Wood v. New York & N.E.R. Co.

• Decision Date: 03 December 1895
• Citation: 70 F. 741
• Parties: WOOD v. NEW YORK & N.E.R. CO. et al. (CARNEGIE STEEL CO., Limited, Intervener). HART et al. v. SAME.
• Court: U.S. District Court — District of Massachusetts

70 F. 741

WOOD v. NEW YORK & N.E.R. CO. et al. (CARNEGIE STEEL CO., Limited, Intervener).

HART et al. v. SAME.

United States Circuit Court, D. Massachusetts.

December 3, 1895

Strout & Coolidge and Geo. S. Selfridge, for receivers.

Alfred Hemenway and William D. Turner, for petitioners.

Simpson Thatcher & Barnum and Ropes, Gray & Loring, for Hart and others.

COLT Circuit Judge.

This is an intervening petition brought by the Carnegie Steel Company, Limited, praying that the receivers of the New York & New England Railroad Company be directed to pay out of the receipts derived from the operation of said railroad a certain claim, amounting to $3,751.86, for material and supplies furnished from September 22, 1893. The articles furnished were coupling links and pins and tank steel. The petition alleges that these supplies were necessary to the operation of the railroad from day to day; that payment of said amount had been approved, and would have been paid but for the filing of a bill of complaint on December 29, 1893 by Theodore F. Wood, on behalf of himself and all other holders of the first mortgage bonds and of the common stock of said railroad who might join therein, praying for the appointment of a receiver; that a decree was entered appointing a temporary receiver, and that on January 23 1894, permanent receivers were appointed; that 'by said decree the receivers were authorized to pay debts for supplies of the kind furnished by your petitioner out of the operating receipts,' and that in pursuance thereof many debts for supplies were paid, but that before payment of the petitioner's account another bill of complaint was filed September 8, 1894, by William T. Hart and others, trustees under the second mortgage, praying for the appointment of a receiver and an order of foreclosure; that under said last bill the same receivers were appointed and the cause consolidated with the Wood suit, and a decree was entered that the receivers thereafter should pay no debts or accounts due from said railroad without the special order of the court, except such expenses as were necessarily incurred in operating and protecting the mortgaged property. The decree in the Wood suit provided substantially as follows: The receivers were ordered to continue the operations of the railroad, and out of the operating receipts to pay wages taxes, royalties, rents, traffic balances due and to become due, debts for supplies, and interest due on securities charged on the property. The receivers were also authorized, in their discretion, from time to time, out of the funds coming into their hands, to pay the expenses of operating the said property, and all taxes and assessments, and the current and unpaid pay rolls and supply accounts incurred in the operation of the road at any time within four months prior to the receivership. The decree in the Hart foreclosure suit provided that the trustees were entitled to take possession of the mortgaged property, and extended the receivership in the Wood suit for the purposes of the foreclosure suit. It further provided that the receivers should make no payments and incur no obligations without special order of the court, except for operating expenses incurred by them.

The present hearing was had on demurrers to the petition filed by the receivers and the trustees in the foreclosure suit. The question presented is whether the petitioner's claim is entitled to a preference over mortgage liens, and should be paid out of current earnings or receipts in the hands of the receivers.

In respect to the payment by receivers of a railroad of pre-existing current debts, as constituting a preference over outstanding mortgage liens, out of current income coming into their hands, or even out of the proceeds of the sale of the property under foreclosure, it may be observed-- First, that no fixed and inflexible rule can be laid down, but that each case is to be largely governed by its own special circumstances; second, that the tendency of judicial decision is to narrow, rather than enlarge, the class of such preferred claims; third, that the allowance of such claims does not depend upon any fixed or arbitrary rule as to the time when the debts were contracted, further than that they must have been incurred within a reasonable time before the appointment of receivers, such reasonable time depending upon the circumstances of each particular case; fourth, that the allowance of such claims does not depend upon the order of court appointing receivers; fifth, that the current income of a railroad is primarily to be devoted to the payment of current debts, and that where such income has been used for the payment of interest upon mortgage indebtedness or for permanent improvements, or in any manner has been diverted for the benefit of the mortgagees at the expense of the current debt fund, there must be a restoration, to the extent of such diversion; sixth, that, independently of the question of diversion, debts may be preferred which are incurred for labor and supplies necessary to keep the road a going concern from day to day, or which are the outcome of indispensable business relations a continuance of which involves the interests of the public and the traffic of the road. Fosdick v. Schall, 99 U.S. 235; Hale v. Frost, Id. 389; Miltenberger v. Railroad Co., 106 U.S. 286; 1 Sup.Ct. 140; Trust Co. v. Souther, 107 U.S. 591, 2 Sup.Ct. 295; Burnham v. Bowen, 111 U.S. 776, 4 Sup.Ct. 675; Union Trust Co. v. Illinois M. Ry. Co., 117 U.S. 434, 6 Sup.Ct. 809; St. Louis, A. & T.H.R. Co. v. Cleveland, C., C. & I. Ry. Co., 125 U.S. 658, 8 Sup.Ct. 1011; Kneeland v. Trust Co., 136 U.S. 89, 10 Sup.Ct. 950; Thomas v. Car Co., 149 U.S. 95, 13 Sup.Ct. 824; Farmers' Loan & Trust Co. v. Kansas City, W. & N.W.R. Co., 53 F. 182; Bound v. Railway Co., 7 C.C.A. 322, 58 F. 473; Finance Co. of Pennsylvania v. Charleston, C. & C.R. Co., 52 F. 524; Id., 10 C.C.A. 323, 62 F. 205. In the leading case of Fosdick v. Schall, supra (pages 251-254), Mr. Chief Justice Waite, speaking for the court, said:

'We have no doubt that, when a court of chancery is asked by railroad mortgagees to appoint a receiver of railroad property pending proceedings for foreclosure, the court, in the exercise of a sound judicial discretion, may, as a condition of issuing the necessary order, impose such terms in reference to the payment from the income during the receivership of outstanding debts for labor, supplies, equipment, or permanent improvement of the mortgaged property as may, under the circumstances of the particular case, appear to be reasonable. * * * The income out of which the mortgagee is to be paid is the net income obtained by deducting from the gross earnings what is required for necessary operating and managing expenses, proper equipment, and useful improvements. Every railroad mortgagee, in accepting his security, impliedly agrees that the current debts made in the ordinary course of business shall be paid from the current receipts before he has any claim upon the income. If, for the convenience of the moment, something is taken from what may not improperly be called the 'current debt fund,' and put into that which belongs to the mortgage creditors, it certainly is not inequitable for the court, when asked by the mortgagees to take possession of the future income and hold it for their benefit, to require, as a condition of

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