Court Opinion

ID: 8262758
Source: CourtListenerOpinion
Date Created: 2022-10-16 15:56:22.685425+00
Date Added: 2024-06-11T16:43:14.173416
License: Public Domain

BOND, J.
This appeal presents one question which is, can the paramountcy of the claim of the intervenor, as a lien upon the proceeds of the mortgaged property, be sustained under the record before us ? Waiving for the moment any discussion of the sufficiency of the proof to show title in the intervenor to the account, the question as to the prior equity of the *497claim demands decision. If such rights exists at all, it must arise upon the transaction out of which the indebtedness sprang, as well as the orders made and the proof taken in the foreclosure proceedings. To a certain extent, a distinction exists between the incidents of a foreclosure of ordinary mortgages and those embracing property held for public uses, such as that of corporations engaged in the calling of common carriers. With respect to the latter, the doctrine has now taken root that a foreclosure may be had under certain conditions at the instance of the mortgagor as well as the mortgagee. Where the mortgagee of a railroad is the actor in a foreclosure suit, the consideration of the duties and responsibilities assumed by the courts in the grant of receiverships, has been deemed sufficient to authorize them to make provision for liabilities incurred in the preservation of the property and the performance of the duty of its owner to the public, which in certain contingencies and to a limited extent, authorizes recourse upon the mortgaged property, or its proceeds, for the payment of unsecured demands against the mortgagor. When the court is thus asked to administer, by the hands of its receiver, property which otves a duty to the public in consideration of corporate franchises, and is also affected with a mortgage lien, the mortgagee necessarily clothes the court with full power to discharge all obligations created, for the protection of the property and arising out of its public uses, during the period of administrative relief, and to that extent, in default of other sources of payment, he empowers the courts to displace his mortgage lien in the payment of such claims. To this catégory belong all costs of receivership and all demands and expenses which must be paid in order to preserve the property, subject to the primary charge of the mortgage, and to provide for its uses by the public while *498it is in the hands of the court. The claim of the intervenor is not embraced in this class. It grew out of transactions anterior to the foreclosure proceedings, and was based upon a simple contract between the mortgagor and the business predecessors of the intervenor, for the sale and purchase of printed matter and stationery. Under the most liberal view expressed by the courts, it could only be accorded an equitable preference upon the surplus income of the railroad for a reasonable time before the appointment of the receiver, and also during the receivership, provided it was the expectation of the seller that he would be paid from such sources, and provided further, the articles sold entered into the property of the railroad as permanent betterments, or were used in the necessary and proper conduct of its business as' a common carrier. As surplus incomes are available in equity for claims possessing these characteristics, it follows that any diversion of such surplus income to the use of the mortgage creditors (payment of interest on the secured debt), or to the permanent improvement of the mortgaged property, would entitle the holder of such claim to saddle the mortgaged property or its proceeds with a trust to the extent of this abstraction of the surplus incomes. These principles are dictated by the peculiar incidents attending the foreclosure of railroad mortgages.. Their just application secures the relative rights of the bondholders and the unsecured creditors. The one is accorded the full preservation of the rights vested in the contract; the other is peripitted to assert, against the fund (surplus income) to which he gave credit or against the property which has appropriated such fund, that equity which evenhanded justice created when he sold to the mortgagor, while in possession of the railroad and in receipt of its incomes, upon the faith of that source of revenue, something necessary to the proper use of the mortgaged property. When the precise grounds of this preferential right are accurately comprehended, *499it will be seen to be a doctrine resting upon a substratum of sound reason and enlightened equity. On the other hand, if misconceived or misapplied, it becomes fraught with mischief, and destructive to the sanctity of contracts, if not leading to simple confiscation of private property. Any misapprehension ■of its true boundary has been removed by the'clear and explicit announcements in the latest rulings of the Supreme Court of the United States, and in the Federal Courts of Appeal. B. & A. Coal Co. v. Central Ry. Co., 170 U. S. Rep. 355; Kneeland v. American Loan Co., 136 U. S. 89; Fosdick v. Shaw, 99 U. S. 239; International Trust Co. v. Townsend, 95 Fed. Rep. 850.
The record before us is barren of any evidence that the claim of the intervenor possessed the essential elements of a demand which would be entitled to a preferential lien upon the surplus income of the railroad company, either before or after the appointment of a receiver, under the foreclosure proceedings herein. The evidence adduced in support of said claim was submitted to the referee, by him reported to the court, and is before us, and we have been unable therefrom to find any support for his finding, besides it is shown in the record that the railroad company had no surplus earnings; that the mere costs of the receivership entailed upon it a still further debt of forty-five thousand dollars. Since there is no evidence in the record upon which to-predicate a diversion of any fund answerable to unsecured creditors and since all the evidence is before us, we are constrained to hold that the learned chancellor erred in confirming the report of the referee, whereby the claim of the intervenor was ordered to be paid out of the proceeds of the sale of the mortgaged property. Under the authorities cited, there was no liability on the part of the bondholders under the various mortgages for the payment of this claim, and the initial order conditioning the appointment of the receiver upon the *500payment of claims like that of the intervenor, was erroneously made and subject to attack by appellant in this case, because the final decree entered herein fully reserved that right.
It is accordingly ordered that the judgment of the lower court, confirming the report of the referee making the demand of the intervenor a preferred one, payable out of the proceeds of the foreclosure sale, be reversed.
All concur.