Continental Trust Co. v. WR Bonsal & Co.

• Decision Date: 02 October 1934
• Docket Number: No. 3646.,3646.
• Citation: 72 F.2d 975
• Parties: CONTINENTAL TRUST CO. et al. v. W. R. BONSAL & CO. et al.
• Court: U.S. Court of Appeals — Fourth Circuit

72 F.2d 975 (1934)

CONTINENTAL TRUST CO. et al. v. W. R. BONSAL & CO. et al.

No. 3646.

Circuit Court of Appeals, Fourth Circuit.

October 2, 1934.

Gordon M. Buck, of New York City (Carlyle Barton and Edward Duffy, both of Baltimore, Md., Theodore S. Garnett, of Norfolk, Va., Humes, Buck, Smith & Stowell, of New York City, Baird, White & Lanning, of Norfolk, Va., Albridge C. Smith, of New York City, Edward R. Baird, Jr., of Norfolk, Va., Davis, Polk, Wardwell, Gardiner & Reed, of New York City, Hughes, Little & Seawell, of Norfolk, Va., Edwin S. S. Sunderland, of New York City, Leon T. Seawell, of Norfolk, Va., and Thomas O'G. FitzGibbon, of New York City, on the brief), for appellants.

T. H. Willcox, of Norfolk, Va., and C. Francis Cocke, of Roanoke, Va. (Willcox, Cooke & Willcox, of Norfolk, Va., Cocke, Hazelgrove & Shackelford, of Roanoke, Va., and Weltner, Meadow & Russell and William K. Meadow, all of Atlanta, Ga., on the brief), for appellees.

Before PARKER, NORTHCOTT, and SOPER, Circuit Judges.

PARKER, Circuit Judge.

This is an appeal by the trustees of the three general mortgages of the Seaboard Air Line Railway Company from an order according priority under the "six months" rule to certain supply claims filed with the railway receivers. No question is raised as to the sufficiency of the net operating income to pay these and other claims filed, without resort to the corpus of the property; and there is no effort to have the claims declared a charge on the corpus. The trustees contend that the claims do not represent operating expenses but are for supplies furnished for reconstruction and betterments, which have been charged in large part to capital account under the rules of the Interstate Commerce Commission, and that for this reason they are not entitled to priority under the six months' rule. The finding of the special master approved by the court below was that the supplies were furnished in connection with projects which were absolutely necessary to the continued operation of the railway and that they added to the value of the property, as well as made possible its continued operation; that they were furnished, not on the general credit of the corporation, but in the expectation that they would be paid from current income; and that they were furnished within the six months next preceding the receivership.

The claims involved in the appeal all relate to supplies used in the construction or repair of bridges on the main line of the railway. That of the Barnett National Bank, assignee of the Vernon Townsend Lumber Company, is for $3,508.76, the value of cross-ties used in the construction of a bridge over the Appomattox river at Petersburg, Va. Claim of Hildreth & Co. is for $929.34 for inspecting the same bridge. Claim of Oglesby Granite Quarries is for $948.15 for rip-rap stone used in connection with replacing a truss span and 500 feet of trestle at the Enoree river bridge. The claim of the Virginia Bridge & Iron Company is for $6,902.87, of which $1,770.84 is for two steel pier casings for strengthening piers which had cracked on the James river bridge at Richmond; $316.79 is for a steel casing for making a similar repair on the Great creek bridge, and $4,815.24 is for structural steel and other bridge material furnished for repairing the Savannah river bridge.

The Petersburg bridge is on the main line of the railway going north towards Richmond, and a large part of the freight and passenger traffic of the Seaboard System passes over it. In 1930 the bridge was an old structure, consisting partly of steel and partly of wood, with a wide and dangerous curvature; the steel portion of the bridge having been erected in 1899. Since 1899, to accommodate the increasingly heavy trains passing over it, the bridge had been strengthened three times. In 1930 it was again showing signs of weakness and further strengthening was not practicable. It was necessary, therefore, that a new bridge be built; and the work of building it was undertaken in 1930, and had not been completed when the receivers were appointed in December of that year. Upon petition to the court, the receivers were allowed to complete the bridge under contracts which had been made by the railroad company; and it appears that in completing it the ties furnished by the Vernon-Townsend Lumber Company must have been used. The new bridge cost $527,711.61, of which $426,756.99 was charged to capital account. It is stated that all of the claims for labor and material used in its construction have been paid either by the railway company or the receivers, except the small claim of the Vernon-Townsend Lumber Company for cross-ties and the inspection charge of Hildreth & Co.

The facts with respect to the Enoree river bridge are thus set forth in the special masters report: "The Enoree River bridge and trestle had been in existence for a great many years as a part of the railway company's main line, but had become weakened so that in the opinion of the proper officers of the railway company it required prompt replacement. The gross cost of the project was approximately $73,000.00, which amount, less the value of the material retired and certain labor charges, was charged by the railway company to capital account under the Interstate Commerce Commission rules, but the claimant does not concede that it was properly so charged."

With respect to the bridges repaired at the James river, Great creek and the Savannah river, to which the claim of the Virginia Bridge & Iron Company relates, the facts as stipulated and embodied in the report of the special master are as follows:

"$1,770.84 represents the purchase price of two steel pier casings acquired by the railway company from the claimant and used to incase two of the piers supporting the James River Bridge, on the main line of the railway company at Richmond, Virginia. The piers which were incased had cracked, creating a dangerous condition. The steel casings were placed around the piers and filled with concrete in order to strengthen the piers and eliminate the dangerous condition. The gross cost of the project was $4,862.90, all of which was charged by the railway company to capital account under the Interstate Commerce Commission rules, but the claimant does not concede that it was properly so charged.

"$316.79 represents the purchase price of one steel casing acquired by the railway company from the claimant and used to incase one of the piers supporting the Great Creek bridge on the main line of the railway company at Cochran, Virginia. The pier had become cracked and weakened, creating a dangerous condition. The casing was placed around the pier and filled with concrete in order to strengthen the pier and eliminate the dangerous condition. The gross cost of the project was $2,800.64, of which $789.74 was charged to operation and $2,010.90 was charged to capital account under the Interstate Commerce Commission rules, but the claimant does not concede that it was properly so charged.

"$4,815.24 represents the purchase price of structural steel and other bridge material furnished, and compensation for services rendered, by the claimant in connection with replacing the Savannah River bridge on the main line of the railway company near Calhoun Falls, South Carolina. In the opinion of the proper officers of the railway company the old bridge required immediate replacement because it had become weakened because of age and was too light for the loads which the railway company was hauling over it. The old bridge consisted of three 150' deck trusses and the new bridge which replaced it was composed of six 76' deck girder spans and seven bents. The claimant also placed additional shims under some of the girders in connection with using for the new bridge some of the piers which had been used for supporting the old bridge. In addition to the work done by the claimant it constructed three new concrete piers and extended the heads of three existing piers to furnish the supports for the new bridge. The gross cost of the project was $50,283.05, of which $29,064.62 was charged by the railway company to operation, and $21,218.43 to capital account, under the Interstate Commerce Commission rules, but the claimant does not concede that it was properly so charged."

The principle upon which the six months' rule is based was first laid down by the Supreme Court in Fosdick v. Schall, 99 U. S. 235, 251, 25 L. Ed. 339, where the court said: "We have no doubt that when a court of chancery is asked by railroad mortgagees to appoint a receiver of railroad property, pending proceedings for foreclosure, the court, in the exercise of a sound judicial discretion, may, as a condition of issuing the necessary order, impose such terms in reference to the payment from the income during the receivership of outstanding debts for labor, supplies, equipment, or permanent improvement of the mortgaged property as may, under the circumstances of the particular case, appear to be reasonable. * * * The business of all railroad companies is done to a greater or less extent on credit. This credit is longer or shorter, as the necessities of the case require; and when companies become pecuniarily embarrassed, it frequently happens that debts for labor, supplies, equipment, and improvements are permitted to accumulate, in order that bonded interest may be paid and a disastrous foreclosure postponed, if not altogether avoided. In this way the daily and monthly earnings, which ordinarily should go to pay the daily and monthly expenses, are kept from those to whom in equity they belong, and used to pay the mortgage debt. The income out of which the mortgagee is to be paid is the net income obtained by deducting from the gross earnings what is required for necessary operating and managing expenses, proper equipment, and useful improvements. Every railroad mortgagee in accepting his security impliedly agrees that the current debts made in...