176 U.S. 257 (1900), 8, Southern Railway Company v. Carnegie Steel Company

Docket Nº:No. 8
Citation:176 U.S. 257, 20 S.Ct. 347, 44 L.Ed. 458
Party Name:Southern Railway Company v. Carnegie Steel Company
Case Date:January 29, 1900
Court:United States Supreme Court

Page 257

176 U.S. 257 (1900)

20 S.Ct. 347, 44 L.Ed. 458

Southern Railway Company


Carnegie Steel Company

No. 8

United States Supreme Court

January 29, 1900

Argued October 13-14, 1898




In a decree for the foreclosure and sale of a railroad property under a mortgage, power was reserved by the court to compel the purchaser to pay any and all receivers' debts or claims adjudged or to be adjudged as prior in lien or equity to the mortgage debts or entitled to preference in payment out of the proceeds of sale. Held that the rights of creditors whose claims had been filed were not affected by the sale of the property or by the fact of its transfer to the purchaser, nor did the reservation in the order of sale prevent the purchaser from contesting upon their merits any claims allowed after the purchase under the decree of sale.

A railroad mortgagee, when accepting his security, impliedly agrees that the current debts of a railroad company contracted in the ordinary course of its business shall be paid out of current receipts before he has any claim upon such income, that, within this rule, a debt not contracted upon the personal credit of the company, but in order to keep the railroad itself in condition to be used with reasonable safety for the transportation of persons and property, and with the expectation of the parties that it was to be met out of the current receipts of the company, may be treated as a current debt, that whether the debt was contracted upon the personal credit of the company, without any reference to its receipts, is to be determined in each case by the amount of the debt, the time and terms of payment, and all other circumstances attending the transaction, and that, when current earnings are used for the benefit of mortgage creditors before current expenses are paid, the mortgage security is chargeable in equity with the restoration of the funds thus improperly diverted from their primary use.

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A general unsecured creditor of an insolvent railroad corporation in the hands of a receiver is not entitled to priority over mortgage creditors in the distribution of net earnings simply because that which he furnished to the company prior to the appointment of the receiver was for the preservation of the property and the benefit of the mortgage securities. Before such a creditor is accorded a preference over mortgage creditors in the distribution of net earnings in the hands of a receiver of a railroad company, it should reasonably appear from all the circumstances that the debt was one to be fairly regarded as part of the operating expenses of the railroad incurred in the ordinary course of business, and to be met out of current receipts.

This case is here upon a writ of certiorari for the review of a final decree of the United States Circuit Court of Appeals for the Fourth Circuit allowing certain claims of the Carnegie Steel Company, Limited, as preferential debts chargeable upon current receipts arising from the operation of certain railroad properties in the hands of receivers.

On the 15th day of June, 1892, William P. Clyde, John C. Maben, and William H. Goadby, citizens of New York, suing for themselves and other creditors and stockholders of the Richmond and Danville Railroad Company and of other defendant corporations, exhibited in the Circuit Court of the United States for the Eastern District of Virginia a bill of complaint against the Richmond and Danville Railroad Company and the Richmond & West Point Terminal Railway & Warehouse Company, Virginia corporations. The bill made the following case:

The Richmond and Danville Railroad Company (hereafter called the Danville Company), in addition to its own line extending from Richmond to Danville, with a twelve-mile branch, being 152 miles of road, through the purchase or the acquisition of stock, or by written lease or operating contracts, obtained the possession and control of more than twenty other railways built under the respective charters of and owned by the corporations named in the bill. It also owned the entire capital stock of the Baltimore, Chesapeake & Richmond Steamboat Company, and through it operated a line of steamers between Richmond, West Point, and Baltimore. Its authorized and outstanding capital stock was five

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million dollars, the larger part being owned by its codefendant company.

The lines of railway comprising this system, known as the Danville system, were in Virginia, North Carolina, South Carolina, Georgia, Alabama, and Mississippi, and reached many of the most important trade centers of those states.

For more than five years prior to the institution of that suit, the Danville Company had held in possession and substantial control all the railways of the other companies in connection with its own road as a single system. Over a large portion of the mileage, the engines and cars in traffic service were used without any fixed apportionment thereof to any specific portion of the system, and the income derived from the operations of the parent and auxiliary, leased, and operated liens was received and distributed through a common treasury, with no separation of the earnings and expenses of the several properties except by entries in books of account apportioning the gross income and expenses on some approximate but arbitrary basis of division as between the different lines over which the traffic yielding the revenue had passed.

The total mileage of the auxiliary portion of the Danville railroad, added to its own mileage, aggregated 3,320 miles, exclusive of its steamer service.

The aggregate outstanding capital stock of the lines constituting the system, together with the stock of the steamboat company, amounted to $43,482,950, of which $10,707,354 was neither owned nor controlled by the defendant companies.

Through the ownership of all or a majority of the stock thereof, some of the roads were operated by the Danville Company as proprietary lines. Others were operated upon the basis of a fixed rental or payment of net earnings, or a guarantee of interest on bonds or dividends of stock, or both.

In consequence of the absorption of such roads in its system by lease or contract, the bonded debts and rental obligations which the Danville Company had assumed and became liable for amounted to $71,128,126. Its own direct bonded debt was $16,136,000, making the total bonded and rental debt of the Danville system $87,314,126.

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The bonded debt resting on the Danville road proper and equipments was in five separate issues of securities; that resting on its auxiliary and operative lines was embraced [20 S.Ct. 349] in fifty-nine different classes of securities issued by the several companies, secured by separate mortgages or deeds of trust covering different sections of the controlled roads or their equipment, capable of separate default or foreclosure, besides five stock guaranties, representing certain of its rental obligations, also secured by provisions for reentry on default.

The Danville Company also had outstanding car trust obligations of its own and leased lines amounting to $1,542,824, and a floating debt of over $5,000,000; also an emergency loan of $600,000, advanced by those interested in the property to prevent default on April 1, 1892.

Besides all such outstanding fixed liabilities on account of its own road and controlled lines, the directors of the Danville Company had pledged its credit and subjected it to other heavy liabilities, to enable its codefendant, the Richmond & West Point Terminal Railway & Warehouse Company (to be hereafter referred to as the Terminal Company) or certain of its controlled companies to acquire the stock control of other lines of railroads not directly connected with or operated by the Danville Company and in which it had no interest whatever. Its board of directors had issued $6,000,000 of bonds of the Danville Company, executed jointly and severally with the East Tennessee, Virginia & Georgia Company, and guaranteed by the Terminal Company "Cincinnati Extension Bonds," which were secured by a trust pledge of preference and ordinary shares of the Alabama & Great Southern Railway Company, Limited. Those bonds had been sold in open market, and apparently constituted an outstanding liability of the Danville Company, but for which it received no valuable consideration whatever. It had executed the same as mere accommodation paper and as a partnership adventure, and was only protected against loss by the above pledge of corporate stock of uncertain value, because it was subject to heavy prior mortgage debts, and the line of road of the particular corporation issuing such stock was a

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central link in the system of the East Tennessee Railway system over which the Danville Company had no control whatever.

By reason of the absolute stock control which the Terminal Company had over the Danville Company, it compelled the latter company, about June 1, 1891, to become the assignee and guarantor of a written lease executed by the Central Railroad & Banking Company of Georgia, of all its system of railroads and steamer lines for a long-term of years to the Georgia Pacific Railway Company, whereby the Danville Company became bound to operate the Central System and to assume and pay all the interest on the bonded debts and all the rental obligations of the Central Railroad & Banking Company, and the Danville Company was compelled to execute and deliver a bond of $1,000,000 to faithfully perform all the covenants in such lease. The result of the operation of the Central-Georgia system of roads had been a constant and heavy loss to the Danville Company.

The bill next set out the relations between the Danville Company and the Terminal Company, and also describes what is known as the Tennessee system, having 2,318 miles in...

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