Court Opinion

ID: 8742633
Source: CourtListenerOpinion
Date Created: 2022-11-26 10:55:00.561487+00
Date Added: 2024-06-11T17:00:29.660142
License: Public Domain

CALDWELL, Circuit Judge
(dissenting). At the threshold of this case we are confronted with the question whether the doctrine of preferential debts, applicable to railroads, has any application to a corporation like the mortgagor in this case. In Wood v. Safe-Deposit Co., 128 U. S. 416, 421, 9 Sup. Ct. 132, 32 L. Ed. 473, the supreme court said:
“The doctrine of Fosdick v. Schall has never yet been applied in any ease except that of a railroad. The case lays great emphasis upon the consideration that a railroad is a peculiar property, of a public nature, and discharging a great public work. There is a broad distinction between such a case and that of a purely private concern. We do not undertake to decide the question here, but only point it out.”
In Hanna v. Trust Co., 36 U. S. App. 61, 16 C. C. A. 586, 70 Fed. 2, and in Ford v. Trust Co., 36 U. S. App. 203, 17 C. C. A. 31, 70 Fed. 144, the question was adverted to, but not decided, by this court. The majority opinion makes no reference to this question, but by implication puts the corporation in this case on the footing of a general traffic railroad in the matter of preferential debts. I express no opinion upon that question. If the doctrine is applicable to this corporation, then the decree of the" circuit court should be affirmed. The opinion of Judge Woolson (Illinois Trust & Sav. Bank v. Ottumwa Electric Ry. Co. [C. C.] 89 Fed. 235) shows what the decree was, and the grounds upon which it was rested. No extended review of the authorities on the doctrine of preferential claims is called for by this case. They have been fully reviewed by the supreme court in the late case of Southern R. Co. v. Carnegie Steel Co., 176 U. S. 257, 20 Sup. Ct. 347, 44 L. Ed. 458; and their review by the majority of the court in this case throws no new light on the subject, but, from the standpoint from which it is made, serves rather to darken it. The cases of Dunham v. Railway Co., 1 Wall. 254; 17 L. Ed. 584, and Railroad Co. v. Cowdrey, 11 Wall. 459, 20 L. Ed. 199, are cited in support of the majority opinion. As these cases were decided long before Fosdick v. Schall, the court might, with exactly as much pertinency and relevancy-to the case at bar, have cited every case from the Year Books down. The question of giving certain classes of the general indebtedness of a railroad company preference over a mortgage on the road first came before the circuit courts in suits to foreclose such mortgages. Some of those courts, perceiving the difference between a railroad and all other kinds of property, and between a mortgage on a railroad and a mortgage on lands and lots (Farmers’ Loan & Trust Co. *151v. Kansas City, W. & N. W. R. Co. [C. C.] 53 Fed. 182; Same v. Northern Pac. R. Co. [C. C.] 71 Bed. 245), were constrained by considerations of equity and justice, which no court of equity could disregard, to give certain classes of indebtedness of the railroad company preference over the mortgage. The power was exercised very sparingly at first, but more liberally by some chancellors than others. The first case in which the supreme court took up and fully considered the question of the power of a court of equity to make preference in suits to foreclose a mortgage on a railroad was the now justly celebrated case of Fosdick v. Schall, 99 U. S. 253, 25 L. Ed. 339. The unanimous judgment of the court was delivered by Chief Justice Waite, and the opinion in that case is the foundation of the doctrine in the federal courts, and no case prior to that judgment has any application to the doctrine. No case has since gone to the supreme court, involving the question of preferential debts, in which the court has not rested its decision on the doctrine of that case, or cited it approvingly. In the very last reported case (Southern R. Co. v. Carnegie Steel Co., supra) involving the question the court quotes extensively and approvingly from the opinion in Fosdick v. Schall. In every case which has come before that court involving the question of preferential debts, it has referred approvingly to the case of Fosdick v. Schall; and in no single one of them is that case criticised, overruled, or declared obiter dicta. In view of these facts it is a matter of surprise to find it stated in the majority opinion that the greater part of the unanimous opinion of the supreme court in Fosdick v. Schall is obiter dicta and to be disregarded. It is difficult to harmonize all the judicial utterances and conclusions in the different cases that have been considered by that court. But this is not surprising when we reflect that the whole doctrine is of modern origin, and that it is not based on any written law, but upon equitable considerations, the application of which rests in a large degree upon the sound judicial discretion of the chancellor, having due regard to the circumstances of the particular case. Some contrariety of opinion and practice in the application of a principle resting solely on equitable considerations, the application of which are dependent on the exercise of that uncertain quantity called "judicial discretion,” was inevitable. It was in view of these considerations that the supreme court, unlike the majority of this court in the case at bar, has uniformly refused to lay down any fixed and inflexible rule for the application of the doctrine. Every case is left to be determined on its own special equities. In Fosdick v. Schall the supreme court said:
“No fixed and inflexible rule can be laid down for tbe government of tbe courts in all cases. Each case will necessarily have its own peculiarities, which must to a greater or less extent Influence tbe chancellor when be comes to act.”
And in Southern R. Co. v. Carnegie Steel Co., supra, after reviewing the cases, the supreme court says:
“It is apparent from an examination of the above cases that tbe decision in each one depended upon its special facts. This court has uniformly refrained from laying down any rule as absolutely controlling in every case *152Involving the right of unsecured creditors of a corporation, whose property is in the hands of a receiver, to have their demands paid out of net earnings in preference to mortgage creditors.”
And this is again repeated at page 292, 176 U. S., page 358, 20 Sup. Ct., and page 473, 44 L. Ed., where it is said:
“Each ease, as already observed, must depend largely upon its special facts.”
In Lackawanna Iron & Coal Co. v. Farmers’ Loan & Trust Co., 176 U. S. 298, 315, 20 Sup. Ct. 363, 369, 44 L. Ed. 475, 484, decided on the same day with the Carnegie Steel Company Case, the court said:
“The decision in each ease has been more or less controlled by its special facts.”
And like utterances are found in other opinions of that court.
In the case of Farmers’ Loan & Trust Co. v. American Waterworks Co. (C. C.) 107 Fed. 23, in which the intervener, the Holly Manufacturing Company, was allowed $44,000 as a preferential claim for three engines and other material furnished to the Waterworks Company, Judge Sanborn says:
“It is perhaps impossible, and, if possible, it would be unwise, to draw the line of demarkation between claims that may and those that may not be preferred to the mortgagees in payment out of the income earned by an insolvent corporation, after receivers in foreclosure are appointed, or out of the corpus of the property. The special circumstances of each ease will necessarily and rightfully influence the discretion, of the court.”
In the case at bar the majority of the court find the machinery and other improvements procured and built with the money of the intervener were not necessary to keep the corporation a going concern, or to prevent a forfeiture of its charter, or to enable it to discharge any duty it owed to the public and was bound to discharge, and that, as the contract to light the city entailed a loss of $2,700 per year on the company, the addition and improvement of its plant which enabled it to continue to perform that contract was an actual damage to the company. In the face of these findings, there is no rule or decision under which the intervener’s claim could be held to be preferred. And when the court arrived at these conclusions this case was decided against the intervener, and all that it said thereafter is obiter dicta and not binding on this or any other court. But, in ilisregard of the rule of the supreme court to confine the decision in this class of cases to the particular facts and circumstances of the case in hand, the majority opinion, after finding facts which effectually dispose of the case at bar, proceeds to a general discussion of the doctrine of preferential debts, and concludes by laying down numerous inflexible and cast-iron rules for the determination of all cases which may arise in the future. One of these rules declares:
“Tbe class of claims which may be awarded a preference In payment over the prior mortgage debt in equity is limited to claims for current expenses incurred in the ordinary. course of the operation of the mortgaged property within a limited time before the appointment of a receiver. It does not include claims for money loaned or for material or labor furnished to make necessary beneficial and permanent additions or improvements to the mortgaged property,”
*153As applied to this case, this rule, for the reasons we stated, is obiter dicta, and, moreover, is not law. It is in direct conflict with the judgment of this court in Trust Co. v. Riley, 36 U. S. App. 100, 16 C. C. A. 610, 70 Fed. 32, in which the judge who writes the majority opinion in this case wrote the unanimous opinion of the court. After a full review of the authorities the court, speaking by Judge Sanborn, said:
“From this brief review of tbc decisions of the supreme court bearing upon tbis question, we think these propositions may properly be deduced: First. There are certain claims against a mortgaged railroad, accruing before the appointment of a receiver, which are entitled to a preference over a prior mortgage debt in'payment out of the earnings of the railroad during the receivership, and out of the proceeds of the sale of its property. Second. It is an indispensable element of every such claim that it is founded upon property furnished or services rendered to the mortgagor which either preserved or enhanced the value of the security of the mortgage debt, and thereby inured to the benefit of the mortgagee. Third. Claims of this character have been given a preference over ihe mortgage debt by these decisions on one of two grounds, — either on the ground that the mortgage is a lien on the net, and not on the gross, income of the railway company; and where that part of the income which is applicable to the payment of current expenses of operation, proper equipment, and necessary improvements has been diverted to pay interest on the mortgage debt, or to otherwise benefit the security, and this diversion has left claims for these expenses unpaid, it is the province and duty of the chancellor to restore the diverted fund by taking an equal amount from the earnings of the railway company during the receivership, and applying it to the payment of these claims in preference to the mortgage debt. Fosdick v. Schall; Burnham v. Bowen; St. Louis, A. & T. H. R. Co. v. Cleveland, C., C. & I. Ry. Co.; Railroad Co. v. Hamilton; Morgan’s L. & T. R. & S. S. Co. v. Texas Cent. Ry. Co., — supra.”
Again it is said:
“Repairs and improvements increase the value of the security of the bondholders.”
It will be observed that among the claims classed as preferential by the court are claims "founded upon property furnished or services rendered to the mortgagor, which either preserved or enhanced the value of the security of the mortgage debt, and thereby inured to the benefit of the mortgagee,” and debts incurred for "proper equipments and necessary improvements,” or any expenditure that operates "to otherwise benefit the security.” The intervener’s claim in this case is founded on property furnished to the mortgagor which enhanced the value of the security of the mortgage debt, and thereby inured to the benefit of the mortgagee. It is for “proper equipments and necessary improvements,” and was an expenditure that operated to benefit the security, so that it falls exactly within the rule announced by this court in Trust Co. v. Riley.
Contrary to the finding of the majority of the court, I find, from a careful consideration of the facts disclosed by the record, that the improvements made were necessary to enable the company to continue as a going concern, so far as relates to furnishing lights, and to carry out its contract to light the city, and to discharge its obligations under its charter. It is immaterial whether the contract to furnish light was profitable or unprofitable to the company. It was a contract to perform public service of vital importance to the *154city and its inhabitants. The doctrine that a corporation bound by contract to light the streets of a city may with impunity repudiate that contract whenever it proves to be unprofitable or its plant inadequate to the purpose is not sound. When the company entered into a contract to light the streets of the city, it took upon itself the discharge of a public duty which it was bound to perform according to the terms of its contract. Neither its insolvency, nor the fact that its plant was inadequate for the purpose, nor the fact, if it was a fact, that compliance with its contract entailed a loss, would be received by the law as an excuse for its nonperformance. It is conceded that the company was saved $4,000 a year in expenses by these improvements and additions to its plant. The improvements and additions passed to the mortgagees, under the mortgage, and were worth all or more than they cost. The company would have been liable to the city for the breach of its contract to light its streets, so that the failure of the company to comply with its contract would not relieve it of any loss under the contract, but would impose new and additional liabilities upon it. It would, moreover, have furnished a ground for the forfeiture of its charter. It is not necessary to prove that this forfeiture would have been enforced. It is enough that it might have been. The contention of the majority that, where a company’s charter authorizes and requires it to operate a street railroad and an electric plant sufficient to light the streets of a city, it must be regarded as a going concern as to both, so long as it operates one of them, and that it cannot, therefore, be said that improvements and additions made to one of them, without which it must have been abandoned, were necessary to keep the company a going concern, is too obviously untenable to require discussion. In Fosdick v. Schall, supra, without assuming to enumerate all the kinds of claims which might be allowed, the court specified the following:
» “Outstanding debts for labor, supplies, equipment, or permanent improvement of the mortgaged property, as may, under the circumstances of thejpartieular case, appear to be reasonable.”
Again:
“The income out of which the mortgagee is to be paid is the net income obtained from deducting from the gross earnings what is required for necessary operating and managing expenses, proper equipment, and useful improvements.”
In Central Trust Co. v. Wabash St. L. & P. Ry. Co. (C. C.) 30 Fed. 332, over $2,000,000 of claims were allowed for borrowed money “in order to provide means for the meeting of its expenses and the keep: ing of its road in successful operation, and completing its lines as aforesaid.” See Farmers’ Loan & Trust Co. v. Kansas City, W. & N. W. Ry. Co. (C. C.) 53 Fed. 182. In Trust Co. v. Clark, 26 C. C. A. 397, 81 Fed. 269, preference was given to a claim for. a gear wheel and pinion. In Manhattan Trust Co. v. Sioux City Cable Co. (C. C.) 76 Fed. 658, for power furnished a street railway. In Railroad Co. v. Wilson, 138 U. S. 501, 11 Sup. Ct. 405, 34 L. Ed. 1023, a preferential claim was allowed for attorney’s fees. In Morrison’s Case, 125 U. S. 591, 8 Sup. Ct. 1004, 31 L. Ed. 825, an allowance was made *155for damages suffered by reason of an injunction bond to prevent the sale of rolling stock. In Manhattan Trust Co. Case (C. C.) 76 Fed. 658, an allowance for an electric generator. In Miltenberger Case, 106 U. S. 286, 1 Sup. Ct. 140, 27 L. Ed. 117, claim was allowed for the construction of five miles of road, repairs on bridge, purchase of engines, etc.; some of the claims existing before, and some accruing after, appointment of the receiver. In Cleveland, C. & S. Ry. Co.’s Case (C. C.) 86 Fed. 73, claim allowed for the construction of railroad bridge. In Atkins’ Case, 3 Hughes, 307, Fed. Cas. No. 604, for moneys advanced by bondholders and stockholders to pay labor claims. In Farmers’ Loan & Trust Co. v. American Waterworks Co., supra, claim allowed for engines, hydrants, boilers, valves, etc., furnished the American Water Company at Omaha. Farmers’ Loan & Trust Co. v. Northern Pac. R. Co. (C. C.) 71 Fed. 245, claim allowed on account of going on an appeal bond, upon the same principle as Morrison’s Case. In Farmers’ Loan & Trust Co.’s Case (C. C.) 71 Fed. 250, claim allowed for taxes paid. Penn Mut. Life Ins. Co.’s Case, 141 Ill. 35, 31 N. E. 138, claim allowed for right of way damages. In Southern R. Co. v. Carnegie Steel Co., supra, a claim for steel rails was held to be a preferential debt. And in Farmers’ Loan & Trust Co. v. Lamont, 69 Fed. 23, 16 C. C. A. 364, 32 U. S. App. 480, this court held a claim for rent of a waiting room for passengers and an office for the company’s ticket agent was a preferential debt.