Source: https://supreme.justia.com/cases/federal/us/170/355/
Timestamp: 2019-04-20 12:17:14+00:00

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Justia › US Law › US Case Law › US Supreme Court › Volume 170 › Virginia & A. Coal Co. v. Central R. &c. Co.
Virginia and Alabama Coal Company v.
the understanding, tacit or expressed, that the current earnings would be appropriated for the payment of the debt.
Upon the evidence contained in the record, it is held that in the contract with the Virginia and Alabama Coal Company and in that with the Sloss Iron and Steel Company, it was the intention of the parties that the coal furnished was to be used in the operation of the lines of the Central Company, and that the Coal Companies looked to the earnings of the Central System as the source from which the funds to pay for the coal to be furnished were to be derived.
In concluding that the claims of the intervenors were entitled to priority out of the surplus earnings which arose during the control of the road by the court, this Court must not be understood as in anywise detracting from the force of the intimations contained in its opinions in Kneeland v. American Loan & Trust Co., 136 U. S. 89, and Thomas v. Western Car Co., 149 U. S. 95.
On December 19, 1888, the Georgia Pacific Railroad Company leased its line of railroad extending from Atlanta to Birmingham, Alabama, to the Richmond and Danville Railroad Company, a corporation organized under the laws of Virginia, and which owned or controlled by lease a line of railroad from Atlanta to Washington, in the District of Columbia, and thereafter the Georgia Pacific road was operated by the Richmond and Danville Company. On June 1, 1891, the Central Railroad and Banking Company of Georgia, a corporation under the laws of Georgia, owning and operating a line of railroad from Atlanta to Savannah, Georgia, and which owned or controlled various other railroads or lines of steamships and a large amount of other property, executed a lease for ninety-nine years of said railroad and various lines and property controlled by it to the Georgia Pacific Company. The lease was signed on behalf of the Georgia Pacific Company by its President, pursuant to the direction of the board of directors of the company, but it was subsequently asserted that this was done without previous authorization or ratification of the stockholders. The Georgia Pacific Company did not take possession of the property of the Central Company or assume or exercise any control over the same except that, on the date of the lease, it requested the Richmond and Danville Company to assume the control of the leased property, with which request there was an immediate compliance.
In March, 1892, a suit was instituted in the Circuit Court of the United States for the Eastern Division of the Southern District of Georgia by Rowena M. Clarke, a stockholder of the Central Company, to obtain a cancellation of the lease of the property of that company, and other specific relief. A temporary receiver was appointed on March 4, 1892. The Danville Company, as also the Georgia Pacific Company, appeared, and disclaimed any rights under the lease, and on March 28, 1892, the preliminary receiver, and other persons constituting the then board of directors of the Central Company, were appointed joint receivers to take charge of the railroad property and assets of the Central Company until there could be a reorganization of such board in pursuance to its charter.
As ancillary to Mrs. Clarke's bill, the Central Company, on July 4, 1892, filed a bill against the Farmers' Loan and Trust Company of New York, trustee, and other creditors, averring its inability to meet many matured obligations, and that it had defaulted on July 1, 1892, on the semiannual interest due on $5,000,000 mortgage bonds dated October 1, 1872, for which the Farmers' Loan and Trust Company was trustee, and that, for these reasons the directors were unable to assume the management of the property, and requesting the court by proper process to call upon its creditors to come into court, and that the court would administer the property for the benefit of all interested. The Farmers' Loan and Trust Company assented to the continuance of the receivership, and on July 15, 1892, under the depending bill, all the receivers, with the exception of one H. M. Comer, were discharged, and Mr. Comer was continued as receiver.
Subsequently, in May, 1893, under bills filed to foreclose a mortgage executed by the Savannah and Western Railroad Company, Comer and one Lowry were appointed receivers, and directed to continue to operate the road as part of the system of the Central Company.
million dollar mortgage on the main stem of the Central Railroad from Atlanta to Savannah because of default in the payment of the interest due July 1, 1892, and the receivership was extended to that bill.
"It is a fact that, since the receivership the receivers of the Central Railroad and Banking Company of Georgia have expended betterments in its railroad lines from the income of the roads during the receivership a sum much larger than the entire claim of the intervenors."
On June 30, 1893, a final decree was entered, dismissing, for want of equity, the bill filed on behalf of Mrs. Clarke, it being, however, recited that the validity of the lease by the Central Company was not passed upon.
On May 26, 1892, the Virginia and Alabama Coal Company was allowed to become a party complainant in the Clarke suit, and to file an intervening petition therein. The Central Company and its receivers and the Danville Company were made parties defendant to the intervention. It was averred in the petition that the Danville Company, while operating the Central Company, purchased from the intervenor, for the use and benefit of the Central in its several divisions, coal, which purchase was made in pursuance of a contract of the Danville Company, dated July 13, 1891. For coal furnished under said contract, and actually delivered to the Central Company (against which latter company, in the course of said business, the bills were originally made out), and used by said Central Company in the running of its machinery, a decree was asked for $26,607.44, as shown by a statement of account annexed to the petition.
"Richmond and Danville Railroad Company"
"Joseph P. Minetree, general purchasing agent, Atlanta, Ga."
"The Virginia and Alabama Coal Company; Mr. J. R. Ryan"
"V.P. and G.M., Birmingham, Ala."
to furnish the C. R. and B. Co. of Ga. with, say 275,000 tons of best quality engine steam coal for the next twelve months, commencing July 1, 1891, and ending July 1, 1892 at 90 cents per ton of 2,000 pounds, to be delivered on cars at mines, and to be shipped at times and in quantities to suit. Settlements for the coal delivered in any one month to be made on or about the first of the second succeeding month, and the C. R. and B. Co. of Ga. reserves the right to increase or decrease the monthly deliveries upon reasonable notice at any time. The division superintendents of the divisions for which the coal will be required will communicate with you as to the monthly deliveries, and all bills for coal furnished under this contract to be sent direct to the division superintendents. Kindly confirm this at once, and oblige, yours, truly,"
Besides asking a decree against all the defendants jointly for the amount claimed, with interest, the petition prayed for general relief. The petition was subsequently amended by averring that the Danville Company was liable under the contract of purchase, and that the Central Company was liable because the coal was bought, and actually used, for the benefit of the Central Company of Georgia.
Central Company, and it was asked that an account might be taken as to the portions so used, and that it should be decreed to be a part of the operating expenses of the railroad company in the hands of the receivers, to be paid as a part of the expenses of the receivership.
On December 3, 1892, the Virginia and Alabama Coal Company, suing for the use of the Sloss Iron and Steel Company, a corporation under the laws of the State of Alabama, filed a further intervening petition, asking payment of an account aggregating $14,359.38, for coal furnished for use on the Central lines by the Sloss Company, under the contract between the Danville Company and the Virginia Company. Grounds of recovery were stated similar to those relied upon in the prior intervention, it being also insisted that, if recovery was allowed against the receiver only for the coal used by him, it should be paid for at its value at the place where used, viz., $2.50 per ton.
To these interventions the Central Company and the receivers thereof separately demurred, while the Danville Company filed motions asking that it be dismissed as a party defendant thereto. The motions were overruled, while decisions upon the demurrers were deferred until the hearing of the interventions.
the judgment for the use of the Sloss Company for the sum of $2,682.80, owing to the fact that a specified quantity of the coal which had been sold and delivered under the contract had not been used on the lines of the Central Company, but by lines held to be independent roads. Exceptions were filed to the master's report, both as to his findings of fact and conclusions of law, on behalf of all parties to the intervention. The reports of the master and the exceptions filed thereto came on for hearing before the court, and on December 29, 1893, an order was entered sustaining the exceptions in part and overruling them in part. A final decree was entered on January 1, 1894, and amended on March 31, 1894, setting aside the reports and adjudging that the Virginia and Alabama Coal Company recover from the Central Company $6,171.98 for the "amount of unpaid-for coal" in cars consigned to the officers of the Richmond and Danville Railroad Company, and which was unloaded after March 4, 1892, and appropriated by the receivers of the company, being 6,857.75 tons at ninety cents per ton, and the Virginia and Alabama Coal Company, suing for the use of the Sloss Iron and Steel Company, was adjudged to recover of the Central Company $735.16, or 816.85 tons of coal at ninety cents per ton, being the amount of unpaid-for coal unloaded after March 4, 1892, and appropriated by the receivers. The receivers of the Central Company were directed to pay the sums so found due out of the current earnings of the Central Railroad and Banking Company in their hands.
of the receivers and that found in the bins of the line after such appointment, and of which the receivers took possession, as well as the coal delivered to the receivers after their appointment, the amount due being determined by the contract price, and an order that they recover from the Central Railroad and Banking Company of Georgia and the receivers of the same such sums thus found to be due. No decree will be entered in favor of the intervenors for the payment of that portion of the coal which was used by the Charlotte, Columbia and Augusta Railroad Company."
An application for a rehearing being denied, a writ of certiorari was allowed by this Court.
In each of the intervening petitions, a liability of the Central Company was asserted to arise from the fact that the coal was sold to and purchased by the Danville Company for use in operating the lines of railway of the Central Company, and in the lower courts, as in this Court, it was contended that, under the prayer for general relief, the petitioners were entitled to have their demands allowed as a preferential claim against any surplus income which might arise from the operation of the Central road under the receiver, after payment of the ordinary expenses of operation, or out of the corpus of the estate, or the proceeds of sale thereof, in the event that the income had been diverted by the receivers in expenditures for betterments.
and said trustees, and all parties holding under them, taking said property subject to such rights and equities on the part of said Bowen, intervenor."
"The income [of a railroad company] 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 on the income."
to use it if no change in the possession had been made. This rule is in strict accordance with the decision in Fosdick v. Schall, which we see no reason to modify in any particular."
a railroad. On the day the bill was filed, and without notice to the first mortgagee, a receiver was appointed and power given him to operate and manage the road,"
"receive its revenues, pay its operating expenses, make repairs, and manage its entire business, and to pay the arrears due for operating expenses for a period in the past not exceeding ninety days, and to pay into the court all revenue over operating expenses."
some of which were incurred more than ninety days before the receiver was appointed. On the latter branch of the subject, it said:"
"It cannot be affirmed that no items which accrued before the appointment of a receiver can be allowed in any case. Many circumstances may exist which may make it necessary and indispensable to the business of the road and the preservation of the property for the receiver to pay preexisting debts of certain classes out of the earnings of the receivership, or even the corpus of the property, under the order of the court, with a priority of lien. Yet the discretion to do so should be exercised with very great care. The payment of such debts stands, prima facie, on a different basis from the payment of claims arising under the receivership, while it may be brought within the principle of the latter by special circumstances. It is easy to see that the payment of unpaid debts for operating expenses, accrued within ninety days, due by a railroad company suddenly deprived of the control of its property, due to operatives in its employ, whose cessation from work simultaneously is to be deprecated, in the interests both of the property and of the public, and the payment of limited amounts due to other and connecting lines of road for materials and repairs, and for unpaid ticket and freight balances, the outcome of indispensable business relations, where a stoppage of the continuance of such business relations would be a probable result in case of nonpayment, the general consequence involving largely, also, the interests and accommodations of travel and traffic, may well place such payments in the category of payments to preserve the mortgaged property in a large sense by maintaining the goodwill and integrity of the enterprise, and entitle them to be made a first lien. This view of the public interest in such a highway for public use as a railroad is, as bearing on the maintenance and use of its franchises and property in the hands of a receiver, with a view to public convenience, was the subject of approval by this Court, speaking by Mr. Justice Woods, in Barton v. Barbour, 104 U. S. 126."
under a state of facts such as shown at bar, where the immediate management of a road was confided by its owners, without protest or interference by the bondholders, to third parties? It would seem not. The dominant feature of the doctrine as applied in Burnham v. Bowen is that where expenditures have been made which were essentially necessary to enable the road to be operated as a continuing business, and it was the expectation of the creditors that the indebtedness created would be paid out of the current earnings of the company, a superior equity arises in favor of the materialman as against the mortgage bonds in the income arising both before and after the appointment of a receiver from the operation of the property.
the agency of a receiver, equities in the income of the property continue to survive.
Upon the evidence contained in the record, we hold that the contract upon which both intervenors relied -- the deliveries of coal furnished by the Sloss Company being under the contract which had been made with the Virginia Company -- was made with the Danville Company, but we conclude from the terms of the contract that the intention of the parties was that the coal was to be used in the operation of the lines of the Central Company, and that the mining companies did not rely simply upon the responsibility of the Danville Company, but, on the contrary, that the coal companies looked to the earnings of the Central system as the source from which the funds to pay for the coal to be furnished were to be derived.
"that, since the receivership, the receivers of the Central Railroad and Banking Company of Georgia have expended for betterments on its railroad lines, from the income of the roads during the receivership, a sum much larger than the entire claim of the intervenors."
in mind the manifest purpose of this stipulation, which undoubtedly was to present the question of the right of the claimants to resort to the corpus of the estate for payment of their claims, we must give the term "betterments" a broad, and not a restricted, meaning. So construed, it must be held to have referred to expenditures for the improvement of the property, as distinguished from mere payments for operating expenses and ordinary repairs, which are usual and legitimate terms of outlay from current receipts. This is the sense in which the term was understood by this Court in Union Trust Company v. Illinois Midland Company, 117 U. S. 434, where the validity of receivers' certificates was upheld which had been paid out of the proceeds of the sale of corpus of the property, because issued to replace earnings diverted from paying operating expenses and ordinary repairs to payment of betterments (p. 117 U. S. 462).
The circumstance that it is uncertain from the terms of the stipulation whether the expenditures for betterments were made by the receivers under the stockholders' bill, or under the bill filed by the Central Company, or under the trustee's bill for foreclosure, is immaterial. Even though the mortgages securing the bonds provided for the sequestration by foreclosure of the income of the road for the benefit of the bondholders, for reasons already stated, that income, until strict foreclosure or a sale of the road, was charged with the prior equity of unpaid supply claimants such as those now before the court.
furnishing of essential and necessary current supplies, not sold upon mere personal credit, against the surplus income arising during the operation of the road under the direction of a court of equity.
MR. JUSTICE PECKHAM and MR. JUSTICE McKENNA, not having heard the argument, take no part in this decision.

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