Court Opinion

ID: 8856538
Source: CourtListenerOpinion
Date Created: 2022-11-26 17:32:17.426683+00
Date Added: 2024-06-11T17:05:40.421767
License: Public Domain

MORRIS, District Judge
(concurring). If it be conceded that the claim of the Carnegie Steel Company has no statute lien superior to the mortgage of October 22, 188(5, because the statute was passed after the date of the execution and recording of the mortgage, and that the debt, having been contracted more than six months before the appointment of the receivers, does not come within the rule which might permit it to be paid out. of the proceeds of the corpus of the mortgaged railroad property, there still remains to be considered whether there is any other ground of equity which entitles, the claim to payment out of any fund under the control of the-court. If, after the appointment of the receivers under the creditors’ bill, there came into their hands earnings which were expended for the betterment of the mortgaged property, instead of being applied to the payment of debts for current supplies, contracted within a reasonable time before the receivership, then, as against the mortgage bondholders so benefited, the supply creditor has an equity to have those earnings restored and applied to his debt.
In Burnham v. Bowen, 111 U. S. 782, 4 Sup. Ct. 675, 678, the supreme court said:
“We think the debt was a charge in equity on the continuing income, as well as that which came into the hands of the court after the receiver was appointed, as that before. When, therefore, the court took the earnings of the receivership, and applied them io the payment of the fixed charges on the railroad structures, thus increasing the security of the bondholders at the-expense of the labor and supply creditors, there was such a diversion of what is denominated in Fosdick v. Schall. 99 U. S. 252, the ‘current debt fund,’ as to make it proper to require the mortgagees to pay if: hack. But it is further Insisted that even though the court did err in using the income of the receivership to pay tile fixed prior charges on the mortgaged property, and thus increase the security of the bondholders, there is no power now to order a sale of the property in the hands of the trustees to pay hack what had thus been diverted. In Fosdick v. Schall, Id. 254, it was said that if, in a decree of foreclosure, a sale is ordered to pay the mortgage debt, provision may be made for a restoration from the proceeds of sale of the fund which has been diverted, and tills clearly because, in equity, the diversion created a charge on the property for whose benefit it had been made.”
The facts of the present ease suggest even a stronger equity in favor of the intervener than existed in the ease of Burnham v. Bowen. The original bill filed by Clyde and others, who were creditors and stockholders, was professedly for tlie purpose of protecting the Richmond & Danville Railroad Company and its system, comprising 26 other railroads, in 6 different states, from disruption from the ef*500forts of creditors to enforce their debts. The court was asked to preserve its unity, and to prevent the ruinous sacrifice which would result from a severance of the system. The trustee of the foreclosed mortgage was not made a party, but within a few days after the filing of the bill the trustee was notified of applications for authority to use the income to pay maturing car-trust installments and rental obligations, and was represented by counsel, and did not object; and two months later the trustee was, on its own motion, made a party to the case. One year later, the trustee filed its bill to foreclose the mortgage of October 22, 1886, under which the sale was decreed. This mortgage covered, not only the Richmond & Danville Railroad proper, as to which it was a third mortgage, but also the interest of the Richmond & Danville Railroad Company in some 20 other railroad lines. These interests, consisting of leases, contracts for operating, and mortgage bonds, were part of the property sold under the decree of foreclosure. In the prayer for relief in the bill for foreclosure, the court is asked to appoint receivers, with power to operate the Richmond & Danville Railroad and “the railroads owned and leased or controlled by it, and with all such power as may be requisite to preserve said property until sale thereof.” It is obvious that the preservation of the unity of the system of railroads which was operated by the Richmond & Danville Railroad Company, without any disruption of the system, >v,as part of the relief prayed by the mortgagee’s bill, as it had been by the original creditors’ bill with which it was presently consolidated. How was the system to be preserved from disruption, and brought to a sale as a unit, except by using the current earnings of the receivers to pay the rentals and contract obligations necessary to prevent forfeitures of the leased and controlled railroads, and the payment of the prior fixed charges of the Richmond & Danville Railroad proper?
On the appointment of the Clyde receivers, June 16, 1892, there was paid over to them the cash then in the treasury of the corporation, amounting to $480,427.91; and they received sums earned prior to their appointment amounting to $671,363.40. These two sums,, amounting to $1,151,791.31, very nearly paid all the current operating debts contracted within six months, which, by order of court, they were directed to pay. The deficit did not amount to as much as. $100,000. Prom June 17, 1892, to July 31, 1893, at which latter date the Clyde receivers were discharged and the mortgagee’s receivers took possession, the Clyde receivers had received:
Gross earnings ... $11,669,789 50
Operating expenses, including taxes. 8,371,997 19
Net earnings . $ 3,297,792 31
Out of this large sum they expended, under orders of court, about $500,000 for. construction and equipment. They made car trusts payments amounting to over $200,000, and the remaining two and a half millions they paid away for interest, rentals, and dividends, Including about $400,000 for interest on the two prior Richmond & Danville mortgages. These payments of interest, rentals, and divi--*501dends on the roads opei'ated by the Richmond & Danville Railroad Company were in very large part on those covered by the foreclosed mortgage, and were paid to prevent forfeitures and preserve the unity of the sysiem. They were made upon orders of court, passed without objection, after notice to the trustee of the bondholders.
The Chile receivers, when they were discharged, handed, over to the new receivers appointed under the mortgagee’s bill, in cash, $141,325.19, and supplies and materials purchased by them to a large amount. It is urged that there were no net earnings, because on the whole operation of the system there was a deficit; but the fact is that there was a gain of $346,163.10 from the operation of the Richmond & Danville Railroad proper, and the deficit resulted from the operation of other lines of the system which, were covered by the mortgage, and which were held and operated by the. receivers, and kept from forfeiture, primarily to preserve the security of the foreclosed mortgage. This was also the policy of the receivers appointed at the; instance of the mortgagees, who operated the system from August 1, 1893, to July 1, 1894, pursuing precisely the same policy as the Clyde receivers. The Clyde bill was not a mortgagee’s bill, hut was’ filed by the stockholders and creditors, with the assent of the corporation, to preserve the system until its financial difficulties could be adjusted. When receivers are appointed under such a bill, it would seem to be peculiarly a case in which the court should use the income of the receivership in the way in which the corporation itself would have been bound to use it; that its 1o say, to pay current supply debts contracted within a reasonable time in preference to new construction and equipment expenses, and even in preference to expenditures to prevent forfeitures of subordinate lines. New England R. Co. v. Carnegie Steel Co., 75 Fed. 54; Scott v. Trust Co., 32 U. S. App. 468-480, 16 C. C. A. 358, 364, 69 Fed. 17-23.
The pleadings in both the Clyde case and the mortgagee’s case, from (he beginning to the end, disclose that the proceedings in court were in aid of the undertaking to adjust the complex financial burdens of the Richmond & Danville system, comprising over 3,000 miles of railroads. It further appears that the reorganization was effected through the sale under the foreclosed mortgage to the Southern Railway Company, and that, in the reorganization, the bondholders under the foreclosed mortgage were secured by a new mortgage on the whole system. It is a case, therefore, which does not suggest harsh treatment of the Richmond & Danville supply creditors in the interest of the bondholders of the foreclosed mortgage. This appeal does mot raise the question of a supply creditor seeking to be paid out of the corpus of a mortgaged property, a,nd who is compelled, before he is allowed to displace a prior recorded mortgage, to bring himself strictly within the limitations to that equity; but this is 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, *502there is no ground for supposing would not have been applied by the company to the payment of the supply creditors’ debt.
The case of Bound v. Railway Co., 7 C. C. A. 322, 58 Fed. 473, was from the beginning a bondholders’ foreclosure suit. There was no proof of' earnings by the receiver diverted from supply creditors. It was an effort by an intervening supply creditor, who had furnished rails 18 months before the receiver was appointed, to obtain priority over the mortgage, and be paid out of the proceeds of a sale of the corpus of the railroad. The ruling in that case was that the claim was, in point of time, beyond the limit to which supply creditors who might claim to be paid in preference to mortgage bondholders must be restricted, and that, as to the diversion of earnings prior to the receivership, the creditor had waived it by his agreement, at the time of the purchase, to give credit and take notes, postponing payment of its claim beyond the due day of the mortgage interest paid.
In the present case we think that earnings of the receivers under the Clyde bill are shown to have been used for the benefit of the bondholders which should have been applied to the payment of the Carnegie Steel Company’s supply claim, and that, under the terms of the decree of foreclosure, the purchaser was rightly required by the circuit court to pay the claim. But I do not think interest should be allowed. Thomas v. Car Co., 149 U. S. 95-116, 13 Sup. Ct. 824, 833. The delay has not been the fault of either the bondholders or the purchaser.