Rhode Island Locomotive Works v. Continental Trust Co.

• Decision Date: 07 November 1900
• Docket Number: 788.
• Citation: 108 F. 5
• Parties: RHODE ISLAND LOCOMOTIVE WORKS v. CONTINENTAL TRUST CO.
• Court: U.S. Court of Appeals — Sixth Circuit

108 F. 5

RHODE ISLAND LOCOMOTIVE WORKS v. CONTINENTAL TRUST CO.

No. 788.

United States Court of Appeals, Sixth Circuit.

November 7, 1900

The appellant is a creditor of the Toledo, St. Louis & Kansas City Railroad Company, and its debt is evidenced by the promissory notes of the company executed in part payment for certain locomotives purchased by it. In May, 1893, upon the application of certain judgment creditors, by bill filed in the circuit court, a receiver was appointed, who took possession of the entire property of the railroad company and from then until its final sale its railroad has been operated under the orders of the court. In December, 1893, a mortgage foreclosure bill was filed in the same court by the trustees under a first mortgage made by the company. The two suits were consolidated under the title of the latter, and the receivership extended to both suits. The appellant filed an intervening petition in the consolidated cause, praying that its said claim might be paid 'by the receiver out of the property, income, and earnings of said railroad, and that its debt be declared a lien and charge upon the property of said railroad, or proceeds thereof, or income therefrom, prior and superior to that of the mortgagees. ' The petition was answered by the Continental Trust Company, the trustee for the bondholders and all the equities of the intervener denied. The issues thus presented were referred to Irvin Belford, as special master, with directions to report his findings of fact and law. The master, among other things, reported that in September, 1892, the railroad company purchased from the Rhode Island Locomotive Works five locomotives, through an arrangement with the New York Equipment Company, whereby the latter corporation paid 80 per cent. of the purchase price for the railroad company to the vendor, and took an absolute title; the railroad company agreeing to pay to the vendor the remaining 20 per cent. In pursuance of this plan the equipment company, under date of January 6, 1893, entered into a contract nominally leasing these engines to the railroad company for the term of 72 months for the consideration of $12,770 in cash upon delivery and 72 monthly installments of $909.22, running February 23, 1893, to January 23, 1899, inclusive; the property to become the property of the railroad company without further conveyance upon the payments being completed. Provisions were inserted common to such transactions touching the care and preservation of the property, and providing for the contingency of default in payment. Plates were affixed to each locomotive reciting that it was the property of the equipment company. For that part of the purchase price which the railroad company undertook to pay directly to the vendor the latter agreed to take the promissory notes of the purchaser, indorsed by S. H. Kneeland, who was a large stockholder in the railroad company. Accordingly, eight notes, each for $1,141.25, were executed, due, respectively, on the 22d of each month, from November, 1892, to June, 1893, inclusive. In January, 1893, seven other locomotives were purchased under an identical arrangement, and for the 20 per cent. of the price to be paid by the company another series of notes was executed, and indorsed by S. H. Kneeland. The company paid of the first series of notes the first five, and of the second series those maturing in February and March, 1893. Renewal notes were made for the notes of the first series maturing April 22, 1892, and for the notes of the second series maturing in April and May, 1893, which renewals were also indorsed by S. H. Kneeland, and further secured by the pledge of four gold debenture bonds of the company for $1,000 each. There is now due of the principal sum of the first series of notes $3,423.75, and of the principal sum of the second series $10,641.68, together with interest. He further reported that the railroad company was in great need of additional locomotive equipment to handle its traffic, and that the receiver had paid, by direction of the court, the balance due to the equipment company under its contracts with the railroad company. He also reported that there was no agreement that that part of the price to be paid by the railroad company to the Rhode Island Locomotive Works should constitute any lien upon the locomotives, and that there had been no evidence offered 'to show that there had been any diversion of current earnings to the payment of interest or to the purchasing of equipment or the making of permanent improvements,' and that there had been no delay by the bondholders in the assertion of their lien under the mortgage, after default. As a conclusion of law, he reported that the intervener was an unsecured creditor entitled to no preference over the mortgagees. Exceptions to this report were filed, and overruled by Circuit Judge Taft, the report confirmed, and the petition dismissed so far as it sought to enforce any lien or secure any preference over the mortgagees. From this decree the Rhode Island Locomotive Works has appealed and assigned errors.

E. O. Potter and Thomas Emery, for appellant.

Edwin T. Rice, Jr. (E. C. Henderson, of counsel), for appellee.

Before LURTON, DAY, and SEVERENS, Circuit Judges.

LURTON Circuit Judge, after making the foregoing statement of the case, .

The attitude of the appellant as a general unsecured creditor of the railroad company is admitted. That any special lien exists upon the locomotives for the security of this part of the purchase price is not now contended. If the appellant is to obtain any relief, it must show: First, that the demand here presented is not a debt created upon the personal credit of the company, but a current operating expense incurred to maintain the property as a going concern, and its railroad in condition to be used with reasonable safety for the transportation of persons and property, and with the expectation of the parties that it was to be met out of the current receipts of the company; and, second, that there are net or current earnings now applicable to the payment of such debts of the income, or that there has been a diversion of the current earnings, either before or since the receivership, which the mortgagees should equitably restore. International Trust co. v. T. B. Townsend Brick & Contracting Co., 37 C.C.A. 396, 95 F. 850; Central Trust Co. v. East Tennessee, v. & G.R. Co., 26 C.C.A. 30, 80 F. 624; Virginia & A. Coal Co. v. Central R. & Banking Co., 170 U.S. 365, 18 Sup.Ct. 657, 42 L.Ed. 1068; Southern Ry. Co. v....