1. The bonds granted by the United States to the Kansas Pacific
Railway Company are not a lien on, nor is the company liable for
five percent of the net earnings of, that portion of ite road west
of the one hundredth meridian.
2. The Court adheres to the rulings in
Union Pacific
Railroad Company v. United States, supra, p.
99 U. S. 402, as to
the principle which should govern in determining the amount of net
earnings. In regard to certain items claimed by the company as
proper deductions from the gross receipts of the road, the
following should be excluded -- money needed to place it in proper
repair, but not actually expended for that purpose, the expenses of
the land department, the interest on the funded debt, which has
priority over the lien of the United States, and the fifty percent
retained by the latter from the amount due for services rendered to
it, and that the following items should be allowed, provided they
were actually paid out of the earninge of the road, and not raised
by bonds or stock -- the equipment account, or replacing and
rebuilding rolling stock, machinery, &c.; the amounts paid for
depot grounds, and the expenses of same; and the construction
account, or improvements and additions to the track, &c.
The facts are stated in the opinion of the Court.
Page 99 U. S. 456
MR. JUSTICE BRADLEY delivered the opinion of the Court.
This case was a suit brought in the court below by the United
States against the Kansas Pacific Railway Company, to recover five
percent of the net earnings of the road belonging to that company
from the time of the completion thereof, alleged to be the second
day of November, 1869, to the thirty-first day of October, 1874;
the said five percent being claimed under the last clause of sec. 6
of the Pacific Railroad Act, passed July 1, 1862, which has already
received consideration in the cases of the Union Pacific and the
Central Pacific Railroad Companies,
supra, p.
99 U. S. 402, p.
99 U. S. 449. The
cause was tried by the court, the facts were specially found, and
the conclusion arrived at that nothing was due to the government
upon the alleged claim; and judgment was rendered for the
defendant.
The Kansas Pacific Railway Company was originally chartered in
1855 by the Territory of Kansas under the name of the Leavenworth,
Pawnee, and Western Railroad Company, mentioned in the ninth
section of the act of 1862, and afterwards, in 1863, received the
name of the Union Pacific Railway Company, Eastern Division, and
finally, in 1869, that which it now bears. By the section referred
to, it was authorized to construct a railroad and telegraph line
from the Missouri River, at the mouth of the Kansas River, so as to
connect with the Union Pacific at the initial point on the one
hundredth meridian, "upon the same terms and conditions in all
respects as are provided in this act for the construction of the
railroad and telegraph line first mentioned" (that is, the Union
Pacific).
The company accepted the terms of the act, and proceeded to
construct its road, receiving subsidy bonds therefor at the rate of
$16,000 per mile for the whole length of its road to the one
hundredth meridian, being 393 15/16 miles; all of which bonds were
delivered as the work progressed. The road was completed to
Sheridan, 405 miles west from the Missouri State line (the point of
commencement), on the second day of
Page 99 U. S. 457
November, 1869, which is the date at which the government
alleges that the road was completed. The authority of the company
to extend its road west of the one hundredth meridian was derived
from the ninth section of the act of 1864, which declared as
follows:
"
And provided further that any company authorized by
this act to construct its road and telegraph line from the Missouri
River to the initial point aforesaid, may construct its road and
telegraph line so as to connect with the Union Pacific Railroad at
any point westwardly of such initial point, in case such company
shall deem such westward connection more practicable or desirable,
and in aid of the construction of so much of its road and telegraph
line as shall be a departure from the route hereinbefore provided
for its road, such company shall be entitled to all the benefits
and be subject to all the conditions and restrictions of this act:
provided further, however, that the bonds of the United
States shall not be issued to such company for a greater amount
than is hereinbefore provided, if the same had united with the
Union Pacific Railroad on the one hundredth degree of longitude;
nor shall such company be entitled to receive any greater amount of
alternate sections of public lands than are also herein
provided."
It thus appears that whilst the company was authorized to extend
its road west of the one hundredth meridian, if it saw fit so to
do, it was entirely in its option, and if it did, it was not to
expect or have any subsidy of government bonds for such extension.
It is found by the court that the company actually extended its
road westward as far as Denver, 245 miles beyond the one hundredth
meridian, but did not complete the same to that point, so as to be
accepted by the President, until the 19th of October, 1872.
A material question in this case is whether the whole line to
Denver, or only the line which the company was first authorized to
construct (which terminated at the one hundredth meridian) is
liable to the lien for the government subsidy, and the payment of
five percent of net earnings. If only the latter, then the time of
completion was that which is claimed by the government, namely, the
second day of November, 1869; but the net earnings liable to the
claim of five percent would be only those produced on the first 393
15/16 miles, or if these cannot
Page 99 U. S. 458
be ascertained, then a
pro rata amount of the whole net
earnings of the road.
From a careful examination of the statutes relating to this
subject, we are of opinion that whilst, as to its entire line, the
company, in the words of the ninth section of the act of 1864, is
"entitled to all the benefits and subject to all the conditions and
restrictions of the act," and is bound to furnish transportation
and telegraphic accommodations to the government on the usual
terms; yet that the subsidy bonds granted to the company, being
granted only in respect of the original road, terminating at the
one hundredth meridian, are a lien on that portion only, and that
the five percent of the net earnings is only demandable on the net
earnings of said portion. This deduction, we think, is clearly
demonstrated by the words of the fifth section of the act of 1862,
which creates the government lien for the payment of the subsidy
bonds. Those words are that
"the issue of said bonds and delivery to the company shall
ipso facto constitute a first mortgage on the whole line
of the railroad and telegraph, with the rolling stock, fixtures,
and property of every kind and description, [and] in consideration
of which said bonds may be issued."
It is the road and appurtenances, in consideration of which, or
in respect of which, the bonds are issued, that is subjected to the
lien. This can apply in the present case only to the first 394
miles of the defendant's road. And as the lien only applies to this
portion, the stipulation for payment out of net earnings cannot
reasonably be applied to any other portion of the line.
This view is strengthened by the terms of the third section of
the act of March 3, 1869, authorizing the defendant company to
assign and transfer to the Denver Pacific Railway and Telegraph
Company that portion of its line between Denver and Cheyenne. By
that section, the said companies were authorized to mortgage their
respective portions of said road (referring to the extension of the
Kansas Pacific from the one hundredth meridian to Denver, and
thence to Cheyenne) to the amount of $32,000 per mile; a privilege
which would hardly have been conceded if the lien of the government
bonds was deemed to extend over those portions of the line.
The result of this conclusion is that only such part of the
Page 99 U. S. 459
annual net earnings of the road as are due to the first 393
15/16 miles are in any event subject to the payment of the five
percent in question.
But inasmuch as the court below, in estimating the net earnings,
credited the company for expenditures which are not allowable
according to the principles announced by us in the case of the
Union Pacific Railroad Company, and as, upon a proper accounting,
it may appear that, in some years, the defendant company realized a
sufficient amount of net earnings from its first 394 miles of road
to pay the interest on the first mortgage bonds, and leave a
surplus applicable to the five percent payable to the government,
it will be necessary to reverse the judgment, in order that a new
trial may be had between the parties. It is proper, however, before
concluding, that we should indicate our opinion with regard to
certain classes of expenditures on which the government and the
company are at issue.
The former insists that certain items should be excluded from
the account which are claimed by the latter to be legitimate. These
items are designated in Schedule C, annexed to the findings of the
court below, and are as follows:
First. "Depreciation account, or expense not charged
up." This is explained to be the amount necessary to put the road
in proper repair, but which was not actually expended for that
purpose. We are clearly of opinion that it is not a proper charge.
Only such expenditures as are actually made can with any propriety
be claimed as a deduction from earnings.
Secondly. "Construction account, or improvements and
additions to track," &c. This item, according to what we have
said in the Union Pacific Railroad case, ought to be allowed.
Thirdly. "Equipment account, or replacing and
rebuilding rolling stock, machinery," &c. This item should also
be allowed as an expenditure properly chargeable to the earnings of
the road, when actually paid out of the earnings and not raised by
the issue of bonds or stock.
Fourthly. "Real estate purchased for depot grounds,
&c., and expenses of same." This item is a proper charge if
actually paid out of the earnings, and not raised by bonds or
stock.
Page 99 U. S. 460
Fifthly. "Expenses of land department." This item is
not allowable.
Sixthly. "Interest on funded debt prior to government
lien." For the reasons expressed in the case of the Union Pacific
Railroad Company, this item is not allowable, though the interest
annually accruing on the first mortgage bonds issued upon the first
393 15/16 miles of the road is payable out of the net earnings
before the five percent due the government.
Seventhly. "Fifty percent government earnings
withheld." This, as explained in the previous opinion, is not
allowable to be charged as an expense.
The judgment of the circuit court will be reversed, and the
cause ordered to be remanded for a new trial, and it is
So ordered.