198 F. 721 (2nd Cir. 1912), 233, Pennsylvania Steel Co. v. New York City Ry. Co.

Docket Nº:233, 194, 161, 236, 237, 240, 234.
Citation:198 F. 721
Party Name:PENNSYLVANIA STEEL CO. et al. v. NEW YORK CITY RY. CO. et al.
Case Date:July 18, 1912
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit

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198 F. 721 (2nd Cir. 1912)




Nos. 233, 194, 161, 236, 237, 240, 234.

United States Court of Appeals, Second Circuit.

July 18, 1912

On Petition for Rehearing October 16, 1912.

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The New York City Railway Company is a street railway corporation under the laws of the State of New York which was organized

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in 1901 under the name of the Interurban Street Railway Company and which will hereinafter be referred to as the City Company. In 1902 this corporation had acquired the property and franchise of a small street railway in Mt. Vernon, New York, of slight value.

The Metropolitan Street Railway Company, which will hereinafter be called the Metropolitan Company, is a street railway under the laws of the State of New York, which was formed in 1895 by the consolidation of various companies and which by the year 1902 had acquired and was operating nearly the entire street railway system in the county of New York. At this time the Metropolitan Company owned and controlled most valuable railway franchises. It held many properties by leases and similar arrangements and had guaranteed interest upon underlying securities.

On February 14, 1902, the Metropolitan Company leased to the City Company its entire railway system for the period of 999 years for the consideration of the assumption of all its obligations except the principal of its funded debt and for the further consideration of the agreement of the City Company to pay an annual rental equal to 7 per cent. upon its capital stock.

The City Company took possession of the Metropolitan Company system under the lease and operated it with continually increasing deficits until September 24, 1907, when receivers of its property were appointed in a suit brought in the court below by its creditors alleging its insolvency.

On October 1, 1907, the Metropolitan Company, averring that it was of vital importance to it and its creditors that its property should be kept intact, petitioned to become a party to the creditors' suit and the persons who had been appointed receivers of the City Company were appointed also receivers of the Metropolitan Company. Afterwards the same men were appointed receivers in foreclosure proceedings instituted in behalf of Metropolitan bondholders.

Neither the Metropolitan Company nor the trustees for the bondholders asked for the appointment of separate receivers for the Metropolitan interests until June, 1908. Thereupon in July, 1908, a separate receiver was appointed for the City Company and an order was entered directing the surrender of the properties to the Metropolitan receivers.

On August 1, 1908, the lease aforesaid was formally surrendered to the Metropolitan receivers. It had, however, been practically laid out of consideration after the receivers had been in office but a short

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time. The facts then appearing made it obvious that the lease could not be adopted with profit to the City estate.

The Metropolitan system was to some extent disintegrated in January, 1908, when the Third Avenue Railroad, comprising a substantial part of it, was transferred to a separate receiver appointed in a foreclosure suit brought in behalf of Third Avenue bondholders. Other roads were also surrendered to their owners.

No order appears to have been made defining the duties of the receivers in their dual capacity as receivers of the City Company and of the Metropolitan Company. The reason for this is stated in the opinion of the Circuit Judge to have been a desire to have the receivers concerned solely with the operation of the railroads and their restoration to a state of efficiency and to reserve for later consideration the question as to which estate should bear the burden of any losses incurred through the operation.

The reports and accounts of the receivers showing the operation of the roads from September 24, 1907, to July 31, 1908, were, as a general rule, made out by them as receivers of the City Company. The facts would also justify the finding that, with respect to third persons, the roads were actually operated by the City Company receivers during such period.

The operation of the railroads by the receivers during the period aforesaid resulted in large losses. According to a statement filed by them the losses from operation amounted to $1,202,137.05 and in addition large expenditures were made for betterments and improvements. The losses from operation, however, did not arise through the mere running of the road. If the receivers had done nothing more than to move the cars there would have been a surplus instead of a deficit. The loss arose through the payment of interest upon underlying securities and rentals upon leased lines of the Metropolitan Company--payments necessary to keep its system together.

The receivers of the City Company upon their appointment took over quick assets belonging to that corporation of large value which were available for the payment of its debts. If the deficits stated in the last paragraph be charged against the City estate, substantially all of such assets will be used up.

The present appeal involves, broadly speaking, the question whether operating deficits and expenditures for betterments should be borne by the Metropolitan estate or by the City estate. The Circuit Court referred certain questions to a special master who held, in substance, that expenditures for the entire period should be charged against the Metropolitan estate. The Circuit Court modified the report of the special master by holding that the losses from September 24, 1907, to October 1, 1907--the period prior to the appointment of the Metropolitan receivers--should be charged against the assets of the City Company but approved the report of the Master with respect to the remaining period. 2

Other material facts are stated in the opinion.

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Bronson Winthrop and Charles T. Payne, for Farmers' Loan & Trust Co.

James Byrne and C.M. Travis, for Pennsylvania Steel Co.

Morgan J. O'Brien, C.E. Rushmore, and George N. Hamlin, for contract creditors' committee.

B.S. Catchings, for tort creditors' committee.

Julien J. Davies and Brainard Tolles, for Guaranty Trust Co.

Richard Reid Rogers, for New York Rys. Co.

Before COXE, WARD, and NOYES, Circuit Judges.

NOYES, Circuit Judge (after stating the facts as above).

A chancery receiver is an indifferent person appointed by the court to hold property in litigation pending suit. He is a ministerial officer with the function of a custodian. He derives his authority from the court and not from the parties at whose instance he is appointed. He acts in behalf of no particular interest, but guards the rights of all. Being a mere holder, his appointment does not change to the title to the property in his charge, not alter any lien of contract. Booth v. Clark, 17 How. 322, 15 L.Ed. 164; Quincy, etc., R. Co. v. Humphreys, 145 U.S. 82, 12 Sup.Ct. 787, 36 L.Ed. 632; Union Bank v. Kansas City Bank, 136 U.S. 223, 20 Sup.Ct. 1013,3 4 L.Ed. 341; Gaither v. Stockbridge, 67 Md. 222, 9 A. 632, 10 A. 309. See, also, Atlantic Trust Co. v. Chapman, 208 U.S. 360, 28 Sup.Ct. 406, 52 L.Ed. 528, 13 Ann.Cas. 1155.

When a court of chancery appoints a receiver of the property of a railroad company which embraces a leasehold estate, it is his duty to take possession of it, but he does not by such act become assignee of the term. He does not stand in the shoes of the lessee and is under no obligation to adopt its contracts. As said by the Supreme Court of Maryland (Gaither v. Stockbridge, supra) in language approved by the Supreme Court of the United States (Quincy, etc., R. Co. v. Humphreys, supra):

"The ordinary chancery receiver, such as we have in this case, is clothed with no estate in the property, but is a mere custodian of it for the court; and, by special authority, may become an officer of the court to effect a sale of the property, if that be deemed necessary for the benefit of the parties concerned. If the order of the court, under which the receiver acts, embraces the leasehold estate, it becomes his duty, of course, to take possession of it. But he does not, by taking such possession, become assignee of the

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term, in any proper sense of the word. He holds that, as he would hold any other personal property involved, for and as the hand of the court, and not as assignee of the term."

See, also, High on Receivers, page 321, and cases cited.

If a receiver elect to adopt a lease, he becomes vested with the title to the leasehold interest and a privity of estate is thereby created between the lessor and him by which he becomes liable upon the convent to pay rent. United States Trust Co. v. Wabash R. Co., 150 U.S. 299, 14 Sup.Ct. 86, 37 L.Ed. 1085, and cases cited. But unless and until he does adopt a lease, there is no such privity and no liability upon the lease. He holds possession not as a trespasser but rather as a licensee for the purpose of determining what disposition to make of the leasehold estate. The rule is well settled that a receiver in taking possession of a leased road is entitled to a reasonable time in which to decide whether the interests of his trust will be better subserved by making the lease his own or by returning the property to the lessor. Quincy, etc., R. Co. v. Humphreys, 156 U.S. 82, 12 Sup.Ct. 787, 36 L.Ed. 632; St. Joseph, etc., R. Co. v. Humphreys, 145 U.S. 113, 12 Sup.Ct. 795, 36 L.Ed. 640; U.S. Trust Co. v. Wabash R. Co., 150 U.S. 287, 14 Sup.Ct. 86, 37 L.Ed. 1085; New...

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