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[176 U.S. 257, 258] This case is here upon a writ of certiorari for the review of a final decree of the United States circuit court of appeals for the fourth circuit allowing certain claims of the Carnegie Steel Company, Limited, as preferential debts chargeable upon current receipts arising from the operation of certain railroad properties in the hands of receivers.
The Richmond & Danville Railroad Company (hereafter called the Danville Company), in addition to its own line extending from Richmond to Danville, with a 12-mile branch, being 152 miles of road, through the purchase or the acquisition of stock, or by written lease or operating contracts, obtained the possession and control of more than twenty other railways built under the respective charters of and owned by the corporations named in the bill. It also owned the entire capital stock of the Baltimore, Chesapeake, & Richmond Steamboat Company, and through it operated a line of steamers between Richmond, West Point, and Baltimore. Its authorized and outstanding capital stock was $5,000,000, [176 U.S. 257, 259] the larger part being owned by its codefendant company.
The lines of railway comprising this system, known as the Danville system, were in Virginia, North Carolina, South Carolina, Georgia, Alabama, and Mississippi, and reached many of the most important trade centers of those states.
For more than five years prior to the institution of that suit the Danville Company had held in possession and substantial control all the railways of the other companies in connection with its own road as a single system. Over a large portion of the mileage the engines and cars in traffic service were used without any fixed apportionment thereof to any specific portion of the system, and the income derived from the operations of the parent and auxiliary, leased, and operated liens was received and distributed through a common treasury with no separation of the earnings and expenses of the several properties, except by entries in books of account apportioning the gross income and expenses on some approximate but arbitrary basis of division as between the different lines over which the traffic yielding the revenue had passed.
The total mileage of the auxiliary portion of the Danville railroad, added to its own mileage, aggregated 3,320 miles, exclusive of its steamer service.
The aggregate outstanding capital stock of the lines constituting the system, together with the stock of the steamboat company, amounted to $43, 482,950, of which $10,707,354 was neither owned nor controlled by the defendant companies.
Through the ownership of all or a majority of the stock thereof, some of the roads were operated by the Danville Company as proprietary lines. Others were operated upon the basis of a fixed rental or payment of net earnings, or a guarantee of interest on bonds or dividends of stock, or both.
In consequence of the absorption of such roads in its system by lease or contract, the bonded debts and rental obligations which the Danville Company had assumed and became liable for amounted to $71,128,126. Its own direct bonded debt was $16,136,000, making the total bonded and rental debt of the Danville system $87,314,126. [176 U.S. 257, 260] The bonded debt resting on the Danville road proper and equipments was in five separate issues of securities; that resting on its auxiliary and operative lines was embraced in fifty-nine different classes of securities issued by the several companies, secured by separate mortgages or deeds of trust covering different sections of the controlled roads or their equipment, capable of separate default or foreclosure, besides five stock guaranties, representing certain of its rental obligations, also secured by provisions for reentry on default.
Besides all such outstanding fixed liabilities on account of its own road and controlled lines, the directors of the Danville Company had pledged its credit and subjected it to other heavy liabilities, to enable its codefendant, the Richmond & West Point Terminal Railway & Warehouse Company (to be hereafter referred to as the Terminal Company) or certain of its controlled companies, to acquire the stock control of other lines of railroads not directly connected with or operated by the Danville Company and in which it had no interest whatever. Its board of directors had issued $6,000,000 of bonds of the Danville Company, executed jointly and severally with the East Tennessee, Virginia, & Georgia Company, and guaranteed by the Terminal Company 'Cincinnati Extension Bonds,' which were secured by a trust pledge of preference and ordinary shares of the Alabama & Great Southern Railway Company, Limited. Those bonds had been sold in open market, and apparently constituted an outstanding liability of the Danville Company, but for which it received no valuable consideration whatever. It had executed the same as mere accommodation paper and as a partnership adventure, and was only protected against loss by the above pledge of corporate stock of uncertain value, because it was subject to heavy prior mortgage debts, and the line of road of the particular corporation issuing such stock was a [176 U.S. 257, 261] central link in the system of the East Tennessee Railway system over which the Danville Company had no control whatever.
By reason of the absolute stock control which the Terminal Company had over the Danville Company it compelled the latter company about June 1, 1891, to become the assignee and guarantor of a written lease executed by the Central Railroad & Banking Company of Georgia, of all its system of railroads and steamer lines for a long term of years to the Georgia Pacific Railway Company, whereby the Danville Company became bound to operate the Central System and to assume and pay all the interest on the bonded debts and all the rental obligations of the Central Railroad & Banking Company; and the Danville Company was compelled to execute and deliver a bond of $1,000,000 to faithfully perform all the covenants in such lease. The result of the operation of the Central-Georgia system of roads had been a constant and heavy loss to the Danville Company.
The bill next set out the relations between the Danville Company and the Terminal Company, and also describes what is known as the Tennessee system, having 2,318 miles in length of proprietary, leased, and operated roads.
The bill further alleged that the enormous floating debt of the Danville Company was wholly beyond its financial ability to carry out of its ordinary revenues, over $4,500,000 of such debt standing in demand loans subject to summary enforcement; that by reason of the depreciation in the market value of its securities, and the failure of the several efforts to reorganize the property, its credit had been much impaired; it was not able to pay its obligations as they matured, but had been forced to ask renewals; it had no available collaterals to enable it to negotiate such a loan as was necessary to adequately protect it against open default; it had been forced to postpone payment of usual operating expense vouchers for supplies, and was allowing heavy arrears of such debts to accrue; many creditors had brought suits and attached cars and funds forwarded to pay employees; besides its floating debt, mortgage coupons on seventeen sectional mortgages, aggregating $989,000, would fall due on July 1, 1892; it had no available money or assets wherewith to pay the debts which would soon mature and no reasonable hope of financial assistance from any quarter to enable it to do so; its directors had had no meeting for over two months, and had practically abdicated their trust and power of management and confessed their utter inability ability to devise means to divert the insolvency and disruption of the system in their charge.
That for the purpose of enforcing a lien and equity upon the income of the railroad system aforesaid, to which the holders of the emergency loan were by contract entitled, 'as well as to preserve the unity of said system,' as it had been for years maintained and operated, and preventing the disruption thereof by separate executions, attachments, or sequestrations, the occurrence of which would be inevitable in view of the defaults in interest payments which would presently occur, the court would forthwith appoint one or more receivers of the entire system of railroads and steamers held and operated by the Danville Company, together with all equip- [176 U.S. 257, 266] ment, material, machinery, supplies, moneys, accounts, choses in action, and assets of every description and wherever situated, together with all leasehold rights and contracts, with authority to manage and operate the same as the officers of and under the direction of the court, and that all the officers, managers, superintendents, and employees of the Danville Company be required to forthwith deliver up the possession of all and singular each and every part of the property, over which the receivers were thus appointed, wherever situate, and also all books of accounts, offices, vouchers, and papers in any way relating to the business or operation of such system of railways and steamers, and for injunctions restraining each and every of the officers, directors, managers, superintendents, agents, and employees of the Danville Company from interfering in any way whatever with the possession and control of the receivers over any part of the property.
Upon hearing and considering the bill, with the exhibits and answer in support thereof, and on motion of the complainants, Frederic W. Huidekoper and Reuben Foster were appointed by the court receivers of the property and assets of the Danville Company, namely, the system of railways then in the possession of and owned and controlled by that corporation, situated in the District of Columbia and in the states of Virginia, North and South Carolina, Georgia, Alabama, and Mississippi, together with all the equipments, shops, appurtenances of every kind, machinery, material, and supplies owned, held, or in the possession and use of such corporation, wherever situate, including all tracks, terminal facilities, real estate, warehouses, offices, stations, and all other buildings of every kind, owned, held, or possessed by the Danville Company, together with all steamers, wharves, and other properties held in connection therewith, and all moneys, choses in action, credit, bonds, stocks, leasehold interests, or operating contracts, and other assets of every kind, and all other property, real, personal, and mixed, owned, held, or possessed by that company.
The receivers, who are referred to in the record as the insolvency receivers, entered into full and exclusive possession on the 16th day of June, 1892.
On that and the succeeding day auxiliary suits were instituted by the plaintiffs against the Danville Company in the circuit courts of the United States for the western district of North Carolina, the district of South Carolina, the northern district of Georgia, the northern district of Alabama and the northern district of Mississippi, and orders were duly entered of record by each of those courts confirming the original appointment of receivers and recognizing the circuit court of the eastern district of Virginia as having primary jurisdiction over all the railroad system and property of the Danville Company wherever situated.
Of the application for an order in accordance with the petition, the defendants and the Central Trust Company had notice. The court by order authorized the borrowing of $1,000,000 receivers' certificates to be used for the purposes indicated in the petition. The Trust Company was represented at the hearing of the application; and, so far as the record discloses, made no objection to the order.
On the 13th day of July, 1892, the Central Trust Company presented its petition and prayed that it be allowed to intervene in the suit brought by Clyde and others for the protection of the holders of the 6 per cent bonds of the Danville Company and of the subscribers to the emergency loan made prior to April 1, 1892, and in respect of which that company was the trust depositary of the income of the Danville system pledged to secure such loan; and by order entered August 16, 1892, leave was given for that company to intervene in the cause, 'on the condition that it hereby submits to the several orders heretofore entered herein.' On the latter day that company presented its petition, asking that Huide- [176 U.S. 257, 269] koper and Foster be appointed as permanent receivers of the Danville Company, if the court should determine to continue its judicial possession of the system. An order to that effect was accordingly made. In presenting the above petition the Central Trust Company appeared not only as trustee of the Richmond & Danville Railroad Company and the consolidated gold mortgage, to be presently referred to, but as trustee representing other mortgages and railroads, including the Virginia Midland Railroad, the Georgia Pacific Railway, and the North Eastern Railroad of Georgia.
On the 19th day of December, 1892, an intervening petition was presented by parties representing the underlying bondholders interested in any litigation or proceedings for the foreclosure of any of the mortgage or trust deeds of the Danville Company or any of the companies forming a part of the Danville system, and they were permitted to become come parties complainant in the Clyde suit, and to file such petitions and take such proceedings as they deemed necessary or requisite for the protection of the interests they represented.
In the suit instituted by Clyde and others, the Carnegie Steel Company, Limited, filed with the Master Commissioner, October 14, 1892, its claims arising out of certain contracts made between that company and the Danville Railroad Company in 1891 for steel rails delivered to the latter between July 25, 1891, and October 10, 1891. The facts relating to those contracts will be hereafter stated.
On the 13th day of April, 1894, the Central Trust Company of New York instituted a separate suit against the Richmond & Danville Railroad Company for the foreclosure of what is known as the consolidated gold mortgage. Upon the filing of that petition, and on the motion of the Trust Company, an order was entered appointing Huidekoper, Foster, and Spencer receivers of the court of all and singular the railroads, property, assets, credits, and effects of the Richmond & Danville Railroad Company, 'the same being the system of railways owned, operated, or controlled by the said corporation, situate in the District of Columbia and in the states of Virginia, North Carolina, South Carolina, Georgia, Alabama, and Mis- [176 U.S. 257, 270] sissippi, together with all the equipment, shops,' etc., 'and other assets of every kind, and all other property, real, personal, and mixed, held or possessed by the said railroad company, the above-mentioned property being now in the possession of said Frederic W. Huidekoper and Reuben Foster, receivers duly appointed by this court in a certain suit brought in this court and now pending therein, wherein William P. Clyde and others are plaintiffs and the Richmond & Danville Railroad Company and others are defendants.' These receivers are described in the record as the foreclosure receivers.
On the 17th day of February, 1894, the suit instituted by the Central Trust Company of New York and the one brought by Clyde and others were consolidated under the name of 'The Central Trust Company of New York and others v. [176 U.S. 257, 271] The Richmond & Danville Railroad Company and others, Consolidated Cause.' Upon application of the Carnegie Company it was made a party defendant in the consolidated cause.
A decree of foreclosure and sale in the consolidated cause was entered April 13, 1894, and a sale took place June 15, 1894, the property embraced by the decree being sold as a unit. Charles H. Coster and Anthony J. Thomas, a purchasing committee, as joint tenants purchased the property for the use, benefit, and behoof of a corporation to be organized pursuant to the terms of an act of the general assembly of Virginia, approved February 20, 1894, entitled 'An Act Authorizing the Purchasers of the Richmond & Danville Railroad, Their Assigns and Successors, to Become and Be a Corporation.' The sale was approved by formal order of court and confirmed to the purchasing committee, composed of Coster and Thomas, for the sole use, benefit, and behoof of the Southern Railway Company created under the laws of Virginia.
The Southern Railway Company prosecuted an appeal from that order to the circuit court of appeals and the action of the circuit court was approved. 42 U. S. App. 145, 76 Fed. Rep. 492, 22 C. C. A. 289. The case is in this court upon certiorari, sued out by the railway company.
Henry Crawford, Edward J. Phelps, and Willis B. Smith for appellant.
Messrs. Nicholas P. Bond, David Willcox, and P. C. Know for appellee.
It appears from the above statement that the property in the hands of the receivers in the Clyde or insolvency suit was surrendered to the receivers in the foreclosure suit under an order that expressly reserved power in the court to adjudge and decree in the Clyde suit upon the rights of creditors asserting claims against the property of the railroad company or its income in preference to mortgage debts. Besides, the decree of sale provided that the purchaser or purchasers, or his or their assigns, under any decretal sale should, as a part of the consideration, in addition to any sum bid, take the property upon the express condition that he or they would pay and satisfy (among other specified claims) all claims theretofore 'filed in this case or in either of the causes, consolidated herein, but only when said court shall allow such claims and adjudge the same to be prior in lien or superior in equity to the mortgage foreclosed in this suit, and in accordance with the order or orders of the court allowing such claims and adjudging with respect thereto.' And the right was dis- [176 U.S. 257, 274] tinctly reserved to retake and resell the property in case the purchaser or purchasers, or his or their assigns, failed or neglected to comply with the order of court in respect of the payment of such prior liens. These conditions were repeated in the order confirming the sale. So that the right of the Carnegie Company to have its claims determined upon their merits is not at all affected by the sale of the property held by the receivers in the consolidated cause, or by the fact of its transfer to the Southern Railway Company. And we add that the above reservation in the orders and decree of the Circuit Court left it open for the Southern Railway Company to contest, upon their merits, any claims allowed after its purchase under the decree of sale.
The respective rights of the mortgagees of a railroad company and of parties having claims against it at the time its property passed into the hands of receivers have been frequently the subject of consideration by this court. But as counsel differ as to the scope and effect of former decisions, it is necessary to examine them and ascertain whether those decisions embrace the case now before the court.
In Burnham v. Bowen, 111 U.S. 776 , 780-783, 28 L. ed. 596, 598, 4 Sup. Ct. Rep. 675, 677-679, it appeared that the trustees of a mortgage covering all the property of a railroad company and all the revenues and income thereof, brought suit to foreclose the mortgage, and had a receiver appointed. In the order appointing the receiver no special provision was made for the payment of debts owing for current expenses. When the receiver took possession the rail- [176 U.S. 257, 278] road company was indebted for coal used on locomotives-a debt contracted by the company in the ordinary course of a continuing business, and which would have been paid out of current earnings at the time agreed on if the company had remained in possession. The debt due the coal company was evidenced by the acceptances of the railroad company, which were for different amounts, maturing a month apart, thus implying, as this court said, monthly settlements of monthly accounts, with a somewhat extended credit to meet the business requirements of the railroad company. A decree was entered finding the amount due to Bowen, the holder of the acceptances, and declaring that the mortgaged property in the hands of the trustees under the decree of foreclosure was equitably bound for the payment thereof.
In Kneeland v. American Loan & T. Co. 136 U.S. 89, 97 , 34 S. L. ed. 379, 383, 10 Sup. Ct. Rep. 950, 953, this court said: 'The appointment of a receiver vests in the court no absolute control over the property, and no general authority to displace vested contract liens. Because in a few specified and limited cases this court has declared that unsecured claims were entitled to priority over mortgage debts, an idea seems to have obtained that a court appointing a receiver acquires power to give such preference to any general and [176 U.S. 257, 283] unsecured claims. It has been assumed that a court appointing a receiver could rightfully burden the mortgaged property for the payment of any unsecured indebtedness. Indeed, we are advised that some courts have made the appointment of a receiver conditional upon the payment of all unsecured indebtedness, in preference to the mortgage liens sought to be enforced. Can anything be conceived which more thoroughly destroys the sacredness of contract obligations? One holding a mortgage debt upon a railroad has the same right to demand and expect of the court respect for his vested and contracted priority as a holder of a mortgage on a farm or lot. So, when a court appoints a receiver of railroad property, it has no right to make that receivership conditional on the payment of other than those few unsecured claims which, by the rulings of this court, have been declared to have an equitable priority. No one is bound to sell to a railroad company or to work for it, and whoever has dealings with a company whose property is mortgaged must be assumed to have dealt with it on the faith of its personal responsibility, and not in expectation of subsequently displacing the priority of the mortgage liens.' Again: 'It is the exception, and not the rule, that such priority of liens can be displaced. We emphasize this fact of the sacredness of contract liens, for the reason that there seems to be growing an idea that the chancellor, in the exercise of his equitable powers, has unlimited discretion in this matter of the displacement of vested liens.' These principles were reaffirmed in Thomas v. Western Car Co. 149 U.S. 95, 110 , 37 S. L. ed. 663, 668, 13 Sup. Ct. Rep. 824, in which it was held that the car company there seeking a preference over mortgage creditors had contracted upon the responsibility of the railroad company, and not in reliance upon the interposition of a court of equity; consequently its claim to a preference was denied.
Can the decree below be sustained consistently with these principles? Are the debts due the Carnegie Company of the class designated in the adjudged cases as current debts contracted, not on the personal credit of the railroad company, but in the ordinary course of its business, and to be met out of current receipts? As already said, whether the parties, seller and buyer, had in view only the personal credit of the latter, is to be determined in each case by its special facts, including the amount of the debt and the terms of payment.
All the rails furnished by the Carnegie Company were not supplied under one contract-a circumstance not to be ignored when determining whether the debts were of the kind that would ordinarily be met out of current receipts. The first contract between the Carnegie Company and the Danville Company was made June 10, 1891-within within less than twelve months before the appointment of receivers in the Clyde suit. It called for the delivery by the Carnegie Company, during the month of July, 1891, of only 2,500 gross tons of rails for which the railroad company was to pay $30 per gross ton, in its notes at four months from date of shipment without interest, with privilege of one renewal for three months with interest at the rate of 5 per cent per annum, and a second renewal for three months with interest at the rate of 6 per cent per annum. The railroad company reserved the option to increase by 200 or 300 the number of tons to be delivered, making the total delivery 2,700 or 2,800 tons. That option was exercised. By another arrangement between [176 U.S. 257, 287] the parties entered into July 21, 1891, the contract was further extended to cover 1,656 tons of rails at the same price, terms, and delivery. Subsequently, by agreement of October 2, 1891, a provision was made for the delivery of 200 additional tons at the price of $26 per ton. The delivery of the rails was in varying amounts and at different times between July 25, 1891, and October 10, 1891. The whole quantity delivered was 4,203 350/2240 tons, worth $125,067.39. Notes were given by the railroad company, and they were renewed at their respective maturities. Those last given, and which were unpaid at the time of the institution of the Clyde or insolvency suit, were each payable at three months, except the last one, which was at four months. They were of the following dates and amounts: March 21, 1892, $38,251.77; March 24, 1892, $35,499.38; April 4, 1892, $12,786.16; May 16, 1892, $5,355.09; June 7, 1892, $33,174.99. The first note was due June 21-24, 1892 (six days only after the appointment of receivers in the Clyde suit), and the last October 7-10, 1892.
The rails so received from the Carnegie Company were used by the Danville Company on the following roads in its possession and under its control: 1108.5 tons 56lb, $33,174.99, on the Northeastern Railroad of Georgia; 1270 tons 731b, $37,713.75, on the Virginia Midland Railroad; 1793.5 tons 70lb, $53,258.69, on the Richmond and Danville Railroad; 31.2 tons 70lb, $920.56, on the Georgia Pacifie Railroad. This use of the rails is shown by the report of special masters, and to that report on this point no exceptions were filed by either party.
It is apparent that the purchases of new steel rails while the railroads were in possession of receivers were made in the ordinary course of business and were properly chargeable upon and payable out of current receipts in preference to the claims of mortgage creditors. In every substantial sense the [176 U.S. 257, 289] expenses thus incurred were operating expenses. They were incurred in the interest of mortgage creditors, the value of whose securities depended upon the unity of the Danville system being preserved and the interests of all concerned not allowed to go to ruin. Why should a different rule be applied to the contracts made with the Carnegie Company shortly before the appointment of receivers in the Clyde suit, the original contract being for only 2,500 tons, and the last one for only 1,656 tons? Is it to be said that the contract for 2,000 tons of steel rails and the contract for 2,500 tons, made by the receivers in the foreclosure suit, created debts of a preferential character, while contracts made by the railroad company of exactly the same kind shortly before the appointment of receivers for 2, 500 and 1,656 tons of steel rails could not under any circumstances become a preferential debt chargeable upon current receipts? Surely the quantity of rails purchased from the Carnegie Company and delivered in 1891 was insignificant in view of the interests involved and the extensive mileage of the Danville system, and was by no means so large as to suggest that they were to be used in constructing new and additional road, and not to keep existing roads in proper condition for use. Every railroad company must have on hand a limited quantity of rails in order to keep every part of its line in proper and safe condition. It is evident that the Carnegie rails purchased shortly before the receivers in the Clyde suit were appointed-the the rails here in question-were obtained for the same reason that induced the subsequent purchases by the receivers. No one will say that the use of these rails did not add directly to the value of the securities of mortgage creditors. Within the reason of the rule adverted to, the debts contracted with the Carnegie Company were as much current debts in the ordinary course of the business of the railroad company as were the debts contracted by the receivers under the orders of court, when they purchased new rails to put the road in safe condition, or when they purchased at one time four passenger locomotives, and at another time eight passenger and freight locomotives, the cost of which was charged upon the income in their hands. Is it to be said [176 U.S. 257, 290] that such expenses incurred by the receivers were preferential debts, but that debts incurred by the railroad company shortly prior to the receivership for rails needed to keep its road in safe condition for use are not of that class?
We next inquire whether it was not at the time the expectation of both parties, vendor and vendee, that the rails delivered by the Carnegie Company between July 25, 1891, and October 10, 1891, should be paid for out of the current earnings of the railroad company? The attendant circumstances require an affirmative answer to this question, although the parties did not in express words declare that the debts due contracted with the Carnegie Company were to be charged upon the current earnings of the railroad company. The quantity of rails was not so large as to preclude the expectation that they could be paid for out of the current earnings of the railroad company. As already said, it was a very small quantity for purposes of ordinary or necessary repairs, and there is nothing in the record to show that the Carnegie Company relied merely or exclusively on the personal credit of the railroad company. The renewal notes executed by the railroad company were all within the three months, immediately preceding the appointment of the receivers. The short credit given strongly indicates, and the fair inference from the record is, that the parties contemplated that the rails were to be paid for out of the current earnings of the railroad. The taking of notes does not indicate the contrary, but only shows that the vendor company preferred to have its debt evidenced by commercial paper which it could use, rather than to stand upon open account. In Burnaham v. Bowen it was said: 'When the receiver was appointed the debt was evidenced by business paper maturing at a future date. It was no waiver of any claim on the fund which might come into the hands of the receiver to renew the paper at maturity for the convenience of the holder. It was undoubtedly given originally to enable the coal company to use it as conmmercial paper if occasion required, and the renewal may have become desirable on account of the use which had been made of it.' The equities of the creditor furnishing that which protected and preserved [176 U.S. 257, 291] the mortgage security and materially increased its value are none the less because the original debt was evidenced by the notes of the company, taken for its convenience and renewed for its accommodation.
It may be said that a part of the rails furnished by the Carnegie Company were not used on the Danville railroad, although used on roads beonong to the Danville system. But that is not a controlling circumstance. The contracts were made with the Danville Company, and, as between the contracting parties, the debts so incurred were, under the circumstances stated, current debts chargeable upon the current receipts of the railroad company that purchased the rails. The rights of the Carnegie Company are none the less because the Danville Company chose, after obtaining the rails, to use a part of them on roads under its control and in its possession, and whose preservation in proper condition was vital to its successful operation. The scheme of reorganization was in the interest of the stockholders and mortgage creditors of the roads constituting the Danville system, and chiefly of the bondholders represented by the Central Trust Company, the trustee in the consolidated gold mortgage. That company, as we shall presently show, stood by and assented to, indeed approved, the application, for the benefit of the bondholders represented by it, of funds which should have been applied in payment of current debts contracted in the interest of mortgage creditors before the appointment of receivers in the Clyde suit. Suppose the court had directed the receivers in the Clyde suit, before turning over the property to the receivers in the foreclosure suit, to pay the claims of the Carnegie Company, is it possible that the mortgage creditors would have been heard to object to such an order? Certainly not, if it appeared, as it does satisfactorily appear in the present case, that the Carnegie debts were incurred in the orinary course of business for the purpose of keeping the railroad in safe condition for use by the public. If the Carnegie claims were preferential debts when the control of the property passed from the railroad company to the receivers in the insolvency or Clyde suit, the latter were bound in equity to [176 U.S. 257, 292] do what the railroad company would have been required to do if it had retained control of the property.
What was done with the earnings of the property that originally came to the hands of the receivers, as well as with the earnings during the receivership under the Clyde bill and also during the receivership in the foreclosure suit instituted by the Central Trust Company? As to these matters there is no room for dispute. Assuming, in view of what has been said, that the claims of the Carnegie Company were current debts chargeable upon current earnings of the railroad property, even while in the hands of the receivers, and therefore to be preferred to claims of mortgage creditors, the next inquiry is whether the current receipts were applied during the receiverships for the benefit of the bondholders, or otherwise, when they should have been applied to the payment of current or preferential debts, including the debts due to the Carnegie Company.
During the insolvency or Clyde receivership, from June 17, 1892, to July 31, 1893, the net earnings were $3,297,792.31. Among the items of expenditure during the same period were the following: Construction, $232, 134.34, of which $19,715.05 was for construction on the Danville road; Equipment, $81,390.32, of which $74,733.28 was for equipment on the Danville road; Interest, Rentals, and Dividends, $3,249,481.89, of which $ 396,522.14 was for the Danville road, $709,324 for the Virginia Midland, $ 20,265 for the North Eastern, and $232,127 for the Georgia Pacific road, the last four roads being those on which, according to the special master's report, the Carnegie rails were used; Sinking Fund, Richmond & Danville road, 5 per cent equipment mortgage, $67,205; and Car Trust payments, $209,500. [176 U.S. 257, 294] Between August 1, 1893, and December 31, 1893, out of the net earnings of the Danville system, excluding certain lines, the receivers paid among other sums the following: Construction on Danville road, $9,232. 61; Equipment on same road, $6,791.35; Interest, Rentals, and Dividends, $ 626,735.85, which included $48,082.90 for the Danville road, Virginia Midland, $199,664.50, and $87.50 for the North Eastern Railroad; Sinking Fund, Danville Company, equipment mortgage, $37,790; Car Trust payments, $ 51,160.
The above figures are found in the statement of the result of the operations of the Danville system for the periods named.
Looking at the cash statement of the receipts and disbursements of the Richmend & Danville Railroad alone, we find that from June 16, 1892, to July 31, 1893, the receipts were $15,432,055.46. In this sum were included $480,427.91 cash received from the Danville Company when the Clyde or insolvency receivers were appointed, and $671,363.40 collected on accounts turned over to those receivers by the railroad company. The disbursements during the above period were $15,290,730.27, leaving in the hands of the receivers on July 31, 1893, $141,325.19 in cash, which was turned over to the foreclosure receivers. The disbursements included among other items the following: Interest and Rentals, $3,249,481.89; Car Trust payments and Sinking Funds, $486,368.16.
The account of disbursements for the Danville road from August 1, 1893, to November 30, 1893, shows, among other things, the payment of Interest and Rentals, $591,457.42; Car Trust payments and Sinking Fund, $ 88,950.
The total floating debt of the Richmond & Danville Railroad remaining unpaid was $318,324.71, of which $22,186.53 represented a claim of the Western Union Telegraph Company in part for labor and supplies and in part for construction of telegraph line, and $90,000 represented a claim of the Pullman Palace Car for mileage of cars. Of the balance, $125,067.39 represented the claims of the Carnegie Company, and $80,317.98 represented all other claims.
These figures show that both during the receivership in the [176 U.S. 257, 295] Clyde suit and the receivership in the foreclosure suit immense sums were expended in paying interest, sinking fund, and car trust debts, and for construction and equipment, which were all for the benefit of mortgage creditors, and which, to the extent necessary, should have been applied in payment of preferential claims, including those of the Carnegie Company. It is a clear case of a diversion of income from the payment of current debts in the interest of mortgage creditors. Judge Simonton well said: 'There can be no question that the steel rails furnished by the Carnegie Steel Company come within the class of supplies necessary to keep the railroad company a going concern. And the evidence establishes the fact that after incurring the debt the railroad company was in the receipt of large earnings, which were applied to permanent improvements, rentals, and interest on the mortgage debt; that the receivers who, under the Clyde bill, took possession of the property, earned large income which was applied in the same way, leaving this debt unpaid; and that when these receivers were discharged they showed in their accounts a cash surplus, which was duly paid over to their successors under the Central Trust Company bill.' Looking at the case in the light of the principle that a mortgagee cannot require from the mortgagor an account of the earnings, tolls, and income until he has made demand therefor or for a surrender of possession under the provisions of the mortgage (Sage v. Memphis & L. R. R. Co. 125 U.S. 361, 378 , 31 S. L. ed. 694, 698, 8 Sup. Ct. Rep. 887; Fosdick v. Schall, 99 U.S. 235, 253 , 25 S. L. ed. 335, 342), the circuit court of appeals also said: 'When, therefore, the receivers appointed at the instance of stockholders and creditors took possession, they enjoyed the same right to the earnings and income which the railroad company enjoyed, and rightfully received them. As the railroad company would have been bound to use this income in the payment of the current expenses for labor and supplies, the receivers should have done so also. But, instead of this, the receivers diverted the earnings, income, and funds in their hands toward the betterment of the property, permanent improvements and additions to it, and payment of interest. And this was natural. They were appointed to [176 U.S. 257, 296] take possession of the property and to conserve it until a plan of reorganization could be adopted and perfected. To facilitate this plan, the property must be kept up. To this end the funds coming from earnings were used. When the purpose of the first receivership was accomplished, the mortgage creditors came in and reaped the benefit. Surely those creditors whose claims were neglected, and from whom the earnings were diverted, have the right to ask and receive at the hands of the court the recognition and preservation of their claims.' 42 U. S. App. 156, 76 Fed. Rep. 498, 22 C. C. A. 294. Judge Morris filed a concurring opinion, and took the same general view of the case as that expressed by Judge Simonton for the court. He said that the case was that of 'a supply creditor seeking to be paid out of the earnings which came to the receivers after his debt matured and which were diverted by them, without opposition from the mortgagee, to expenditures which directly resulted in preserving the mortgaged property, which earnings, if the receivers had not been appointed, there is no ground for supposing would not have been applied by the company to the payment of the supply creditor's debt.' 42 U. S. App. 160, 161, 76 Fed. Rep. 501, 22 C. C. A. 298.
We must not be understood as saying that a general, unsecured creditor of an insolvent railroad corporation in the hands of a receiver is entitled to priority over mortgage creditors in the distribution of net earnings simply because that which he furnished to the company prior to the appointment of the receiver was for the preservation of the property and for the benefit of the mortgage securities. That, no doubt, is an important element in the matter. Before, however, such a creditor is accorded a preference over mortgage creditors in the distribution of net earnings in the hands of a receiver of a railroad company, it should reasonably appear from all the circumstances, including the amount involved and the terms of payment, that the debt was one fairly to be regarded as part of the operating expenses of the railroad incurred in the ordinary course of business and to be met out of current receipts.
Passing by as unnecessary to be determined some of the questions discussed by counsel, our conclusion is that as current earnings which should have been applied in meeting cur- [176 U.S. 257, 297] rent expenses or liabilities, including the debt due the Carnegie Company, were diverted for the benefit of mortgage creditors, it was the duty of the court to see that that company was reinstated in its claim of priority over the mortgage creditors in the distribution or application of the net earnings of the property. That duty was properly performed by the Circuit Court, and the decree of the Circuit Court of Appeals affirming the judgment of the Circuit Court is affirmed.
Mr. Justice Brewer, not having heard the argument in this case, did not participate in the decision.
As I comprehend the record, the rails for which preferential payment is now allowed did not serve the purpose of ordinary repair and maintenance of the tracks in which they were laid. Moreover, my understanding of the proof is that it obviously shows there was no surplus revenue at any time legally applicable to the claim now allowed, and hence that no such revenue was diverted to the benefit of the foreclosing mortgage creditors during either of the receiverships by way of betterments or otherwise. Moreover, I think the proof is clear that, conceding every possible expense which can be claimed to have been a betterment or in any wise to have inured to the benefit of the foreclosing mortgage creditors, nevertheless as such mortgage creditors have contributed to the payment of the general creditors, by the assumption of receivers' certificates and cash contributions, a sum largely in excess of the amount of such payments for assumed betterments, etc., the mortgage creditors are entitled to credit for their advances, and therefore there would be a large balance in their favor. In effect, to state the presumed betterments and charge them against the foreclosing mortgage creditors, without referring to or taking into account their contributions, is to charge them for betterments for which they have already paid. St. Louis, A . & T. H. R. Co. v. Cleveland, C. C. & I. R. Co. 125 U.S. 658 , 31 L. ed. 832, 8 Sup. Ct. Rep. 1011.

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