Case Name: GREGG v. METROPOLITAN TRUST COMPANY
Court: Supreme Court of the United States
Jurisdiction: United States
Decision Date: 1905-03-06
Citations: 197 U.S. 183
Docket Number: No. 141
Parties: GREGG v. METROPOLITAN TRUST COMPANY.
Judges: Mr. Justice Harlan and Mr. Justice White, dissenting.
Reporter: United States Reports
Volume: 197
Pages: 183–197

Head Matter:
GREGG v. METROPOLITAN TRUST COMPANY.
CERTIORARI TO THE CIRCUIT COURT OP APPEALS POR THE SIXTH CIRCUIT.
No. 141.
Argued January 20, 23, 1905.
Decided March 6, 1905.
Claims for supplies furnished to a railroad company within six months before the appointment of a receiver are not entitled under any general rule to precedence over a lien expressly created by a mortgage recorded before the contracts for such supplies were made.
Under the orders authorizing receiver’s certificates involved in this case one furnishing ties within six months prior to the appointment of the receiver, and some of which were not used until after such appointment, held not entitled to payment therefor out of the proceeds of the certificates.
The iacts are stated in the opinion.
Mr. Harlan Cleveland for petitioner:
■ „The diversion of current earnings for the benefit of the first mortgage bondholders was not a condition precedent to the payment of Gregg as a supply claimant out of the proceeds of the sale of the mortgaged property. Central Trust Co. v. East Tenn., V. & G. R. Co., 80 Fed. Rep. 624; Miltenberger v. Railway Co., 106 U. S. 286, 311; Burnham v. Bowen, 111 U. S. 776, 781; Kneeland v. Trust Co., 136 U. S. 89, 97; Thomas v. Car Co., 149 U. S. 94, 117, see contra, however, International Trust Co. v. Townsend Brick Co., 95 Fed. Rep. 850, 860; and see also Rhode Island Locomotive Works v. Trust Co., 108 Fed. Rep. 5; New England R. R. Co. v. Carnegie Steel Co., 75 Fed. Rep. 54; Wood v. N. Y. & New Eng. R. R. Co., 70 Fed. Rep. 741; Finance Co. v. Charleston &c. R. R. Co., 62 Fed. Rep. 205; St. Louis Trust Co. v. Riley, 70 Fed. Rep. 32; Central Trust Co. v. Clark, 81 Fed. Rep. 269; N. Y. Guaranty I. Co. v. Tacoma Ry. Co., 83 Fed. Rep. 365; Trust Co. v. Illinois Midland Co., 117 U. S. 434; V. & A. Coal Co. v. Cent. Railroad Co., 170 U. S. 355, 365.
This court has never refused to pay supply claimants out of the corpus, on the ground that there has been no diversion of earnings; and has never formulated any such, doctrine; nor have its decisions been construed as' formulating any such doctrine except .by the Circuit Court of Appeals for the Sixth Circuit. Four other courts of equal jurisdiction have interpreted its decisions as being quite the contrary. •
The only cases in this court in which a charge against the-corpus of .the property has been denied are the following: Fosdick v. Schall, 99 U. S. 235; Huidekoper v. Locomotive Works, 99 U. S. 258; Penn v. Calhoun, 121 U. S. 251; St. Louis &c. R. R. v. Cleveland &c. R. R., 125 U. S. 658; Kneeland v. Ameer. Loan Co., 136 U. S. 89; Morgan’s Co. v. Texas Central Ry., 137 U. S. 171; Louisville &c. R. R. Co. v. Wilson, 138 U. S. 501; Thomas v. Western Car Co., 149 U. S. 95. In none of these cases were claims for supplies furnished or labor rendered to a railroad company necessary to maintain the railroad from day to day as a going concern.
All the six months’ claimants are entitled to the same treatment, especially in this case. The order is broad enough to cover this claim. Cases cited supra.
The suggestion that the petitioner had a claim against another fund, namely, the ’surplus earnings of the receivership, is.without weight.
There is a Special equity in the claim for ties delivered before the receivership and used by the receiver.
The purchase of these ties by. the company when it was, as it knew, hopelessly insolvent and had no reasonable expectation óf paying therefor, and after it had defaulted on the interest'due upon its bonds, was a fraudulent purchase which would have entitled petitioner, had the ties not been in the possession of the court, to have retaken them, and which would have entitled and justified the court to order their redelivery to him, or in default thereof, payment therefor. Donaldson, Assignee, v. Farwell, 93 U. S. 631; Wimot v. Lyon, 49 Ohio St. 296; Talcott v. Henderson, 31 Ohio St. 162; Morrow v. New England Stove Co., 57 Fed. Rep. 693; Davis v. Stewart, 8 Fed. Rep. 803; Jaffray v. Brown, 29 Fed. Rep. 476.
This court has recognized special equities entirely apart from any question of diversion. St. L. &c. R. R. v. Cleveland, &c. Ry., 125 U. S. 658, 673; Union Trust Co. v. Souther, 107 U. S. 598; Morgan’s Co. v. Tex. Cent. R. Co., 137 U. S. 171, 197.
Mr. Herbert Parsons and Mr. Lawrence Maxwell, Jr., for respondents:
Petitioner’s claim is not against the corpus but the receiver’s earnings. V. & A. Coal Co. v. Cent. R. R. &c. Co., 170 U. S. 355, 365. This is not a labor claim. It could only be paid out of Ihe corpus if it were a claim paid because of diversion or earnings to the bondholders, or because it was necessary to pay it in order to keep the road a..going concern. It does not fall within either class. As to the position of different Circuit Courts of Appeals on this question see cases in Federal Reporter cited on petitioner’s brief, and Cutting v. T., O. & A. Ry. Co., 61 Fed. Rep. 150, 156; Niles Tool Works v. Louisville &c. Ry. Co., 112 Fed. Rep. 561; Illinois Trust Co. v. Dowd, 105 Fed. Rep. 123; Kansas L. & T. Co. v. Electric L. & P. Co., 108 Fed. Rep. 702.
While this court sometimes may have permitted the payment of a current claim out of the proceeds of sale without proof of diversion, those were exceptional instances. The claim of the petitioners is not such an one. There is no reason why this court should overrule the discretion of the court below in omitting to give a preference to this claim. Cases cited on petitioner’s brief can be distinguished.
In order to entitle his claim to payment, the petitioner must' prove that current earnings were diverted for the benefit of the mortgage creditors and that there has been no restoration of the diverted fund. See the cases cited 'on petitioner’s brief.
■ There is’no special equity in the $3,200 claim for ties used by the receiver except as a claim against the receiver but not under the «orders. authorizing certificates.

Opinion:
Mr. Justice Holmes
delivered the opinion of the coprt.
This is a petition against a receiver appointed in proceedings for the foreclosure of two railroad mortgages. The petitioner, in pursuance of a contract made on December 1, 1896, with the Columbus, Sandusky and Hocking Railroad Company, the mortgagor, delivered railroad ties to the value of $4,709.53 in May and on June 1, 2 and 3, 1897. The receiver was appointed on June 1, 1897. After his appointment there was found on hand a part of the above ties, to the value of $3,200, and these ties were used in the maintenance of the railroad as a going concern. The petitioner makes a claim on the body of the fund in the receiver's hands, for these and other necessary supplies furnished within six months, amounting "in all to $6,804.49. The claim for the ties, at least, is admitted to have been "a necessary operating expense in keeping and using said railroad and preserving said property in a fit and safe condition as such." The petitioner waives a special claim against the receiver for $863.39 for the ties received .June 2 and 3, but does claim a lien for $3,200 for ties on hand and not returned to him after the receiver's appointment, in case his whole claim is not allowed. The Circuit Court of Appeals affirmed a decree of the Circuit Court establishing this claim as a six months' claim, but denying the right to go against the body of the fund, whereupon a certiorari was allowed by this court. 109 Fed. Rep. 220. 124 Fed. Rep. 721.
The case stands as one in which there has been no diversion of income by which the mortgagees have profited, or otherwise, and the main question is the general one, whether in such a case a claim for necessary supplies furnished within six months before the receiver was appointed, should be charged on the corpus of the fund. There are no special circumstances affecting the claim as a whole, anti if it is charged on the corpus if can be only by laying down a general rule that such claims for supplies are. entitled to precedence over a lien expressly created by a mortgage recorded before the contracts for supplies were made. An impression that such a general rule was to be deduced from the decisions of this court led to an evidently unwilling application of it in New England R. Co. v. Carnegie Steel Co., 75 Fed. Rep. 54, 58, and perhaps in other cases. But we are of opinion, for reasons that need no further' statement, Kneeland v. American Loan & Trust Co., 136 U. S. 89, 97, that the general rule is the other way, and has been recognized as being the other way by this court.
The case principally relied on for giving priority to the claim for supplies is Miltenberger v. Logansport &c. Railway Co., 106 U. S. 286. But while the payment of some preexisting claims was sanctioned in that case, it was expressly stated that "the payment of such debts stands, prima facie, on a different basis from the payment of claims arising under the receivership." The ground of such allowance as was made was not merely that the supplies were necessary for the preservation of the road, but that the payment was necessary to the business of the road — a very different. proposition. In the later cases the wholly exceptional character of the allowance is observed and marked. Kneeland v. American Loan & Trust Co., 136 U. S. 89, 97, 98. Thomas v. Western Car Co., 149 U. S. 95, 110, 111; Virginia & Alabama Coal Co. v. Central Railroad & Banking Co., 170 U. S. 355, 370. In Union Trust Co. v. Illinois Midland Ry., 117 U. S. 434, 465, labor claims accruing within six months before the appointment of the receiver were allowed without special discussion, but the principles laid down in the Miltenberger case had been repeated in the judgment of the court, and the allowance was said to be in accordance with them. It would seem from St. Louis, Alton &c. R. R. v. Cleveland, Columbus &c. Ry., 125 U. S. 658, 673, 674, that in both those cases there was a diversion of earnings. But the payment of the employes of the road is more certain to be necessary in order to keep it running than the payment of any other class of previously incurred debts.
Cases like Union Trust Co. v. Souther, 107 U. S. 591, where the order appointing the receiver authorized him to pay debts for labor or supplies furnished within six months out of income, stand on the special theory which has been developed with regard to income, and afford no authority for a charge on the body of the fund. Fosdick v. Schall, 99 U. S. 235; Burnham v. Bowen, 111 U. S. 776; Morgan's Louisiana & Texas Railroad & Steamship Co. v. Texas Central Ry., 137 U. S. 171; Virginia & Alabama Coal Co. v. Central Railroad & Banking Co., 170 U. S. 355; Southern Ry. Co. v. Carnegie Steel Co., 176 U. S. 257. It is agreed that the petitioner may have a claim against surplus earnings, if any, in the hands of the receiver, but that question is not before us here. .
The order appointing • the receiver did not go beyond the distinction which we have mentioned, and gave the petitioner no new or higher right than he had before. After directing him to do certain things, it gave him authority, but did not direct him, to make various payments. It gave him authority, among other things, "to pay the employés, officials and other persons having claims for wages, services, materials and supplies due and to become due and .unpaid growing out of the operation of the railroad of the defendant, including current and unpaid vouchers; to settle accounts incurred,in the operation of the railroad of the defendant company; to pay any and all obligations accrued or accruing upon any equipment trust made by the defendant railroad company; and for such purpose, as well as for the purpose of meeting the obligations of the pay rolls," he was authorized, "in his discretion, to borrow súch sums of money as may be necessary for such purpose,, not exceeding thirty-five thousand 'dollars. But said receiver will pay no claims against the said railway, company which have accrued due more' than six months prior to the date-.of this order." It is questionable whether the purposes for which the $35,000 might be borrowed were other than paying equipment trust debts and pay rolls. But even if any words in the order authorized a charge on the corpus in order to pay claims like that of the petitioner, or a payment of them except from income, certainly. there are none requiring it or going beyond giving authority to the receiver, if, for instance, he thought payments of previous debts necessary to the continued operation of the road. A strict construction of the decree is warranted by the previous decision of the same Circuit Court of Appeals in International Trust Co. v. T. B. Townsend Brick & Contracting Co., 95 Fed. Rep. 850.
A few days later, on June 7, 1897, the receiver applied for and received leave to issue certificates up to $200,000, "for the purpose of paying car trusts, maturing and matured, pay rolls, interest on terminal property, traffic balances, taxes and sundry other obligations created in and about the maintenance and operation of said railroad within six months next preceding and following the appointment of a receiver herein." By a further decree on July 7, $30,000 of these certificates were applied to payment for land bought by the- company, $135,000 to car trust obligations, current pay rolls, necessary repairs and expenses of operating the road, and $35,000 to the pay rolls for the previous April and May. The petitioner suggested that the latter' decree was a diversion of funds in which, by the terms of the order authorizing the certificates, he was entitled to share, and that the payment of the $35,000 for the April and May labor entitles him to come in on principles of equality. It is not necessary to answer this .contention at length. The original order gave the petitioner no such rights as he asserts. It would have been a stretch of authority for the receiver in his discretion to apply the borrowed money to this debt. At least he was not bound to do so. The petition on which the original order was made stated that the money was wanted to pay certain obligations, "or so much thereof as may be necessary," embodying the distinction which we have drawn from the cases. We already have intimated that the payment of railroad hands might stand on stronger grounds than the payment for past supplies — and if the payment was wrong it would not be righted by making another, less obviously within the scope of the decree.
We are of opinion, finally, that there is no special equity with regard to the S3,200 worth-of ties on hand and used by the receiver after his appointment. It is said that the purchase by the railroad company after it had defaulted, as it had, in the interest of its bonds, was fraudulent, and that the petitioner would have been entitled to take back the ties but for the appointment of the receiver. The answers to this contention again are numerous. It does not appear that the purchase of the ties was fraudulent. Donaldson v. Farwell, 93 U. S. 631. It does not appear, and is not likely that the company bought with the. intention not to pay the price. It' does not appear that it concealed its insolvency. The default in the interest of the bonds was a public fact. Again, it is a mere speculation whether the petitioner, if he had had the right, would have demanded back the ties. He did not demand them of the receiver. It is quite as likely that if he had known the whole truth he would have- taken his chances. The thing that he is least likely to have known is the form of the appointment of the receiver, and, therefore, it is probably a fiction that that encouraged him to wait. It should not have encouraged him, because, as we have said, it gave him no rights. The fact that the receiver used the ties is of no importance. They already were the property of the road, and it was his business to use them. The material point is not the time when they were used, but the time when they were acquired.
Decree affirmed.