Illinois Trust & Savings Bank v. Doud

• Decision Date: 21 November 1900
• Docket Number: 1,317.,1,316
• Parties: ILLINOIS TRUST & SAVINGS BANK v. DOUD et al. DOUD v. ILLINOIS TRUST & SAVINGS BANK et al.
• Court: U.S. Court of Appeals — Eighth Circuit

105 F. 123

ILLINOIS TRUST & SAVINGS BANK v. DOUD et al.

DOUD v. ILLINOIS TRUST & SAVINGS BANK et al.

Nos. 1,316, 1,317.

United States Court of Appeals, Eighth Circuit.

November 21, 1900

(Syllabus by the Court.)

No corporation is required to exercise all the powers granted to it as a condition of the exercise of any of them, unless such a requirement is expressly made in some statute or ordinance under which it obtains some of its powers and privileges, or its powers are inseparably connected with each other.

It is only for the violation of an express provision of the law under which a corporation derives its powers or privileges or for such a misuse or nonuse of them as results in a substantial failure to fulfill the design and purpose of its organization, that a forfeiture of a franchise will be decreed.

The claim of a creditor for money loaned to pay interest upon a prior mortgage debt is inferior in equity to the lien of a prior mortgage, and cannot be given a preference over it in the administration of the mortgaged property under a receivership in foreclosure.

A mortgagee of the property, acquired and to be acquired, and of the income, of a quasi public corporation, such as a railroad company, takes a lien on the net income after the current expenses of operation in the ordinary course of business are paid, and impliedly agrees that the gross income shall be first applied to the payment of these expenses.

A court of equity engaged in administering mortgaged railroad property under a receivership in a foreclosure suit may, in its discretion, prefer unpaid claims for current expenses incurred in the ordinary operation of the railroad within a limited time before the receivership, to the bondholders secured by a prior mortgage, in the distribution of the income or the proceeds of the mortgaged property; but the right to give such preference is confined to claims of this class.

The broad language of the dicta in Fosdick v. Schall, 99 U.S. 235, 252, 25 L.Ed. 339, that 'necessary operating and managing expenses, proper equipment, and useful improvements' are to be deducted from the current income before the net income out of which the mortgage is to be paid arises, has been disapproved and modified, and the class of claims entitled to equitable preference has been limited to those just mentioned, so as to exclude claims incurred for the construction of permanent and beneficial improvements to the mortgaged property outside the current expenses of its ordinary operation, by the later decisions of the supreme court in Kneeland v. Trust Co., 10 Sup.Ct. 950, 136 U.S. 89, 98, 34 L.Ed. 379; Morgan's L. & T.R. & S.S Co. v. Texas Cent. Ry. Co., 11 S.Ct. 61, 137 U.S. 171 196, 198, 34 L.Ed. 625; Thompson v. Railroad Co., 10 Sup.Ct. 29, 132 U.S. 68, 71, 73, 74, 33 L.Ed. 256; Thomas v. Car Co., 13 Sup.Ct. 824, 149 U.S. 95, 110, 37 L.Ed. 663; Southern Ry. Co. v. Carnegie Steel Co., 20 Sup.Ct. 347, 176 U.S. 257, 296, 44 L.Ed. 458; and Lackawanna Iron & Coal Co. v. Farmers' Loan & Trust Co., 20 Sup.Ct. 363, 176 U.S. 298, 315, 44 L.Ed. 475.

The test of the equity which entitles the claim to preference over the mortgage in foreclosure is the consideration of the claim, whether it was or was not for a part of the current expenses of ordinary operation within a limited time before the receivership.

The rule of the civil and maritime laws allowing priority to the last creditor who furnishes necessary supplies and repairs to conserve the thing has not been adopted by the supreme court in the distribution of the proceeds of the foreclosure of railway mortgages.

Neither the fact that the consideration of the claim conserved the property and increased the security of the mortgagee, nor the fact that it was necessary to keep the mortgagor a going concern, nor the fact that the mortgagor pledged or mortgaged the current income to secure the payment of the claim, will raise a preferential equity in its favor, if its consideration was not a part of the current expenses of the ordinary operation of the property.

If a mortgagor diverts the current income from the payment of claims for current expenses which have this preferential equity to the payment of claims of other classes, 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 may not exceed the amount of the diversion.

A loan to a quasi public mortgagor on a pledge or mortgage of its income of money to make a substantial, beneficial, and necessary addition to its mortgaged property entitles the lender to no preference in equity in the distribution of the income or proceeds of the property over the claim of a prior mortgagee whose mortgage covered all the income and property of the mortgagor, acquired and to be acquired.

The trustee of and the majority of the bondholders secured by a mortgage are not estopped from enforcing its lien by the knowledge, acts, or omissions of a minority of the bondholders.

This appeal involves the right of a creditor of a mortgagor, a quasi public corporation, to a preference in payment over a prior mortgagee. On June 15, 1892, the Ottumwa Electric Railway, a corporation, engaged in furnishing steam heat and power, in operating a street railroad by electricity, and in furnishing electric light to the city of Ottumwa, executed a trust deed, which will hereafter be called a mortgage, to the Illinois Trust & Savings Bank, a corporation, to secure the payment of its 200 bonds of $1,000 each, which were issued and sold to bona fide purchasers. This mortgage covered the property of the mortgagor, acquired and to be acquired, and its rents, income, and profits. On March 28, 1896, the mortgagee filed its bill to foreclose this mortgage, and upon its request a receiver was appointed on April 14, 1896, to impound the income of the mortgagor under the mortgage for the benefit of the mortgagee. No accumulated income came to the hands of the receiver upon his appointment, and the order appointing him did not impose upon the mortgagee the payment of the claim of the intervener hereafter mentioned out of the income or the property as a condition of this appointment of the receiver. On June 15, 1896, Levi B. Doud intervened in this suit, and filed his petition, in which he prayed that he might have a lien upon the income collected by the receiver and upon the mortgaged property and its proceeds superior to that of the mortgagee for the sum of $11,000 and interest, which he had loaned to the mortgagor in 1894 and 1895 to enable it to construct an addition to its plant and to pay the accruing interest on its mortgage debt. The claim of the intervener was referred to a master in chancery, who found that $6,000 of it was for money loaned to pay an installment of interest on the mortgage debt, that $5,000 was loaned to enable the mortgagor to construct the addition to its plant, and that the intervener was not entitled to a preferential lien for any part of his claim. Exceptions were filed to this report, and the circuit court held that the intervener was entitled to a preferential lien for the $5,000 furnished to construct the addition, but was not entitled to such a lien for the $6,000 loaned to pay the interest, and rendered a decree accordingly, from which the mortgagee and intervener have appealed.

The facts disclosed by the record which are material to the issues presented by these appeals are these: The Ottumwa Railway, at the time it borrowed this money of the intervener, was engaged in three classes of business. It was operating a street railway by electrical power, it was furnishing steam heat and power to customers, and it was furnishing electric light to private customers and to the city of Ottumwa. It had a power plant with a boiler capacity of 750 horse power and an engine capacity of 600 horse power and it had a lease of 190 horse power from the Iowa Water Company for a rental of $6,000 a year, which would expire on March 1, 1895. The three classes of business which this corporation was conducting were carried on together by the use of this power, which the mortgagor could produce at its own plant was ample to operate the railway, to furnish steam heat and power to its customers, and to furnish electric light to some, and probably to all, its private customers; but it was not sufficient to do these things and to furnish light to the city in addition. The mortgagor had acquired permission from the city to operate the railway and to furnish electric light and power derived from other corporations by purchase. The permission to operate the railway was a separate permission, granted by separate ordinances; while the permission to erect poles, string wires, and to furnish electric light and power was another permit, granted by distinct ordinances, and entirely separate from the permission to operate the railway and to furnish steam heat and power. In the summer of 1894 the mortgagor was furnishing electric light to the city of Ottumwa under a contract which would expire on March 1, 1895, which entailed an annual loss of $2,700. The water company had passed into the hands of a receiver. Its contract to furnish 190 horse power would expire in March, 1895, and it was unable to furnish this power after that date; and the power it was furnishing was less than 190 horse power, and was unsatisfactory and inefficient. The mortgagor could operate its railway, furnish its steam heat and power, and probably supply its private customers with electric light from its own plant without this 190 horse power; but it...