Chicago & A.R. Co. v. United States & Mexican Trust Co.

• Decision Date: 02 July 1915
• Docket Number: 4340.
• Citation: 225 F. 940
• Parties: CHICAGO & A.R. CO. v. UNITED STATES & MEXICAN TRUST CO. et al.
• Court: U.S. Court of Appeals — Eighth Circuit

225 F. 940

CHICAGO & A.R. CO. v. UNITED STATES & MEXICAN TRUST CO. et al.

No. 4340.

United States Court of Appeals, Eighth Circuit.

July 2, 1915

Syllabus by the Court.

Where the mortgaged property of a railroad company is placed in the hands of a receiver before the commencement of a suit to foreclose the mortgage and a subsequent suit for that purpose is commenced, the proceedings do not impound the income for the benefit of the mortgage bondholders, until either a demand has been made of the receivers to surrender the income and the administration of the property which has been refused, or an intervention has been made in the earlier suit, or an application for an order to impound the income for the benefit of the bondholders has been made to the court, or the receivership has been extended to the later suit, or receivers have been appointed therein.

A mortgagee of the property and income of an operating railroad company impliedly agrees that the current expenses of the ordinary operation of the railroad for wages, supplies materials, and like necessities of operation, for six months before the impounding of the income for its benefit, may be first paid out of the gross income of operation before that net income arises which the mortgagee's lien holds fast.

A court of equity, administering railroad property in a foreclosure suit, may prefer claims for such current expenses to the claims of bondholders in payment out of the surplus income of the railroad property to the claims of mortgage bondholders secured by a prior mortgage.

If the current income of the property has been diverted from the payment of claims for such current expenses to claims not of this preferential class, leaving claims for such current expenses unpaid, the court may, from the proceeds of the corpus of the mortgaged property, restore and apply to the payment of the unpaid claims for such current expenses the amount so diverted.

But if there has been no diversion there can be no restoration,, and the amount that may be so restored and applied may not exceed the amount so diverted.

Conceding but not admitting, that it is the duty of a railroad company connecting with a mortgagor railroad company, to receive and transport freight billed over its line by the mortgagor company, that fact does not render its claims for balances of repairs of cars, loss and damage claims, or overcharges arising from the discharge of that duty, entitled to preference in payment out of the income or out of the corpus of the mortgagor's property over the claims of bondholders secured by a prior mortgage.

'Traffic balances' are the balances of moneys collected in payment for the transportation of passengers and freight. Claims for balances for car repairs, loss and damage, and overcharges are not traffic balances.

An order made in the appointment of receivers, or in the consolidation of causes, which authorizes, but does not direct or order, receivers to pay certain classes of claims does not adjudge that claims within those classes, which the receivers did not pay under the order, are entitled to preference in payment, either out of the income or out of the corpus of the property, over the claims of bondholders secured by a prior mortgage.

The claims of bondholders, secured by the lien of a recorded mortgage on the property, the after-acquired property, and the income of a railroad company, to payment out of the proceeds of the mortgaged property, are, in the absence of special circumstances, such as a surplus, or a diversion of income, prior in right and superior in equity to the claims of subsequent creditors of the mortgagor company for unpaid current expenses, although, when the mortgage was made and recorded, the railroad was not built, and the mortgage disclosed the fact that it was made to raise the money to build it.

William C. Scarritt, Elliott H. Jones, Charles M. Miller, Paul Pinkerton, and Edward L. Scarritt, all of Kansas City, Mo., for appellant.

Samuel Untermyer, of New York City, and Samuel W. Moore, of Kansas City, Mo., for appellees.

Before SANBORN and CARLAND, Circuit Judges, and LEWIS, District Judge.

SANBORN Circuit Judge.

The complaint of the appellant in this case is that the court below refused to order $1,074.14, balances due it from the Kansas City, Orient & Mexico Railway Company for car repairs, loss and damage claims on shipments of freight, and overcharges, paid out of the corpus of the latter's property in preference to the claims of bondholders secured by a prior mortgage thereon. The mortgage was made on February 1, 1901, and it created a lien upon the property, the after-acquired property, and the income of the Orient Company to secure the payment of the bonds issued thereunder. The repairs and overcharges were made, and the loss and damage claims were incurred, between January 9, 1910, and March 7, 1912, when a creditors' bill was filed against the Orient Company, and receivers were appointed by the court below, who took possession of its property and proceeded to operate its railroad. Afterwards, on August 7, 1912, the trustee named in the mortgage filed a bill to foreclose it, and on December 24, 1912, the two suits were consolidated, the receivership was extended over the foreclosure suit, and the income of the railway company was first impounded for the benefit of the bondholders secured by the mortgage.

Where the mortgaged property of a railroad company is placed in the hands of a receiver before the commencement of a suit to foreclose the mortgage, and a subsequent suit for that purpose is commenced, the proceedings do not impound the income for the benefit of the mortgage bondholders until either a demand has been made of the receivers to surrender the income and the administration of the property, which has been refused, or an intervention has been made in the earlier suit, or an application for an order to impound the income for the benefit of the bondholders has been made to the court, or the receivership has been extended to the later suit, or receivers have been appointed therein. Gilman v. Telegraph Co., 91 U.S. 603, 617, 23 L.Ed. 405; Galveston R.R. Co. v. Cowdrey, 11 Wall. 459, 20 L.Ed. 199; Freedman's Saving Co. v. Shepherd, 127 U.S. 494, 502, 8 Sup.Ct. 1250, 32 L.Ed. 163; United States Trust Co. v. Wabash Railway, 150 U.S. 287, 305-309, 14 Sup.Ct. 86, 37 L.Ed. 1085; Agra & Masterman's Bank v. Barry, 3 Irish Reports, Equity, 443, 450; Howell v. Ripley, 10 Paige (N.Y.) 43, 48; American Loan & Trust Co. v. Central Vermont R. Co. (C.C.) 86 F. 390, 392; American Bridge Co. v. Heidelbach, 94 U.S. 798, 24 L.Ed. 144; Teal v. Walker, 111 U.S. 242, 249, 250, 4 Sup.Ct. 420, 28 L.Ed. 415; Atlantic Trust Co. v. Dana, 128 F. 209, 219, 62 C.C.A. 657, 667; Hook v. Bosworth, 64 F. 443, 448, 12 C.C.A. 208.

On January 6, 1914, the Chicago & Alton Railroad Company intervened in the consolidated cause, set forth its claim, and prayed its payment in preference to the payment of the claims of the bondholders. On February 2, 1914, a decree of foreclosure of the mortgage and of sale of the mortgaged premises to pay the bonds, aggregating $24,538,000, which were thereby adjudged to be secured by the mortgage by a first lien from February 1, 1904, on the property, the after-acquired property, and the income of the railroad company, was rendered and on July 6, 1914, the mortgaged property was sold for $6,001,000 to the Kansas City, Mexico & Orient Railroad Company. There was no diversion of the income of the railway company from the payment of the current expenses of the ordinary operation of the railroad for wages, materials, supplies, and like necessities of operation to the payment of claims of an inferior class, such as for interest on a bonded debt, for borrowed money, and for unnecessary improvements of the mortgaged property, and the only question was whether or not the claim of the intervener was entitled in equity to a preference over the claims of the bondholders in payment out of the proceeds of the body of the property. The court below was of the opinion that $1,074.14 of it was not so entitled, and the intervener has appealed to this court to reverse that decision.

The first impression which the facts in this case make upon the mind is that the ruling of the court was right. The railway company made and recorded a trust deed of its property, its after-acquired property, and its income on February 2, 1901 whereby it fastened a first lien thereon to secure the payment of the bonds issued thereunder. Thereafter the intervener, in the face of the prior mortgage, extended credit to the Orient Railway Company for the balances of car repairs, loss and damage claims, and overcharges for which it makes its claim. The lien of the mortgage was of record, and the intervener had legal notice of it. After that mortgage was made and recorded the Orient Company had no power by any contract or promise it could make to give any of its other debts a lien on its property superior to that of the mortgage bondholders, and it never made or tried to make any such agreement or promise. When these balances for car repairs, loss and damage claims, and overcharges are analyzed and thoughtfully considered, they amount to nothing more than simple debts of the Orient Company for labor done and for money advanced by the intervener for the mortgagor company...