Fordyce v. Omaha, Kansas City & E.R.R.

• Decision Date: 11 April 1906
• Docket Number: 2,404,2,423.,2,401
• Court: U.S. District Court — Western District of Missouri
• Parties: FORDYCE et al. v. OMAHA, KANSAS CITY & E.R.R. et al. Missouri RY. CONST. CO. v. SAME. OAKMAN et al. v. SAME.

145 F. 544

FORDYCE et al. v. OMAHA, KANSAS CITY & E.R.R. et al. Missouri RY. CONST. CO. v. SAME. OAKMAN et al. v. SAME.

Nos. 2,401, 2,404, 2,423.

United States Circuit Court, W.D. Missouri, Western Division.

April 11, 1906

The following is the portion of thy master's report referred to in opinion:

A claim, to be preferential, must be one contracted upon the faith of being paid from the current income (Lackawana etc., Co. v. Farmers', etc., Co., 176 U.S. 298, 20 Sup.Ct. 363, 44 L.Ed. 475), and must not be one created for construction or ordinarily for equipment (Rhode Island Locomotive Works v. Continental Trust Co., 108 F. 5, 47 C.C.A. 147; Illinois Trust & Savings Bank v. Doud, 105 F. 123, 44 C.C.A. 389, 52 L.R.A. 481; Atlantic Trust Company v. Dana, 128 F. 209, 225-230, 62 C.C.A. 657). Where there is no net income of the receivership, the question arises whether claims of a preferential nature can be charged against the property foreclosed, in the absence of proof of a diversion of income for the benefit of the mortgagees. The order appointing the receivers does not aid in the solution of the question, because by its terms it is limited to the net income of the receivership, of which, as hereinafter seen, there was none. Besides this, the claims presented not having been paid, the purchaser at the foreclosure sale can question their right to a preference. This has been clearly decided. In Louisville, etc., R Co. v. Wilson, 138 U.S. 501, 506, 11 Sup.Ct. 405, 407 34 L.Ed. 1023, 1025, Mr. Justice Brewer said: 'We would not be understood as asserting, even by implication, that the terms of an order of appointment of a receiver vest in all claimants an absolute right as against the security holders. Such terms may be, and doubtless are, a protection to the receiver; and what he does and pays within those terms may be, thereafter, beyond the challenge of any party interested in the property. But when he has not acted, and the question is presented to the court as to the liability of the property for any claim, the court is not foreclosed by the order of appointment, but may consider and determine equitably the extent of liability of the property to such claim and what its rights of priority may be. Hence, as the receiver did not pay this claim, the parties in interest may rightfully challenge its priority, even if it were within the very letter of the order of appointment of the receiver. ' In Gregg v. Mercantile Trust Co., 109 F. 220, 226, 48 C.C.A. 318, 324 Judge Lurton said: 'If the order made when the receiver in this case was appointed be construed as including claims for services of the kind rendered by these appellants, the order did not vest in the claimants described any absolute right to be paid out of the corpus of the mortgaged property in preference to the mortgagees. If the receiver had acted under that order, and paid these claimants out of income, it would doubtless protect him. But he did not. He had no surplus to so apply. When the claimants sought to have their claims paid out of the corpus of the mortgaged property, and thereby displace fixed liens, the court was free to hear the objections to such a decree, and to decide the matter upon settled principles of equity. Railroad Co. v Wilson, 138 U.S. 501, 506, 11 S.Ct. 405, 34 L.Ed. 1023. ' In Monsarrat v. Mercantile Trust Co., 109 F. 230, 231-232, 48 C.C.A. 328, 329, 330. Judge Lurton said: 'The contention that the balance due on this mileage account when a receiver was appointed for the defendant railroad company, became a liability of the receiver by virtue of the order made when the receiver was appointed is unsound. That order was the usual order made in such cases, directing the receiver to pay labor, supply, and material claims, and 'traffic or mileage balances,' which had accrued within six months. Conceding that the order included the balance due on this mileage account, still it does not follow that the claim became thereby a receiver's debt. In the case of Gregg v. Trust Co. (a case against the same receiver, and decided at this term) 109 F. 220, 48 C.C.A. 318, we had occasion to pass upon the local effect of that order, it being there contended that every claim within the terms of that order was thereby preferred over the mortgagees in the corpus of the mortgaged estate. We then held that, while the receiver would have been protected if he had paid out of the earnings of the receivership the claims embraced within the order, yet the order did not vest in any of the claimants an absolute right of payment out of the corpus of the mortgaged estate in preference to the mortgagees, and that if, in default of income out of which the receiver might comply with the order, creditors should seek to displace mortgages resting upon the corpus of the railroad, the mortgagees were entitled to be heard. The case of Railroad Co. v. Wilson, 138 U.S. 501, 506, 11 Sup.Ct. 405, 34 L.Ed. 1023, was cited as an express authority. If this was a right conclusion, it clearly follows that such an order did not have the effect of converting debts of the railroad company into debts of the receiver.'

In this case, the order for the receiver to pay from the earnings was made at a time when the bondholders were not represented nor in court. Atlantic Trust Co. v. Dana, 128 F. 209 225-230, 62 C.C.A. 657. This fact would not be material unless there were net earnings of the receivership. In this court the view prevails that proof of diversion is necessary. In Illinois Trust & Savings Bank v. Doud, 105 F. 123, 131, 132, 148, 44 C.C.A. 389, 397, 398, 414, 52 L.R.A. 481, Judge Sanborn said: 'It is the diversion of the income of the mortgaged property from these claims, which have a superior equity to the claim of the bondholders, that forms one of the grounds of the preferential lien which is vouchsafed to them. But it is only when the income is diverted from the payment of these claims which have a higher equity to the payment of those which stand upon a lower plane that any equity arises in favor of any one on account of diversion. In Fosdick v. Schell, 90 U.S. 235, 253, 254, 25 L.Ed. 339, Chief Justice Waite said that, if the officers of the company give to one class of creditors that which properly belongs to another, the court may, upon an adjustment of the accounts, so use the income which comes into its own hands as, if practicable, to restore the parties to their original equitable rights. * * * Whatever is done, therefore, must be with a view to a restoration by the mortgage creditors of that which they have thus inequitably detained. It follows that, if there has been in reality no diversion, there can be no restoration, and that the amount of restoration should be made to depend upon the amount of the diversion.' Burnham v. Bowen, 111 U.S. 776, 4 Sup.Ct. 675, 28 L.Ed. 596; Union Trust Co. v. Illinois M.R. Co., 117 U.S. 434, 6 Sup.Ct. 809, 29 L.Ed. 963; Wood v. Safe Deposit Co., 128 U.S. 416, 420, 421, 9 Sup.Ct. 131, 32 L.Ed. 472. * * * When a careful examination and analysis of the facts and opinions in all the cases in the Supreme Court upon the subject of preferential claims in suits to foreclose mortgages of quasi public corporations is made, and dicta are distinguished from adjudications, the decisions of that court will be found to sustain these propositions: A mortgagee of the property, acquired and to be acquired, and of the income of a quasi public corporation, such as a railroad company, obtains a lien upon the net income of the company after the current expenses of operation incurred in the ordinary course of business are paid, and impliedly agrees that the gross income shall be first applied to the payment of these current expenses, before the net income to which he is entitled arises. A court of equity, engaged in administering mortgaged railroad property under a receivership in a foreclosure suit, may prefer unpaid claims for current expenses of the ordinary operation of the railroad, incurred within a limited time before the receivership, to a prior mortgage lien, in the distribution of the income or of the proceeds of the mortgaged property. If such a mortgagor diverts the current income from the payment of current expenses to the payment of interest on the mortgage debt, or the improvement of the mortgaged property, so that current expenses remain unpaid when a receiver is appointed, the court may, out of the income accruing during the receivership, restore to the unpaid claims for current expenses the amount so diverted. But if there has been no diversion there can be no restoration, and the amount of the restoration cannot exceed the amount of the diversion. ' In Kansas Loan & Trust Co. v. Electric Ry. & Light Co. (C.C.) 108 F. 702, it was, as stated in the syllabus, decided: 'The right of one furnishing supplies to an insolvent railroad company to a preference over the mortgagee is dependent on the fact that there has been a diversion of the net earnings of the mortgaged property over and above the necessary expenditures for operation, and that such diversion has inured to the benefit of the mortgagee, and the burden rests upon the claimant of such preference to establish such facts. ' Judge Philips, among other things, said: 'This cause has been submitted to the court on exceptions filed to the special master's report allowing the claim of the intervener as a preferred claim, to be paid out of the proceeds of the sale of the mortgaged premises prior to the claim of the mortgagee thereon. The master's report, as submitted to the court, with the other papers in the case, presents the matters in controversy in such shape that it is impossible for the court to intelligently understand and pass upon the matters in dispute. As the intervener's right to a...