Court Opinion

ID: 8636060
Source: CourtListenerOpinion
Date Created: 2022-11-24 19:45:25.935436+00
Date Added: 2024-06-11T16:55:55.894782
License: Public Domain

DRUMMOND, Circuit Judge.
In 1S4S, the legislature of this state authorized the con*40struction of a railroad from Richmond to Newcastle, a distance of twenty-seven miles.
The act was amended in 1851, by authorizing the extension of the railroad in a northwestern direction to a point on the Wabash river, opposite Logansport, and in that way to Lafayette.
The act of the legislature amending the original charter, required that the accounts connected with the running and construction of the road should be kept distinct, and that when the road was completed it should all be united and constitute one entire railway. In 1852, the road having occasion to borrow some money, executed a mortgage or deed of trust to trustees, of whom Mr. Tullan, the plaintiff, is thg successor, to secure three hundred thousand dollars of bonds which were issued and transferred to various parties, who advanced money upon them.
This mortgage described the property as “the present and future-to-be-acquired property of the Newcastle and Richmond Railroad Company, that is to say, the first section from Richmond to Newcastle.”
A bill was filed in November, 18G4. to foreclose this mortgage, — neither principal nor interest having been paid, — and it is for relief under this bill of foreclosure, and for payment of principal and interest of these bonds, that the case has been so long pending in court, and is now about to be finally disposed of.
The Cincinnati & Chicago Air-Line Railroad Company was made a defendant at the time this bill was filed.
Between the date of the mortgage in 1852, and the filing of the bill, there had been other mortgages executed upon the whole property between Logansport and Richmond, and under a foreclosure of one of these mortgages in this court the property was sold subject to the mortgage of 1S52. The various parties went into possession, and under this decree and sale the Cincinnati & Chicago Air-Line Railroad Company was holding the property at the time this bill was filed. They, of course, were not bound to pay the three hundred thousand dollars, the debt for which the mortgage of 1852 was given. They had nothing to do with the contract made between the road and these parties (holders of these bonds! other than that they were in possession of the property which was given to secure the payment of these bonds and interest.
I think this is all that it Is necessary to state before coming to what took place in this court at the May term, 1809, under the bill filed in this cause in 1804. Much had occurred during the progress of the case; many orders had been made by the court; and among others, orders requiring separate accounts to be kept and money to be paid into court for the purpose of protecting these mortgages, which orders do not seem io have been in all respects complied with.
At the May term. 1809, Davis, J., made an interlocutory decree, which is the foundation of all the questions which arise before me at this time. That decree found that the mortgage of 1852 covered the railroad and its revenues between Richmond and Newcastle, and that the road between these two points, “with the bridges, depots, and other property thereon, with the tolls and income arising therefrom,” were within the terms of the mortgage. And the court found negatively that the mortgage did not extend to any other portion of the road, nor were the income and tolls of any other part of the road mortgaged. It found also, as a necessary corollary from this, that the plaintiff was entitled to receive from the defendant nothing more than the net income of the road from Newcastle to Richmond. It also found that the rolling stock which the defendant had purchased from Choteau and others who claimed under the decree and sale under a subsequent mortgage, was in fact equitably owned by the old road, and should be divided ratably between the parties — that it to say, as twenty-seven, the distance between Richmond and Newcastle, is to one hundred and eight, the distance between Richmond and Logansport, or one-fourth of the rolling stock. — and that for one-fourth of the value of the rolling stock at the date of its conversion by the defendant, with interest, the defendant was liable.
The first question arises upon this decree. The case was referred to a master and instructions given to him as to his report and the principles which should govern his calculation. He has made his report, exceptions have been filed and argued, but the plaintiff has claimed the right to question one of the points found by the court in its interlocutory order of May, 1869, and it is the undoubted right of the plaintiff so to do. Until the case is finally disposed of by the chancellor, any interlocutory order made during the progress of the case is subject to modification.
This order made in May, 1869, was only an interlocutory order and it is therefore within the rule. It is claimed on the part of the plaintiff that the order made at that time by the court, declaring that the mortgage only covered that portion of the railroad between Richmond and Newcastle, was erroneous, for the reason that the statute amending the charter and authorizing the extension of the road to Logansport obviously contemplated that there was to be one entire road; that separate accounts were to be kept, and that when it was completed, the road was a whole, and was not therefore separable into distinct parts, and that ipso facto (and not by anything which took place afterwards and by which income was earned by the assignees or vendees under a decree of this court) by the passage of the amendments and the directions of the legislature and the taking possession and completion of the road to Lo-gansport, the mortgage expanded and brought within its grasp the whole road from New*41■castle to Logansport as well as that from Richmond to Newcastle.
An argument has been submitted on that point, the strength of which the court feels and admits. But it would have to be a very clear, case — one about which no doubt could be efttertained — to warrant the court in the present aspect of the case in interfering with the order made at the May term, 18G9.
If the case is doubtful it is not the duty of the court to modify or change that part of the decree, and on looking at it,. I am not satisfied, notwithstanding the arguments which have been used, that that portion of the decree is erroneous, and I do not feel at liberty to interfere with it. but think that it ought to stand as the decree of the court and as binding upon the court now. So that we must proceed on the assumption that the mortgage, or deed of trust, only covers so much of the property as was described by the interlocutory order of the May term, 1869, and consequently we must deny the right of the plaintiff to bring the whole road, that is the •one hundred and eight miles, under the mort.gage. This is entirely independent of any question which arises in consequence of the defendants receiving income from the road, which depends upon different principles.
There are some principles involved in the master’s report which are questioned, and as to which it is the duty of this court to give its opinion. The master, it seems, being instructed by the interlocutory order already referred to, to ascertain the gross earnings of this part of the road from the time the bill was filed, and from its earnings to deduct the expenses, not allowing for permanent improvements which were not required to run the. road safely and securelj', and being instructed also that a reasonable rent should be allowed for the use of the rolling stock employed in making gross earnings, made a pro rata estimate of the earnings and of the expenses of the road in order to reach the results required by the court, viz. the net earnings of the road between Richmond and Newcastle. The objection is made that that principle was erroneous. X am satisfied that it was, under the circumstances, correct, and that no other course could be adopted. I admit that it is a very unsatisfactory mode— that it does not necessarily lead to a true result, but I think it is the only practicable mode by which the master could reach the result aimed at by the court. The reasons for the rule which the master adopted are, I think, satisfactorily stated by him in his report. He says that from the organization of the Newcastle & Richmond Railroad Company, and through all the changes and consolidations, which were numerous, the road from Richmond to Newcastle has been operated and used, and is nowT operated and used, and the income received, and the operating expenses paid as a part of the entire road; that no accounts were made or kept showing separately the income or operating expenses of any particular part, and that the income of this part has been blended with the income of all the other parts of the several lines of road of which it formed a portion, and that the operating expenses have in like manner been paid out of the common fund produced by the use of the various parts. Now, under such circumstances, it is difficult to see how the master could adopt any other rule than he has adopted, admitting that this rule leads not to actual results, but to an approximation merely.
Its soundness will be further illustrated by the legislation connected with this railroad. It was obviously intended that the accounts should be kept separate until the road was finally completed to Logansport, so that it should be known precisely how much each part cost, both in construction and in operation. This was a law that stood directly in the path of all these parties, individual and corporate, who were in possession or who came into possession of this railroad. It was a rule for their conduct which was disregarded by them, and I do not think that it is competent for them to complain if the pro rata estimate is now adopted for the purpose of ascertaining the net income of the road between Richmond and Newcastle. It is something that grows out of their own fault, with which the mortgagees under the mortgage of 1852 had nothing to do, and for which they can not justly be held responsible. This disposes of the first, second, third, fourth and eighth exceptions that have been taken to the master’s report, and they are overruled, because they all proceed upon the ground that the master erred in adopting that rule for the purpose of ascertaining the net earnings of the road between Richmond and Newcastle.
Another objection is, that the earnings of the road should be taken into account from the time that the Cincinnati and Chicago Air-Line Railroad Company went into possession of the road, July 1, I860.
The interlocutory order of May, 1869, declared that the plaintiff was entitled to the net income of the road for the twenty-seven miles, from the date of the filing the bill, namely, from November, 1864. It does not appear why that time was fixed on by the court. It may have been on the ground that the court would hold a party in possession for the net income of the road from the time that it should be considered a demand was made for the earnings and income. However that may be, the court at the May term. 1872. modified the order which was originally given to the master, and authorized him to take an account of the earnings of the road from the 1st of July, 1860, leaving the parties to the equities which might arise in reference to that modification of the order, it obviously being the intention of the court to leave the question open for the decision of the court at this time; and that, therefore, is the question which now arises: What is the true con-*42struetion of the language in the mortgage: “The present and future-to-be-acquired property of the Newcastle and Richmond Railroad Company; that is to say, the first section from Richmond to Newcastle.”
The property and the future-to-be-acquired property, and income of the road were mortgaged. I think that the mortgagees were entitled to the income of the road as soon as it came into existence as property.
This question is quite important, because I believe the net earnings, between the time the defendant took possession, on the first of July, 1860, up to the time of the beginning of the suit, as found by the master, amount to ninety-five thousand three hundred and forty-four dollars and eight cents ($95,344.08). It is in relation to the principle which we are now considering that the fifth exception by the defendant is made to the master’s report.
It is claimed that the general rule is — and there is no controverting the position in case of an ordinary mortgage — that the mortgagor, until he is interfered with by the mortgagee, has the right to the earnings and the profits of the mortgaged property; that any income derived from it becomes the property of the mortgagor; that in point of fact, the mortgagor cannot mortgage, and does not mortgage, what is not in esse at the time he executes his mortgage.
The rents, profits and income, is something that arises in the future. It is claimed that it is not possible for the mortgage to cover what is only to be brought into existence after its execution. There is no disputing this, general rule. But the question is whether parties cannot agree that as soon as property does come into existence in the future, that property shall be seized by virtue of the contract and held in equity for the fulfillment of the obligation of the mortgagor, and I think it can be, and that when the income of this property came into being, that is to sáy, as soon as it was received, then the mortgage operated upon it by virtue of the contract which was made between the parties; and ■ whoever received the income, received if and held it in trust for the party who was entitled to it. I do not see how this differs from' the. principle declared by the supreme court of the United States, in the case of Coe v. Pennock, 23 How. [64 U. S.] 117. The question there was whether property which was acquired after the mortgage was executed, became the property of the mortgagees as-against subsequent creditors, and the court •held that it did. That was a case where locomotives and cars were constructed and put on the road after the date of the mortgage, and it seems to me that the principle operates in this case with peculiar force, because these parties took possession of this property with the knowledge of the contract which'was in existence.
It was on the face of the decree under which they claimed. They could no . more get rid of it, or of its binding effect in equity, than they could of any other fact set forth in the title under which they held.
The decree of this court was the foundation of their title and is to-day the only one, as far as this court knows, upon which that title depends, and that declares they took the property subject to this mortgage. Then I hold that the parties who have knowledge of this — and they must be presumed to have— as soon as they received the income of this property, held it for the benefit of those who-were protected by the mortgage of 1852, And these circumstances furnish an' additional reason why it was obligatory upon them thus to discriminate, so as to know what the expenses and earnings were upon this particular section of the road. But it is said by the defense that however this may be, the defendant certainly would not be chargeable with any income after it offered to deliver up, in open court, and surrender to-the plaintiff the property of which it was in possession, and the only property., as it insists, that was covered by the .mortgage. The answer to this is, that as to the income there was no mortgage upon it, and no trust unless-it was earned. If they operated' the road and earned income, they -could not, of course, avoid the responsibility growing out of these facts. The only answer that they could have made would be that there was no-income earned, or that they-did not use the road.
It is objected that the percentage of -expenses of the gross earnings of the road, as-established by the master in his report, is too small; that was fixed at sixty-three and three-tenths per cent., and it is in relation to-this that the court has had the most difficulty.
I have an impression, I may as well state-frankly, that this percentage is not large enough; but I have examined Very carefully the report of the master, and the reasons he-gives for fixing upon this percentage, -and I cannot say that the proof does not warrant it. It is claimed that the master' took the gross earnings of the road from the books of the-defendant, but did not take the expenses from the same source; and it is insisted, and with some considerable plausibility, that having gone to one source of information for the-earnings, and the same source furnishing the' expenses, that he should not have taken the account of earnings without also having taken that of expenses.
But he says that in the expenses there were included other items than the mere running expenses of the road, which he' thought it was his duty alone to consider; that the construction account included in it various other things, all of which went to make up the sum total of the expense account, and as to which he could not discriminate.
I may add that in some instances it is stated by the master that at a particular time, which he gives, the expenses of the road were, in one case, over ninety per cent., and in another, eighty-two per cent., and it is *43claimed that he ought to have taken this during that time to determine the running expenses; but he has given the reason why it was not done, and while I am not entirely satisfied that this percentage is large enough, still I do not see anything in the case that warrants the court in interfering with the report of the master on that ground. I can not say but what there is evidence in the case that may justify him in his conclusions; and I think, perhaps, there may be some complaint made that all the light that could be thrown on this subject was not furnished by the defendant, but that the master was left to grope in the labyrinth of accounts, without the assistance which might have been rendered. I do not know that this is actually true, but there is something that seems to indicate it.
Observations of a somewhat similar character may be made to the objection taken to the account furnished by the master as to the value of the rolling stock which was turned over to the defendant at the time it took possession under Ohoteau and others.
The master states the circumstances connected with this part of his report. He says that the testimony as to their value was conflicting, and that he was obliged to form an opinion somewhat from the value of such articles, as established by the market generally. The discrepancy between the statements of Judson and Gest, if they may be considered binding as testimony upon the master, is very great, as to the value of this property — one of them making it only $4S,260 and the other $100,000. The master says that in view of all the circumstances, he finds that a reasonable price would be $100,000, and thinks it would be rather less than the actual value. Now the question is whether the court can interfere with the report of the master on the ground that he has committed an error as to the value of this rolling stock. It was competent for the master to believe one of these witnesses rather than the other, and unless there are some circumstances in the case that show the one fixing the lesser value was more entitled to credit than the other, the court cannot interfere with the report of the master on that ground. It is the duty of the party making the exception to satisfy the court that the report is wrong in this particular; otherwise it must stand.
There is one point upon which the court differs from the master, and the exception will be sustained; and that is, as to the rule by which the master determined the amount of rent to be paid to the parties who owned the rolling stock which ran over this road, and by means of which the income was obtained. The interlocutory order of May, 1869, instructed the master that a reasonable rent should be allowed for the use of this rolling stock, and the master has fixed the rent at eight per cent., and finds that sum was a reasonable rent for the use of the rolling stock employed in making the earnings over twenty-seven miles of the road.
The question is whether, all things considered, that is a sound rule. I hardly think it is. It is right that the master should be heard in explanation of his finding upon this point, and he says that the rolling stock employed was maintained and kept in repair by expending money and labor, treated and charged as part of the operating expenses of the road, and therefore in fixing the amount of rent he did not take into consideration the wear and tear, but the value of the rolling stock as forming so much capital invested and employed in making the earnings, and he has apportioned the value according to the length of the road; and, upon the capital thus ascertained he has calculated it at eight per cent, as a reasonable rent. Now I think the circumstances of the case do not warrant that. It seems to me that that is too low a per cent, for the use of the rolling stock of the defendants. This was an important element in the earnings of the road, and it seems to me that the master has hardly had a just appreciation of the part this rolling stock bore in obtaining these earnings. Bight per cent on that kind of property, considering how subject it is to loss and deterioration in many ways, seems hardly enough, and I think that the facts scarcely warranted the master in finding so low a percentage; and that exception will be sustained by the court.
Some criticism has been made upon the manner in which the master obtained the results upon his pro rata rule. It is insisted on the part of the defense that he has made his denominators too low in every instance. Bor example, the master took the length of the road from Richmond to Logansport, one hundred and eight miles, to obtain a pro rata estimate for twenty-seven miles, then he took the length of the road from Richmond to Valparaiso, 170 miles, to make a pro rata estimate, and then for Chicago 216 miles, and then for the whole length of the road, about 580 miles. I am rather inclined to think there is something in this criticism on the part of the defense; and therefore in referring back the case to the master, I shall ask him to reconsider his pro rata estimate upon these points and see whether he has been precisely correct I am not certain as to this, and therefore I shall not make an absolute ruling upon that point. _
There is only one remaining question which, although it is not absolutely necessary now to discuss or decide, still as it was presented in the argument, and may have some influence upon the action of the parties, I may as well state what is the opinion of the court. That is as to the effect of any finding of the court against the defendant for the indebtedness which is due for the income upon its property, I mean the Cincinnati & Chicago Air-Bine Railroad Company. It is claimed that although the mortgage may not cover *44any oilier property than that between Richmond and Newcastle, as it included the income and after-acquired property of the road, and the defendant was in possession, subject to the equities protected by the mortgage, that its property is bound equitably for any decree that may be rendered against it. And 1 do not know why this principle, to some extent at least, may not be a sound one. They, as the operators of the road from Richmond to Logausport, received the income on this particular part; as receivers of the income of this part' they may be bound to respond for that to the mortgagees under the mortgage of 1852.
NOTE. For other opinions in this case, see Bill v. New Albany, etc., Ry. Co. [Case No. 1,407]; Pullan v. Cincinnati & C. Air-Line R. Co. [Id. 11,461].
That a court may on, or previous to, the final judgment revise any of its preliminary orders, consult Breedlove v. Nicolet, 7 Pet. [32 U. S.] 4l3; Simson v. Hart, 14 Johns. 63; Akerly v. Vilas [Case No. 119].
As the court has already said, they held it in trust for whomsoever are entitled to it, and having so received and held it, there may be, perhaps, an equitable lien upon their property to respond for the amount. But 1 do not decide this point, and it may remain open for future consideration.
X may say, in conclusion, that the master appears to have devoted himself with great industry and fidelity to the investigation of the several points submitted to him by the court, and the manner in which he has discharged his duty, considering the many difficulties and embarrassments attending its performance, is very creditable to him. And the court, in the examination of the various questions referred to in this opinion, has derived great assistance from the arguments of the counsel on both sides.