Seventh Nat. Bank of Philadelphia v. Shenandoah Iron Co.

• Decision Date: 01 August 1887
• Citation: 35 F. 436
• Parties: SEVENTH NAT. BANK OF PHILADELPHIA et al. v. SHENANDOAH IRON CO. [1]
• Court: U.S. District Court — Western District of Virginia

35 F. 436

SEVENTH NAT. BANK OF PHILADELPHIA et al. v. SHENANDOAH IRON CO. ^[1]

United States Circuit Court, W.D. Virginia.

August, 1887

Complainants the Seventh National Bank of Philadelphia, a creditor of defendant in the sum of $25,000; the Union Trust Safe-deposit & Insurance Company, holder of defendant's promissory note for $10,000, and of first-mortgage bonds of defendant to the amount of $15,000; the Eighth National Bank of Philadelphia, holder of two promissory notes of defendant for $7,000 each, and of $19,000 of its first-mortgage bonds and John Milnes, claiming to be a creditor of defendant for the amount of $64,421.34 for advances and supplies made by him to defendant, and also its accommodation indorser to the amount of $332,500,-- presented their bill setting forth these facts, and that defendant had, on May 26, 1881 executed and delivered to the Fidelity Insurance Trust & Safe Deposit Company, as trustees, a first mortgage, bearing date April 1, 1881, upon all its property and franchises, to secure bonds of various denominations to the amount of $500,000, of which $349,500 had been issued to persons unknown to complainants, and now holding same, and the remaining $150,500 had been pledged from time to time by defendants as collateral security for its outstanding promissory notes; that defendant's floating indebtedness amounted to about $477,343.58, evidenced by its promissory notes aggregating $372,648.74, and the residue by open book-accounts; that these notes were drawing to maturity on 11th September, 1885, and at intervals thereafter, and all prior to January 1, 1886; that by reason of lack of funds the first, a note for $2,890.57, would be protested, the credit of defendant utterly gone, and it would be impossible to continue its mining and manufacturing operations,-- the result of which would render it impossible to pay its coupons on its first-mortgage bonds, and thus bring about a foreclosure of the mortgage; that the property of defendant was in such condition that continuance of its manufacturing would probably enable a realization of a sufficiency to pay its coupons, and from time to time reduce its floating indebtedness; that it was necessary for the protection of the holders of its floating indebtedness and those furnishing supplies not to be interfered with; and praying for an injunction and appointment of receivers, and for general relief. Injunction granted September, 1885, and following were decrees appointing receivers, orders allowing them to issue certificates, a reference to master to take account of indebtedness of defendant. Under the last order the master made his report, to which 13 exceptions were filed, on which exceptions the opinion was rendered.

W. H. Travers and John G. Johnson, for plaintiffs.

J. S. Clark, for defendant and mortgage bondholders.

PAUL J.

The questions to be decided by the court at this time are presented for its consideration by exceptions filed by the first-mortgage bondholders to the special commissioner's report of liens. These exceptions are 13 in number. The first five relate to the claims allowed by the master in favor of J. W. Rogers. To these claims, amounting in the aggregate to $24,984.83, the master has allowed priority to the lien of the first-mortgage bonds. These claims against the company originated in an agreement made between the company and B. & T. J. Milnes, formerly engaged in the mercantile business at Milnes, the location of the company's iron-works, and who were succeeded in their business as merchants by William Milnes, Jr., and J. W. Rogers, under the firm name of Rogers & Milnes, who continued the business until March 1, 1886, when this firm dissolved, and J. W. Rogers became the liquidating partner, and as such is the claimant of the amount in controversy. The agreement referred to provided that the company, in paying off its employees in store orders, should give its orders on this store, and on none other. Under this arrangement store orders were given to its employees by the company on these successive firms, the transactions running through several years, and amounting to a large sum, on which considerable payments were made from time to time, but still leaving a large balance due to J. W. Rogers on account of these store orders, and a small balance of $118.23, due on account of materials furnished by the store directly to the company.

Counsel for Rogers in their argument have based his right to a lien prior to that of the bondholders on two grounds: First. That, as the statute of Virginia passed March 21, 1877, (see Acts Assem. 1876-77, p. 188, as amended by act of April 2, 1879, see Acts Assem. 1878-79, pp. 352, 353,) gives to the laborers who received the store orders from the company 'a prior lien on the franchise, the gross earnings, and on all the real and personal property of said company which is used in operating the same,' that Rogers and Milnes, having paid off these orders, became assignees of the same, and as such assignees they have a right, under the Virginia statute above quoted, to enforce for their benefit the lien which the original holders of the orders, to-wit, the laborers, held against the company, as security for the payment of their wages. Second. That, independent of the provisions of the statute, he is entitled under the general principles of equity to the payment of these claims, as being for supplies furnished, in preference to the lien of the bondholders. Numerous cases are cited to maintain this position, among them: Fosdick v. Schall, 99 U.S. 251; Trust Co. v. Souther, 107 U.S. 594, 2 S.Ct. 295; Burnham v. Bowen, 111 U.S. 777, 778, 4 sup.Ct.Rep. 675; Trust Co. v. Railway Co., 117 U.S. 434, 6 S.Ct. 809. We think a very brief examination of this doctrine of equity principles will eliminate it from the discussion of the questions before us. The doctrine is a new one, and has arisen out of, and, as far as the court has been able to ascertain, is confined to, railroad corporations. All the authorities cited are cases of controversies touching the rights of creditors of railroads, and, so far as we have found, no authority for this innovation on the rights of the prior lienholders of a corporation such as we are dealing with. It rests upon the principle that the current expenses must be paid out of the current earnings; and in order for its application it must be shown that there has been a diversion of the current earnings from the payment of current expenses and that they have been applied to the benefit of the lienholders. This is the doctrine as laid down in Fosdick v. Schall, 99 U.S. 254, and the succeeding decisions, state and federal, on this subject. The chief reason assigned for its existence in connection with railroad corporations, is that a railroad is a quasi public corporation. The public has such an interest in a railroad that, in the language of Chief Justice WAITE in Burnham v. Bowen, 111 U.S. 781, 4 S.Ct. 675, it must be treated as a 'going concern.' To the same effect is the language of Judge HUGHES in Atkins v. Railroad Co., 3 Hughes, 317. Should we admit the application of the equity principles contended for to a corporation like the Shenandoah Iron Company, and were it possible for us ro admit that the claims of Rogers are for materials and supplies furnished the company, there yet is no evidence in this case of the existence of current earnings, which have been diverted from the payment of current expenses, and applied to the benefit of the mortgage bondholders, so as to constitute the claims of Rogers a prior lien to that of the bondholders. The court is clearly of opinion that the general principles of equity invoked do not establish a lien in favor of J. W. Rogers prior to that of the mortgage bondholders.

Let us then examine the question whether the evidence in this case establishes, under the provisions of the Virginia Statute 1876-77, as amended by the act of 1878-79, a lien prior to that of the mortgagees, in favor of J. W. Rogers. In the memoranda of liens filed in the clerk's office of the county court of Page county, December 18, 1885, by Rogers &amp Milnes,-- are one for $9,657.06, the other, January 2, 1886, for $2,268.46; both of which sums are evidenced by certain notes therein specified,-- these sums of money are claimed to be due to the firm of Rogers & Milnes 'for supplies furnished and necessary to the operation of the said Shenandoah Iron Company. ' The master, in his report, and the evidence shows it, says that but an inconsiderable part of these sums were for supplies furnished the company. He bases his report of these liens on the grounds that 'Rogers & Milnes are practically assignees of the wage claims and entitled to the same priority as would be accorded to the assignors;' meaning by the wage claims the orders given by the company to its laborers on the firm of Rogers & Milnes, and by them paid to the holders in merchandise. Counsel for these claimants have not pressed the demand for the priority of these claims on the ground that they are for supplies furnished and necessary to the operation of the company. It is...