Central Trust Co. v. East Tennessee, V. & G.R. Co.
Decision Date | 04 May 1897 |
Docket Number | 413. |
Citation | 80 F. 624 |
Parties | CENTRAL TRUST CO. OF NEW YORK v. EAST TENNESSEE, V. & G.R. CO. et al. |
Court | U.S. Court of Appeals — Sixth Circuit |
This is an appeal, by the several interveners mentioned above, from a decree of the circuit court refusing to allow payment of their several claims out of the corpus of the property of the railroad company in preference to the mortgages foreclosed in the principal case. The East Tennessee, Virginia & Georgia Railroad Company is an insolvent railroad corporation, whose entire property was originally placed in the hands of receivers, June 24, 1892, under a bill filed in the circuit court by Samuel Thomas, who was a large general creditor. Subsequently two foreclosure bills were filed in the same court for the purpose of foreclosing two junior mortgages subject to the lien of certain other and senior mortgages. The original receivership was extended to these foreclosure suits, and the three causes consolidated under the style of the Central Trust Company of New York against the East Tennessee, Virginia & Georgia Railroad Company et al. Under the final decree of foreclosure the railroad and all of its properties and appurtenances have been sold, subject to certain underlying mortgages, and were purchased by the Southern Railway Company. The income of the several receiverships has been exhausted in the payment of operating expenses, preferential claims, and interest upon underlying mortgages, paid to prevent default and premature maturity of the debts thereby secured. The proceeds of the foreclosure sale were insufficient to pay off the mortgage debts, and have been applied towards the payment of the bonds secured by the foreclosed mortgages; but the purchaser, by the terms of the decree of sale, is obligated to pay, in addition to its bid, all such other amounts as shall be necessary to pay off and discharge such claims against the receivers, or against the railroad company, as shall be determined to be entitled to preference over the foreclosed mortgages. The appellants are creditors of the railroad company, who by intervention have asserted claims for materials and supplies furnished to the railroad company before the appointment of the receivers but who have been denied preference over the mortgagees in payment. Their claims to priority are asserted-- First, because they say their accounts are for materials and supplies used in the operation of the said railroad, and furnished within a short time prior to the appointment of receivers; second, they assert that the net earnings of the railroad company were not applied to the payment of the income debts, but were diverted to the payment of interest upon mortgage debts, and in the improvement of the mortgaged property. For this reason they insist that they are entitled to be paid out of the corpus of the mortgaged property to the extent of such diversion of income. The circuit court refused priority to the claims preferred by W. B. Belknap & Co., E. A. Kinsey & Co., and the Westinghouse Air-Brake Company, upon the ground that their several claims were not for materials and supplies furnished within the time prescribed by the order appointing the receivers. The claim of Matthews, Northrup & Co. was for advertising matter. This claim was rejected by the court below upon the ground that such advertising matter was not a claim of the class entitled to preference. So far as these claims were asserted upon the ground of a diversion of income to the payment of interest, or in improving the mortgaged property, the report of the special commissioner that there had been no such diversion was concurred in by the court.
W. C Herron, for appellants.
Henry Hudson, for appellee.
LURTON Circuit Judge, after making the foregoing statement of facts, .
The question as to whether there was a diversion of the current income by the railroad company to the payment of interest on the foreclosed mortgage debts, or in the permanent improvement of the mortgaged property, was principally one of fact, and was referred to a special commissioner, who reported that there had been no such diversion. The exceptions to this finding were considered by the court below, and overruled. We think it was not error to exclude from consideration income applied to the payment of interest on the senior mortgages. The junior mortgagees did not receive the income so paid, even if it was technically a diversion, and cannot be called on to reimburse the fund applicable to the payment of the debts of the income for such diversion. St. Louis A. & T.H.R. Co. v. Cleveland, C.C. & I. Ry. Co., 125 U.S. 658, 8 Sup.Ct. 1011. This doctrine of a diversion of income, and the liability of mortgagees to restore the income thus diverted, was first formulated in Fosdick v. Schall, 99 U.S. 235. Speaking of the ground upon which the mortgagees may be postponed in favor of creditors who had a right to look to the application of current income in payment of their debts, Chief Justice Waite, at page 254, said:
During the period of time covered by the purchase of the materials and supplies embraced in the several claims of appellants the net earnings were probably insufficient to justify the payment of interest on the foreclosed mortgage debts, and to make certain improvements shown to have been made during that time. But it is also shown that, during the same period, money was borrowed on open account, more than sufficient to equal the diversion complained of, which went into a common treasury, from which operating expenses, preferential claims, interest, and improvements were paid, without any definite showing as to whether the borrowed money was applied to the payment of interest and improvements, or to current income debts. Under this system of bookkeeping, the addition of borrowed money to the income arising from operation showed a substantial surplus after payment of the great mass of income debts, and all disbursements on account of interest upon the two mortgages foreclosed, as well as upon improvements in the roadway. Prior to the period covered by the maturity of appellants' claims, there was a surplus of gross earnings over all operating expenses; but it cannot be contended that the company was under any obligation to future creditors to accumulate a surplus to meet possible deficiencies in the income to meet future income debts, or that it was improper to apply such surplus in payment of interest. St. Louis, A. & T.H.R. Co. v. Cleveland, C.C. & I. Ry. Co., 125 U.S. 658-675, 8 Sup.Ct. 1011. Whatever diversion there may have been of income to payment of debts or liabilities, not properly debts of the income, seems to have been more than reimbursed by the money borrowed. The burden is upon complainants to show that there has been a misappropriation of earnings to the improvement of the mortgaged property, or to the payment of interest, before the mortgagees can be justly called upon to reimburse the fund applicable to debts of the income in consequence of such diversion. If interest was paid or improvements made out of borrowed money, then there was no diversion; or if made out of gross earnings, and the latter was reimbursed by borrowed money, the diversion was made good. The abstracts showing income from all sources and disbursements upon all accounts are somewhat complicated, in consequence of the mode of bookkeeping adopted. The commissioner and court below concurred in reporting that there was no diversion shown. In the absence of very cogent evidence of mistake of fact, or of some error of law, the finding of fact by the commissioner must be accepted as final. Emil Kiewert Co. v. Juneau, 24 C.C.A. 294, 78 F. 708; Kimberly v. Arms, 129 U.S. 512-524, 9 Sup.Ct. 355; Tilghman v. Proctor, 125 U.S. 136, 8 Sup.Ct. 894; Turley v. Turley, 85 Tenn. 256, 1 S.W. 891. But, independently of any diversion of current income, there is a class of debts, incurred in maintaining the operation of a railway, which, under special circumstances, and subject to very positive limitations, has been held to outrank, in priority of payment, contract liens. In Miltenberger v. Railway Co., 106 U.S. 286-311, 1 Sup.Ct. 140, 162, it appeared that the receiver had claimed credit for certain claims paid by him for materials and supplies furnished and purchased before his appointment by the railroad company, upon the ground that 'the creditors threatened not to furnish any more supplies on credit unless they were paid the arrears. ' The payments were allowed, the court saying: ...
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