251 F. 514 (6th Cir. 1918), 3099, New York Trust Co. v. Detroit, T. & I. Ry. Co.

Docket Nº:3099, 3100.
Citation:251 F. 514
Party Name:NEW YORK TRUST CO. et al. v. DETROIT, T. & I. RY. CO. (two cases). Appeal of HALLEY COAL CO. et al. Appeal of TRIPP.
Case Date:June 04, 1918
Court:United States Courts of Appeals, Court of Appeals for the Sixth Circuit

Page 514

251 F. 514 (6th Cir. 1918)

NEW YORK TRUST CO. et al.

v.

DETROIT, T. & I. RY. CO. (two cases).

Appeal of HALLEY COAL CO. et al. Appeal of TRIPP.

Nos. 3099, 3100.

United States Court of Appeals, Sixth Circuit.

June 4, 1918

These cases are here on appeal from judgments denying the right to interest on six months and receivership claims. On February 1, 1908, the Knickerbocker Trust Company, as trustee named in a junior mortgage given by the Detroit, Toledo & Ironton Railway Company, instituted foreclosure proceedings on its entire line, and prayed the appointment of receivers. The appointing order authorized them in their discretion to pay out of the funds coming into their hands the expenses of operating the company's property and all approved claims arising from its previous operation, incurred at any time within six months prior to such date. About three months later a creditors' bill was filed by Courtney and others against the company. Lisman & Co. intervened to prosecute an alleged indebtedness, whose disallowance by the District Court was affirmed on appeal. Lisman v. Knickerbocker Trust Co., 211 F. 413, 128 C.C.A. 85. A third bill was filed on June 20, 1910, by the New York Trust Company, as trustee under a prior mortgage, which was a first lien on the Northern and Southern divisions of the company's road and a second mortgage on its Central division. In both of the last-named cases the same receivers were appointed as in the first suit, and the three cases were consolidated. On May 12, 1911, decrees of foreclosure were entered. After publication of sale had been made, the sale was adjourned for reasons satisfactory to the

Page 515

court on the application of the Knickerbocker Trust Company. Other adjournments were subsequently ordered. In the summer of 1912, the Central Trust Company of New York, trustee, filed a bill in the federal court for the Southern district of Ohio for the foreclosure of the mortgage covering the Central division of the road and being a first lien thereon. The same receivers were appointed as in the cases pending at Detroit. The pendency of the Ohio case compelled an amendment of the decrees theretofore rendered. As the property had been operated as an entirety, a reference to a master was necessarily made to apportion the receivership expenses on the different divisions of the road and to determine the portion of the same to be borne by the purchasers. Further amended decrees were entered about December 9, 1912. An upset price of $1,650,000 was fixed for the Northern and Southern divisions of the road and of $1,550,000 for the Central division. The road and certain stocks owned by it were offered for sale on April 17, 1913. The last-named division of the road was sold at the upset price. The other divisions were sold at the upset price on June 28, 1913. No sale of the stocks, acceptable to the court, was effected until January, 1914, their selling price being $45,140. The receivership indebtedness and the six months claims aggregated on December 31, 1913, about $3,800,000, and at the time the receivership terminated over $4,000,000. The road was continuously operated by the receivers at a loss.

The purchasers at the foreclosure sales co-operated with a reorganization committee and transferred their bids to a new company, known as the Detroit, Toledo & Ironton Railroad Company. The decrees rendered in both the Michigan and Ohio courts provide that the funds arising from the sale of the railway company's property shall be applied, prior to payment on any of the mortgages, to the satisfaction of (a) costs, disbursements, allowances, receivers' fees, and trustee's compensation; (b) receivers' certificates (subject to the right to question the priority of the lien of those of a specified issue); (c) claims for expenses incurred by and obligations of the receivers in maintaining and operating the company's property; and (d) claims, liens or charges set up by intervention against such property, its proceeds or its income arising during the receivership, whether they accrued during the receivership or within six months prior thereto. The court reserved the right to resume possession of and resell the company's property or any part thereof for the payment of any and all such claims adjudged to be superior to the mortgage liens, and ordered that, if any such indebtedness or obligations of the receivers should not be paid on such distribution, the purchaser should pay the same, and that the property or such portion of it as the court might determine should stand charged therewith. The excess of the items (a), (b), (c), and (d) over the selling price of the property was paid out of funds contributed by such holders of bonds and receivers' certificates as entered the reorganization scheme and whose contributions varied from 10 per cent. to 35 per cent. of their holdings. The reorganization scheme and all decrees and orders entered by the court provided for the payment of interest on the receivers' certificates but not on any other indebtedness or claims. The Public Utilities Commission of Ohio, in authorizing the new company to issue bonds, also directed the payment of the six months claims, but made no mention of interest on the same. On June 19, 1911 a special master was appointed to ascertain and report all claims, liens, and charges upon the company's property, the proceeds of its sales, or its income pending the receivership Some of the claims, set up in case No. 3099, were incurred by the receivers; others prior to their appointment. The Tripp claims, set up in case No. 3100, arose during the receivership. The contracts with the Foundry Company were made in Michigan; all others in Ohio. On May 29, 1915, the master reported, allowing the appellants' claims, but denying interest on them. Payment of the principal sum due was accepted by each appellant with a reservation and agreement, excepting in the case of the Tripp claims, that such acceptance was without prejudice to the right to demand interest, or to invoke the court's action thereon. All of the claims matured in a short specified time after delivery of the supplies furnished. In so far as the record shows, none of the claimants demanded interest until after the master was appointed. The District Court overruled the exceptions to the disallowance of interest and affirmed the master. Hence the appeals.

Page 516

Beaumont, Smith & Harris, of Detroit, Mich., Keifer & Keifer, of Springfield, Ohio, Charles Wright, Jr., of Detroit, Mich., and Johnson & Jones, of Ironton, Ohio, for appellants.

Alfred A. Cook, of New York City, and Leo M. Butzel, of Detroit, Mich. (Emil Goldmark, of New York City, of counsel), for appellee.

Before WARRINGTON and DENISON, Circuit Judges, and SATER, District judge.

Page 517

SATER, District Judge (after stating the facts as above).

The Detroit, Toledo & Ironton Railroad Company (the new company) resists the appellants' claims for interest. The question as to whether any of such claims was improperly given an equitable priority by the trial court, as between its owner and the bondholders, need not be considered, as no issue is made on that point.

There are two well-defined classes of interest. In the one, it arises out of some contract, express or implied, to pay it. In the other, it is allowed as damages for some breach of contract or the violation of some duty, and is usually fixed by legislation. Jones v. Mallory, 22 Conn. 386, 392; County of Redwood v. Winona, etc., Co., 40 Minn. 512, 522, 41 N.W. 465, 42 N.W. 473; Perley on Interest, 5; Sanders v. L.S. & M.S. Ry. Co., 94 N.Y. 641; Sedgwick on Damages (9th Ed.) Secs. 282, 295. When it is expressly reserved in the contract, or is implied by the nature of a promise, it is not given as damages, but becomes a substantive part of the debt itself, and is recoverable as of right; but, when it is given on money demands as damages for delay in payment, it is but just compensation to the plaintiff for a default on the part of his debtor, and its allowance is often a matter of discretion. Redfield v. Ystalyfera Iron Co., 110 U.S. 174, 176, 3 Sup.Ct. 570, 28 L.Ed. 109; Redfield v. Bartels, 139 U.S. 694, 701, 11 Sup.Ct. 683, 35 L.Ed. 310; Jourolmon v. Ewing, 80 F. 604, 607 et seq., 26 C.C.A. 23 (C.C.A. 6); Perley on Interest, 5, 6; Sedgwick on Damages, Sec. 282; Daniel, Neg. Inst., Sec. 919. When interest is contractual and the creditor accepts the principal, the right to recover interest (if any has accrued) still remains for the reason it is as much a part of the debt as the principal itself. See cases last above cited and King v. Phillips, 95 N.C. 245, 59 Am.Rep. 238; 2 Edwards on Bills and Notes, Sec. 1012; Southern Central R. Co. v. Town of Moravia, 61 Barb. (N.Y.) 180; Fake v. Eddy, 15 Wend. (N.Y.) 76.

The foregoing statement of the law has been deemed advisable because the appellants contend that their contracts for supplies must be read as if the state statutes relating to interest were imported into them, and that, so read, their respective contracts provided for interest upon any default of payment, and that therefore their right to interest is contractual. The Ohio General Code provides that parties may stipulate for the payment of interest at any rate not exceeding 8 per cent. per annum, payable annually (section 8303), and that all judgments upon contracts made as provided in that section shall bear interest at the stipulated rate (section 8304). Section 8305, which deals with cases other than those mentioned in sections 8303 and 8304, provides inter alia that the owners of claims, such as the appellants have, when the same become due and payable, 'shall be entitled to interest at the rate of six per cent. per annum, and no more. ' Section 2869, Howell's Michigan Stat. Anno. (2d Ed.) declares that the interest rate shall be 5 per cent. per year, but parties may stipulate for the...

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