Martin Metal Mfg. Co. v. United States & Mexican Trust Co.

• Decision Date: 02 July 1915
• Docket Number: 4366.
• Citation: 225 F. 961
• Parties: MARTIN METAL MFG. CO. v. UNITED STATES & MEXICAN TRUST CO. et al.
• Court: U.S. Court of Appeals — Eighth Circuit

225 F. 961

MARTIN METAL MFG. CO. v. UNITED STATES & MEXICAN TRUST CO. et al.

No. 4366.

United States Court of Appeals, Eighth Circuit.

July 2, 1915

Syllabus by the Court.

The claim of a creditor for payment out of the corpus of railroad property for necessary supplies furnished to a railroad company and used in the operation of the railroad is inferior in equity to the claims of bondholders under a prior mortgage, and is not entitled to preference in payment over them, in the absence of the diversion to the payment of unpreferred claims of current income from the payment of current expenses for wages, materials, supplies, and such necessities of operation.

The expectation of a claimant, when he sells supplies or loans money to a mortgagor railroad company necessary for its operation, that he will be paid out of the current income of the company, is not sufficient to take a claim, otherwise not preferential, out of its class, and transfer it to the class entitled in equity to preference in payment over the claims of bondholders secured by a prior mortgage.

Jean Madalene, of Wichita, Kan. (S. B. Amidon, of Wichita, Kan on the brief), for appellant.

F. H Moore, of Kansas City, Mo. (Samuel Untermyer, of New York City, and Samuel W. Moore, of Kansas City, Mo., on the brief), for appellees.

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

SANBORN Circuit Judge.

This is an appeal from an order allowing the claim of the intervener and appellant as a general creditor, but denying it a preference in payment out of the mortgaged property over the claims of the bondholders secured by a prior mortgage made February 1, 1901, upon the property, the after-acquired property, and the income of the Kansas City, Mexico & Orient Railway Company. A creditors' bill was filed against the Railway Company on March 7, 1912, under which the court appointed receivers, who took possession of its property. Subsequently, on August 7, 1912, the trustee under the mortgage brought a bill to foreclose it, and on December 26 1912, the latter suit was consolidated with the former, the receivership was extended over it, and the income and property of the Railway Company was thereafter impounded for the benefit of the mortgage bondholders. On February 2, 1914 a decree of foreclosure of the mortgage and of sale of the mortgaged property was rendered, wherein the court adjudged that the mortgage was a first lien upon the property to secure the payment of bonds issued thereunder to the aggregate amount of $24,538,000. On January 27, 1914, the Martin Metal Manufacturing Company intervened in the consolidated cause, prayed that its claim for $1,730.20, the purchase price of certain tanks, culverts, and parts of culverts which the Railway Company bought between October 18 and December 10, 1911, and used in the operation of the railroad, should be paid out of the income or out of the proceeds of the mortgaged property in preference to the payment of the claims of the mortgage bondholders. The intervener alleged in its petition its sale of its property to the Railway Company and the latter's use of it in the operation of the railroad within six months preceding the appointment of the receivers under the creditors' bill, but more than six months before the income of the Railway Company was impounded for the benefit of the mortgage bondholders by the extension of the receivership over the suit to foreclose the mortgage; that it sold its property with the understanding and expectation that the purchase price thereof would be paid out of the income of the Railway Company; and that instead of paying its claim the managing officers and directors of the Railway Company diverted the income to the payment of interest on the mortgage bonds, to the payment of other indebtedness of the company, and to payment for the construction of the railroad, all of which expenditures inured to the benefit of the bondholders. The trustee under the mortgage...