Court Opinion

ID: 8741654
Source: CourtListenerOpinion
Date Created: 2022-11-26 10:51:04.75075+00
Date Added: 2024-06-11T17:00:26.343944
License: Public Domain

MAXEY, District Judge,
after stating the ease, delivered the opinion of the court.
The records before us embrace five distinct appeals, and each one will be considered in its order.
(1) First National Bank of Houston v. Ewing et al.
This appeal brings up for review that part of the final decree of distribution which postpones the claim of the appellant as a bond*182holder to the payment of receivers’ certificates and other claims classed by the court as preferential. The objection of the appellant to. the issuance of receivers’ certificates will be first considered. In respect of this item, amounting in the aggregate to $245,279.54, the record shows that the certificates were expressly authorized by an order of court passed January 23, 1896. The statement of the case exhibits the order in its entirety, which discloses clearly the purposes for which the certificates were authorized. By the order it was adjudged that the certificates, when issued, should become a first lien on all the property of the Galveston, La Porte & Houston Bailway Company, of every character and description, including net earnings, and that such lien should be prior and superior to all other liens upon the property, of whatsoever nature. While the appellant was not a party to the proceeding which culminated in the order, the record nevertheless shows that its president had full knowledge of the pending receivership, and that he was awqre of the application for authority to issue the certificates. On the 17th of May, 1897, as the holder of 63 first mortgage bonds issued by the defendant railway company, and delivered to the Union Trust Company of New York, as trustee, the appellant intervened in the original suit, pro interest suo, seeking to1 establish its claim as a first lien on the railway property in preference to all other claims not entitled to priority. Subsequently the Continental Trust Company of the 'City of New York, as trustee under the second mortgage executed by the defendant railway company, filed a cross bill seeking a foreclosure of its mortgage, and made the appellant and others parties defendant. On February 25, 1898, with the appellant, the two trust companies, and others interested, before the court, a decree of foreclosure was rendered, ordering a sale of the property of the railway company. It was found by the decree that the receivers had been previously, to wit, on January 23, 1896, granted authority to issue interest:bearing certificates not to exceed in amount $250,000, which should operate as a first lien upon the property, including net earnings, prior and superior to all other lien's of whatsoever nature, and that pursuant to such authority they had issued, negotiated, sold, and disposed of receivers’ certificates of sundry dates in the aggregate of the principal sum of $245,053.25, which were outstanding and held by divers and numerous persons. And upon the findings it was declared “that the receivers’ certificates or debentures issued and disposed of under the hereinbefore recited order of January 23, 1896, are, for the full amount of principal and interest thereof, a yvalid and subsisting lien upon the roadbed, rolling stock, depots, and all other property of said railway company, of every character and description, wherever situated.” It was further directed that all liens, mortgages, equitable charges, claims, or demands of every nature and description, held, owned, or asserted by any of the parties tó the cause, should be transferred to the proceeds of sale, with like but no greater effect than the same appertained to the property itself, and subject to the future determination of the court, except as otherwise specially directed in the decree. And by the decree were reserved for future determination • all questions as to the classification, rank, and priority of all liens, equitable charges, or other demands, except *183as therein adjudicated, held, owned, or claimed by any of the parties. It is doubtful whether, under a proper construction of. the decree, ,any question whatever was reserved touching the receivers’ certificates, as their status seems to have been adjudicated and their priority established. In any event, all questions as to their issuance, their validity, negotiation, and sale, were effectually set at rest, and they were not thereafter subject to attack, except by an appropriate proceeding to review the decree. If the appellant was dissatisfied with the directions of the decree, he had ample remedies at hand to correct any errors which may have been committed. A petition for rehearing (equity rule 88) was available if seasonably presented, and, as the decree rendered was one from which an appeal would lie, that remedy was open to him. Central Trust Co. v. Grant Locomotive Works, 135 U. S. 207, 10 Sup. Ct. 736, 34 L. Ed. 97. But the appellant was passive, and failed to contest the validity of the receivers’ certificates until the rendition of the final decree of distribution on the 18th of November, 1899. Having bad its day in court, it will not now be heard to bring in review questions which were conclusively determined by the decree to which it was a part v. Swann v. Wright’s Ex’rs, 110 U. S. 590, 4 Sup. Ct. 235, 28 L. Ed. 252; Steamship Co. v. Moran, 33 C. C. A. 313, 91 Fed. 22; Bank v. Hazard (C. C.) 30 Fed. 484. If, however, it he conceded that the classification, rank, and priority of the certificates were left open by the decree of February 25, 1898, there is no doubt that the court was correct in awarding them priority of payment over the first and second mortgage bonds. The certificates, as determined by the last-mentioned decree, were issued, negotiated, and sold pursuant: to the decretal order of February 23, 1896.. By that: order they were directed to be issued for construction and ballasting purposes; for the purchase of rolling stock, ties, lumber,'bridges, and other material necessary for the completion, maintenance, and safe .operation of the road; for the construction and repair of bridges, culverts, depots, and other structures; for the purchase of right of way and for the payment of taxes; for the payment of the amount due as shown by the pay rolls of the railway from September 1, 1895, to January 6, 1896; for the payment of a debt due to the Rogers Locomotive Company amounting to $4,879.12; and for the payment of operating expenses. It will be readily seen that the certificates were authorized for lawful and proper purposes. So far as they were issued for work to he done and materials to be supplied during the period of the receivership, the authorities are clear that they were entitled to pr iority over the mortgage bonds, on the theory that the expenditures resulted in the improvement and betterment of the railway property. And it is equally well settled that such priority exists in the case of expenses incurred by the railway company itself, a few months prior to the receivership, for the necessary labor, materials, rolling stock, and other supplies necessary to operate the railway and maintain it as a going concern. Fosdick v. Schall, 99 U. S. 235, 25 L. Ed. 339; Union Trust Co. v. Illinois M. Ry. Co., 117 U. S. 434, 6 Sup. Ct. 809, 29 L. Ed. 963; Miltenberger v. Railway Co., 106 U. S. 286, 1 Sup. Ct. 140, 27 L. Ed. 117; Thomas v. Car Co., 149 U. S. 95, 13 Sup. Ct. 824, 37 L. Ed. 663; Virginia & A. Coal Co. v. Central Railroad & Banking Co., *184170 U. S. 355, 18 Sup. Ct. 657, 42 L. Ed. 1068; Southern Ry. Co. v. Carnegie Steel Co., 20 Sup. Ct. 347, Adv. S. U. S. 347, 44 L. Ed.-. The appellant interposed objections to other claims, including audited vouchers amounting to about $120,000. These claims accrued during .the receivership for operating and other necessary expenses incurred by the receivers. They are composed of a large number of items, such as rentals of rolling stock, track material, hardware, castings, stationery, ice for trains, coal, purchase of locomotives, terminal extensions, supplies and repairs, track and bridge iron, and rental of freight terminals. In addition, there are a number of claims for stock killed, judgments rendered, advertising, and various other small items of similar character. On the 25th day of September, 1899, the master filed his report upon the audited vouchers as undisputed indebtedness, and, no objection having been taken, the report, under equity rule 83, stood confirmed. It may be also observed that this report of the master was affirmatively acted upon by the court on November 17, 1899, and to the order made no exceptions were filed. The matters of fact contained in the report were thus foreclosed, and the only question left for determination was one of classification of the claims, which by order of the'court were assigned to class B. The claims, with possibly a few exceptions, were for necessary expenses incurred by the receivers in the operation of the road, and, under, the foregoing authorities, were manifestly entitled to priority over the mortgage bonds. Several of these claims, including an attorney’s fee of $5,000 allowed to Ewing and Ring, were strenuously objected to by the appellant. While, in' view of the facts appearing of record, the claim for the attorney’s fee seems to have been properly allowed, we do not deem it necessary to decide the question, as it is apparent that, if all claims about which there is any doubt be stricken out, the remainder of the claims assigned to class B would be largely in excess of the fund in the registry of the court. Hence, in any view that may be taken of the case, there would be nothing left for the bondholders, and the appellant therefore has no interest in the fund to be protected. The conclusion reached by the circuit court was correct, and the decree is accordingly affirmed.
(2) L. J. Smith v. T. W. House et al.
The appellant, Smith, intervened in the original suit on January. 22, 1896. In his petition, among other allegations, it was alleged that the appellant and the Galveston, Laporte & Houston Railway Company entered into a contract on February 20, 1895, by the terms of which it was agreed that the appellant should do all the clearing, grading, bridging, and track-laying for the railway, company necessary to complete the line of railway, including the construction of the bridge over-Galveston Bay; the material for the work to be furnished by the railway company, except that the appellant was to furnish all the iron, including bridge iron, bolts, washers, and packers. For the amount due him the appellant sought to establish an equitable lien on the property of the railway company. On January 27th thereafter, the appellant submitted to the court an application alleging that all parties at interest had agreed that the railway company was indebted to *185him In the sum oí $61,241.22; and he prayed an order authorizing the issuance oí receivers’ certificates, to be known as “conditional certificates,” which should simply certify that there was due the appellant 5 he amount slated, so that the certificates might be practically nothing more than an acknowledgment that the indebtedness had been liquidated as to amount. Agreeably to the prayer of the application, an order was entered authorizing the receivers to issue certificates to the appellant for the amount claimed, which, however, were to be conclusive only as to the amount of the appellant’s indebtedness against the railway company. In the decree of foreclosure, February 25, 1898, if was found by the court that the railway company was indebted to the appellant for labor and material performed and supplied by him for construction work on the railway in the sum of $61,241.21, and, further, that conditional certificates had been issued for the amount, in which all questions of rank and priority were reserved. In none of the orders mentioned, nor in the decree of February 35th, were the certificates declared to he a lien on the railway property. But in the final decree of distribution the indebtedness of the appellant was adjudged to be entitled to a lien, subject, however, to the liens and right of priority of payment of the claims included in class A and class JB, and of the mortgage's executed to the two trust companies. The appellant objects to the classification made; by the court, and insisis that his demand should be preferred to the claims of the bondholders, and that he should stand at least upon an equal footing with the holders of claims in class B in the distribution of the fund. His contention appears to be predicated upon the assumption that in the decree of distribution he was adjudged to have a mechanic’s lien. This contention is evidently based upon a misconception of the decree;, since throughout this voluminous record there does not appear a peti - tion, application, hill, plea, or other pleading in which the appellant has asserted a claim to a lien of that nature. We have already derided. in the case of ihe First National Bank of Houston, that the claims of the bondholders were subject and subordinate to the preferential claims embraced in class A and class B. And it would seem to follow that, if the claim of appellant is not superior to the claims of the bondholders, he would uot be entitled'to relief. He bases his claim of such superiority ou two grounds: (1) That he is entitled to a lien under the laws of Texas; and (2) that, having furnished the labor and material to construct the railway before it went into the hands of receivers, he has an equitable lien on the property to secure the payment of the indebtedness thereby incurred.
i. Whether the appellant, as a contractor to construct a railroad, is entitled to a lien under the laws of Texas to enforce the payment of his claim, is a question which need not he determined on this appeal, as it clearly appears that, if such lien exists, in any case, the appellant failed to take the steps provided by those laws to fix and secure it. By article 8295 of the Revised Statutes of Texas, it is provided :
“In order to fix and secure the lien herewith provided lor, it shall be the duty of every original contractor, within-four months * * * after the indebtedness shall have accrued, to file his or their contract in the office of tbe *186county clerk-'of the county in which such property is situated, and cause the sanjé to be recorded in a book to be kept by the county clerk for that purpose.”
•’ That the contract of appellant was not filed and recorded in the Office of the county clerk is not denied. But it is insisted that the strict letter of the law in reference to filing and recording the contract should not be applied, as, by his intervention in the original suit a:few days after the appointment of receivers, he brought his claim to thé attention of the court, and was awarded, as evidence of it, receivers’ conditional certificates. It is .doubtless, true that a court of equity would' relieve a party from a strict compliance with statutory requirements, where he had used due diligence and manifested a purpose to claim the rights arising under the statute. But laches and neglect are always discountenanced by a court of equity, and nothing cán call it into activity but conscience, good faith, and reasonable diligence. Where these are wanting, the court is passive and does nothing. Speidel v. Henrici, 120 U. S. 377, 7 Sup. Ct. 610, 30 L. Ed. 718; Pennsylvania Mut. Life Ins. Co. v. City of Austin, 168 U. S. 685, 18 Sup. Ct. 223, 42 L. Ed. 626. Prom the inception of appellant’s connection with the case, on January 22, 1896, to the date of the final decree of distribution, November 18, 1899, extending over a period of nearly four years, he never, in any pleading or paper on file, claimed a mechanic’s lien. • His demand against the railway company was submitted to the court, and promptly recognized as a valid indebtedness against the company. No lien, however, attached under the orders of the court prior to November 18, 1899, nor was the claim awarded preference. And if any statutory lien ever existed in his favor as a contractor, by his long continued silence when he should have spoken, and unexplained laches, he has waived it. “He who is silent when conscience requires him to speak shall be debarred from speaking when conscience requires him to keep silent.”
2. The appellant next insists that as he constructed the railway by his own energy, labor, and money, he is entitled to a lien which should be preferred to that of the bondholders. While it is claimed that the appellant performed work and furnished materials in the work of construction, there is nothing in the record to show how much is due for the one or the other. But, independent of that consideration, it appears that the indebtedness was incurred in the work of original construction, and not for the purpose of operating and maintaining, as a going concern, a railway already in existence. In reference to the latter, the authorities cited in the case of First Nat. Bank v. Ewing et al., ante, announce the doctrine that, within narrow limits, ■such indebtedness, accruing a short time prior to the receivership, will be given preference over railway mortgages. But, as to indebtedness incurred by a contractor in the work of original construction or reconstruction of the railway, priority of its payment over the mortgage bonds is denied. Railroad Co. v. Cowdrey, 11 Wall. 459, 20 L. Ed. 199; Hale v. Frost, 99 U. S. 389, 25 L. Ed. 419; Railroad Co. v. Hamilton, 134 U. S. 296, 10 Sup. Ct. 546, 33 L. Ed. 905; Dunham v. Railway Co., 1 Wall. 254, 17 L. Ed. 584; Porter v. Steel Co., 120 U. S. 649, 7 Sup. Ct. 1206, 30 L. Ed. 830; Penn v. Calhoun, 121 U. S; 251, 7 Sup. Ct. 906, 30 L. Ed. 915; Lackawanna Iron & Coal *187Co. v. Farmers Loan & Trust Co., 24 C. C. A. 487, 79 Fed. 202; Id., 20 Sup. Ct. 363, Adv. S. U. S. 363, 44 L. Ed.-.
Holding, as we do, that the classification of the claims, as between the appellant and the bondholders, was properly made, it would seem unnecessary to go further. Bui, as counsel for the appellant contend with earnestness that the receivers’ certificates and certain other claims are not entitled to priority over his own, we will briefly consider this contention. We have shown, in the case of First Xat. Bank v. Ewing et ah, that these certificates were not open to attack by the bank, and what was there said applies with much greater force to the present appellant. According to the report of the master, the appellant had issued to him during the receivership receivers’'certificates amounting to §62,238.47. Of this amount, §50,513.98 were'for ballasting the roadbed, and §11,724.49 for general construction and bridge w ork. It appears that prior to Ihe decree of final distribution he had disposed of the certificates issued to him. He was, therefore, no stranger to these certificates. At: the beginning of the proceeding he waived exceptions to the report of the master recommending their issuance, and agreed that the court should hear and act upon the report without delay. The order of court authorizing their issuance was not excepted to by him; and his counsel prepared (he decree,of foreclosure, •which found that the certificates had been regularly issued pursuant to the prior order of the court, and adjudged them a lien upon the property of the railway company. Hubsequentlv, on April 16, 1898, the appellant filed an answer to the petition of the Union Trust Company, in which the trust company assailed the receivers’ certificates. In this answer he averred that (he issuance of the certificates was necessary for the protection of the property of the railway company, and for the preservation of its rigids and franchises. He further averred (using his own language) “that all the funds realized from .said receivers’ certificates were faithfully expended in and applied to the preservation and management of said railroad property, whereby the good will and integrity of the enterprise were maintained, which was indispensable, and the interests and accommodation of travel and traffic subserved, and the charier rights, franchises, and property of said railway company protected.” The answer further averred that the bondholders were aware that the certificates would be issued, and had ample opporlunity to appear and make (heir objection, but that they had willfully remained inert and inactive, speculating upon chances, and lying’ idly by, seeing the court and receivers dealing with the property, without proles!. It was further averred that the acts and doings of the bondholders “are contrary to equity and good conscience, and operate, as this respondent submits, an estoppel upon the petitioner.” To obviate the effect of the appellant’s own words as em: ployed in the answer, his counsel suggest that the answer was filed before the master made his report upon the certificates. That is true, hut, as evidence that the averments of the answer were made after careful investigation and upon mature deliberation, reference may be made to a petition filed in the cause by defendant on November 8,-1898, praying for counsel fees, in which he alleged that, in order to protect the security of the receivers’ certificates, he gave, through his solicit*188ors, the matter of priority a careful investigation upon the law and facts, and filed a lengthy response to the contest of the Union Trust Company. Having, while the owner of a part of the certificates, strenuously endeavored to maintain their integrity and validity, we think that it would he inequitable to permit the appellant to assail them after he has parted with the interest which he originally owned.
After what we have said in the foregoing case of First Nat. Bank v. Ewing et al. in reference to the claim of Ewing & Ring for fees, and a few other claims in class B, it is not deemed essential to pursue the question further than to say that the operating expenses incurred by the receivers during their management and control of the property are entitled to preference over the claim of this appellant. While the demand of the appellant against the railway company is a meritorious one, we cannot, consistently with established principles, adjudge it priority over claims of higher dignity, and displace liens to which it is subordinate. The decree of the circuit court should be affirmed, and it is so ordered.
(3) Galveston, Houston & Northern Railway Company v. T. W. House et al.
Upon this appeal the specifications of error challenge the ruling of the circuit court refusing to allow state and municipal taxes, with interest, penalties, and costs, and certain right of way claims, to be paid out of the fund in court. The contest is between the appellant, to which the railway was conveyed by the master commissioner at. the instance of the purchaser, and the holders of claims to which priority was adjudged. It is insisted by the appellant that taxes, the item which we will first consider, constitute a lien upon the corpus of the property and earnings in the hands of the receiver paramount to all others, and, if not paid out of the earnings, should have priority of payment over other claimants and lienholders, out of the proceeds arising from the sale of the property. On the other hand, it is contended by the appellees that there was no warranty of title, and, applying the maxim caveat emptor; the purchaser took the property subject to the incumbrances resting upon it, including defects which may have existed in the title. That the taxes in question were, under the laws of Texas, a lien upon the railway property, is not questioned by counsel. And it seems to be settled law that such liens are prior to all other liens whatsoever, except judicial costs, which are first to be paid where the property is rightfully in the custody of the court. “It is the imperative duty of the court,” said Mr. Chief Justice Fuller in the case of In re Tyler, 149 U. S. 187, 13 Sup. Ct. 791, 37 L. Ed. 696, “to recognize as paramount, and enforce with promptness and vigor, the just claims of the authorities for the prescribed contributions to state and municipal revenue.” Georgia v. Atlantic & G. R. Co., 3 Woods, 434, Fed. Cas. No. 5,351; Union Trust Co. v. Illinois M. Ry. Co., 117 U. S. 434, 6 Sup. Ct. 809, 29 L. Ed. 963. And it is immaterial how the claim for taxes may be brought to the attention of the court, — whether by the receiver, the master appointed in the cause, the tax collector, or through intervening petitions filed by the state and municipalities interested. In any case, and whenever *189properly brought: to the court’s attention, they should be promptly paid. But, notwithstanding the superior dignity of tax claims, the burden of their payment, under some circumstances, may be cast upon tbe purchaser at a judicial sale, and this upon the principle that at such sale there is no warranty of title. Osterberg v. Trust Co., 93 U. S. 424, 23 L. Ed. 964; Railway Co. v. Harrison, 37 C. C. A. 615, 96 Fed. 910, citing authorities. In the latter case it is said by the court:
“The general doctrine is well settled that there is no warranty in judicial sales; that the maxim caveat emptor applies, and the purchaser takes the property without recourse i!or 1ax liens or other incumbrances dr defects in the title.”
But the exception to the rule in equity, and recognized in the Harrison Case, is where the decree provides for the satisfaction of liens out of the proceeds of sale or. other funds in the registry of the court. The exception is thus stated by the court at page 619, 37 C. C. A., and page 911, 96 Fed.:
“In the argument of counsel on helialf of the appellant this rule is recognized. but with the assertion that it operates only to forbid the purchaser ‘from asking that prior liens be paid out of the proceeds of the property sold.’ No authority is cited for so limiting its effect, and we are of opinion that the rule applies with equal force to any fund which is in the registry of the court, or in the hands of the receiver, as the earnings or other production of the property involved. Exception to this general rule undoubtedly arises in equity in the following instances: First, where the decree or order for the sale expressly provides for discharging liens or other claims against tlie property out of the proceeds or other funds coming into court, or where the proceedings or provisions axe otherwise inconsistent with such rule; and. second, where there is fraud, concealment, or unfair dealing in the proceedings which entitle the purchaser to equitable relief.”
It then becomes necessary to ascertain whether, under a proper construction of the decree, the purchaser at the sale of October 4, 1898, took the property subject to tbe lien for taxes. It was provided by the decree that the purchaser should take the- property as it was held and enjoyed by the Galveston, Laporte & Houston Kailway Company, “subject only” (following tlie language of the decree) “to the liens, in respect to the portions of property enumera fed, to the burden of which such sales were specially herein directed to be made; and all persons who are parties to this cause, or quasi parties, by intervening petitions or otherwise, and all persons claiming under said railway company since the execution of tlie aforesaid mortgage deeds of trust, are hereby forever barred and foreclosed of all right, title, interest, estate, claim, demand, or equity of redemption of, in, or to any of the property herein directed to be sold, when sold, except as herein otherwise specially provided; and all liens, mortgages, equitable charges, claims, or demands of every nature and description, held, owned, or asserted herein by any of such parties or quasi parties to this cause shall be transferred to the proceeds of the sale herein directed to be made, with like but no greater effect, than the same appertained to the property itself, and subject to future determination by the court, except as herein otherwise specially provided.” The decree, it will be observed, does not, in June verba, provide that the purchaser should take The property relieved of the taxes, but that seems to be tbe plain *190meaning of the language employed. He took it subject only, to certain enumerated liens, and, upon the principle that “the expression of one thing is the exclusion of the other,” he took the property free from all liens and incumbrances except those specifically mentioned. The tax liens were not embraced in the excepted classes, and therefore the appellant, for whom the property was originally purchased by Smith and Broadhead, has the right to resort to the fund in court to secure the payment of the taxes due, and thus relieve it of the tax incumbrances. This conclusion is strongly supported by the order of the •court directing the master commissioner to execute a conveyance of the property to Broadhead. It is there adjudged that Broadhead and his assigns “shall take, have, hold, possess, and enjoy the same free from all and singular the claims of the parties complainants, defendants, and interveners herein, as and according to the provisions, of the decree and orders of the court in this cause, and from all claims arising during said receivership or prior thereto.”
It is also insisted by the appellees that the claim of the appellant for taxes is barred by the order of June 26, 1899, which directed all parties having claims against the receiver or the fund in court, save those who had already intervened or become parties to the suit, and saving the holders of receivers’ certificates and of undisputed indebtedness, to intervene in the suit by the 1st day of September, 1899, under the penalty of having their claims barred. This order obviously is without application to the appellant, as its intervention, seeking-payment of the taxes in question, was filed June 12, 1899, — some days prior to the date of the order.
It is further contended by the appellees that in no event should interest, penalties, and costs accruing upon the claim for taxes be allowed. In Thomas v. Car. Co., 149 U. S. 116, 117, 13 Sup. Ct. 833, 37 L. Ed. 671, it was said by the court:
“As a general rule, after property of an insolvent passes into the hands of a receiver or of an assignee in insolvency, interest is not allowed on the claims against the funds. The delay in distribution is the act of the law. It is a necessary incident to the settlement of the estate. Williams v. Bank, 4 Metc. (Mass.) 317, 323; Thomas v. Minot, 10 Gray, 263. We see no reason in departing from this rule in a case like the present, where such a claim would be paid out of moneys that fall far short of paying the mortgage debt.”
The general rule announced by the supreme court is applicable to cases where the fund is to be shared by creditors without liens, or by those having liens of equal and common rank. But where there are claims of several classes, with liens of different priorities, the holders thereof are entitled to interest down to the date of the decree. Jourolmon v. Ewing, 56 U. S. App. 149, 29 C. C. A. 41, 85 Fed. 103; Central Trust Co. v. Condon, 31 U. S. App. 387, 14 C. C. A. 314, 67 Fed. 84. As we have shown, the lien for taxes is superior to all other claims, except for judicial costs, and practically constitutes a class of its own. There being in the registry of the court more than a sufficient amount to pay the state and municipal taxes and judicial costs, the accrued interest, penalties, and costs should be allowed.
As to the contention of the appellant that right of way claims should be paid out of the fund, we shall have but little to say. When the appellant purchased the property,-it took it subject to such defects *191of title as existed in reference to lands which had been used by the Galveston, Laporte & Houston Railway Company for right of way purposes. As against such imperfect titles there was no warranty (Waples v. U. S., 110 U. S. 630, 4 Sup. Ct. 225, 28 L. Ed. 272), nor anything in the decree to relieve the appellant of the burden of perfecting them.
It is proper to add that the writer, differing with a majority of the court, is of opinion that the appellant purchased the railway property subject to the lien for taxes, which should be paid by it out of its own funds.
The decree appealed from is amended so as to direct the payment out of the fund in court of the state and municipal taxes as found by the master’s report, including principal, interest, penalties, and costs; and, as thus "amended, quoad this appeal the decree of the circuit court is affirmed. The costs of this appeal will be paid by the receiver out of the funds in court.
(4) St. Charles Car Company v. T. W. House et al.
Upon this appeal it becomes our duty to determine whether the claim of the appellant for rolling stock purchased by the receivers should participate with the claims of class B in the distribution of the fund in court. The rolling stock in question, amounting in (he aggregate to $66,200, consisted of first-class coaches, mixed coaches, combination passenger, baggage, and express cars, caboose cars, and coal and box cars. The contract by which it was acquired was made -January 24, 1896, upon authority of the order of court granting permission to issue receivers’ certificates; and pursuant to the contract the receivers, after paying $22,066.66 in cash, executed two promissory notes, of §22,066.66 each, payable to the appellant in one and two years after date, respectively, with interest payable semiannually at: the rate of 7 per cent, per annum from date until paid, "and at the rate of ten per centum after maturity.” The notes contained the following concluding clause:
“This noie is one of two for a like amount * * * this day executed and delivered by us in part payment: of the purchase money for certain equipment this day bought by us from the St. Charles Car Company: and the payment of this note is secured by a lease contract or conditional sale of even date herewith, executed by us in favor of the St. Charles Car Company, and of record in the record of chattel mortgages of Harris county, Texas.”
The semiannual interest not having been paid at maturity, the appellant, through its attorney, about tbe 12tli day of May, 1897, demanded of tbe receivers tbe payment of the money or return of the cars, as provided in the contract. The rolling stock being required in the operation of the railway, the receivers declined lo comply with either demand, and retained possession of the cars until May 1, 1899, when they were delivered to the master commissioner as hereinafter mentioned. The decree of foreclosure of February 25, 1898, found:
“That, of the rolling stock belonging to said railway company, the following portions are subject to purchase-money liens upon conlraets of conditional sale, viz.: ■ * * * Six passongor coaches, three combination coaches, two caboose ears, fifty box ears, and fifty coal cars, purchased by said receivers from tlie St. Charles Car Company, subject to a lien for $44.'UiH.32. as it existed on July 21, 1897, with interest as per contract, accrued and to accrue.”
*192By that decree the property, rights, and franchises of the defendant railway company were ordered sold subject to the lien df the appellant; and the court reserved the right, if the purchaser failed to pay off and satisfy the lien within a stated time, to have the rolling stock sold to discharge the same; saving, however, to the appellant the right to resort to any other appropriate remedy for the enforcement of its lien. The purchaser of the property failing to pay for the rolling-stock, the appellant on December 10, 1898, presented a petition seeking to have it sold to sátisfy its claim. In this petition the appellant, in addition to other relief, prayed that, should the amount realized from the sale be insufficient to pay off and discharge its indebtedness, the deficiency be ordered to be paid as a part of the operating expenses of the receivership. On May 2, 1899, the court entered a decretal order directing the delivery of the rolling stock to the master commissioner for the purpose of being sold. The order contained the following recitation:
“Whereas, o-n the hearing of the above entitled and numbered cause a final decree was on the 25th day of February, 1898, rendered by this court, in and by which it was considered, adjudged, and decreed that the receivers of the property 'and effects of .the defendant railway company theretofore appointed by this court were justly indebted to the St. Charles Car Company in the sum of $44,133.32 for the purchase money of the personal property hereinafter described, sold, and delivered by the said St. Charles Car Company to the said receivers, which purchase ivas made by authority of an order from this court; and whereas, the said St. Charles Car Company was in and by said decree considered and adjudged entitled to have and receive of and from said receivers the said sum of $41,133.32, with interest thereon at the rate of ten per cent, per annum from July 24, 1897, and that said indebtedness and interest.as aforesaid was considered, adjudged, and decreed to be a first lien, prior in right to all other claims of whatever character against either the defendant the Galveston, Laporte & Houston Railway Company or the said receivers, upon the following property, now in possession of T. W. House, receiver, to wit, six passenger coaches, three combination coaches, two caboose cars, fifty box cars, and fifty coal cars, purchased by said receivers from St. Charles Car Company, subject to a lien for $44,133.32, as it existed on July 24, 1897, with interest as per contract, accrued and to accrue, or such portion thereof as is now in existence.” ■
And it was ordered:
“Should the property sell for more than the amount of the said St. Charles Oar Company’s judgment, interest, and costs, then the amount in excess thereof shall be paid in cash to the said special master commissioner, to be paid into the registry of the court, as hereinbefore provided. The court reserves the right to accept or reject any and all bids. It is further ordered and decreed that in the event the proceeds from the said sale should prove insufficient to fully pay off, satisfy, and discharge said judgment, then the said St. Charles Oar Company shall have the right to present to this court its petition to have the deficiency that may be due and owing it paid out of the funds now in the registry of the court, as a part of the operating expenses of the receivership.”
In obedience to the order the receivers delivered the rolling stock to the master commissioner, who sold the same at public auction, where it was purchased by the' appellant for the sum of $80,500; and this amount, less the expenses of sale amounting to $600, was entered, pursuant to a confirmatory order, as a credit on its claim.
It is obvious that the notes to the appellant and the lease contract contemporaneously executed by the receivers became merged in the *193decree of foreclosure and i lie subsequent order of the court, and since no exceptions were reserved to, nor appeal taken from, them, it is now too late to challenge either their effect or correctness. Hee above case; of First National Bank of Houston v. Ewing & King. The decree and subsequent order explicitly adjudged the claim of the appellant to he. an indebtedness against the receivers, and the latter by plain inference conferred upon it the right to receive any deficiency resulting from the sale out of the fund in the registry of the court. It is also a significant fact to be considered in this connection that in the reports filed by the receivers from September 1, 1896, to October 14, 1899, the claim of the appellant was invariably referred to as a liability of the receiver; and the rolling stock was used" by the receivers, in operating the railway for a period exceeding three years, and until its final sale. We have no doubt that this claim is entitled, equally with other claims in class 1», to participate in the distribution of the fund.
It is therefore ordered that the final decree of distribution be amended by striking out the item allowing the St. Charles Car Company $2,868.39. and inserting in lieu thereof, in class T>, an allowance to the appellant of §11,233.32, balance due on car contract, the same being the principal of (lie indebtedness due the appellaul, less $29,600,^ the proceeds of the sale of the cars; and, as so amended, the final decree of distribution is affirmed. The costs of this appeal will be paid by the receiver out of the funds in the registry of the court. Ordered accordingly.
(5) W. C. Corbett v. T. W. House et al.
This appeal raises the question whether the claim of appellant shall be paid in full, to the detriment of other claims assigned to class B. The circuit court awarded preference to appellant’s claim and classified it with the receivers’ certificates, labor claims, and other operating expenses incurred by the receivers in the management of the; property. This classification he objects to, since the creditors included in it will be paid only about 77 per cent, of the par value of their indebtedness, exclusive of interest. By his intervention in the suit the appellant sought to establish the priority of his demand on the ground that the claims assigned to him, amounting to $7,334.15, represented work and labor performed by employes of the receivers during the years 1897 and 1898. Upon an inspection of the master’s report it will be observed that, approximately, one-half of (he total amount of the claims were severally assigned to him by the superintendent and engineer, the auditor and general freight and passenger agent, station agents, train dispatchers, si enographers, and clerks of the auditor, and superintendent and chirks at stations. The appellant insists that he should he preferred to other creditors in class B, and to certain designated claims in class A, because, under the laws of Texas, laborers’ liens are superior to all other liens of every kind and character, and hence the claims thereby secured should he paid in preference to all others except judicial costs. It is questionable whether the assignors, above enumerated, of one-half the claims owned by the appellant, would, in any view of Hie case, be entitled to laborers’ liens under the Texas statutes, which give to mechanics, laborers, and operatives a *194lien to secure the payment of their wages. Milligan v. Railway Co. (Tex. Civ. App.) 46 S. W. 918; Krakaner v. Locke, 6 Tex. Civ. App. 446, 25 S. W. 700; Malcomson v. Wappoo Mills (C. C.) 86 Fed. 192; In re Stryker, 158 N. Y. 526, 53 N. E. 525. But, however that may be, we do not think that either the laborers’ lien law or article 1472 of the Revised Statutes of Texas, regulating the distribution of funds that may come into the hands of a receiver of a state court, should or can be construed to have application to the classification of claims and priority of liens accruing against receivers appointed by,the courts of the United States. The claims in question were those of employés performing work in the immediate service of receivers duly appointed by a court of the United States having jurisdiction of. the cause; and their relative rank and classification of payment were matters to be determined by the court in accordance with the general principles of equity jurisprudence. Thus, it was said by Mr. Justice Story, speaking for the court, in Boyle v. Zacharie, 6 Pet. 658, 8 L. Ed. 536:
“But the acts of Maryland regulating the proceedings on injunctions and other chancery proceedings, and giving certain effects to them in courts of law, are of no force in relation to the courts of the United States. The chancery jurisdiction given hy the constitution and laws of the United States is the same in all the states of the Union, and the rule of decision is the same in all. In the exercise of that jurisdiction, the courts of the United States are not governed by the state practice; but the act of congress of 1792, c. 36, has provided that the modes of proceeding in equity suits shall be according to the principles, rules, and usages which belong to courts of equity, as contradistinguished from courts of law. And the settled doctrine of this court is that the remedies in equity are to be administered, not according to the state practice, but according to the practice of courts of equity in the parent country, as contradistinguished from that of courts of law, subject, of course, to the provisions of the acts of congress, and to such alterations and rules as, in the exercise of the powers delegated by those acts, the courts of the United States may from time to time prescribe. Robinson v. Campbell, 3 Wheat. 212, 4 L. Ed. 372; U. S. v. Howland, 4 Wheat. 108, 4 L. Ed. 526. So that, in this view of the matter, the effect of the injunction granted by the circuit c.ourt was to be decided by the general principles of courts of equity, and not by any peculiar statute enactments of the state of Maryland.”
U. S. v. Howland, 4 Wheat. 108, 4 L. Ed. 526; Neves v. Scott, 13 How. 267, 14 L. Ed. 140; Fordyce v. Du Bose, 87 Tex. 78, 26 S. W. 1050.
In the case last cited, at page 82, 87 Tex., and page 1051, 26 S. W.,. it was said by the supreme court of Texas:
“The legislature of a state has no more authority to prescribe rules of procedure for courts of the United States, nor to limit the effect of judgments of such courts rendered in the exercise of their constitutional powers, than congress has to prescribe rules for the state courts, or to place limitations upon their judgments within the bounds of the states. * * * The several acts of the legislature upon the subject of receivers do not purport by their language to affect receivers appointed by the federal courts in their offi-' cial capacity, and courts will construe them so as to embrace such subjects as the legislature had the authority to legislate upon. End. Interp. St. § 271. These acts were not intended to affect the procedure of federal courts as to receivers appointed by such courts,”
But it is contended by the appellant that by section 2 of the act of congress of August 13, 1888 (25 -Stat. 436), it is made the duty of courts of the-United States to obey the directions of the state statutes to which reference has been made. This section provides as follows:
*195“Sec. 2. That whenever in any cause pending in any court of the United States there shall be a receiver or manager in possession of any property, such receiver or manager shall manage and operate such property according to the requirements of the valid laws of the state in which such property shall be situated, in the same manner that the owner or possessor thereof would be bound to do if in possession thereof. Any receiver or manager who shall willfully violate the provisions of this section shall be deemed guilty of a misdemeanor, and shall, on conviction thereof, be punished by a line not exceeding three thousand dollars, or by imprisonment not exceeding one year, or by both said punishments, in the discretion of the court.”
It will be observed that the receiver or manager is enjoined to manage and operate the property pursuant to the requirements oí state laws, and for willful violation of his duty he is subject to'severe punishment. There is, however, no duty resting upon the court, by virtue of the act, to administer property in its hands agreeably to the laws of the states; and to give it such a strained and unnatural construction would impute to congress the purpose and intention, without the employment of apt and expressive language, to seriously impair the constitutional jurisdiction of the courts of the United States in matters of equitable cognisance. It is evident that the act of congress has no application to the present case.
In reference to the receivers’ certificates to which objection is made by the appellant, we think that enough has been said in the cases of First Nat. Bank v. Ewing et al. and Smith v. House et al., ante, to show that the claims thereby represented are entitled to participate in the fund equally with the indebtedness of this appellant. And, after a careful consideration of the points raised and discussed by counsel, we are of opinion, without giving special attention to other assignments of error which are very general in their nature, that, while slight errors may have been committed, the ruling of the court was substantially correct in its classification of claims which accrued for operating expenses while the railway was managed and operated under the direction of the court. The rule for the payment of such claims, and the one which the circuit court seems to have followed, was clearly laid down in Union Trust Co. v. Illinois M. Ry. Co., 117 U. S. 481, 6 Sup. Ct. 834, 29 L. Ed. 979, where it was said by Mr. Justice Blatchford, speaking for a unanimous court:
“We are of opinion that (with the exception of debts for taxes and receivers’ certificates issued to borrow money to pay taxes, or to discharge tax liens) there should be no priority or preference among the debts and claims, whether receivers’ certificates or other debts, which are allowed precedence over the mortgage bonds of any road, but that they should all stand alike.”
The decree of the circuit court should be affirmed, and it is so ordered.