Case Name: Solon Humphreys et al. v. John Allen, Receiver, et al.
Court: Illinois Supreme Court
Jurisdiction: Illinois
Decision Date: 1882-01-18
Citations: 101 Ill. 490
Docket Number: 
Parties: Solon Humphreys et al. v. John Allen, Receiver, et al.
Judges: 
Reporter: Illinois Reports
Volume: 101
Pages: 490–517

Head Matter:
Solon Humphreys et al. v. John Allen, Receiver, et al.
Filed at Ottawa January 18, 1882.
Beceiver’s certificates—for indebtedness of railroad—made a first lien as against prior mortgage—time to question power of cowrt. If the holder of railroad bonds secured by trust deeds on the road, having notice of the appointment of a receiver, and an order of court directing him on his petition to issue certificates of indebtedness on which to raise money to discharge a chattel mortgage on the personal property of the company, and to pay taxes, current expenses, etc., and making such certificates a prior and first lien on all the property of the company, desires to question the power of the court to make such order, he must do so before such certificates are issued and sold to bona fide purchasers, or paid out to creditors of the company. After their issue and sale, it will be too late for him, or purchasers from him with notice of the facts, to raise the question whether the subject matter to which the certificates were applied was within the scope of the power of the court in the preservation of the property for the benefit of all concerned.
Appeal from the Appellate Court for the Second District;— heard in that court on appeal from the Circuit Court of Peoria county; the Hon. David McCulloch, Judge, presiding.
On May 21, 1864, the Peoria, Pekin and Jacksonville Railroad Company executed its 1200 coupon bonds, payable to Francis Cooley, or hearer, of which 800 were each for $1000 principal, and 400 were each for $500 principal, and they all bore interest, payable annually, at the rate of seven per cent per annum, after January 1, 1865, and the principal was payable July 1, 1894. These bonds were numbered consecutively, from 1 to 1200. To secure the payment of these bonds, this company, on the same day, executed a deed conveying to Francis Cooley and James Buell, as trustees, all the real and personal property of the company, then acquired or thereafter to he acquired. By a clause in the bonds, default in the payment of any part of any installment of interest for six months after demand therefor, was to render the whole of such bonds due and payable at once; and by a clause in the deed, after a lapse of six months after such default the trustees were authorized to take possession under the mortgage, upon the written request of any two or more of the holders of such bonds, and sell the property, etc. The company failed to pay a part of the interest due July 1, 1871, and also made default in payment of large sums of interest falling due thereafter. After the making of these bonds and this mortgage, the company made an issue of a series of second mortgage bonds.
At the February term of that court, for the year 1878, John Allen and John H. Allen, holders and owners of a large number of both first and second mortgage bonds, filed a bill in the circuit court of Peoria county, alleging demand of interest past due, default of payment thereof, and the insolvency of the company; alleging that the principal of all the bonds had become due, and asking foreclosure, and for the appointment of a receiver to take charge of the property and manage and operate the same. At that term John Allen was appointed such receiver, and entered immediately upon his duties as such.
Afterwards, at the May term, 1878, on the petition of Allen, as such receiver, an order of court was made and entered of record, reciting, in substance, that at the time of the appointment of such receiver the railroad company had become, and was, indebted for services, supplies, rentals (incurred within the preceding six months), and for unpaid taxes, $67,831.51; and that the company was also indebted on March 4,1878, to various persons, in the sum of $81,600, which had been borrowed and expended in repairs and improvements of the road, and for the protection of the credit of the company, and being so indebted, executed to William W. Booraem, as trustee for such persons, a chattel mortgage upon certain of its engines and rolling stock, acquired by the company after the adoption of the constitution of 1870, and declaring the indebtedness for services, supplies, repairs and rentals a first- lien upon the property of the railroad company ; and declaring the chattel mortgage a valid lien upon the engines and rolling stock therein mentioned; and finding that it would be for the best interests of the railroad company, and for the preservation of its property and the saving of interest on the chattel mortgage, that the receiver should be authorized to raise money on certificates to be issued by him, and ordering, in substance, that the receiver be authorized to borrow money sufficient to pay all of such indebtedness, and to issue to the parties from whom he may borrow, receiver’s certificates, bearing interest; and' for the payment of such certificates he may use any part of the receipts or current revenue of the road which may be in his hands, in excess of current expenses; and further ordering, that the certificate's issued to provide for the indebtedness for supplies, services, etc., shall be designated on their face as class “A, ” and that those issued to provide for the payment of the debt secured by the chattel mortgage shall be designated on their face as class “B.” And it was further ordered, that all certificates so issued should be a valid and first lien upon all the property, real, personal and mixed, of such railroad company, and that the receiver report to the court the persons to whom such certificates may be issued, and on what account, the amount, time of payment, and rate of interest.
When this order was made, the railroad company and the trustees in the first and second mortgages were parties to the proceeding, and the trustees expressly consented to the order; but Mr. Constable was not a party, nor was Humphreys, Jessup, Terry or Field, nor bondholders other than the Allens, parties to the record at that time. The record, however, does show that Mr. Constable, who at that time was the holder, for himself or others, of the bonds now owned by Humphreys, Jessup, Terry and Field, was a director of the railroad com pany, and was aware that the making of the chattel mortgage had been authorized by the board of directors, and of the fact that the same had been executed. The record also shows that he was present at a meeting of the board of directors on June 11, 1878, where it was reported to the board that the road had been placed in the custody of the receiver, and that an order had been made for the issue of receiver’s certificates for the purposes named, and which it was ordered should be a first lien, as above stated.
During the summer of 1878, the receiver issued certificates of class “A” to the amount of $67,483.65. Before the 1st of March, 1879, he issued also certificates of the class “B” to the amount of $79,497.08, and the issuing of all of them was duly reported to the court. Of these certificates, Elizabeth Bayard held of class “A” to the amount of $50,000 (numbers 7 to 16 inclusive), and of class “B” to the amount of $25,000, (numbers 1 to 5 inclusive, and numbers 17 and 18) ; and William Oathout of class “A” held certificate number 6, amount $5000, purchased in good faith for value, without notice of any defect or vice in them. The other certificates were given either for money borrowed or in satisfaction of debts which the receiver had been ordered by the court to pay, and those receiving such certificates surrendered the securities held by them for such debts. All this was known to Mr. Constable, who was a holder of a large amount of the bonds secured by the mortgages. He did not intervene in the litigation, or in any manner object to what he knew was being done.
On the 10th of May, 1879, James M. Constable sold to Solon Humphreys, Morris K. Jessup, John P. Terry and Cyrus W. Field, first mortgage bonds to the amount of $692,000, with all outstanding coupons, and also second mortgage bonds of the company to the amount of $664,000, with all outstanding coupons thereto attached; also, preferred stock of the company to the amount of $164,400; also, common stock of the company to the amount of $604,700. The price at which this purchase was made was $380,600. Ten per cent of the same was paid in cash; ten per cent of the same was to he paid in November, 1879; twenty per cent in May, 1880; thirty per cent in May, 1881, and thirty per cent in May, 1882, with interest at the rate of six per cent per annum, payable semi-annually. By their agreement the bonds and stock were to be held by the Central Trust Company of New York, as collateral security for the payment of the purchase money, the buyers having the option to pay the same, with accrued interest, at any time within three years. It is recited in this agreement, that it was understood “that General Wager Swayne is to proceed, under the instructions of said Field, Jessup, Terry and Humphreys, to take such ■legal measures as may be requisite to foreclose the road, and also to change the receiver at any time, all costs and expenses of such proceedings to be borne by Jessup, Field, Terry and Humphreys, and also the expense of the trust. ”
On June 14, 1879, Francis B. Cooley and James Buell filed their cross-bill in the cause, setting up that they were trustees under the first mortgage, and charging that all the principal sums in the bonds had become due by' defaiilt of payment of interest, and praying a foreclosure of the first mortgage.
On July 14, 1879, Humphreys, Jessup, Terry and Field having intervened and been made parties, were admitted in the chancery cause as co-complainants with the Allens, in which they set up their ownership of the bonds which they purchased from Constable, and charge that the receiver’s certificates were improvidently authorized to be issued, and insisting that they ought not to be held a lien prior to their rights as holders of the mortgage bonds.
On the 7th of August, 1879, a decree of foreclosure was rendered, finding the whole amount of the principal of the first mortgage bonds to be due and payable, and that there was due and unpaid at that time, of interest specified in the coupons, $417,278.87, and "that there was also due at that-date, $89,764.19 of interest accrued upon overdue coupons; the whole amount found due was $1,507,043.06. The decree ordered the road to be sold subject to taxes legally due, and to all just claims for right of way, and to certain prior mortgages on small portions of the real estate, and directed the master, after making the sale, to pay certain expenses, the compensation of the trustees, and thirdly, “all such indebtedness contracted, or to be contracted, by the receiver, as may not be excepted to, at or' before the confirmation of said sale, ” and further directed that all the residue of the money arising from the sale shall be brought into court, subject to further order. The decree further provided, that the rights of all of the holders of the bonds and coupons, and of other persons having an interest in the fund, be reserved for subsequent determination; and that all such persons have the same rights against the fund arising from the sale that they would against the property sold prior. The master, under this decree, sold the railroad and property of the company, and Solon Humphreys became the purchaser for the sum of $950,000. In the decree of foreclosure it is recited that the same was entered by the consent of the railroad company, John H. Allen, John Allen, Francis B. Cooley and James Buell, and of Humphreys, Jessup, Terry and Field.
' Before the confirmation of this sale, Humphreys, Jessup, Terry and Field filed their exceptions to the payment of any and all indebtedness contracted by the receiver, except for necessary expenses in operating the road, and for supplies purchased since his appointment; and they especially objected to the payment of certain certificates under the order of the court, made May 6, 1878. After this, the sale was confirmed by order of' the court.
The record shows that of the first mortgage coupons maturing on and after July 1, 1878, none were paid, and that of those máturing on and after July 1, 1871 (embracing the coupons attached to bonds 13 to 25 inclusive), a portion only have been paid, leaving $227,278.87 unpaid. A rule was entered by the court on all the parties to show cause why distribution should not be made among holders of the bonds and coupons, and several claims of priority were interposed. Humphreys and his co-interveners claimed that the coupons held by them should be paid in the order of their maturity, before any distribution could be legally made on the principal sums specified in the bonds. It was insisted by the holders of coupons on which nothing had been paid, where the holders of other coupons of the same series and time of maturity were paid in full, that they should be equalized, and that the amount due upon such unpaid coupons should be paid in full before any part of the fund should, be distributed upon coupons maturing later, or upon the principal sums secured by the bonds.
The court ordered that all the certificates issued by the receiver, mentioned above, be first paid; and the court denied the application of coupon holders for priority of payment, and ordered that the fund, after the payment of costs and receiver’s certificates, be distributed pro rata to the holders of bonds and overdue coupons, treating all such claims, whether for principal or unpaid interest, as equal in law and equity. From this decree Humphreys, Jessup, Terry and Field, and some other holders of bonds and coupons, appealed to the Appellate Court for the Second District, where the decree was affirmed. From the judgment of the Appellate Court, Humphreys, Jessup, Terry and Field alone appealed to this court, and insist: first, that coupons overdue at the time when the principal of the bonds became due are entitled to priority of payment over the principal sums mentioned in the bonds, and in the order of their maturity; and second, that holders of bonds and coupons are entitled to priority of payment out of the fund as against the holders of the receiver’s certificates.
Mr. Wager Swayne, and Messrs. Hat, Greene & Littler, for the appellants,
insisted it was error to allow the issue of receiver’s certificates to pay claims for labor, supplies, etc., furnished the company within ,a period of six months before the appointment of a receiver, and also certificates with which to pay off an indebtedness for borrowed money, for which John Allen was personally responsible. The order of the court below established two classes of indebtedness as a first lien against the mortgaged property, amounting to about $150,000. The claims thus allowed a preference over the debt secured by the mortgage, were contracted years after the execution and recording of the mortgage. This displacement is not warranted by authority, and is subversive of the inviolability-of contracts.
On the final hearing in chancery all interlocutory decrees are open for revision, and are under the control of the court. Fitzhugh v. McPherson, 9 Gill & J. 51; Ridgley v. Bond, 18 Md. 433; Fanniquet v. Perkins, 16 How. 82; Consequa v. Fanning, 3 Johns. Ch. 364; Gibson v. Rees, 50 Ill. 383.
A trustee can not charge the trust estate by his executory contracts, unless authorized to do so by the terms of the instrument creating the trust. New v. Nicoll, 73 N. Y. 130.
The person appointed receiver was disqualified from acting, being the senior officer of the company, and its largest creditor. Baker et al. v. Admr. of Backus, 32 Ill. 115; Taylor v. Oldham, Jacobs, 527; Kerr on Receivers, 126-130.
The receiver’s authority was limited by the order of the court under which he acted, and all persons purchasing his certificates were bound to take notice of the extent of his authority. Bank of Montreal v. C. C. and W. R. R. Co. 48 Iowa, 524; Stanton et al. v. Ala. and Chattanooga R. R. Co. 2 Woods C. C.
As to the application of the earnings of a railroad to current expenses, etc., see Fosdick v. Schall, 9 Otto, 252.
Messrs. Wiley & Neal, for the appellees:
The order was interlocutory only, and not subject to review in a higher court until a final decision. Woodside et al. v. Woodside et al. 21 Ill. 207; Gage v. Eich, 56 id. 297; Racine and Miss. R. R. Co. v. Farmers’ Loan and Trust Co. 70 id. 249.
Even if the decree was erroneous, the rights of third persons acquired under it are not divested by its reversal. McLagan v. Brown, 11 Ill. 519; Clark v. Pinney, 6 Cow. 297; Hubbell v. Brownwell, 8 Ohio, 120; Goudy v. Hall, 36 Ill. 319 ; Feaston v. Fleming, 56 id. 457; Gray v. Brignardello, 1 Wall. 634; Gusteau v. Wisely, 37 Ill. 433; Wadhams et al. v. Gay, 73 id. 415.
As to the power of a court of equity to appoint a managing receiver of a railroad company when taken under its charge as a trust fund to pay incumbrances, and to authorize such receiver to raise money necessary for the preservation and management of the property, and make the same chargeable as a lien thereon for its repayment, see Wallace v. Loomis, 7 Otto, 147; Meyer et al. v. Johnston, 53 Ala. 237; Stanton et al. v. Alabama and Chattanooga R. R. Co. 2 Woods C. C.; Fosdick v. Schall, 9 Otto, 235.
The bondholders were represented by their trustees, and must be regarded as bound by their acts, so far as the interests of third persons acting upon the faith of the action of the court, may be affected. Wallace v. Loomis, 7 Otto, 163 ; Jones on Railroad Securities, sec. 539.
Every railroad mortgagee, in accepting his security, impliedly agrees that the current debts, made in the ordinary course of business, shall be paid from the current receipts before he has any claim upon the income. Fosdick v. Schall, 9 Otto, 235.
Mr. Wheeler H. Peckham, for the appellees the Bank of New York, National Banking Association, and Union National Bank:
The petitioners have consented to the entry of the order giving the certificates priority over the bonds. Even if the consent of the trustees of the mortgage was not binding on the bondholders, it was necessary that those who repudiate it should do so promptly. Silence after knowledge is consent. Gold Mining Co. v. National Bank, 96 U. S. 640. Jones on Railroad Securities, secs. 363, 438.
A court of equity having the power to issue receiver’s certificates and make them a prior lien, a purchaser of them is not bound to look into the proofs and judge their sufficiency. Should the adjudication of the court be afterwards reversed, intermediate purchasers would be protected. Lovett v. Reformed Church, 12 Barb. 67; Ebaugh v. Church, 3 E. D. Smith, 60 N. Y. Com. Pleas; Wood v. Jackson, 18 Wend. 107.

Opinion:
Mr. Justice Dickey
delivered the opinion of the Court:
Whatever may he said as to the limitations which the law places upon the exercise of the power of the chancellor to make certificates issued by a receiver for moneys borrowed by him, a lien upon the property, superior to the vested lien of the mortgagees, in this case we think that appellants are not in a position to raise that question. The bonds which they held, they bought from Mr. Constable on the 10th of May, 1879. At that time all of these certificates had been issued and disposed of by the receiver, and were held by the parties who had paid for them in cash, or had received them in substitution of securities which they held for preexisting debts. Whether the subject matter to which these certificates were applied comes within the scope of the powers of the court in the preservation of the property for the benefit of all concerned, was a question which might have been raised, and ought properly to have been raised, before the certificates were issued and sold. Mr. Constable, the owner of these bonds, knew, as a director in the railroad company, and by proceedings which occurred in the directors' meetings, that the road and other property of the company had been placed in the hands of a receiver. He knew that the order for the issue of certificates, to be made a first lien upon the property of the company, had been entered of record, and that such certificates were about to be issued and put upon the market. The proceeds of a part of these certificates were to be applied in releasing from a chattel mortgage property upon which the bondholders claim to have a lien, and in which he had an interest as a stockholder. It was incumbent upon him, if he intended to insist that these certificates should not be a paramount lien upon the property of the company, that he should have intervened and raised his objections. On the contrary, with a full knowledge of all the facts, he lay by and permitted others in good faith to invest their money in these certificates, and the money to be applied for his benefit in discharging the liabilities of the company for services and supplies, and for a debt by which the rolling stock of the company in which he was interested was tied up. In a court of equity he could not be heard afterwards to claim that the holders of these certificates should not have this priority.
The appellants purchased these bonds on the 10th of May, 1879, and the circumstances show that they knew that the bonds had become over due, and that they were advised of the condition of the litigation. The very language of the contract by which they purchased shows that they knew that the road was then in the hands of a receiver, and that the conduct of the business by the receiver was not satisfactory, and accordingly they were authorized to take measures to have the receiver changed. Under the circumstances they occupy no better position as holders of these bonds than did Mr. Con stable, whose mouth, we have seen, had been closed upon this subject by his own conduct.
The remaining question, relating to the priority claimed for holders of coupons first falling due, was disposed of, and by a majority of the court decided against, the views of appellants, in the case of Humphreys et al. v. Martin et al. 100 Ill. 542, and need not be discussed here.
The judgment of the Appellate Court is therefore affirmed.
Judgment affirmed.