Westinghouse Electric Mfg. Co. v. Barre & Montpelier Traction & Power Co.,

• Decision Date: 07 October 1924
• Parties: WESTINGHOUSE ELECTRIC MFG. CO. v. BARRE & MONTPELIER TRACTION & POWER CO., ET AL
• Court: Vermont Supreme Court

126 A. 594

98 Vt. 130

WESTINGHOUSE ELECTRIC MFG. CO. v. BARRE & MONTPELIER TRACTION & POWER CO., ET AL

Supreme Court of Vermont

October 7, 1924

November Term, 1923.

APPEAL IN CHANCERY in receivership proceedings. Heard on the pleadings, including petitions and cross-bill by various parties in interest, and on evidence presented in vacation after the March Term, 1922, Washington County, Wilson Chancellor. From a decree giving certain unsecured creditors preference over mortgage bondholders the American Trust Company appealed. Reversed and remanded, with directions.

Decree reversed, and cause remanded for further proceedings and decree in accordance with the views herein expressed. Let the Trust Company pay the costs of the plaintiff and of the State in this Court; let it recover its costs in this Court from the Power Company and the Surety Company on the basis of an equitable apportionment between them.

J Ward Carver for plaintiff.

Fred E. Gleason for defendant Barre & Montpelier Traction & Power Co.

A L. Sherman and Weld A. Rollins for American Trust Co.

Edward H. Deavitt and George L. Hunt for city of Montpelier.

John W. Gordon for R. J. Stewart.

Fred B. Thomas for the State.

H. C. Shurtleff for the receiver.

Present: WATSON, C. J., POWERS, TAYLOR, SLACK, and BUTLER, JJ.

OPINION

TAYLOR

This is a receivership proceeding originally instituted against the Barre & Montpelier Traction & Power Co., for the sake of brevity referred to as the Traction Company, the Montpelier & Barre Light and Power Co., an attaching creditor of the Traction Company, hereinafter referred to as the Power Company, and H. J. Slayton, a deputy sheriff, holding an execution in favor of one Stewart, a judgment creditor of the Traction Company. Subsequently said Stewart and numerous other creditors of the Traction Company became parties to the proceeding. Meanwhile a receiver was appointed who took over the property of the Traction Company and has had the possession and management thereof hitherto.

The Traction Company is a Vermont corporation, and at the time the receiver was appointed was engaged in the operation of an electric railway in the cities of Montpelier and operation of an electric railway in the cities of Montpelier and Barre and the town of Berlin. Since the appointment of the receiver he has continued the operation of the railway under the direction of the court of chancery. See 97 Vt. 306, 123 A. 201. In 1897 the Traction Company issued coupon bonds to the amount of $ 100,000, secured by mortgages of its property to the American Trust Company, as trustee. The interest on the mortgage indebtedness falling due since the appointment of the receiver has not been paid. The Traction Company being thus in default, the Trust Company presented its bill of complaint, praying for foreclosure of its mortgages, which it had leave to file in the receivership proceedings. At the final hearing the Trust Company claimed a first lien on all of the tangible property of the Traction Company and asked for a judicial sale or a strict foreclosure. No question was made as to the validity of the mortgage indebtedness, nor that the Trust Company was entitled to a decree of foreclosure, but certain of the claimants asserted priorities as to bondholders and to other claimants as well, which were the only questions contested. (1) It was ordered that all receivership expenses, including the compensation of the receiver and of his counsel, taxes accrued since the appointment of the receiver, and expenses incurred in operating the railway under the orders of court be first paid and provided for. The claim of the city of Montpelier for paving was allowed as a receivership expense. (2) The claim of the State for taxes, except such as had accrued since the appointment of the receiver which were allowed as a receivership expense, were adjudged to be a lien upon all of the property of the Traction Company, subject only to the payment of receivership expenses. (3) The Stewart claim was given priority as against all claims except the foregoing. (4) Certain specified claims, thirty in number, were allowed with priorities equal among themselves against all other creditors, including the bondholders, except those named above. (5) Other claims were allowed as those of general creditors, without priority. The American Trust Company was decreed an absolute foreclosure, subject to the payment of the claims which had been given priority specified in paragraphs (1) to (4) inclusive, with limited time for the Traction Company and general creditors to redeem. On failure to redeem and of the Trust Company to pay the claims given priority within a limited time after the expiration of the time of redemption, it was ordered that the receiver should sell the remaining assets of the Traction Company at public auction by a date named, distribute the proceeds thereof in accordance with the foregoing priorities, and render final account in the premises as soon as feasible. The American Trust Company filed exceptions to the chancellor's "findings of fact and rulings of law," which were, upon consideration, overruled. From the final decree the Trust Company has appealed.

The questions argued relate principally to the right of the preferred creditors of the Traction Company to priority over the bondholders, though counsel for Stewart insists that his claim should be paid in advance of the claim of the city of Montpelier, while counsel for the Power Company insists that its claim underlies both the Stewart judgment and the city's paving claim. The conflicting claims can best be considered in the order in which they are given priority by the decree. CLAIM OF THE CITY OF MONTPELIER

While this claim is prosecuted in the name of the city it is for the benefit of the National Surety Company. The claim is for the expense of paving the track area in certain streets of the city occupied by the Traction Company's railway, which, by the terms of its franchise, is made a charge against the company. The nature and foundation of the claim is fully stated in City of Montpelier v. National Surety Co., 97 Vt. 111, 122 A. 484. While the action on the Surety Company's bond was pending the city filed its claim in this cause. Pending the appeal from the decree and after satisfying the final judgment against it in the action at law, the Surety Company applied for leave to prosecute the claim of the city for its benefit which was granted. The situation, then, is this: The city's judgment has been fully satisfied by the Surety Company and the latter, by leave of the court, supports an affirmance of the decree below for its own benefit as subrogee of the city. The claim having been allowed by the chancellor as a receivership expense is thereby given priority to all of the other litigated claims. The Trust Company, Stewart, and the Power Company severally object to this part of the decree, and counsel for the receiver argues in opposition to the allowance of the claim as an expense of the receivership.

The franchise under which the paving claim accrued went into effect in 1918, while the original bond mortgage bears date in 1897. It is not claimed, however, that this affects the rights of the parties. It appears that the franchise of 1918 was accepted by the Traction Company and the bondholders in lieu of the original franchise and that a "supplemental indenture" was executed, which in effect adapted the bond mortgage to the situation as it then existed. For present purposes, then, we may treat the franchise as antedating the Trust Company's mortgage. It may be admitted that the relations of the parties are such that the Surety Company would equitably be entitled to subrogation; but manifestly it would not thereby acquire any better standing, at least, than that of the city. Could the latter successfully defend the decree, if its claim had not been paid by the Surety Company? In support of the claim to priority, counsel rely not only upon the claim that the paving expense was properly allowed as a charge of the receivership, but they insist that the obligation of the Traction Company under the franchise was a condition annexed to the grant, and that thereby a charge upon the property of the company was created for the performance of the duty imposed by the franchise. It is recognized that the franchise contains no provision in terms reserving a lien upon the property; but it is urged that such is the result of a condition annexed to the grant, as the power granted can be exercised only upon the conditions specified. It is not questioned, but seems to be tacitly admitted, that to give the city's claim priority over the mortgage something in the nature of a lien attaching to the property prior to the mortgage must be found. Such is the doctrine of the cases that permit an otherwise unsecured claim to displace the mortgage security. See 22 R. C. L. 1121, where it is said, "The creditor must obtain a lien upon the property of the company, or security in some other form, or he will have to take his chances with all other creditors," citing Fogg v. Blair, 133 U.S. 534, 33 L.Ed. 721, 10 S.Ct. 338.

In brief, the circumstances attending the granting of the Traction Company's franchise were these: The Traction Company was authorized by its charter to occupy the streets of the city with its railway, "observing and complying with all lawful ordinances and regulations as to the use of streets and of highways." The city council had authority to "fix, demand, impose, and enforce" just and reasonable terms, conditions, and regulations for the use or occupation of any street in the city by the Traction Company and to prohibit the use thereof until such terms had been complied with. No. 293, Acts of 1912,...