Where expenditures have been made which were essentially
necessary to enable a railroad to be operated as a continuing
business, and it was the expectation of the creditors that the
indebtedness so created would be paid out of the current earnings
of the company, a superior equity arises, in case the property is
put into the hands of a receiver, in favor of the materialman, as
against mortgage bondholders, in income arising from the operation
of the property both before and after the appointment of the
receiver, which equity is not affected by the fact that the company
itself is the purchaser of the supplies, but is solely dependent
upon the facts that the supplies were sold and purchased for use,
that they were used in the operation of the road, that they were
essential for such operation, and that the sale was not made simply
upon personal credit, but upon
Page 170 U. S. 356
the understanding, tacit or expressed, that the current earnings
would be appropriated for the payment of the debt.
Upon the evidence contained in the record, it is
held
that in the contract with the Virginia and Alabama Coal Company and
in that with the Sloss Iron and Steel Company, it was the intention
of the parties that the coal furnished was to be used in the
operation of the lines of the Central Company, and that the Coal
Companies looked to the earnings of the Central System as the
source from which the funds to pay for the coal to be furnished
were to be derived.
In concluding that the claims of the intervenors were entitled
to priority out of the surplus earnings which arose during the
control of the road by the court, this Court must not be understood
as in anywise detracting from the force of the intimations
contained in its opinions in
Kneeland v. American Loan &
Trust Co., 136 U. S. 89, and
Thomas v. Western Car Co., 149 U. S.
95.
On December 19, 1888, the Georgia Pacific Railroad Company
leased its line of railroad extending from Atlanta to Birmingham,
Alabama, to the Richmond and Danville Railroad Company, a
corporation organized under the laws of Virginia, and which owned
or controlled by lease a line of railroad from Atlanta to
Washington, in the District of Columbia, and thereafter the Georgia
Pacific road was operated by the Richmond and Danville Company. On
June 1, 1891, the Central Railroad and Banking Company of Georgia,
a corporation under the laws of Georgia, owning and operating a
line of railroad from Atlanta to Savannah, Georgia, and which owned
or controlled various other railroads or lines of steamships and a
large amount of other property, executed a lease for ninety-nine
years of said railroad and various lines and property controlled by
it to the Georgia Pacific Company. The lease was signed on behalf
of the Georgia Pacific Company by its President, pursuant to the
direction of the board of directors of the company, but it was
subsequently asserted that this was done without previous
authorization or ratification of the stockholders. The Georgia
Pacific Company did not take possession of the property of the
Central Company or assume or exercise any control over the same
except that, on the date of the lease, it requested the Richmond
and Danville Company to assume the control of the leased property,
with which request there was an immediate compliance.
Page 170 U. S. 357
In March, 1892, a suit was instituted in the Circuit Court of
the United States for the Eastern Division of the Southern District
of Georgia by Rowena M. Clarke, a stockholder of the Central
Company, to obtain a cancellation of the lease of the property of
that company, and other specific relief. A temporary receiver was
appointed on March 4, 1892. The Danville Company, as also the
Georgia Pacific Company, appeared, and disclaimed any rights under
the lease, and on March 28, 1892, the preliminary receiver, and
other persons constituting the then board of directors of the
Central Company, were appointed joint receivers to take charge of
the railroad property and assets of the Central Company until there
could be a reorganization of such board in pursuance to its
charter.
As ancillary to Mrs. Clarke's bill, the Central Company, on July
4, 1892, filed a bill against the Farmers' Loan and Trust Company
of New York, trustee, and other creditors, averring its inability
to meet many matured obligations, and that it had defaulted on July
1, 1892, on the semiannual interest due on $5,000,000 mortgage
bonds dated October 1, 1872, for which the Farmers' Loan and Trust
Company was trustee, and that, for these reasons the directors were
unable to assume the management of the property, and requesting the
court by proper process to call upon its creditors to come into
court, and that the court would administer the property for the
benefit of all interested. The Farmers' Loan and Trust Company
assented to the continuance of the receivership, and on July 15,
1892, under the depending bill, all the receivers, with the
exception of one H. M. Comer, were discharged, and Mr. Comer was
continued as receiver.
Subsequently, in May, 1893, under bills filed to foreclose a
mortgage executed by the Savannah and Western Railroad Company,
Comer and one Lowry were appointed receivers, and directed to
continue to operate the road as part of the system of the Central
Company.
On January 23, 1893, the Farmers' Loan and Trust Company of New
York, trustee for the mortgage bondholders of the Central Railroad
and Banking Company of Georgia, filed its dependent bill in said
court for the foreclosure of the five
Page 170 U. S. 358
million dollar mortgage on the main stem of the Central Railroad
from Atlanta to Savannah because of default in the payment of the
interest due July 1, 1892, and the receivership was extended to
that bill.
In an agreed statement of facts contained in the record, it was
stipulated as follows:
"It is a fact that, since the receivership the receivers of the
Central Railroad and Banking Company of Georgia have expended
betterments in its railroad lines from the income of the roads
during the receivership a sum much larger than the entire claim of
the intervenors."
On June 30, 1893, a final decree was entered, dismissing, for
want of equity, the bill filed on behalf of Mrs. Clarke, it being,
however, recited that the validity of the lease by the Central
Company was not passed upon.
On May 26, 1892, the Virginia and Alabama Coal Company was
allowed to become a party complainant in the Clarke suit, and to
file an intervening petition therein. The Central Company and its
receivers and the Danville Company were made parties defendant to
the intervention. It was averred in the petition that the Danville
Company, while operating the Central Company, purchased from the
intervenor, for the use and benefit of the Central in its several
divisions, coal, which purchase was made in pursuance of a contract
of the Danville Company, dated July 13, 1891. For coal furnished
under said contract, and actually delivered to the Central Company
(against which latter company, in the course of said business, the
bills were originally made out), and used by said Central Company
in the running of its machinery, a decree was asked for $26,607.44,
as shown by a statement of account annexed to the petition.
The contract referred to in the petition reads as follows:
"Richmond and Danville Railroad Company"
"Office general purchasing agent"
"Joseph P. Minetree, general purchasing agent, Atlanta, Ga."
"The Virginia and Alabama Coal Company; Mr. J. R. Ryan"
"V.P. and G.M., Birmingham, Ala."
"Dear Sir: We beg to accept your verbal offer of today
Page 170 U. S. 359
to furnish the C. R. and B. Co. of Ga. with, say 275,000 tons of
best quality engine steam coal for the next twelve months,
commencing July 1, 1891, and ending July 1, 1892 at 90 cents per
ton of 2,000 pounds, to be delivered on cars at mines, and to be
shipped at times and in quantities to suit. Settlements for the
coal delivered in any one month to be made on or about the first of
the second succeeding month, and the C. R. and B. Co. of Ga.
reserves the right to increase or decrease the monthly deliveries
upon reasonable notice at any time. The division superintendents of
the divisions for which the coal will be required will communicate
with you as to the monthly deliveries, and all bills for coal
furnished under this contract to be sent direct to the division
superintendents. Kindly confirm this at once, and oblige, yours,
truly,"
"[Signed] Joseph P. Minetree"
"
General Purchasing Agent"
"July 13, 1891"
Besides asking a decree against all the defendants jointly for
the amount claimed, with interest, the petition prayed for general
relief. The petition was subsequently amended by averring that the
Danville Company was liable under the contract of purchase, and
that the Central Company was liable because the coal was bought,
and actually used, for the benefit of the Central Company of
Georgia.
An amendment was subsequently filed to the petition, setting up
that the coal delivered by the Virginia Company had been furnished
to the Central Company under the contract recited in the petition,
and that said coal was furnished to the Central Company for the
purpose of being used by it in the running of its machinery and the
prosecution of its business; that a great portion of said coal
remained on hand in the bins and storage places of the Central
Company at the time of the appointment of the temporary receiver,
and a large portion was still on hand when the board of receivers
were appointed, and went into the possession of said receivers, and
had since that time been actually used by the receivers in the
running of the machinery of and the operation of the business of,
the
Page 170 U. S. 360
Central Company, and it was asked that an account might be taken
as to the portions so used, and that it should be decreed to be a
part of the operating expenses of the railroad company in the hands
of the receivers, to be paid as a part of the expenses of the
receivership.
On December 3, 1892, the Virginia and Alabama Coal Company,
suing for the use of the Sloss Iron and Steel Company, a
corporation under the laws of the State of Alabama, filed a further
intervening petition, asking payment of an account aggregating
$14,359.38, for coal furnished for use on the Central lines by the
Sloss Company, under the contract between the Danville Company and
the Virginia Company. Grounds of recovery were stated similar to
those relied upon in the prior intervention, it being also insisted
that, if recovery was allowed against the receiver only for the
coal used by him, it should be paid for at its value at the place
where used,
viz., $2.50 per ton.
To these interventions the Central Company and the receivers
thereof separately demurred, while the Danville Company filed
motions asking that it be dismissed as a party defendant thereto.
The motions were overruled, while decisions upon the demurrers were
deferred until the hearing of the interventions.
The issues raised by the respective interventions were referred
to a master for report and decision. At different dates, the master
reported, recommending judgments in favor of the Virginia and
Alabama Coal Company, on its behalf and as suing for the use of the
Sloss Company, against the Danville and Central Companies and the
receiver of the Central, jointly and severally, for the full
amounts claimed, with interest, and that, upon the payment of the
amount of the decree by the Central Company or its receiver, a
judgment should be entered in its or his favor against the Richmond
and Danville Company for whatever sum might be paid for coal
delivered prior to March 4, 1892, and actually used before the
appointment of a receiver. By a supplemental report, the master
reduced the judgment against the receiver for the benefit of the
Virginia Company solely, by the sum of $5,543.10, with interest,
and
Page 170 U. S. 361
the judgment for the use of the Sloss Company for the sum of
$2,682.80, owing to the fact that a specified quantity of the coal
which had been sold and delivered under the contract had not been
used on the lines of the Central Company, but by lines held to be
independent roads. Exceptions were filed to the master's report,
both as to his findings of fact and conclusions of law, on behalf
of all parties to the intervention. The reports of the master and
the exceptions filed thereto came on for hearing before the court,
and on December 29, 1893, an order was entered sustaining the
exceptions in part and overruling them in part. A final decree was
entered on January 1, 1894, and amended on March 31, 1894, setting
aside the reports and adjudging that the Virginia and Alabama Coal
Company recover from the Central Company $6,171.98 for the "amount
of unpaid-for coal" in cars consigned to the officers of the
Richmond and Danville Railroad Company, and which was unloaded
after March 4, 1892, and appropriated by the receivers of the
company, being 6,857.75 tons at ninety cents per ton, and the
Virginia and Alabama Coal Company, suing for the use of the Sloss
Iron and Steel Company, was adjudged to recover of the Central
Company $735.16, or 816.85 tons of coal at ninety cents per ton,
being the amount of unpaid-for coal unloaded after March 4, 1892,
and appropriated by the receivers. The receivers of the Central
Company were directed to pay the sums so found due out of the
current earnings of the Central Railroad and Banking Company in
their hands.
An appeal was prosecuted from the final decree to the Circuit
Court of Appeals for the Fifth Circuit, which court, on February
25, 1895, reversed the decree of the circuit court, 66 F. 803, and
remanded the cause to that court,
"with instructions to enter a decree in favor of the
intervenors, the Virginia and Alabama Coal Company and the Sloss
Iron and Steel Company, for the amounts respectively due them for
coal delivered to the lines under the control and forming a part of
the system of the Central Railroad and Banking Company of Georgia,
as shown by the evidence in this cause, including the coal
furnished before the appointment
Page 170 U. S. 362
of the receivers and that found in the bins of the line after
such appointment, and of which the receivers took possession, as
well as the coal delivered to the receivers after their
appointment, the amount due being determined by the contract price,
and an order that they recover from the Central Railroad and
Banking Company of Georgia and the receivers of the same such sums
thus found to be due. No decree will be entered in favor of the
intervenors for the payment of that portion of the coal which was
used by the Charlotte, Columbia and Augusta Railroad Company."
An application for a rehearing being denied, a writ of
certiorari was allowed by this Court.
MR. JUSTICE WHITE, after making the foregoing statement,
delivered the opinion of the Court.
In each of the intervening petitions, a liability of the Central
Company was asserted to arise from the fact that the coal was sold
to and purchased by the Danville Company for use in operating the
lines of railway of the Central Company, and in the lower courts,
as in this Court, it was contended that, under the prayer for
general relief, the petitioners were entitled to have their demands
allowed as a preferential claim against any surplus income which
might arise from the operation of the Central road under the
receiver, after payment of the ordinary expenses of operation, or
out of the corpus of the estate, or the proceeds of sale thereof,
in the event that the income had been diverted by the receivers in
expenditures for betterments.
Had the Central Company, through its own officers, operated its
line of railway during the period when the coal in question
Page 170 U. S. 363
was furnished, it cannot be doubted, in the light of the
decision in
Burnham v. Bowen, 111 U.
S. 776, that in the event that the company failed to
make payment for such coal while a going concern, the indebtedness
created, upon the appointment of a receiver, might have been
properly allowed as a charge upon the surplus income arising during
the receivership. In the case referred to, an Iowa state court, in
the early part of 1875, and subsequently, by removal, a circuit
court of the United States sitting in equity, took possession of,
and operated through a receiver, a line of railway owned by the
Chicago, Dubuque and Minnesota Railroad Company. When the receiver
took control, the company was indebted to the Northern Illinois
Coal and Iron Company for coal furnished "during 1874" and used in
running locomotives. During the receivership, there was paid from
the earnings which came into the hands of the receiver the amount
of a judgment indebtedness for lands purchased by the company for
its depot and offices, and also several judgments rendered against
the company for its right of way. The sum of these payments by the
receiver exceeded the amount of the indebtedness owing for the coal
furnished as above stated. In October, 1876, a decree of strict
foreclosure was entered, in which, however, a reservation was made,
for future decision, of all matters in controversy between the
plaintiffs, and all and any of the defendants and intervenors and
claimants. Among the persons who had intervened in the foreclosure
proceedings was one Bowen, who had acquired acceptances which had
been given to the coal company for the indebtedness referred to. He
petitioned for a judgment against the railroad company for the
amount of such indebtedness, "and that such judgment be declared a
lien on the property and road of said company in the hands of said
trustees and their grantees." A decree was entered on October 30,
1880, finding due to Bowen on his claim a specified sum, and
declaring that the mortgaged property in the hands of the trustees
under the decree of foreclosure was equitably bound for the payment
thereof,
"said property having passed to said trustees subject to the
rights and equities of said Bowen, intervenor,
Page 170 U. S. 364
and said trustees, and all parties holding under them, taking
said property subject to such rights and equities on the part of
said Bowen, intervenor."
Provision was then made for a sale of the property if the claim
was not paid. An appeal having been taken by the trustees, this
Court held that, at the time of the appointment of the receiver,
the indebtedness in question was one of the current debts for
operating expenses made in the ordinary course of a continuing
business, to be paid out of current earnings. In the course of the
opinion, speaking through Mr. Chief Justice Waite, the Court
reiterated the doctrine enunciated in
Fosdick v. Schall,
99 U. S. 252,
where it was declared that:
"The income [of a railroad company] out of which the mortgagee
is to be paid is the net income obtained by deducting from the
gross earnings what is required for necessary operating and
managing expenses, proper equipment, and useful improvements. Every
railroad mortgagee, in accepting his security, impliedly agrees
that the current debts made in the ordinary course of business
shall be paid from the current receipts before he has any claim on
the income."
And it was further said, pp.
111 U. S.
781-782:
"So far as anything appears on the record, the failure of the
company to pay the debt to Bowen was due alone to the fact that the
expenses of running the road and preserving the security of the
bondholders were greater than the receipts from the business. Under
these circumstances, we think the debt was a charge in equity on
the continuing income, as well on that which came into the hands of
the court after the receiver was appointed as that, before. When
therefore the court took the earnings of the receivership, and
applied them to the payment of the fixed charges on the railroad
structures, thus increasing the security of the bondholders at the
expense of the labor and supply creditors, there was such a
diversion of what is denominated in
Fosdick v. Schall, the
'current debt fund,' as to make it proper to require the mortgagees
to pay it back. So far as current expense creditors are concerned,
the court should use the income of the receivership in the way the
company would have been bound in equity and good conscience
Page 170 U. S. 365
to use it if no change in the possession had been made. This
rule is in strict accordance with the decision in
Fosdick v.
Schall, which we see no reason to modify in any
particular."
It was thus settled that where coal is purchased by a railroad
company for use in operating lines of railway owned and controlled
by it, in order that they may be continued as a going concern, and
where it was the expectation of the parties that the coal was to be
paid for out of current earnings, the indebtedness, as between the
party furnishing the materials and supplies and the holders of
bonds secured by a mortgage upon the property, is a charge in
equity on the continuing income, as well that which may come into
the hands of a court after a receiver has been appointed as that,
before. It is immaterial in such case, in determining the right to
be compensated out of the surplus earnings of the receivership,
whether or not during the operation of the railroad by the company
there had been a diversion of income for the benefit of the
mortgage bondholders, either in payment of interest on mortgage
bonds or expenditures for permanent improvements upon the property.
Nor is the equity of a current supply claimant in subsequent income
arising from the operation of a railroad under the direction of the
court affected by the fact that, while the company is operating its
road, its income is misappropriated and diverted to purposes which
do not inure to the benefit of the mortgage bondholders and are
foreign to the beneficial maintenance, preservation, and
improvement of the property. This principle finds support in
Miltenberger v. Logansport Railway Company, 106 U.
S. 286,
106 U. S.
311-312, the decision in which case was approvingly
referred to in
Union Trust Company v. Illinois Midland
Company, 117 U. S. 434, and
in the recent case of
Thomas v. Western Car Company,
149 U. S. 95,
149 U. S. 110.
In the
Trust Company case, the Court said (p.
117 U. S.
456):
"The principle laid down in
Wallace v. Loomis,
97 U. S.
146, was applied in
Miltenberger v. Logansport
Railway Company, 106 U. S. 286,
106 U. S.
311-312. 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
Page 170 U. S. 366
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 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
of 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,
Page 170 U. S. 367
some of which were 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
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 accommodations 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."
Is there any good reason why the equitable doctrine applied in
the cases to which we have referred should not be applied
Page 170 U. S. 368
under a state of facts such as shown at bar, where the immediate
management of a road was confided by its owners, without protest or
interference by the bondholders, to third parties? It would seem
not. The dominant feature of the doctrine as applied in
Burnham
v. Bowen is that where expenditures have been made which were
essentially necessary to enable the road to be operated as a
continuing business, and it was the expectation of the creditors
that the indebtedness created would be paid out of the current
earnings of the company, a superior equity arises in favor of the
materialman as against the mortgage bonds in the income arising
both before and after the appointment of a receiver from the
operation of the property.
The equity thus held to arise when a purchase of necessary
current supplies is made by the owning company is not in any wise
influenced by the fact that the company itself is the purchaser of
the supplies, but is solely dependent upon the fact that the
supplies are sold and purchased for use, and that they are used in
the operation of the road; that they are essential for such
operation, and that the sale was not made simply upon personal
credit, but upon the tacit or express understanding that the
current earnings would be appropriated for the payment of the debt.
Clearly, if the owning company had entered into an agreement with
some individual to commit to his uncontrolled management as their
agent the operation of the company's lines, the bondholders could
not be heard to say that thereby no equities could arise in favor
of labor or supply claimants in the income of the property
preserved or kept in operation by their efforts. This would be the
category in which the Danville Company would stand if the lease of
the Central lines was not valid. On the other hand, if the lease
was lawful, upon the insolvency for any cause of the Danville
Company while the lease continued in force, its relation towards
its leased line in the adjustment and settlement as against the
leased road of equities arising between those who had furnished
supplies to the road and the bondholders would be precisely that of
an owner of the leased lines, and if such possession is terminated
by the court through
Page 170 U. S. 369
the agency of a receiver, equities in the income of the property
continue to survive.
Upon the evidence contained in the record, we hold that the
contract upon which both intervenors relied -- the deliveries of
coal furnished by the Sloss Company being under the contract which
had been made with the Virginia Company -- was made with the
Danville Company, but we conclude from the terms of the contract
that the intention of the parties was that the coal was to be used
in the operation of the lines of the Central Company, and that the
mining companies did not rely simply upon the responsibility of the
Danville Company, but, on the contrary, that the coal companies
looked to the earnings of the Central system as the source from
which the funds to pay for the coal to be furnished were to be
derived.
While it was established that during the time the Danville
Company was in control of the Central property, a semiannual
installment of interest -- which exceeded the amount of the claims
of the intervenors -- was paid to the holders of bonds of the
Central Company, we cannot say that there was a diversion of income
from the Central lines for such purpose. At the best, it could only
be conjectured that such payment was probably made from that
income. Whether, however, there was a diversion of income before
the receivership inuring to the benefit of the bondholders, the
equity in favor of the coal company for payment out of subsequent
income, as we have seen, survived and attached to the property when
it was taken possession of by the receiver, and if a surplus of
income was created by the operations of the road under the receiver
sufficient to satisfy the claims of the intervenors, the right to
demand that the surplus income be applied in satisfaction of the
claims in question was undoubted. From the evidence, we find that
there was such surplus. It was stipulated in the record as a
fact
"that, since the receivership, the receivers of the Central
Railroad and Banking Company of Georgia have expended for
betterments on its railroad lines, from the income of the roads
during the receivership, a sum much larger than the entire claim of
the intervenors."
Keeping
Page 170 U. S. 370
in mind the manifest purpose of this stipulation, which
undoubtedly was to present the question of the right of the
claimants to resort to the corpus of the estate for payment of
their claims, we must give the term "betterments" a broad, and not
a restricted, meaning. So construed, it must be held to have
referred to expenditures for the improvement of the property, as
distinguished from mere payments for operating expenses and
ordinary repairs, which are usual and legitimate terms of outlay
from current receipts. This is the sense in which the term was
understood by this Court in
Union Trust Company v. Illinois
Midland Company, 117 U. S. 434,
where the validity of receivers' certificates was upheld which had
been paid out of the proceeds of the sale of corpus of the
property, because issued to replace earnings diverted from paying
operating expenses and ordinary repairs to payment of betterments
(p.
117 U. S.
462).
The circumstance that it is uncertain from the terms of the
stipulation whether the expenditures for betterments were made by
the receivers under the stockholders' bill, or under the bill filed
by the Central Company, or under the trustee's bill for
foreclosure, is immaterial. Even though the mortgages securing the
bonds provided for the sequestration by foreclosure of the income
of the road for the benefit of the bondholders, for reasons already
stated, that income, until strict foreclosure or a sale of the
road, was charged with the prior equity of unpaid supply claimants
such as those now before the court.
In concluding that the claims of the intervenors were entitled
to priority out of the surplus earnings which arose during the
control of the road by the court, we must not be understood as in
any wise detracting from the force of the intimations contained in
the recent utterances of this Court in the
Kneeland (
136 U. S. 136 U.S.
89) and
Thomas (
149 U. S. 149 U.S.
95) cases as to the necessity of a court of equity's confining
itself within very restricted limits in the application of the
doctrine that in certain cases a court having a road or fund under
its control may be justified in awarding priority over the claims
of mortgage bondholders to unsecured claims originating prior
Page 170 U. S. 371
to a receivership. In the
Kneeland case, however, the
claim refused priority was based upon an alleged instrument of
lease, and was for four months' rental of cars operated on a line
of railroad by a receiver appointed at the suit of a judgment
creditor, such receiver being succeeded in office by a receiver
appointed in the foreclosure proceedings instituted by the trustees
of the mortgage bondholders. It was held that the alleged contracts
of lease were, in substance and effect, "antecedent contracts of
sale;" that in those contracts, ample provision had been made by
the vendor for his security by stipulations authorizing a retaking
of the property upon failure to make payment promptly of the
installments of purchase money as they became due, and that the
claim against the fund was in reality for a portion of the purchase
price of the cars. Under these circumstances, the debt was held not
to be embraced "in the few specified and limited cases" in which
this Court "has declared that unsecured claims were entitled to
priority over mortgage debts," and particular attention was called,
among other things, to the fact that the receivership at the suit
of the judgment creditor was not for the benefit of the mortgage
bondholders, so that it could not be asserted that the expenditures
of such receivership were payable, in any event, out of the income
or corpus of the property, and the fact was also noticed that, from
the time of the purchase of the rolling stock in question in the
suit to the time of the final disposition of the mortgage
foreclosure, the receipts did not equal the operating expenses, and
there had been no diversion of the current earnings either to the
payment of interest or the permanent improvement of the property.
In the
Thomas case, claims for rental of cars, which
rental had accrued prior to the receivership, were denied priority
over the mortgage bonds, but the facts in that case were such as to
justify the conclusion that the car company contracted "upon the
responsibility of the railroad company, and not in reliance upon
the interposition of a court of equity." In neither the
Kneeland nor the
Thomas case was there any
intention to question the prior decisions of the Court, which
allowed priority to claims based upon the
Page 170 U. S. 372
furnishing of essential and necessary current supplies, not sold
upon mere personal credit, against the surplus income arising
during the operation of the road under the direction of a court of
equity.
In view of the conclusion which we have reached, none of the
other matters urged in argument need be noticed. The decree of the
circuit court of appeals being in consonance with the views we have
expressed, the decree of that court is
Affirmed.
MR. JUSTICE PECKHAM and MR. JUSTICE McKENNA, not having heard
the argument, take no part in this decision.
