Atchison, T. & S. F. Ry. Co. v. Hurley

Decision Date20 March 1907
Docket Number2,424.
PartiesATCHISON, T. & S.F. RY. CO. et al. v. HURLEY et al.
CourtU.S. Court of Appeals — Eighth Circuit

Robert Dunlap (Wm. R. Smith and Gardiner Lathrop, on the brief), for appellants.

John S Dean, for appellees.

Before SANBORN, HOOK and ADAMS, Circuit Judges.

ADAMS Circuit Judge.

This was an appeal from an order of a court of bankruptcy in the district of Kansas denying to the Atchison, Topeka & Santa Fe Railway Company a claim for a preference against the assets of Mt. Carmel Coal Company, bankrupt, or the alternative relief prayed for.

In 1896 the Osage Carbon Company and the Cherokee & Pittsburg Coal &amp Mining Company, as parties of the first part, Charles J Devlin, as party of the second part, and the railway company as party of the third part, entered into an agreement whereby the parties of the first part leased, for certain rents and royalties reserved, to Devlin for a term of three years certain coal lands situate in the state of Kansas with the right to mine coal therefrom, and the party of the second part agreed to sell and deliver to the railway company and the latter to buy from him daily all the coal required by it in the operation of certain of its lines of railroad in the state of Kansas, at the prices stated in the lease, the same to be paid for by the railway company on the 15th day of each month for all coal delivered to it during the preceding calendar month. Power was conferred upon the railway company to terminate the lease for failure by Devlin to perform any of his undertakings, and the right to assign the lease was made subject to the consent of the railway company. Subsequently Devlin duly assigned to the Mt. Carmel Coal Company all his rights under the lease. By two successive agreements between the latter company and the other parties to the lease the same was extended with slight modification, unimportant now to mention, subject to all its original terms and conditions, until June, 1906. All the parties continued in the performance of their respective obligations until July, 1905, when the Mt. Carmel company was adjudicated a bankrupt. Receivers were duly appointed and authorized to conduct the business of the bankrupt in the usual course, until trustees should be chosen. The receivers and subsequently appointed trustees successively continued to operate the mines under orders of the court, and, in the language of the court below, 'performed fully the terms of the contract as it is written with the coal company and the railway company. ' While the receivers were in charge the railway company and the two coal companies, the original lessors, filed their joint intervening petition, setting forth their relations with the bankrupt under the contract of 1896 as extended, their rights thereunder as already stated, and, in substance, that by an agreement had between them and the bankrupt the contract had been modified to the extent that the railway company had agreed that, without waiting until the 15th day of the month to make its payment for coal theretofore purchased, it would, in order to accommodate the bankrupt and enable it to pay off laborers and keep the mines going, make advance payments from time to time when necessary for those purposes for coal thereafter to be delivered under and pursuant to the terms of the contract; that pursuant to that agreement and for the purposes stated it had advanced $57,304.16 to the bankrupt with the understanding that it should be repaid by the delivery of coal under the contract, during the months of July and August, 1905; that the intervening bankruptcy proceedings of July 7th and the appointment of the receivers by the court alone prevented the bankrupt from carrying out its obligation and delivering the requisite coal to it.

The petitioners prayed that the lease be declared forfeited and void and the mines delivered back to them, or that the receivers be directed to deliver to the railway company the amount of coal so paid for in advance by it. The intervening petition was referred to a referee who heard the proof and reported unfavorably to granting any relief, and his report was afterwards confirmed by the district judge and the petition dismissed. The facts are not materially controverted.

The referee found and reported the amount claimed by the railway company, $57,304.16, had been advanced in the way shown by the proof, to enable the bankrupt to meet its pay rolls. He concluded as follows:

'I am unable to find any testimony indicating an intention to modify the written lease. There certainly was no express oral agreement to that effect. It is true the advances were to be paid, by money due the coal company for coal furnished the Santa Fe Company, and the money, instead of being paid under the terms of the written contract, would be kept to reimburse the Santa Fe Company for money advanced.' The court in reviewing the action of the referee said:
'True, at the time the sums of money were advanced it was no doubt contemplated and agreed by the parties that the bankrupt would repay the money by furnishing coal at the price of the coal measured in money by the terms of the contract and would furnish such coal in July and August as claimed, but at the time of the failure of the bankrupt the coal remained in the ground unmined.'

From these facts the referee concluded that the verbal agreement was a separate independent parol contract, and had nothing to do with the original contract as evidenced by the lease, and the court in affirming the referee's conclusion observed as follows:

'I am of opinion that the transactions by which the money was advanced by the treasurer of the railway company to the bankrupt were completed transactions by reason of which the bankrupt became indebted to the railway company for so much money and that such transactions are wholly independent of and separate and apart from the original contract between the parties. * * * The contracts under which the money was advanced created no lien upon any property for its repayment. * * * '

The supplemental agreement whereby provision was made for advance payments for coal to be thereafter delivered under the lease may or may not be properly called a modification of the original agreement. That is immaterial. What we are concerned about is not its name, but its meaning; that is, what was the intent and purpose of the parties in making it. In arriving at such intent and purpose we should consider the situation of the parties and the facts and circumstances surrounding them in the light of which, and to effect which, the supplemental agreement was made. The clear intent and purpose of the main contract, so far as the railway company is concerned, was to make a reliable provision in advance for its daily necessities for a period of years-- a provision so important to the railway company itself and to the traveling public that it saw fit to secure and make it certain by stipulations giving it the right to veto any assignment of the lease or to declare a forfeiture of all the coal company's rights under the lease if it failed to observe its contract obligations. It appears that the coal company, while the contract was still in force and being executed, became embarrassed and unable to meet its pay rolls. As a result it might not be able to mine or deliver the coal which it had agreed to mine and deliver to the railway company, and which the latter imperatively required for its daily consumption. In this state of things the railway company agreed to waive its right to withhold payment for 15 days after coal was delivered to it and pay for some of it before it was delivered; and the coal company agreed, as found by the trial court, to repay such advances, not in money, but by furnishing coal in the months of July and August following at the price fixed by the original contract. This arrangement made when the coal company was in embarrassed circumstances, and obviously inspired by the necessity of meeting the pay rolls and for the ultimate purpose of securing performance of the only part of the original contract in which the railway company was interested, namely, securing its supply of coal, is so intimately and vitally related to the original contract that we are unable to agree with the trial court that it was intended to be independent and separate from it. It was not, in our opinion, a modification of any of the substantive provisions of the contract, but was a change rendered necessary by subsequent events in the method of its execution only. It was an arrangement in no manner inconsistent with any of the provisions of the original contract, but only in aid of its execution.

The contract after the new arrangement remained as before. The coal company still had a right to mine coal on the same terms and conditions as before, and was bound to supply the daily needs of the railway company as before. The money paid in advance entitled the railway company to an amount of coal which the money so advanced would pay for according to the terms of the original contract. We think the inevitable meaning of the new arrangement, interpreted in the light of the conditions surrounding the parties and as necessarily intended by them, was to set apart a sufficient amount of coal after it should be mined as security for the payment of advances made. This result is not expressed in the conventional form of a mortgage or pledge, but the method of producing it was devised for the purpose of acquiring the needed money by the coal company and of furnishing security for its repayment. If the parties intended the arrangement to be one for borrowing and securing the repayment of money, we ought, as between them, to so regard it and to treat it as creating an...

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