keep the road and its structures in a safe and proper
condition to serve the public. Its power to do this does not depend
on consent nor on prior notice. Consent is desirable, but is seldom
practicable where the debts exceed the value of the property.
Though prior notice to persons interested, by notifying them as
parties, first requiring them to be made parties if they are not,
is generally the better way, yet many circumstances may be
judicially equivalent to prior notice. A full opportunity, as in
this case, to be heard on evidence as to the propriety of the
expenditures and of making them a first lien is judicially
equivalent. The receiver, and those lending money to him on
certificates issued on orders made without prior notice to parties
interested, take the risk of the final action of the court in
regard to the loans. The court always retains control of the
matter, its records are accessible to lenders and subsequent
holders, and the certificates are not negotiable instruments.
The principle laid down in
Wallace v. Loomis was
applied in
Miltenberger v. Logansport Railway Co.,
106 U. S. 286. In
that case, a bill was filed by a second mortgagee against the
mortgagor and a first mortgagee and judgment creditors of the
mortgagor, to foreclose a mortgage on a railroad. On the day the
bill was filed, and without notice to the first mortgagee, a
receiver was appointed and power given him to operate and manage
the 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
Page 117 U. S. 457
all revenue over operating expenses."
After that, and without notice to the first mortgagee, who had
not appeared, though notified of the order appointing the receiver
and of the pendency of the suit, the court authorized the receiver
to purchase engines and cars and to adjust liens on cars owned by
the mortgagor 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 the order appointing
the receiver was made, and to construct five miles of new road and
a bridge. The petition for the order stated the necessity for the
rolling stock and for the adjustment of the liens; that the payment
to the connecting lines was indispensable to the business of the
road and it would suffer great detriment unless that was provided
for, and that the new road and the bridge would come under the
mortgages and their construction would be to the advantage of the
bondholders. After the first mortgagee had appeared and answered,
an order was made, but not on prior notice to it, authorizing the
receiver to issue certificates to pay for rolling stock he had
bought under orders of the court; and to pay debts incurred for
building the five miles of road and the bridge under those orders,
and to pay debts incurred for taxes and rights of way, and back pay
and supplies in operating the road, the certificates to be payable
out of income, and if not so paid, to be provided for by the court
in its final order. Claims thus arising were afterwards allowed to
be paid out of the proceeds of sale before the mortgage bonds. This
Court upheld such priority as to the debts for the purchase of
rolling stock and for the adjustment of liens and for the
construction of the five miles of road and the bridge and for the
amount due connecting lines, some of which was incurred more than
ninety days before the receiver was appointed. On the latter branch
of the subject, it said:
"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
Page 117 U. S. 458
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 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 by MR. JUSTICE WOODS in
Barton
v. Barbour, 104 U. S. 126."
In allowing the certificates of the 8th and 14th series for
necessary repairs with priority, the master acted, and we think
properly, on the authority of the cases of
Wallace v.
Loomis and
Miltenberger v. Logansport Railway Co.
In this connection, it is objected that in those cases, the
suits were foreclosure suits brought by trustees under mortgages,
and that a different rule should obtain in a case where the
trustees or the bondholders do not come into court initially asking
the aid of equity in the appointment of a receiver. It is said that
the
Hervey suit was not such a suit, but the
coplaintiffs
Page 117 U. S. 459
with Hervey were judgment creditors of the Paris and Decatur
Company, with executions returned unsatisfied. The bill set out the
precarious condition of all the property held and used by the
Illinois Midland Company and the necessity for a receiver in the
interest of all the creditors of all four of the corporations, to
prevent the levy of executions on such property, and it prayed for
a judicial ascertainment and marshaling of all the debts of all the
corporations, and their payment and adjustment as the respective
rights and interests of the creditors might appear, and for general
relief. The plaintiffs set forth that they represented a majority
of the stock in all the corporations. This bill was quite
sufficient to enable a court of equity to administer the property
and marshal the debts, including those due the mortgage
bondholders, making proper parties before adjudging the merits.
In regard to the fact that neither the Paris and Decatur
bondholders nor their trustee were parties to the suit when the
order of October 9, 1876, was made, the commissioner took the view,
which the circuit court confirmed, that while they ought to be
heard before the order was made conclusive against them, yet as the
objections to the merits of the order would not have been availing
if made before it was entered and the money had been actually and
faithfully applied under the order of the court to the improvement
of the mortgaged property, no equitable reason appeared why the
bondholders should keep the benefits and escape the burden.
The certificate of the 14th series was issued not only under the
order of October 9, 1876, but under that of January 29, 1881. The
Union Trust Company was admitted, on its own petition, to be a
party defendant in the
Hervey suit in September, 1877.
That petition stated that the interest on the Paris and Decatur
bonds had been in default since July 1, 1875. The order of January
29, 1881, was made by the federal court. The Union Trust Company
had removed the
Hervey suit into the federal court in
April, 1878, and had filed in that court a foreclosure bill on the
Paris and Decatur mortgage as early as December, 1876, and another
such bill in February, 1878. The interest on the Paris and Decatur
bonds had been in default,
Page 117 U. S. 460
as the latter bill alleged, since January 1, 1876, and the
receiver was in open possession of the entire line of road, and
running it, and exercising the powers which the orders of the
courts had conferred upon him. Under these circumstances, the Paris
and Decatur trustee, and its bondholders in court, through it, can
be heard to make no other objections to the orders except such as
arise as to the merits of the expenditures made under them. The
view of the commissioner and the circuit court was that the
bondholders should have such rights and equities as they could have
properly claimed as parties
ab initio, and that this view
should apply against them as well as for them. In this we
concur.
The principles properly applicable to this branch of the case
were well expressed by MR. JUSTICE HARLAN, in his opinion of
February 29, 1884, as follows:
"Those who take receiver's certificates must be deemed to have
taken them subject to the rights of parties who have prior liens
upon the property and who have not, but should have, been brought
before the court. While the court, under some circumstances and for
some purposes, and in advance of the prior lienholders' being made
parties, may have jurisdiction to charge the property with the
amount of receiver's certificates issued by its authority, it
cannot, without giving such parties their day in court, deprive
them of their priority of lien. When such prior lienholders are
brought before the court, they become entitled upon the plainest
principles of justice and equity to contest the necessity,
validity, effect, and amount of all such certificates as fully as
if such questions were then for the first time presented for
determination. If it appears that they ought not to have been made
a charge upon the property superior to the lien created by the
mortgages, then the contract rights of the prior lienholders must
be protected. On the other hand, if it appears that the court did
what ought to have been done, even had the trustee and the
bondholders been before it when the certificates were authorized to
be issued, the property should not be relieved from the charge made
upon it in good faith for its protection and preservation. Of these
rules or principles the parties who inaugurated this litigation
cannot justly complain.
Page 117 U. S. 461
They were not ignorant of the fact that there were existing
mortgages upon this property, and that fact should have been
brought to the attention of the court at the very outset. Nor have
the bondholders any ground of complaint if the court charges upon
the property such expenditures as now appear to have been
rightfully made in the interest of all concerned in its management
while in the hands of a receiver. As to receiver's certificates
issued, with the sanction of the court, after the trustees became
parties, the purchasers and holders should be accorded such rights
as, by the settled principles of equity, are accorded to those who
deal with judicial tribunals having jurisdiction in the
premises."
The propriety of the allowance of the certificates of the 12th
series, for tax liens, needs no argument, and we think the
interest, as allowed, was proper.
As to the $35,000 of certificates of the 16th and 17th series,
issued to pay for betterments, the present holders, who bought them
directly from the receiver, had no connection with the case or with
the parties. A question was made before the commissioner that the
receiver did not faithfully apply the money as directed by the
court. He held, and the circuit court sustained him, that these
purchasers were not bound to see to the application of the
proceeds, citing the decision to that effect by Mr. Justice Woods
in
Stanton v. Alabama & Chattanooga Railroad Co., 2
Woods 506. In this view we concur.
It was also contended before the commissioner that all that the
holders of these certificates were equitably entitled to was the
money they paid, and without interest, and not the face of the
certificates and interest. The view taken by the commissioner and
confirmed by the circuit court was that, as the certificates were
issued for debts contracted by the court, when it had jurisdiction
of the parties and of the subject matter, to persons who in good
faith invested their money for the benefit of the property in the
possession of the court, the certificates should be paid according
to their tenor, as authorized. We concur in these views. It may be
added that as the order of June 29, 1881, authorized the
certificates to be sold at not
Page 117 U. S. 462
more than ten percent discount, it must be presumed that the
parties taking the certificates relied on the promise to pay their
face, and would not otherwise have trusted the receiver or the
fund. The court which made that order thought the limit of discount
a reasonable one, and the certificates were sold within that
limit.
In regard to what the order calls "betterments," it appears from
the petition of the receiver, on which the order was made, that the
$35,000 were to be expended for ties, rails, new turntable, and
foundations, bridges, and fences on the existing line of road, and
not for any new extent of road. An affidavit annexed to the
petition, made by the roadmaster of the Illinois Midland Company,
states that in order to place the railway in a suitable condition
for the safe transportation of business, the expenditure
contemplated was absolutely necessary. The commissioner finds that
the money was expended in substantial compliance with the order of
the court, and that the improvements made by the receiver no more
than made up for the deterioration of the road, especially in view
of its imperfect construction and inferior material from the
beginning. This finding was approved by the circuit court.
As to the certificates of the 18th series issued to replace
earnings diverted from paying for operating expenses and ordinary
repairs, to pay for betterments, while debts to a large amount had
been incurred for the operating expenses and ordinary repairs, it
appears by the petition of the receiver, and the affidavit of the
roadmaster annexed to it, on which the order of June 29, 1881,
under which the certificates were issued, was made, that the
expenditures for new side tracks and betterments so paid for out of
the earnings consisted principally of expenditures for roadbed,
bridges, iron, and ties, which were in a worn out and insufficient
condition. The commissioner and the circuit court rested the
allowance of these certificates on what was said by this court in
the case of
Fosdick v. Schall, 99 U. S.
235,
99 U. S.
253-254, which views were applied in
Burnham v.
Bowen, 111 U. S. 776, to
the effect that when the current income of a railroad in the hands
of a receiver is diverted to the improvement of the property by
the
Page 117 U. S. 463
receiver and debts for operating expenses are not paid,
provision should be made, in foreclosing a mortgage on the road to
pay such debts out of the proceeds of the sale of the property.
See also Union Trust Co. v. Souther, 107 U.
S. 591.
The general principles hereinbefore stated, on which the
receiver's certificates referred to are allowed, are those
sanctioned in
Meyer v. Johnston, 53 Ala. 237, and
Hoover v. Montclair and Greenwood Lake Railway Co., 29
N.J.Eq. 4.
The strenuous contention on the part of the Paris and Decatur
bondholders is that a court of chancery had no power, by a
receiver, and without their consent, to create, on the corpus of
the property, any lien taking priority over the mortgage lien. But
these bondholders were represented by their trustee, the Union
Trust Company. It filed a bill in the federal court as early as
December, 1876, to foreclose the Paris and Decatur mortgage, and it
was made a party, on its own petition, to the suit in the state
court in September, 1877. The Paris and Decatur mortgage provided
that in case of default for six months in paying interest on the
bonds -- and such default occurred at latest on January 1, 1876,
and the six months expired July 1, 1876, more than three months
before any order was made on which any of the certificates were
issued -- all the bonds should become due, and the lien might be
enforced, and the trustee might enter on the property, and operate
it till sold, and make all needful repairs and replacements, and
such useful alterations, additions, and improvements to the road as
might be necessary for its proper working, and pay for them out of
the income; and also that, in case of a default so continuing, the
trustee might foreclose the mortgage by legal proceedings, or sell
the property by public auction, and should, in case of such sale,
deduct from the proceeds all expenses incurred in operating,
managing, or maintaining the road, or in managing its business, and
thereafter apply the proceeds to pay the bonds. In the face of
these provisions of the mortgage under which the bonds are held,
and of the facts before recited as to the negligence of the
trustee, all the while the property was in the hands of the court,
it does not at all comport with the principles of equity for the
bondholders now to insist that the want of
Page 117 U. S. 464
affirmative consent by them or their trustee could paralyze the
arm of the court in the discharge of its duty. The want of that aid
which it was the duty of the trustee and the bondholders to give to
the court in discharging its responsible functions, with the road
openly in charge of the receiver and being run by him, and his acts
plain to view, and the interest on the bonds in arrear, cannot be
urged to a court of equity as a ground for denying its power to do
what was thought by it best for the interests of all concerned,
including even those who thus willfully stood aloof.
The appellants Borg and others also complain of provisions in
the final decree, giving priority over the Paris and Decatur bonds
to just and equitable proportions of the following items: (1)
amount of wages due employees of receivers Dole, Rees, and Genis,
as shown by Schedules J and K of the report of the commissioner,
the total amount being $76,820.90; (2) the indebtedness due from
the receivership to railroad companies, as shown by Schedule L of
the report, amounting to $84,615.21; (3) the general indebtedness
of the receivership, as shown by Schedule M of the report, under
the head of "Supplies," amounting to $67,787.76, and under the head
of "Damages," amounting to $5,871.04, and 44 items under the head
of "Miscellaneous," amounting to $32,937.49; (4) seven claims
theretofore allowed and ordered to be paid by the court, amounting
to $1,493.18; (5) four claims on intervening petitions, allowed at
$11,642.29; (6) amount of wages due employees of the Illinois
Midland Company within six months immediately preceding the
appointment of the first receiver, as shown by Schedule H of the
report; such equitable proportions of the receivers' indebtedness
and of the six months' labor claims to be ascertained in the manner
provided by the decree.
As to items (1), (2), (3), (4), and (5), while it is admitted
that these debts were incurred for the ordinary expenses of the
receivers in operating the road, it is contended that they are
entitled to priority only out of the income of the road, and not
out of the proceeds of the property itself. Of course, such items
are payable out of income, if any, before the corpus is resorted
to, but that may be resorted to when the items are proper ones to
be
Page 117 U. S. 465
allowed for operating expenses, after scrutiny and opportunity
for those opposing to be heard. This view is in accordance with the
principles above laid down and the authorities above cited.
It is contended, however, that in the order of September 11,
1875, appointing Dole receiver, while authority was given to him to
carry on the business of the road, and to make repairs and
additions essential to its interests and safety, it was provided
that, out of the moneys he should receive from its operation, he
should pay for the expenses of operation; that he was not
authorized by that order to contract any debt which the receipts of
the road would not pay; that the terms of the order were such as to
exclude the payment of any of the expenses embraced in the six
items above named out of any fund other than the receipts from the
operation of the road; and that the orders appointing Rees and
Genis were equally limited. But we think this view is not correct.
The terms of these orders do not impair or exclude the ample
authority which the court would otherwise have, and otherwise has,
to order the claims in question to be paid out of the property
itself, with priority.
The claims embraced in the six items have been carefully
scrutinized and reported on favorably by the commissioner and
allowed by the circuit court within and in accordance with the
principles above laid down, and we think that all of them,
including the "six months' labor claims," were properly
allowed.
The appellants Borg and others also complain that the final
decree declares that the just and equitable proportion of the
floating indebtedness of the receivership, and of the sixmonths
labor claims, so made liens prior to the bonds, shall be borne by
and imposed upon the three several railroad properties, on the
basis of the relative lengths of the roads, being for the Paris and
Decatur 67 miles, the Peoria, Atlanta, and Decatur, 60 1/2, and the
Paris and Terre Haute, 13 1/2. It is urged that in the total amount
of debt to be thus apportioned among the several roads there are
included debts which, as against the Paris and Decatur bondholders,
belong distinctively to the
Page 117 U. S. 466
other two roads, and should be charged exclusively on them. This
view is based on these allegations: that the Peoria, Atlanta, and
Decatur road was never finished at either end, and always paid rent
for access to Peoria at one end and to Decatur at the other; that
the Paris and Terre Haute road uses the track of another road to
reach Terre Haute, and its terminal facilities there, and does not
own onehalf in value of the track between Paris and Terre Haute;
and that the Paris and Decatur road uses only two miles of another
road at Decatur, and has good eastern connections at Paris. In this
view, it is insisted that each road should pay its own terminal
charges, and the cost of reaching its own charter points. The
terminal expenses and track rentals of the two roads, other than
the Paris and Decatur, were always charged by the receivers against
the combined Illinois Midland road. The view taken by the
commissioner and the circuit court was that the receiver took the
roads as he found them, each incomplete, and no one reaching any
important point, and was obliged to continue the leasing
arrangements of the Illinois Midland Company, so as to have a
continuous line from Peoria to Terre Haute, which he operated as an
entirety. The commissioner stated his conclusions thus:
"In the operation of the road, no separate accounts of receipts
or disbursements for each section, nor of the amount of business
contributed by each section, nor of the extent of the use of each
road, in the transaction of the various items of business taken at
the several stations were kept, nor, indeed, has it been possible
to keep such accounts. The Paris and Decatur road received its
share of the benefits accruing from the use of the leased lines,
the exact relative proportion of benefits to each sectional road it
is impossible to ascertain. The operating expenses have been
incurred in the management of a single undertaking for the common
benefit of all parties in interest. The use of the several leased
tracks was necessary for that common undertaking. Without the use
of the leased tracks, the road could not have entered either of its
terminal points nor the City of Decatur, which was equally
essential. Neither of the sectional roads enters any one of the
three main points on the line. Indeed, without the leased
lines,
Page 117 U. S. 467
the operation of the road or either of the sections would have
been impracticable, and it seems to me that the rentals for the use
of the leased lines were incurred as much for the common benefit as
were the expenses for employees and supplies along the line. If the
management of the road had been so profitable as to have left a net
income to apply on the mortgage debt, the Paris and Decatur
bondholders would have been entitled to their proportionate share
of the income derived from the use of the leased lines; they could
scarcely have expected that without contributing to the payment for
the use of those lines."
These views apply equally to the terminal facilities furnished
by the leasing roads.
In opposition to these considerations it is urged that while
they may properly apply among the companies which were parties to
the sales and purchases, they do not apply to the holders of
unsurrendered and unexchanged Paris and Decatur bonds, on the
ground that they had nothing to do with the conduct of a joint
enterprise and could derive no benefit therefrom, and that they
denied in the pleadings of their trustee and now deny the validity
of the sales, and did not acquiesce in any act of union of the
roads.
An argument is made that there was no affirmative legislative
authority for the purchase and sale of the Paris and Decatur road.
This question was considered by the circuit court in its opinion,
and it said that while the question was by no means free from
difficulty, it was inclined to think that the warrant for the
purchase was found in the charter of the purchasing company, and
that as the effect of the arrangement was to establish a continuous
line from Peoria via Decatur to Terre Haute to be operated under a
common management, and as there was nothing in the charters of the
selling companies expressly forbidding the arrangements they made
with the purchasing company, and as what was done was fully
executed and its validity had never been questioned in a direct
proceeding by the state or by those interested in the selling
companies, it was not disposed to make the rights of the parties in
this litigation depend upon the inquiry whether the contracts were
technically valid or not. Its conclusion was
Page 117 U. S. 468
stated thus:
"In
Thomas v. Railroad Co., 101 U. S.
71, the Court said that"
~ There can be no question that in many instances where an
invalid contract which the party to it might have avoided or
refused to perform has been fully performed on both sides whereby
money has been paid or property changed hands, the courts have
refused to sustain an action for the recovery of the property or
the money so transferred;
"further, 'that the executed dealings of corporations must be
allowed to stand for and against both parties, when the plainest
rules of good faith require it;' still further,"
"that contracts which, though invalid for want of corporate
power, have been fully executed shall remain as the foundation of
rights acquired by the transaction."
"I am the more readily inclined to act upon the view indicated
because, as said by Judge Drummond in
Dimpfel v. Ohio &
Mississippi Railway Co., 9 Biss. 129,"
"both by the legislation of the state and by the construction of
the same by its highest court, great encouragement has been given
to the union of lines of railroad for the purpose of having them
operated under some general management, the result of which has
been the consolidation of many lines of road which were originally
separate and distinct, but which are now operated under a uniform
system."
"Those who were parties to the arrangement in question, those
who acquiesced in it, and those who failed in due time by some
proper proceeding to question its validity should be held to be
estopped to raise any such question in these causes. The litigation
must therefore be conducted to a conclusion upon the basis that the
sale and transfer by the Paris and Decatur Railroad Company and the
Paris and Terre Haute Railroad Company to the Peoria, Atlanta, and
Decatur Railroad Company is not to be here questioned."
Independently of this, it is entirely sufficient to rest our
conclusion on the principle that nonaction on the part of the Paris
and Decatur bondholders and their trustee, which allowed the court
and the receivers to go on, during the entire litigation,
contracting debts in respect to the whole line operated as a unit,
and administering the property as one, under circumstances where,
as shown, it was and is impossible to separate the interests as
to
Page 117 U. S. 469
expenditures and benefits, in respect to the matters now
questioned, and where important rights have accrued on the faith of
the unity of the interests, amounts to such acquiescence as should
operate as an estoppel. The interlocutory decree contains a clause
in accordance with the foregoing conclusion, and, for the reasons
above stated, we think it is right.
It is further contended on behalf of Borg and others that all of
the receiver's debt should be borne primarily by the Peoria,
Atlanta, and Decatur Company in exoneration of the Paris and
Decatur mortgage on the ground that, by the terms of the conveyance
from the Paris and Decatur Company to the purchasing company, the
latter assumed "all the bonded and floating indebtedness" of the
selling company. It is contended that, both from the contract and
by general principles, the purchasing company is bound to bear
alone all expenses that will impair the security of the Paris and
Decatur mortgage, and especially the expenses of running the road
as a public servitude; and that the court and the receivers are
bound by the same limitation. The idea underlying this view is that
the receiver appointed by the court is merely the agent of the
purchasing company, and his management of the purchased road is
merely a continuation of the management of the purchasing company.
The view taken by the commissioner, and confirmed by the circuit
court, was that the receiver, as an executive officer of the court,
was entrusted with all the properties committed to his charge, to
use and preserve them, under the direction of the court, for the
benefit of all parties in interest; that the receiver sustained the
same relation to the bondholders of each of the constituent
companies; that as the property of each of them has been used and
preserved for the benefit of its bondholders, it is equitable that
each property should contribute its just proportion towards
defraying the necessary expenses; that as the Peoria, Atlanta, and
Decatur mortgage was executed more than two years before the
purchase of the Paris and Decatur road, and as the obligation of
operating the latter road, assumed by the purchasing company, was
an ordinary liability and an unsecured obligation, the equities of
the Peoria, Atlanta, and Decatur
Page 117 U. S. 470
bondholders require that the expenses of operating the purchased
road, whether before or after the appointment of a receiver, should
not take precedence, out of the corpus of the property of the
purchasing company, over its bonds, issued and negotiated before
the transfer, to the exoneration of the bonds of the purchased
road; and that it is more equitable that the expenses of the
receivership, incurred under the direction of the court for the
benefit of one road as well as the other, should be borne by each
proportionally. We think these views are correct, and that it is
right to measure the proportions according to the lengths of the
roads.
Borg and others complain of the following part of the final
decree:
"That Waring Brothers hold nine hundred and ninetyfour (994)
bonds of the Paris and Decatur Railroad Company, from which the
first five coupons have been detached, the numbers of which bonds
are given in Schedule F, 'Exchanged Paris and Decatur bonds,'
attached to said special commissioner's last mentioned report,"
filed January 15, 1885;
"that there is now due on said 994 bonds the principal sum of
$497,000, with interest thereon as provided in said bonds and the
coupons thereto attached, the principal and interest to this date
amounting to the sum of $859,589.13, and that said Waring Brothers
are entitled to the full benefit and advantage of said 994 bonds,
the same as if said bonds had not been exchanged for those of the
Illinois Midland Railway Company, and as if there had been no
cancellation or attempted cancellation of the same, and it is
ordered by the court that upon the surrender into court for
cancellation by said Waring Brothers of bonds of the Illinois
Midland Company to an amount equal to the said 994 bonds of the
Paris and Decatur Railroad Company, then the said 994 bonds of the
Paris and Decatur Railroad Company shall be held, and are hereby
declared to be, in full force and unsatisfied, in the hands of said
Waring Brothers, the same and with like effect as the other said
valid outstanding bonds of the said Paris and Decatur Railroad
Company, any exchange or cancellation thereof to the contrary
notwithstanding, and the special commissioner hereinafter appointed
is directed to hold for cancellation such
Page 117 U. S. 471
Illinois Midland Railway bonds when so surrendered, and to
report the fact of such surrender and holding for cancellation to
the court."
The report of the commissioner shows that each of the 994 bonds
has the word "cancelled" stamped thereon, and each has a hole
punched through the signature of the president of the company.
The argument on the part of Waring Brothers to sustain the above
provisions of the decree in regard to the 994 bonds is that the
Illinois Midland bonds, amounting to $4,175,000, were intended to
be largely used in retiring by exchange the bonds of the three
sectional roads, amounting to $2,780,000; that in the agreements
made between Hervey and Grant Brothers & Co., and between
Hervey and Waring Brothers, and between Waring Brothers and Grant
Brothers & Co., in regard to the issuing of Illinois Midland
bonds, and the exchange of the bonds of the sectional roads for
them, the underlying contract was that the three sectional
companies should be legally consolidated, so as to make the new
Illinois Midland mortgage to be issued a first lien on the entire
property; that the three parties above named owned, among them, all
but a few of the Peoria, Atlanta, and Decatur bonds, and all of the
Paris and Terre Haute bonds, and a large portion of the Paris and
Decatur bonds; that the agreement was, as understood by all
parties, that the sectional bonds should be exchanged for the new
Illinois Midland bonds, dollar for dollar, and that, as to such of
the Paris and Decatur bonds as should not be retired by exchange,
an equal amount of the new Illinois Midland bonds should be
destroyed; that, under this arrangement, Grant Brothers & Co.
and Waring Brothers would surrender their sectional bonds, secured
by sectional first mortgages, and accept in lieu thereof Illinois
Midland bonds, secured by what would be a first mortgage on the
three roads, subject to the unexchanged Paris and Decatur bonds;
that the written contracts on the subject stipulated that the three
railroads should be "consolidated into one company under the name
of the Illinois Midland Railway Company;" that the purchases and
fusion which took place were not a consolidation, within the
meaning of the contracts; and that what was contracted for
Page 117 U. S. 472
was to be not merely a consolidation of the properties of the
three companies, so that all those properties should pass to the
ownership of one of the companies, but a consolidation of the
companies themselves, they to be so united as to become one company
and one artificial body.
We are unable to concur in this view, and are of opinion that
what was done was a substantial compliance with the contracts. What
Hervey did in procuring the sales of the roads, and the change of
the name of the purchasing company, and in making the new mortgage
and bonds, was done with the concurrence of Grant Brothers &
Co. and Waring Brothers The exchanges made of the Paris and Decatur
bonds for the Midland bonds were not isolated transactions, but
followed as parts of one transaction, by which the roads were
united and the new bonds created and exchanged. The transaction
contemplated by the contracts was fully performed, and the Paris
and Decatur bonds, which Waring Brothers surrendered, were
exchanged and surrendered specifically for cancellation. In the
contract of July 4, 1874, between Waring Brothers and Grant Bros.
Co. it was provided that 907 Paris and Decatur bonds held by Waring
Brothers should be exchanged for 907 of the new bonds of the
Illinois Midland Company, and cancelled. The evidence and the
written contracts show that it was contemplated by the parties,
including Waring Brothers, that such of the Paris and Decatur bonds
as should not be surrendered and exchanged should retain their
precedence over the Illinois Midland bonds, and their priority of
lien on the Paris and Decatur property. In the contract between
Hervey and Grant Brothers & Co., of July 4, 1874, it was agreed
that the latter should retain in their hands Illinois Midland bonds
equal in amount to any Paris and Decatur bonds which should be
outstanding, and should cancel and return to Hervey all Paris and
Decatur bonds which should be exchanged by their holders for
Illinois Midland bonds, and that if, after July 1, 1876, there
should be any outstanding unexchanged Paris and Decatur bonds,
Grant Brothers & Co. should cancel and return to Hervey an
amount of Illinois Midland bonds equal to the amount of the then
outstanding unexchanged
Page 117 U. S. 473
Paris and Decatur bonds. In the schedule to the agreement of
July 4, 1874, between Grant Brothers & Co. and Waring Brothers,
it was stated that the Illinois Midland bonds were to be issued
"subject and in subordination only to such bonds already issued
by the Paris and Decatur Railroad Company as for the time being
shall be existing and be preferentially charged on the portion of
the undertaking which shall have been constituted with or represent
the undertaking of the said lastmentioned railway company."
The president of the Union Trust Company was advised of these
agreements in December, 1874. Waring Brothers surrendered, to Grant
Brothers & Co., 887 Paris and Decatur bonds, and took for them
this receipt:
"LONDON, February 17, 1875"
"Received from Messrs. Waring Brothers, 885 bonds of Paris and
Decatur Railroad Co., as per attached list, in exchange for a like
number of Illinois Midland bonds, in fulfillment of first clause of
our agreement of July 4, 1874, the difference between 885 bonds and
907 bonds mentioned in agreement having been drawn and cancelled
between date of agreement and the present time, which 885 bonds of
Paris and Decatur Railroad Co. are to be cancelled forthwith, in
accordance with said agreement."
"GRANT BROTHERS and CO."
In the agreement made as late as May 4, 1877, between Grant
Brothers & Co. and Waring Brothers it was agreed that the
former should use their best exertions "to obtain the exchange of
the outstanding Paris and Decatur bonds which have not yet been
exchanged for Illinois Midland bonds, so as to complete the
amalgamation."
The exchange and surrender of the 885 bonds was a completed
transaction. No surrender of any of the Paris and Decatur bonds by
any one was made dependent on the surrender of any others of them
or of the whole. Each person who surrendered gave up his lien under
the Paris and Decatur mortgage, and took one under the Illinois
Midland mortgage, as it was, and took the risk of its value. He
left those who did not surrender to hold under the Paris and
Decatur mortgage.
Page 117 U. S. 474
There was no contingency and no reservation on the part of those
surrendering. The surrender was for cancellation, and was
cancellation. The Illinois Midland mortgage and bonds were and are
valid. All parties got what they contracted for.
In regard to the other 109 Paris and Decatur bonds (to make up
the 994 exchanged bonds now presented by Waring Brothers, as
holders), each of them is stamped with the word "cancelled," and
each has a hole punched through the signature of the president of
the company. In 1872, Waring Brothers purchased, from Grant
Brothers & Co., 928 Paris and Decatur bonds. July 4, 1874, they
still held 907 of them. February 17, 1875, they had only 885.
Afterwards, Genis, acting for them and for Grant Brothers &
Co., brought with him from London to the United States all the
Paris and Decatur bonds which had been surrendered by any one and
cancelled, receiving them from the custody of Grant Brothers &
Co. These bonds included, not only the 885, but undoubtedly the 22
others mentioned in the receipt, and 87 more necessary to make up
the 994. All of the 109 bonds being marked "cancelled," and the
evidence as to the entire 994 being what it is, it must be held
that the 109, as well as the 885, were exchanged, surrendered, and
cancelled, and that the decree is erroneous, and must be reversed
in regard to all of the 994.
The decree provides that the special commissioner, charged with
its execution as to a sale, shall first offer the three railroad
properties for sale, each separately, and four locomotive engines
(on which there is a specific lien) separately, and all other
property acquired by the receivers otherwise than from said
railroad companies separately, and, after having so offered said
properties, shall then offer the whole of them for sale en masse;
and if the highest bid received by him for the entire properties
shall exceed the aggregate amount of the several highest bids for
them when offered separately, then the whole shall be struck off
and sold as an entirety to the person making the bid, and the
proceeds be divided into five parts, in proportion to the amounts
bid separately on the five constituent parts, and distributed to
the lienholders and bondholders in the
Page 117 U. S. 475
same manner as if the five constituent parts had been sold
separately.
Borg and others object to that provision, and claim that the
holders of the unexchanged Paris and Decatur bonds are entitled to
have a separate sale of the property covered by the Paris and
Decatur mortgage. We have considered the views urged in opposition
to the above clause, but are of opinion that under it, taken in
connection with all the other provisions of the decree, the rights
of the Paris and Decatur bondholders are sufficiently secured, and
that they have, substantially, the benefit of a separate sale. No
one of all parties can get less by the sale in gross.
The appeal of the Union Trust Company does not cover anything
not embraced in the appeal of Borg and others.
The appeal of Waring Brothers is next to be considered. They
object that certain claims of theirs under the head of
"Miscellaneous," in Schedule M to the commissioner's report, part
of the receiver's indebtedness, are by the decree declared to be
subordinate to the mortgages and bonds of the three sectional
roads, namely:
"$30,322.09, claim assigned by Terre Haute and Indianapolis
Railroad Company;"
"14,140.67, terminal facilities at west end, assigned by Toledo,
Peoria and Warsaw Railroad Company;"
"$54,900, loan account, allowed by order of court, June 11,
1884;"
"$32,000, loan account, allowed by order of court, June 11,
1884;"
"$29,064.84, Rees' notes, allowed by order of court, June 11,
1884."
As to the $30,322.09, Waring Brothers bought the claim in
August, 1877, from the Terre Haute and Indianapolis Company. The
receivership owed that amount to that company for rent of track,
material supplied, and traffic balances. The $14,140.67 was a claim
bought by Waring Brothers, in September, 1877, from the receiver of
the Toledo, Peoria and Warsaw
Page 117 U. S. 476
Company. It was for rent of track, stores supplied, and labor
performed. As to both of these items, the debts were contracted by
the receiver, and fall within the principle under which claims of
like character are allowed priority.
As to the items of $54,900 and $32,000, "Loan Account," the
commissioner, in his first report, made this statement:
"The Loan Account. Receiver Genis borrowed of the First National
Bank of Terre Haute the sum of $57,400 for the current expenses of
the road, upon which he paid $2,500, leaving a balance due the bank
of $54,900. He had also a running loan account with McKeen and Co.,
another banking house in Terre Haute, for moneys borrowed for the
use of the road, upon which there is a balance due the bank of
$32,000. These moneys were borrowed by the receiver as such, but
the greater part thereof was further secured by the personal
obligations of Mr. Genis or Waring Brothers. The transactions are
therefore characterized by Mr. Freidenberg's counsel as the
personal accounts of those parties, and not the accounts of the
receiver as such. But even if it were true that these moneys were
those of Mr. Genis individually, yet if it were further true that
Mr. Genis was authorized to make the expenditures for the
protection, reparation, or safety of the trust estate, and if he
advanced his own moneys for that purpose, he could, I think, on
principle, have a lien on the trust estate for moneys so advanced.
New v. Nicoll, 73 N.Y. 131. But there appears to have been
no express authority from the court to borrow these moneys. While a
receiver entrusted with the operation of a railroad must
necessarily be allowed a certain discretion as to outlays of money
made in good faith, in the ordinary course of business, and to a
certain extent the details of the business must be left to his
discretion, yet transactions of such magnitude as the loans in
question are, I think, unwarrantable without the previous authority
of the court; and the conduct of the receiver in this respect ought
not to be sanctioned, and certainly cannot be permitted to become a
precedent. At the same time, the evidence appears to show that the
sums so borrowed were applied directly to pay the expenses of the
receivership, repairs, supplies, payrolls, or to replace moneys
which had been so applied.
Page 117 U. S. 477
Mr. Genis' testimony is very specific on these points. He says
that, after applying the income of the road towards expenses
(repairs, supplies payrolls), and, when he could not longer
postpone payment of balance, he had to borrow. While reprehending
this unauthorized action, yet as the money was applied for repairs
on the property and expenses of administering the trust, and as the
transaction was thus beneficial to the parties in interest, and as
no bad faith appears to be imputed to the lenders, it seems to me
that the rejection of these claims, as against the lenders, would
be harsh and inequitable. And, as Waring Brothers, upon whose
credit, in part at least, these sums were advanced, have since paid
the same to the original lenders, and taken an assignment of the
claims, I see no reason why they are not likewise entitled to
payment."
In the opinion on this report the circuit court said that it
approved the conclusions of the commissioner as to "Loan Account."
In the interlocutory decree of June 11, 1884, is this clause:
"And the court approves the findings and conclusions of the said
special commissioner under the head of 'The Loan Account,' in said
report, and finds that the receiver borrowed of the First National
Bank of Terre Haute, Ind., and of McKeen and Co., bankers, certain
sums of money, which he applied directly to pay the necessary
expenses of the execution of his trust herein, and that there are
balances of $54,900 and $32,000, respectively, due on account of
such loans; and the court orders, adjudges, and decrees that the
holders of said claims are entitled to priority of payment out of
the trust estate, before payment of bonds."
But, by the final decree, the items of $54,900 and $32,000 are
declared to be subordinate to the mortgage bonds, while allowed as
indebtedness contracted by the receivers. We are of opinion that
these two claims ought not to be allowed priority. The debts were
contracted without the previous authority of the court. The amounts
were large, and we cannot sanction the action of the receiver in
borrowing sums of money so large in amount, without the previous
authority of the court, even though the purposes to which the
moneys were applied were such as is shown.
As to the item of $29,064.84, it consists of eight notes given
by receiver Rees, in May and December, 1878, as shown by
Page 117 U. S. 478
Exhibit X to the first report of the commissioner, in regard to
which the commissioner said, in that report, under the head of
"Accounts of Waring Brothers. . . . The acceptances or notes of
Dole and Rees, Exhibit X, aggregating $29,064.84, are contested
upon the ground that those receivers had no power to contract the
debts. Mr. Genis' explanation of the item appears on page 140 of
the abstract. Seven of the eight notes appear to have been given
for legitimate and necessary purposes, such as rent of railroad
track, repairing of engine, purchase of stationary engine, money
advanced for general expenses, etc. The several amounts were small,
and, I think, within the discretion of the receiver to contract. It
would be very trying on the court, as well as receiver, if the
latter, in operating a railroad, were compelled to obtain the
sanction of the court for all sums as small as these. The last
item, of $7,000, is more vigorously contested. An account of the
transaction is given by Mr. Genis (Abstract, 192). Waring Brothers
were desirous that Rees should resign, and Genis, on their behalf,
acceded to his demand for the payment of a forfeiture provided in
Rees' private contract of employment with Waring Brothers, as a
condition precedent to his resignation; and thus he ended his
agency and his receivership at the same time. The payment of the
forfeiture was made out of Waring Brothers' own funds, and there is
no claim that it is a charge against the trust fund. On the day
Rees resigned, he further insisted that Waring Brothers should
advance moneys with which to pay a certain claim before he
resigned. This was a debt of $7,000 to a bank. It was a debt of the
receivership, upon which he was also personally liable. On page
141, abstract, speaking of this item, Mr. Genis says: 'The last
item, $7,000, is cash, given Mr. Rees as receiver, and passed into
the general funds, as the books will show.' It is broadly charged
that this transaction was bribery, and that the bribe is now asked
to be repaid out of the trust funds. Undoubtedly, the debt paid was
a debt of the receivership, the trust fund got the benefit of the
payment, and the only benefit Rees received was his release as
surety upon a debt of the receivership. Waring Brothers' money was
loaned to the receiver, and was used by him to pay a debt for which
the receivership was
Page 117 U. S. 479
primarily liable; and the fact that such payment was demanded by
the retiring receiver does not make it any the less a present debt
against the receivership."
In its opinion on that report, the circuit court said that it
approved the commissioner's conclusions as to "Accounts of Waring
Brothers," and, in the decree of June 11, 1884, it stated that "the
court approves the findings and conclusions of said special
commissioner under the head of
Accounts of Waring Brothers,'"
but the question of the priority of the item of $29,064.84 over the
bonds appears to have been reserved by that decree. In the final
report of the commissioner, under the head of "Relative Equities of
Receiver's Floating Indebtedness and the Mortgage Bonds," after
discussing the subject at length, he said:
"I am therefore of opinion that all just indebtedness contracted
by the receivers in the execution of their trust, and in the
operation of the road, including claims for labor and supplies,
liabilities incurred in sustaining necessary business relations
with other railroad companies, liabilities as a common carrier,
damages to persons and property in operating the roads, obligations
to shippers properly incurred in due course of business, and other
claims, if any, of like character, and coming within the same
principle, are entitled to priority in payment over bonds."
But in the final decree, the item of $29,064.84 is not given
such priority. We are of opinion that this item cannot be allowed
priority, for the reason that the borrowing of the money for which
the notes were given was not sanctioned in advance by the court.
Though made up of amounts not, perhaps, large in themselves, the
aggregate cannot be called small; and there never could be any
difficulty in obtaining an order of the court, if one were proper,
to borrow money to a specified total amount, for specific purposes.
In any event, the item of $7,000 could not be allowed priority, as
the purposes for which that sum was used were not sufficiently
shown.
Waring Brothers also object because the final decree orders that
the "rents due Waring Brothers for use of rolling stock, as shown
by Schedules U and W of" the final "report of the special
commissioner," and "the sum of $21,099.43 due Waring Brothers for
extraordinary depreciation of rolling stock," be subordinated to
the mortgage bonds of the three sectional
Page 117 U. S. 480
roads, respectively. The net amount due for the above rents, as
stated in those schedules, with interest to January 15, 1885, is
$325,354.35, and that amount is allowed as a debt by the
commissioner. The court did not allow it priority, and we see no
sufficient ground for reversing the decision. The same conclusion
is reached as to the item for $21,099.43.
Waring Brothers also object because the court did not, in the
final decree, specifically allow ten claims of theirs, amounting to
$67,488.81, set forth under the head of "Right of Way Claims and
Outstanding Titles," in Schedule I to the second report of the
commissioner, and give them priority to the mortgage bonds; and
because that decree remitted the holders of those claims to such
suits as they might "properly bring in any court of competent
jurisdiction against the company alleged to be liable thereon, or
against the purchaser or purchasers" at the sale to be made under
the decree. We see no error in the decree in this respect, nor in
its failure to allow interest on the items of $4,500, $9,100, and
$17,001.47; nor in its failure to allow more to Waring Brothers for
right of way, land, buildings, and mechanics' liens, or to make any
different provision from that made in regard to the use of any
claims by them in payment of the railroad property, if they should
purchase it; nor in its failure to give precedence over the
mortgage bonds to the claims of Waring Brothers called "Six Months'
Supply Claims."
We come now to the appeal of S. A. Fletcher and Co. They are the
holders of the three certificates of the 17th series, and the four
certificates of the 18th series, before mentioned, and allowed with
priority, and of seven other receiver's certificates named in
Schedule N to the commissioner's second report, and allowed with
priority, seven of the entire fourteen having been issued under one
of the two orders before mentioned, each dated June 29th, 1881, and
the other seven under the other of those two orders. The circuit
court, in its final decree, reserved for future determination all
questions of the relative priorities and equities among those who
were given liens prior to the mortgage bonds, in case the
respective properties should not sell for amounts in excess,
respectively, of the liens to which precedence was given over the
mortgage
Page 117 U. S. 481
debts. S. A. Fletcher and Co. appeal from that part of the
decree, and insist that the decree ought to have found that the
receiver's certificates held by them were liens of the force,
character, and effect, and to the extent, provided by the two
orders of June 29, 1881, according to the purport of the
certificates, and entitled to priority of payment over all bonds
and debts, and all receiver's debts and certificates, except the
receiver's certificates specially excepted in those orders. By each
of the orders of June 29, 1881, each certificate to be issued under
it was declared to be a special charge and lien on the line and
property in respect of which it should be issued, superior in lien
to all mortgage bonds, and debts of the company, and receiver's
debts, except such receiver's debts as had theretofore been
declared by order of court to be special charges and liens on such
line and property. We are of opinion that (with the exception of
debts for taxes, and receiver's certificates issued to borrow money
to pay taxes or to discharge tax liens) there should be no priority
or preference among the debts and claims, whether receiver's
certificates or other debts, which are allowed precedence over the
mortgage bonds of any road, but that all should stand alike,
notwithstanding any orders heretofore made, and that the decree
should so provide.
It results that the decrees are reversed so far as they
allow to Waring Brothers the benefit of the 994 Paris and Decatur
bonds as unexchanged and uncancelled bonds, and so far as they deny
priority over the Paris and Decatur bonds to the items of
$30,322.09 and $14,140.67, and so far as they fail to provide that
there shall be no priority or preference (with the exception above
stated) among the debts and claims, whether receiver's certificates
or other debts, which are allowed precedence over the mortgage
bonds of any road; and the causes are remanded to the circuit
court, with a direction to make those modifications in the decrees;
and in all other respects the decrees are affirmed. No costs are
allowed in this court for or against any party, and the expense of
printing the record is to be borne equally by Borg and others and
Waring Brothers.