# Sage v. Memphis & Little Rock Railroad Co. (125 U.S. 361)

* related portals: Supreme Court of the United States.
* sister projects: Wikidata item.
Supreme Court of the United States
125 U.S. 361
Sage v. Memphis & Little Rock Railroad Co.
MEMPHIS & LITTLE ROCK RAILROAD CO. v. SAGE Appeals from the Circuit Court of the United States for the Eastern District of Arkansas
No. 126, 127. Argued: January 6, 9, 1888. --- Decided: March 19, 1888.

## Linked case(s)

18 F. 571
A bill in equity, brought by a judgment creditor of a railroad company against the company, which alleges in substance that the property of the company is so heavily mortgaged that if the plaintiff should attempt to enforce payment of his debt by seizure and sale on execution there would [p362] be no bidders at more than a nominal amount, while, if the property were placed in the hands of a receiver by the court, and held together and carefully used in transporting passengers and freight, there would be a large surplus each year for the payment of the plaintiffs debt, contains ample averments to give a court of equity jurisdiction to appoint a receiver of the property: but this point is decided on the facts of the present case, and the court does not mean to say that one or more of the judgment creditors of a railroad company can, as matter of right, require such a property to be put in the hands of a receiver merely because the company falls or refuses to pay its debts.
The fact that a judgment creditor filing a. bill in equity to obtain the appointment of a receiver of the debtor's property did not first sue out execution and have a return of nulla bona is immaterial, if not objected to by the debtor, and if it appears on the admitted facts that so doing would have been an idle ceremony.
If a court of equity is induced by imposition to appoint a receiver of the property of a railroad company when one wvould not have been appointed had the court been aware of the exact situation, and the receiver is discharged on learning the imposition, and during the receivership a fund has accumulated from surplus earnings, trustees, representing mortgage creditors of the corporation, who did not intervene in the suit pending the receivership and set up no claim to the fund during the receivership and had no claim to it except as mortgage trustees out of possession, are not entitled to the fund.
It is again held that the mortgagor of a railroad is not required to account to the mortgagee for earnings, even though the mortgage covers income, while the mortgaged property remains in the mortgagor's possession, and no demand has been made for it or for surrender of its possession under the provisions of the mortgage.

## Statement of the Case

THE case was stated by the court as follows:
The decree from which these appeals are taken relates to the distribution or a fund in the registry of the circuit court arising from the operation by its receiver of the Memphis & Little Rock Railroad Company (as reorganized). The decree directed it to be paid to the surviving trustees in a certain mortgage executed by that company, for distribution [p363] among the beneficiaries under said mortgage. Sage and the railroad company each complain of that decree; the former insisting that the money should have been applied in satisfaction of a judgment obtained by him against the company, while the latter insisted that it was entitled to receive it.
The history of the claims of the respective parties is as follows:
On the 24th day of June, 1882, the Memphis & Little Rock Railroad Company (as reorganized) in an action brought by Russell Sage on that day in the circuit court of the United States for the Eastern district of Arkansas, confessed judgment in his favor for the sum of $125,921.13; that sum being the aggregate amount, principal and interest, of a demand note for $115,479.03 executed by that company June 20, 1882, to the president of the Missouri Pacific Railway Company, and indorsed by him to Sage, and of another note of $10,000 held by the latter against the same defendant. On the same day on which this judgment was entered, Sage commenced in the chancery court of Pulaski county, Ark., a suit in equity g ainst the Memphis & Little Rock Railroad Company (as reorganized). The bill, after setting out the judgment, alleged that the entire tangible property of the company consisted of its railroad—extending from its junction with the St. Louis, Iron Mountain & Southern Railroad, through the counties of Pulaski, Lonoke, Prairie, Monroe, St. Francis, and Crittenden, to the Mississippi river—an inclined track used to transfer its rolling stock across that river to Memphis, a steam-boat, certain lands and depot in that city, locomotives, cars, and other property, such as are usually employed in the management of a railroad; that the defendant by deed of May 1, 1877, duly recorded, mortgaged its property to trustees to secure the payment of bonds amounting to $250,000, and maturing, in installments of $50,000 each, on the 1st day of May, in the years 1879 to 1883, inclusive, of which installments four were then due and unpaid; that by deed of May 2, 1877, duly recorded, defend- [p364] ant mortgaged its property, rights, and franchises of every description to secure the payment of other bonds, with coupons attached, amounting to $2,600,000, payable July 1, 1907, and bearing interest after July 1, 1882, at the rate of 8 per cent. per annum; that both of said mortgages authorized the trustees to take possession of and sell the mortgaged property upon the non-payment of any of the bonds or interest at maturity; that the aggregate amount of the mortgages exceeded the saleable value of the property and franchises of every description owned by the company, or, at least, the sum for which they would sell under execution; that, by reason of the existence of the mortgages, no bidders could be found at more than nominal amounts for the property; that, a large part of the bonds secured by the mortgages being due and unpaid, the trustees would interfere with the sale of any part of the property under execution if the plaintiff should attempt, in that mode, to enforce payment of this judgment; and that for these reasons the suing out of execution upon such judgment would cause useless expense and delay, and result in no benefit whatever to plaintiff.
The plaintiff also alleged that if the company's property was held together, and carefully used in the transportation of passengers and freight, it would produce a large income, sufficient to pay all operating expenses and necessary repairs, leaving each year a large surplus to pay off and discharge plaintiff's debt; that such income could be made only by working the property as a unit, for purposes of transportation; consequently the seizure and sale of it, or of any material part thereof, would destroy its capacity to produce such income, without benefit to the plaintiff, and at the same time incommode the public by destroying the use of the road in the manner contemplated by the state.
The bill further alleged that the company had hitherto failed and refused to apply its surplus income to the payment of its debts, and unless prevented would continue in that course, and apply its surplus to other uses, to his great injury and loss.
The relief asked was that the court take possession of and [p365] operate the road by a receiver, and in that manner seize upon the only means in reach of the law for satisfying the plaintiff's demands; such relief to be subject to all the rights and equities of the holders of bonds or of said trustees.
The railroad company appeared and waived notice, and, the court being of opinion that the relief asked was necessary for the protection of the plaintiff's interests and rights, E. K. Sibley was appointed receiver. He was directed to take possession of the entire railroad, with the inclines, connections, tracks, depots, rolling stock, books, papers and all other property of the company of every kind. The company was ordered to surrender possession, and the receiver directed to operate the railroad, in the usual manner, in the carriage of passengers, freights, and express matter; keeping account of all receipts ande xpenses, and making report of all his acts and doings as might be required. Such surrender was made, and possession was taken by the receiver.
John L. Farwell and Robert K. Dow, as stockholders of the company, respectively intervened, October 14, 1882, and November 1, 1882, as defendants, and assailed the proceeding in which the receiver was appointed as being merely a financial expedient by which Sage and others could make a successful speculation in the stocks and securities of the company. They charged that the company was not really indebted to Sage in any sum, and, among other things, they asked that he be enjoined from prosecuting his judgment, and that the receiver be discharged. On the 10th of November, 1882, they filed their respective petitions for the removal of the cause to the circuit court of the United States, and it was so removed.
On the 1st of December, 1883, Dow and many others, holding judgment rendered by default upon preferred mortgage and general mortgage coupons, filed their claims. These judgments aggregated nearly $200,000. Two days thereafter, December 3, 1883, an order was entered requiring the receiver at once to surrender to the railroad company all the property of whatever kind in his custody as receiver; to pay out of the money in his hands all sums and dues authorized by the order appointing him; to retain the balance subject to [p366] the order of the court: and to make full report of his acts, showing what moneys he had received, and for what purpose they had been expended. The order declared that the railroad and other property in the hands of the receiver were delivered to the defendant only upon the condition—to which it assented—that it assume all the liabilities of the receiver, and agree to pay and discharge, out of the property or its income, all demands which might be legally established by judgment against the receiver; in default whereof the court might retake possession, and, by proper order, enforce the payment of such judgments.
On the 12th day of February, 1884, the receiver filed a report of his administration of the property, from which it appeared that there were a few unsettled accounts for traffic balances due to and from him, which he was unable to adjust. The company assuming in open court to pay such balances as were due from the receiver, it was, by consent of the parties, ordered that the receiver transfer to it all balances due to him, and that it receive and retain them for its own use. Thereupon the complainant filed a petition praying that the receiver, out of the funds in his hands, pay his judgment in the bill mentioned. The defendant filed a motion to strike from the files sundry claims of H. Sanford and other creditors of the defendant, and that the money in the hands of the receiver, after paying the amount due the complainant, be paid to the defendant, and to certain named creditors.
Upon the hearing, February 14, 1884, of the motion to strike out the claims of H. Sanford and others, said creditors respectively amended their claims by adding the following: "Claimant says that the bill filed in this suit, and all the subsequent proceedings therein, have been simulated, collusive, and fraudulent, and intended to cheat, hinder, and delay this claimant, and others in like cases, in the collection of their just debts, one of which is evidenced by said judgment in favor of claimant; wherefore he prays that his said claim be paid out of said fund in preference to all unsecured debts against said defendant." The court thereupon overruled the motion to strike out the claims of Sanford and others.
[p367] The cause was then referred to the master to report upon the charges of fraud and collusion made in the amended claims. By subsequent order, the master was directed to show by his report the total amount of money which came to the hands of the receiver; the amount expended by him in new construction and improvement of the road; the operating expenses of the road while in his hands; the amount paid out byh im in costs and attorney's fees in this suit, to whom paid, and for what services; and the total amount of money with which the receiver should be charged in a final settlement of his accounts.
On the 23d of February, 1884, Dow and Matthews, trustees in the mortgage of May 1, 1877, filed their claim and petition of intervention, they having previously brought suit to foreclose. In that petition they prayed that the moneys in the hands of the receiver be applied in the discharge of bonds secured by such mortgage. April 15, 1884, Dow, Matthews, and Moran, trustees in the mortgage or May 2, 1877, (the latter being successor of Pierson,) filed their claim of intervention, praying that, if the fund in court was not paid out on the claim and intervention theretofore filed by Dow and Matthews, it be paid in discharge of overdue interest on the bonds secured by the latter mortgage.
On the 22d of May, 1884, the master made a report, embodying, among others, the following findings: (1) That the total amount which came to the hands of the receiver during his term of office was $1,675,919.73; (2) that the amount expended during his administration for new construction was $310,992.92, not including certain sums expended for bridge repairs, cross-ties, repairs to locomotives, and maintenance of cars; (3) that the amount chargeable to the receiver on final settlement of his accounts was $218,998.98, which he had deposited as required by the court, and that he was thereby full acquitted; (4) that the suit instituted by Sage was collusive, in that it was brought with the connivance of the railroad company, for the purpose of shielding it, by means of a receivership, against suits by the company's creditors; (5) that during the receivership the railroad was largely improved by [p368] the receiver out of the income of the property, and that the receiver was honest, competent and faithful; (6) that Dow, one of the trustees in both the preference and general mortgages of the company, was the managing trustee, having, or seeming to have, the chief direction of all litigation involving either the trustees or the holders of bonds secured by the general mortgage; (7) that the intervenors were holders of bonds secured by the general mortgage, and that at no time during the continuance of the receivership did the trustees, as trustees of either mortgage, seek to intervene in the cause, or to take any action in regard to the property, or to cause its restoration to the defendant company, or to take any steps to put an end to the receivership; (8) that before the failure of the company to pay any installment of interest, Dow stated and threatened that, in case any default in the payment of such interest occurred, the bondholders would not take any steps to foreclose the mortgage, but would bring as many separate suits at law in the United States circuit court as could be separately brought upon coupons taken from the bonds secured by the mortgages every six months.
Exceptions by Sage and the company to the master's report having been overruled, it was adjudged that the money in the registry of the court be paid to Robert K. Dow and Watson Matthews, surviving trustees in what is called the 'Preference Mortgage of May 1, 1877,' for distribution by them among the beneficiaries under that mortgage, and that plaintiff pay all the costs of this suit. From that decree Sage and the railroad company have separately appealed. No appeal was prosecuted by bondholders having judgments at law, and who, by the decree, were placed upon an equality with other bondholders, secured by the same mortgage, who had not obtained judgments for the amount of their unpaid coupons.
Mr. Wager Swayne, for Sage, and for the Memphis and Little Rock Railroad Company as against intervening trustees and judgment creditors.
Mr. U. M. Rose, for the trustee.
[Argument of Counsel from pages 369-375 intentionally omitted]
MR. JUSTICE HARLAN, after stating the facts in the above language, delivered the opinion of the court.
This work is in the public domain in the United States because it is a work of the United States federal government (see 17 U.S.C. 105).
Public domainPublic domainfalsefalse