Court Opinion

ID: 8801571
Source: CourtListenerOpinion
Date Created: 2022-11-26 14:34:24.041528+00
Date Added: 2024-06-11T17:03:55.493876
License: Public Domain

GILBERT, Circuit Judge
(dissenting). There are two grounds on which I think it should be held in this case that the mortgagee, coming into a court of equity seeking equitable relief, and asking for the appointment of a receiver, should be required to do equity, and submit to the preferred payment of claims of the appellant which, within a reasonable time prior to the receivership, furnished goods to keep the mortgaged property a going concern, in the expectation of payment out of the income, but which has not been paid because of the diversion of the income to the payment of interest or betterments. One is the broad principle upon which the equitable right rests. As stated by Chief Justice Waite in Fosdick v. Schall, 99 U. S. 235, 25 L. Ed. 339, the power to displace a mortgage upon the corpus or upon the earnings “rests upon the fact that, in the administration of the affairs of the company, the mortgage creditors have got possession of that which in equity belonged to the whole or a part of the general creditors. Whatever is done, therefore, must be with a view to a restoration by the mortgage creditors of that which they have thus inequitably obtained.” An equitable right of so meritorious a nature should nqt, we think, be barred by an artificial rule of 6 months limitation, or by a lapse of time (within the statute of limitations) other than a delay which must result in prejudice to the mortgagee.
This, as I understand it, is the purport of all the decisions of the Supreme Court of the United States, and in no reported decision of that court is it found that a period of 6 months or any precise period of limitation has been fixed. In Hale v. Frost, 99 U. S. 389, 25 L. Ed. 419, the interveners had furnished supplies to the machinery department of the railway company nearly 3 years before the receiver was appointed, and 16 months before the receivership had received the notes of the railway company for the balance found due. The court held that they were entitled to payment in full. In Burnham v. Bowen, 111 U. S. 776, 4 Sup. Ct. 675, 28 L. Ed. 596, the court approved the payment of the intervener’s claim for a balance, due 11 months before the receivership, for coal furnished for running the railway company’s locomotives. In Southern Railway Co. v. Carnegie Steel Co., 176 U. S. 257, 20 Sup. Ct. 347, 44 L. Ed. 458, the decision in Burnham v. Bowen was followed. In Va. & Ala. Coal Co. v. Central R. R. & Banking Co., 170 U. S. 355, 18 Sup. Ct. 657, 42 L. Ed. 1068, the period was 8 months. These decisions establish the principle that every railroad bondholder, in accepting his bonds, impliedly agrees that the current debts of the mortgagor incurred in the ordinary course of the business shall be paid from the income before he shall have any claim thereon.
The case of Gregg v. Metropolitan Trust Co., 197 U. S. 183, 25 Sup. Ct. 415, 49 L. Ed. 717, does not hold to the contrary. In-that case it was expressly found that there had been no diversion of income by which the mortgagee had profited or otherwise, and the purport of the decision was that claims for supplies furnished to a railroad company within 6 months before the appointment of a receiver are not entitled, under the general rule, to precedence over a lien expressly created by a mortgage recorded before the contracts for such supplies were made. But in that case the court cited and approved its own decisions which are hereinabove referred to.
*700Other federal courts have denied the 6 months rule. In Farmers’ Loan & Trust Co. v. Kansas City & N. W. R. Co. (C. C.) 53 Fed. 182, Judge Caldwell allowed claims that had accrued 18 months prior to the receivership, and said:
“There is no fixed rule barring preferential debts contracted more than 6 months before the appointment of the receiver. There is no ‘6 months rule.’”
In that case the court referred to Central Trust Co. v. St. Louis, A. & T. Ry. Co. (C. C.) 41 Fed. 551, in which case an interval of from 2 to 3 years had elapsed between the dates of the mortgages and the receivership, and stated that Mr. Justice Brewer, when the question thereafter arose as to what debts should have priority, said:
“I did not understand from the parties making th'e application for a receiver that there was any desire or thought of cutting off any just claims accruing during the brief period which has elapsed since their mortgage was given, and, if counsel or party had any such idea, they much mistake my judgment in the premises.”
Again, in Northern Pacific R. Co. v. Lamont, 69 Fed. 23, 16 C. C. A. 364, the Circuit Court of Appeals for the Eighth Circuit said:
“A preferential debt is not barred, though contracted more than six months before the appointment of a receiver. As to such debts, there is no arbitrary ‘6 months rule,’ as has been often decided.”
In New York Guaranty & Indem. Co. v. Tacoma Railway & M. Co., 83 Fed. 365, 27 C. C. A. 550, this court held that a claim was not barred which accrued 22 months prior to the receivership.
In the present case the appellant’s claim has all the elements essential to an equitable preference: (1) The goods that were furnished were of the nature of those for which such a claim is preferred. About 25 per cent, of the appellant’s claim is for materials furnished which were used for repairs and replacements of public service systems for furnishing water, gas, and electric light; about 37 per cent, was for goods furnished and used for service connections to customers;, and about 42 per cent, was for making extensions and bet-terments, and for laying new pipes and mains in the place of those which had become old or unfit. (2) The materials furnished were such as were necessary to conserve the property and retain the franchises of a public service corporation. In Union Trust Co. v. Morrison, 125 U. S. 609, 8 Sup. Ct. 1008, 31 L. Ed. 825, the court, in giving preference to such a claim, said: “The ground of the claim is that a portion of the property covered by the mortgage, being in peril of abstraction and loss, was rescued and saved to the mortgage by the act of the petitioner.” (3) The evidence shows that the income of the corporation was diverted to the payment of the interest due to the mortgage bondholders. (4) The goods were sold and credit extended by the appellant in reliance upon payment thereafter out of the income of the corporation.
The appellees contend that the appellant’s claim is mostly for reconstruction, and that preferences are allowable only for current supplies, and are denied for betterments and new construction or reconstruction, citing Thomas v. Western Car Co., 149 U. S. 95, 13 *701Sup. Ct. 824, 37 L. Ed. 663, Lackawanna Iron & Coal Co. v. F. L. & T. Co., 176 U. S. 298, 20 Sup. Ct. 363, 44 L. Ed. 475, Toledo R. R. Co. v. Hamilton, 134 U. S. 296, 10 Sup. Ct. 546, 33 L. Ed. 905, and Porter v. Pittsburg & Bessemer Steel Co., 120 U. S. 649, 7 Sup. Ct. 741, 30 L. Ed. 830. In the first of these cases the claim, which the court denied, was a claim for rental dúe for the use of the railroad cars of another company. The court said that the debt was not one which was made necessary for the business of the railroad company, or the preservation of its property. In Toledo R. R. Co. v. Hamilton, the court held that a railroad mortgage cannot be displaced in favor of a claim arising from building a dock on the railroad property, that the building of such a dock was original construction and not the keeping up as a going concern a railroad already built, that the amount due was no part of the current expenses of operating the road, and that there was as to the claimant no diversion of current earnings. In Porter v. Pittsburg & Bessemer Steel Co., the railroad, at the time when the claims accrued, had not been opened for use. There was no “going concern.” There was no diversion of income to pay interest on mortgage bonds, and the claims were not for expenses or repairs which went toward keeping a completed road in operation. They all arose from the original construction of the road. In Lackawanna, etc., Co. v. Farmers’ Loan, etc., Co., the claim 'was for rails furnished to an extent which led the court to say that it amounted to “the construction of a new road”; that the claim was not for materials used, and was not a “current debt made in the ordinary course of business.” In that case the court thus summed up the decisions:
“This court has uniformly held that in the distribution of the current earnings of an insolvent railroad company, whose property is being administered by a receiver, mortgage creditors could not be postponed to unsecured creditors, unless the debts due the latter were of the class known as current debts arising in the ordinary course of business and properly chargeable upon current receipts.. The decision in each case has been more or less controlled by its special facts.”
The cases just referred to are cases of the classes in which claims ¡to preference are disallowed. But among the cases which more closely resemble the case at bar, and which are controlling here, are: Fosdick v. Schall, in which the court defined the allowable claims to be those which were “for necessary operating and managing expenses, proper equipment, and useful improvements”; Union Trust Co. v. Illinois Midland Ry. Co., 117 U. S. 434, 6 Sup. Ct. 809, 29 L. Ed. 963, in which necessary repairs and operating expenses were held to include the expense of rails, ties, turntables and fences'; Miltenberger v. Logansport Ry. Co., 106 U. S. 286, 1 Sup. Ct. 140, 27 L. Ed. 117, where it was held that a claim for freight balances was entitled to preference on the theory that a failure to pay such balances might disrupt traffic relations with other carriers and thus cripple the road; and Southern Railway Co. v. Carnegie Steel Co., supra, in which the claim was for $teel rails furnished to the railway company, and in which the court held the allowable claims for *702preference to be debts of a railway company contracted in the ordinary course of its business.
The appellees deny the application of the doctrine of Fosdick v. Schall to water companies, and they refer to the fact that the material furnished by the appellant was nearly all furnished for water supply. They cite Wood v. Guaranty Trust Co., 128 U. S. 418, 9 Sup. Ct. 131, 32 L. Ed. 472. But that case does not hold that the doctrine is inapplicable to water companies. The court declined to express an opinion on that question, and went no further than to observe that the doctrine of Fosdick v. Schall had never yet been applied to any case except to that of a railroad. Nor does any federal case hold the doctrine inapplicable to water companies. In Reyburn v. Consumers’ Gas, Fuel & Light Co. (C. C.) 29 Fed. 561, Judge Blodgett held the doctrine applicable to a gas, fuel and light company, and said that the doctrine of Fosdick v. Schall is “that, for the purpose of keeping works of a public character, within which the works of this company may be properly included, in operation, those who have given the company credit for the supplies necessary to keep the works in operation — current operating supplies — are to have a lien.” In Illinois Trust & Savings Bank v. Ottumwa Electric Ry. (C. C.) 89 Fed. 235, the doctrine was held applicable to a company engaged in operating an electric railway system, an electric lighting plant, and a steam-heating plant. The decision in that case was on appeal affirmed in Illinois Trust & Savings Bank v. Doud, 105 Fed. 123, 44 C. C. A. 389, 52 L. R. A. 481.
When the question of the applicability of the doctrine is approached, no distinction. in principle is discovered between a railway company and a water company organized to supply a municipality with water. Both are corporations of public utility. Both enjoy the right of eminent domain. Both operate under a public franchise, and the service rendered to the public by a railroad company in the transportation of passengers and freight is of no more vital importance than the service of a water company in furnishing a city with wholesome water, with the attendant advantage of protection against fire and disease. I think it should be held that the doctrine is applicable to the corporation here under consideration.
Another, and I think a conclusive, ground for reversing the decree, is that the corporation here in receivership is a corporation of the state of Washington, in which state the appellant, a foreign corporation, was doing business, and by the laws of which the contracts between the parties were controlled. The Supreme Court of Washington in Bellingham Bay Imp. Co. v. Fairhaven & N. W. Ry. Co., 17 Wash. 371, 49 Pac. 514, held that the right to priority of lien over a mortgage, debt in favor of. a claim for supplies furnished a railway company is not lost by laches in asserting it, if an action at law to enforce the demand has not been barred by the statute of limitations. After citing Hale v. Frost, 99 U. S. 389, 25 L. Ed. 419, Burnham v. Bowen, 111 U. S. 776, 4 Sup. Ct. 675, 28 L. Ed. 596, and Farmers’ L. & T. Co. v. Kansas City & N. W. R. Co. (C. C.) 53 Fed. 182, and quoting from the latter case Judge Caldwell’s language, *703in which he said, “There is no fixed rule barring preferential debts contracted more than six months before the appointment of the receiver,” the court said:
“Upon principle, jt would seem but just that a party should, in the absence of special circumstances of controlling importance, be entitled to equitable relief for the full period in which, according to the statute, an action might be maintained at law to enforce the demand. If the lapse of three years is necessary under the statute to bar the debt, there appears to be no sufficient reason, generally speaking, why the equitable right should be barred within a shorter period.”
Such has been the established and settled rule of the state of Washington for 20 years. The appellant had the right to rely upon it as the law of the state, and it may be assumed that it did' so when it sold the goods and extended the credit, and the trustee and the bondholders were chargeable with notice of it.
Concerning the question of the binding force upon federal courts of the decisions of local state courts, Judge Harlan, in Kuhn v. Fairmont Coal Co., 215 U. S. 349; 30 Sup. Ct. 140, 54 L. Ed. 228, after reviewing the decisions, announced these rules:
“(2) Where, before the rights of the parties accrued, certain rules relating to real estate have been so established by state decisions as to become rules of property and action in the state, those rules are accepted by the federal courts as authoritative declarations of the law of the state. * * * (4) So, when contracts and transactions are entered into and rights have accrued under a particular state of the local decisions, or when there has been no decision by the state court on the particular question involved, then the federal courts properly claim the right to give effect to their own judgment as to what is the law of the state applicable to the case, even where a differ! ent view has been expressed by the state court after the rights of parties accrued. But even in such cases, for the sake of comity and) to avoid confusion, the federal court should always lean to an agreement with the state court, if the question is balanced with doubt.”
It seems clear that the case which is now before us comes within the first of these rules, and that it is one of those cases where a rule'established by state decision has become a rule of property. This case does not involve the application of general principles of commercial law, or of contracts. It involves the rights of parties to the proceeds of property located in the state of Washington which is held under a mortgage made in that state.
It is uniformly held that the decisions of state courts as to the rights of parties under mortgages, whether of real or personal property, are binding upon the federal courts, notwithstanding that the state decisions involve no question of the construction of a state statute or Constitution. In Etheridge v. Sperry, 139 U. S. 266, 277, 11 Sup. Ct. 565, 569 (35 L. Ed. 171), it was said:
“We are aware that there is great diversity in the rulings on this question by the courts of the several states; but, whatever may be our individual views as to what the law ought to be in respect thereto, there is so much, of a local nature entering into chattel mortgages that this court will accept the settled law of each state as decisive in respect to any case arising therein.”
The doctrine of that case was applied by this court in Peterson v. Sabin, 214 Fed. 234, 130 C. C. A. 608, in which, after quoting Etheridge v. Sperry, this court said:
*704“We are to inquire, therefore, whether the question here presented has been directly or in effect determined by the Supreme Court of Oregon. That court has distinctly held that, where a mortgagee has given the mortgagor unlimited power to dispose of the mortgaged property for his own use, the mortgage is void as to the creditors of the mortgagor, even though there was no actual fraudulent intent on the part of either of the parties to the mortgage.”
And this court followed the construction so established by the decision of the state court. In City of Omaha v. Omaha Water Co., 192 Fed. 246, 112 C. C. A. 504, the court said:
“The decisions of the Supreme Court of Nebraska concerning the nature and extent of the estate or rights' of mortgagees in mortgaged property are controlling upon us.”
In Dugan v. Beckett, 129 Fed. 56, 63 C. C. A. 498, it was held that, in determining whether a chattel mortgage executed by a bankrupt was fraudulent on its face, the federal courts follow the decisions of the courts of last resort of the state in which the controversy arose; the law on the subject being regarded as a rule of property. In Re Buchner (D. C.) 202 Fed. 979, it was held that priority of mortgages executed in Illinois on land located in that state is to be determined in accordance with the decisions of the Illinois Supreme Court. In Re Haywood Wagon Co., 219 Fed. 655, 135 C. C. A. 391, the court said:
“In following the decisions of th'e local courts upon such a question we are following the rule which the Supreme Court laid down in Etheridge v. Sperry, 139 U. S. 266 [11 Sup. Ct. 565, 35 L. Ed. 171].”
In Haggart v. Wilczinski, 143 Fed. 22, 74 C. C. A. 176, the court said:
“The settled law of the state on the subject of mortgages is regarded as a rule of property.”
In Percy Summer Club v. Astle, 163 Fed. 1, 90 C. C. A. 527, a case which involved the construction to be given the language of a deed, the court said:
“Where, however, the decision of the state court, though based upon the common, law, is deemed of an application especially local, this decision is given an authority almost as great as-would be assigned to it if it construed a state statute”
—citing Burgess v. Seligman, 107 U. S. 20, 33, 2 Sup. Ct. 10, 21 (27 L. Ed. 359), where it was said:
“Since the ordinary administration of the law is carried on by the state courts, it necessarily happens that by the course of their decisions certain rules are established which become rules of property and action in the state, and have all the effect of law, and which it would be wrong to disturb.”
In Dooley v. Pease, 180 U. S. 126, 21 Sup. Ct. 329, 45 L. Ed. 457, a case which involved the power of the owner of personal property to sell it and still remain in the possession of it, so as to exempt it from, seizure and attachment, the court said:
“It is equally well established that the courts of the United States regard and follow the policy of the state law in cases of this kind.”
*705In Guffey v. Smith, 237 U. S. 101, 35 Sup. Ct. 526, 59 L. Ed. 856, concerning the rights which pass under an oil and gas lease, the court, .after citing the decisions from,the Supreme Court of the state, said:
“These decisions constitute rules of property, and must be accepted and applied in passing upon the complainants’ rights.”
In General Electric Co. v. Richardson (D. C.) 228 Fed. 758, the court followed the rule established by the Supreme Court of Pennsylvania that conditional sales are void so far as they affect the rights of bona fide purchasers, and «held that, the contract being a Pennsylvania contract, the law of that state was a rule of property to be applied as such in the courts of the United States in any controversy over the right of property, whether the right was invoked in an action at law or in proceedings in equity. And in Gilman v. Lamson Co., 234 Fed. 507, - C. C. A. -, it was held that where, at the time of the making of a contract to be performed in the state where made, there is a settled rule of decision of that state as to the damages recoverable for its breach, such rule governs in an action for its breach in the federal court.