Gregg v. Mercantile Trust Co.

• Decision Date: 07 May 1901
• Docket Number: 858,866,865,877,868,875,876.
• Citation: 109 F. 220
• Parties: GREGG v. MERCANTILE TRUST CO. et al. ADAMS & WESTLAKE CO. v. SAME. Columbus TERMINAL & TRANSFER R. CO. v. SAME. HARRISON et al. v. SAME. STEWART v. SAME. LOUISVILLE & N.R. CO. v. SAME. BALTIMORE & O.S.W.R. CO. v. SAME.
• Court: U.S. Court of Appeals — Sixth Circuit

109 F. 220

GREGG v. MERCANTILE TRUST CO. et al. ADAMS & WESTLAKE CO. v. SAME. Columbus TERMINAL & TRANSFER R. CO. v. SAME. HARRISON et al. v. SAME. STEWART v. SAME. LOUISVILLE & N.R. CO. v. SAME. BALTIMORE & O.S.W.R. CO. v. SAME.

Nos. 858, 868, 865, 866, 875, 877, 876.

United States Court of Appeals, Sixth Circuit.

May 7, 1901

These seven appeals have been heard together. The appellants are all general creditors of the Columbus, Sandusky & Hocking Railroad Company, who claims have been duly established, but who appeal because they have not been allowed a preference over the mortgage debts of said railroad company in the proceeds of the sale of the mortgaged railroad property. The property of the railroad company is subject to two mortgages securing issues of bonds aggregating some $11,000,000, and the property mortgaged is confessedly insufficient to pay these mortgage debts. These mortgages are in course of foreclosure in two consolidated causes under the style of 'The Metropolitan Trust Co. v. The Columbus, Sandusky &amp Hocking Railroad Company. ' The first of these foreclosure bills was filed June 2, 1897, the complainant being the Mercantile Trust Company, trustee under the first of the two mortgages mentioned. Under that bill, and on the day of its filing, S. M. Felton was appointed receiver by an order which, among other things, provided that he should 'pay the employes, officials, and other persons having claims for wages, services, materials, and supplies due and to become due, and unpaid growing out of the operation of the railroad of the defendant, including current and unpaid vouchers; and for such purpose, as well as for the purpose of meeting the obligation of the pay rolls, said receiver is hereby authorized in his discretion to borrow such sums of money as may be necessary for such purpose, not exceeding $35,000; but said receiver will pay no claims against the said railroad company which have accrued due more than six months prior to the date of this order. ' June 7, 1897 the receiver applied for leave to borrow $200,000 upon certificates, stating in his petition that the railroad company, prior to his appointment, had incurred indebtedness 'in the maintenance and operation of said railroad, which it is necessary to pay in order to further operate and maintain said railroad in the performance of its duties as a common carrier, etc., and that a part of said indebtedness was for materials and supplies furnished said railroad company, and for obligations necessarily incurred in the maintenance and operation of said railroad during a period of six months preceding the appointment of said receiver herein ' He asked authority to issue $200,000 in certificates to be paid out of the earnings of the railroad, if sufficient, or, if not, then out of the proceeds of the sale of said railroad. An order was made accordingly; the complainant, the trustee under the first mortgage, making no objection to either of the two orders already mentioned. July 7, 1897, the receiver seems to have changed his mind as to the importance of paying off the traffic balances and supply claims due from the railroad company, and accordingly reported to the court that he had borrowed $35,000 under the order made when appointed, and had applied it altogether in the payment of one class of claims directed to be paid, namely, to the payment of the company's pay rolls for April and May, 1897. He asked to have the order of June 7th modified so as to allow him to use the certificates therein ordered as follows: To pay money borrowed to pay April and May pay rolls, 1897, $35,000; to pay a mortgage lien on certain terminal property, $30,000; and that the balance of $135,000 be applied to the payment of 'car-trust obligations' and current operating expenses, repairs, etc. The order was accordingly modified. The labor and supply claims proper accrued within six months prior to the order appointing receiver appear to have somewhat exceeded $100,000. None of these claims, except the April and May pay rolls, were paid by the receiver, and there is not now, nor has there ever been, any surplus of receiver's earnings out of which the claims of appellants can be paid. The circuit court appointed a special master, and directed him to hear proof, and report all debts due for labor and supplies furnished within six months which were within the purview of the order of June 2, 1897. The master accordingly reported that the claims of W. S. Gregg, the Adams & Westlake Company, a part of the claim of the Columbus Terminal Company, the claim of the Louisville & Nashville Railroad Company, and of the Baltimore & Ohio Southwestern Railroad Company were claims which had accrued within six months, and were claims of the character entitled to be paid preferably out of the current income of the railroad company or of the receiver; but that there was no surplus income in the hands of the receiver, and that there had been no diversion of income applicable to such debts by either the company or the receiver. For these reasons he reported that these claims were not entitled to be paid in preference to the mortgagees out of the proceeds of the sale of the corpus of the railroad property. The master reported that the claims preferred by Gilbert H. Stewart and by Harrison, Olds & Henderson were not of a preferential character. The receiver excepted to the master's finding in favor of the preferential character of the claim of the Columbus Terminal Company. This exception was sustained by the circuit court. The terminal company excepted to so much of the master's report as excluded a part of its claim as not being of a preferential character. This exception the court below overruled. Gilbert H. Stewart and Harrison; Olds & Henderson excepted to the report against the preferential character of their claims. These exceptions were sustained by the circuit court. All of the appellants excepted to the report that there had been no diversion of income by the railroad company applicable primarily to the payment of their debts; also to so much of the report as held that appellants were not entitled to be paid out of the corpus of the railroad property in preference to the mortgagees. These exceptions were all overruled, and all of the claims of the appellants disallowed, and their petitions dismissed, so far as they sought payment out of the corpus of the mortgaged property. From these decrees appellants named in the caption have separately perfected appeals and assigned errors.

Harlan Cleveland, W. O. Henderson, and George Hoadly, for six months' creditors.

Paul D. Cravath, for prior lien bonds, general mortgage bonds, and Felton certificates.

Before LURTON, DAY, and SEVERENS, Circuit Judges.

LURTON Circuit Judge, having made the foregoing statement of the case, .

1. The claim of W. S. Gregg is for cross-ties essential to the replacement of ties decayed in current operation of the railroad. A large proportion were on hand when the receiver was appointed, and were used by him in the maintenance of the roadway. They were all purchased within six months before the receivership, and under circumstances indicating an expectation that they would be paid for out of current income. The claim is in every respect a highly meritorious one. The claim of the Adams & Westlake Company is for hardware needed in the usual and ordinary daily operation of the railroad. It is for a small amount, and comes clearly within the rule in respect to supply claims proper for ordinary operation of a railroad. The claims of the Louisville & Nashville Railroad Company and of the Baltimore & Ohio Southwestern Railroad Company are for traffic balances in current account between those railroad and the defendant company. These balances accrued within six months, and are such traffic balances as come within the rule of the decided cases, beginning with Fosdick v. Schall, 99 U.S. 235, 25 L.Ed. 339.

2. The claim of the Columbus Terminal & Transfer railroad Company consisted of two items. The first of these is for $8,525, and was for rentals accruing within six months under a perpetual lease of certain tracks and terminal facilities at Columbus, Ohio. The claim arises under a contract between the terminal company and two of the original companies, to whose properties and contracts the defendant railroad company has succeeded. Under that contract the terminal company leased for a term of 99 years, with right of renewal in perpetuity, certain tracks and terminal facilities, the lessee companies agreeing to pay as rental a sum in quarterly payments, in advance, equal to the interest for the next ensuing quarter upon all of the outstanding first mortgage bonds of the terminal company, provided such bonds should not exceed $350,000 in 5 per cent. bonds. The lessee companies also bound themselves to keep the property in repair and pay all taxes, assessments, etc. For failure to pay rent or keep any of the other covenants for a period of 30 days, the lessor might, at its option, resume possession, and declare the lease forfeited, and all interest and estate in the property, including all additions and improvements, terminated. This provision for the protection of the lessor in its rents clearly indicates that the lessor did not rely upon its rentals as constituting an equitable charge upon the current income of the lessee company. The right to enter it for 30 days its rents should be in arrears, and to forfeit the lease, together with all improvements which the lessor company was most likely to make in view of the perpetual character of its term, afforded a most stringent remedy. Aside from this provision for its security, the very character of the claim prevents its inclusion among that class of claims for materials...