Opinion · Supreme Court of the United States
LACKAWANNA & C. CO. v. FARMERS'LOAN & C. CO.
176 U.S. 298
- Type
- Opinion
- Court
- Supreme Court of the United States
- Jurisdiction
- Federal
- Date
- 1900-02-26
- Topic
- general
How later courts describe this case
- security taken upon renewal of notes given for rail
Citator
UpLaw has not yet analyzed LACKAWANNA & C. CO. v. FARMERS'LOAN & C. CO.. The absence of a flag is not a finding that it is good law.
- Cited by
- 31 opinions
LACKAWANNA c. CO.v. FARMERS' LOAN c. CO.,176 U.S. 298(1900)
20 S.Ct. 363
LACKAWANNA IRON AND COAL COMPANYv. FARMERS' LOAN AND TRUST COMPANY.
CERTIORARI TO THE CIRCUIT COURT OF APPEALS FOR THE FIFTH CIRCUIT.
No. 22.
Argued March 10, 1899.
Decided January 29, 1900.
THE Houston and Texas Central Railway Company, a corporation
of Texas, formerly owned and operated in that State several lines
of railroad, as follows: From Houston to Denison, a distance of
345 miles, known as the main line; from Hempstead, on the main
line, to Austin, a distance of 118 3/4 miles, known as the
Western Division; and from Bremond, on the main line, to Ross, a
distance of 58 miles, known as the Waco and Northwestern
Division. It also owned lands donated by the State in aid of the
construction of its roads.
Prior to April 1, 1881, the Company had executed various
mortgages or deeds of trust, namely: 1. A mortgage dated July 1,
1866, covering the main line and ten sections of land for each
mile, known as the main-line first mortgage, in which Easton and
Rintoul were substituted trustees. 2. A mortgage dated December
21, 1870, covering the Western Division and ten sections of land
for each mile thereof, commonly known as the Western Division
first mortgage, in which the same persons were substituted
trustees. 3. A mortgage dated June 16, 1873, covering the Waco
and Northwestern Division (to be hereafter referred to as the
Waco Division) and also 6000 acres of land for each mile thereof,
commonly known as the Waco and Northwestern Division first
mortgage, in which the Farmers' Loan and Trust Company, a New
York corporation, was trustee. 4. A mortgage dated October 1,
1872,
Page 299
covering the main line and Western Division as a second mortgage
and 3840 acres of land per mile of completed road, commonly known
as the main line and Western Division consolidated mortgage. 5. A
mortgage dated May 1, 1875, commonly known as the Waco and
Northwestern Division consolidated mortgage, and covering the
Waco Division and 6000 acres of land per mile of completed road.
6. A mortgage dated May 7, 1877, commonly known as the income and
indemnity mortgage, and covering all the property of the Railway
Company. 7. A mortgage dated April 1, 1881, commonly known as the
general mortgage, and covering all the property of the Company.
The present suit, designated in the Circuit Court by the
number 227, was brought April 6, 1889, by the Farmers' Loan and
Trust Company to obtain a decree of sale of the property covered
by the mortgage of June 16, 1873, on the Waco Division. On the
same day Charles Dillingham, who was already receiver and in
possession of the railway property of the Houston and Texas
Central Company, was appointed receiver of all the railway
property and property covered by the first mortgage of the Waco
Division with power to operate the same, and was directed to keep
separate accounts of the expenditures and earnings of that
Division.
During the progress of the cause the Lackawanna Iron and Coal
Company, a Pennsylvania corporation, intervened by petition,
asserting an equitable lien, prior to the claims of bondholders,
on the mortgaged property for the value of steel rails alleged to
have been furnished by it and laid on the Waco Division.
Subsequently the Pacific Improvement Company, a California
corporation, became the assignee of the claim of the Lackawanna
Company, and was made a coplaintiff with the latter company.
From a report made January 13, 1896, by a special master
appointed to find and report upon the subject-matter of the
intervening petition, the following facts appear:
Pursuant to a written contract with the Houston and Texas
Central Railway Company, dated December 28, 1882, the Lackawanna
Company in the year 1883 delivered to the
Page 300
former 5020 tons of steel rails at the price of $40.40 per ton,
in payment for which the Lackawanna Company received ten
promissory notes of the Railway Company, payable at six months
from their respective dates, amounting with interest to
$206,932.16. These notes were all paid either at their maturity
or at the maturity of other notes given in renewal thereof.
Pursuant to another contract dated April 26, 1883, between the
Lackawanna Company and the Railway Company, the former delivered
to the latter in the year 1883, 5009 tons of steel rails at
$39.50 per ton, and received in payment therefor the Railway
Company's ten promissory notes dated respectively June 21, 22 and
23, 1883, August 10, 14 and 15, 1883, and September 6, 11, 15 and
20, 1883, each payable six months after date, and aggregating,
with interest, $201,346.64 — the Railway Company being entitled,
under the contract, to renew the notes at maturity for a further
term of six months by paying the interest at six per cent or
adding the interest to the new notes. As these notes matured, the
payment of so much of the debt as was not satisfied at maturity
was extended until, in process of settlements and extensions, the
Railway Company, in the satisfaction of the balance due the
Lackawanna Company under the contract, executed its eight
promissory notes payable four months from their respective dates,
with six per cent interest from maturity. These notes aggregated
$118,000. In the negotiations resulting in this settlement the
Lackawanna Company demanded that the Railway Company should
secure the renewal notes by the hypothecation of collaterals. In
compliance with that demand the Railway Company deposited with
the Lackawanna Company, when the renewal notes were delivered,
170 first mortgage bonds of the Galveston, Harrisburg and San
Antonio Railway Company of the face value of $170,000. At the
date of the master's report, January 13, 1896, the value of those
bonds was $157,250, or 92 1/2 per cent of their face value. They
were in the possession of the Pacific Improvement Company, as
assignee of the Iron Company. No interest on the bonds had been
collected by the Iron Company or by the Railway Company, but the
Page 301
interest had been collected by the Southern Development Company.
It was agreed before the special master by the parties in
interest that the court should consider the 170 bonds as sold for
$157,250 on December 23, 1895, and should credit that sum, as of
that date, upon the claim of the Iron Company or of the Southern
Development Company.
On the 30th day of October, 1883, — nearlysix years before
the present foreclosure suit was brought, — the Lackawanna
Company and the Railway Company made another contract in addition
to those above mentioned, under which the former delivered to the
latter, during the months of February, March, April and May,
1884, 8552 tons of steel rails. That contract was similar in its
general terms to those of December, 1882, and April, 1883. It
provided for the delivery by the Lackawanna Company of 10,000
tons of Bessemer steel rails at $36.60 per ton, as nearly as
practicable between February 1 and August 1, 1884, at the rate of
1500 to 2000 tons per month. It also provided that upon the
delivery of each 500 tons of rails payment should be made
therefor either in cash or in the notes of the Railway Company
payable at six months from the average date of delivery, with six
per cent interest from such date, the purchaser to have the
privilege of renewing the notes before their maturity for a
further term of six months by paying the interest or adding the
same to the renewal notes. In March and April, 1884, the auditor
of the Railway Company made a statement or voucher of rails then
delivered under the contract. That statement passed into the
hands of the treasurer of the Railway Company with a memorandum
that notes were to be issued therefor payable at twelve months
from their respective dates. In conformity with that memorandum
the Railway Company executed and sent to the Lackawanna Company
eight notes, payable twelve (instead of six) months from their
respective dates. The latter Company thereupon notified the
Railway Company of the error, but the notes as executed were
received as a matter of accommodation to the Railway Company.
Afterwards, in April and May, 1884, the Railway Company, in
settlement of the balance due for the 8552 tons of rails,
Page 302
executed and delivered to the Lackawanna Company nine promissory
notes payable at six months from their respective dates, with the
option in the maker of renewal for a like term. Each of those
notes were renewed for six months for like amount as the
originals, and their aggregate amount was $327,175.50. This sum,
added to the $118,000 above referred to, made $445,175.30, the
aggregate principal amount due to the Lackawanna Company, not
including the $157,250, the amount at which the 170 bonds
delivered as collaterals were valued.
All the rails delivered under the first contract, and about
one half of those delivered under the second contract, were paid
for by the Railway Company prior to the appointment of any
receiver of the property; but the remaining half under the second
contract, and the rails furnished under the third contract, had
not been paid for when the master's report was filed.
The second contract for rails was made one year and ten months
prior to the appointment of the receiver in cause numbered 185
(to be hereafter referred to), about three years and three months
prior to the appointment of the receiver in consolidated cause
numbered 198 (to be presently referred to), and about six years
prior to the appointment of the receiver in this cause. The third
contract was made about sixteen months prior to the receivership
in cause 185, about two years and nine months prior to the
receivership in consolidated cause 198, and about five years and
six months prior to the appointment of the receiver in this
cause.
About 6.2 miles of the railway of the Waco Division (the part
of the railway covered by the mortgage to the Farmers' Loan and
Trust Company) was laid with the rails furnished under the first
two of the above contracts, but it was not shown what proportion
of those rails were furnished under each of the contracts; 30.8
miles of the railway were laid with rails furnished under the
third contract. The old iron rails removed from the 37 miles of
the Waco Division, upon which the above rails were laid — 2960
tons — were received by the receivers in cause No. 185, and were
sold by them in 1885 at the price of $13 net.
Page 303
The master's report contained the following:
"I find that the debt for which the Lackawanna Company claims
payment in its petition herein cannot be classed as a current
debt made in the ordinary course of business, as those terms seem
generally to be understood, yet it appears that at the time when
the contracts hereinbefore mentioned were entered into between
said Lackawanna Company and the defendant Railway Company that
the condition of the track of the defendant Railway Company was
such that the demand for new rails upon the most worn portion of
the roadway was practically imperative. For a number of years
prior to December, 1882, only about 5000 tons of new rails had
been purchased. The road north from Houston for 90 miles was
built in 1857-1861, and thence northward to Denison, 1867-1872.
The Western Division leading to Austin was constructed in part
prior to 1861, and completed in 1873, and the Waco Division was
completed about 1875. The condition of these roads was bad,
except such portions as had been relaid with 5000 tons of rails
purchased prior to December 28, 1882. There was continual
breakage of rails and wrecking of trains, the track was unsafe,
and was generally so regarded, not only by `railroad men,' but by
the travelling public; the damage to merchandise, rolling stock,
etc., was continuous, and the need for new rails appears to have
been `absolutely necessary as a preservation of human life, the
loss of which was liable to occur at any moment.'
"I find that when the aforesaid contracts were made with the
said Lackawanna Company both seller and buyer expected the debts
to be paid from the net income of the railway; that the credit
extended under said contracts was at the request of and for the
accommodation of the defendant Railway Company and upon its
general credit. That said sales were made without any stipulation
that security should be given by the defendant company for said
rails, or that payment therefor should be made out of any
particular fund or in any particular way; that said sales were
for an unusually large amount of rails, and the defendant was
unable to pay cash therefor, and there was no other way of
obtaining said rails except upon
Page 304
credit; and petitioner herein at the time of said contracts and
sales had knowledge of the mortgage of June 16, 1873, given by
the defendant Railway Company upon the properties of its Waco and
Northwestern Division to secure the first mortgage bonds, which
said mortgage has been herein foreclosed. I find that the steel
rails supplied by said Lackawanna Company under the
aforementioned contracts, 18,581 tons, were placed in the track
of the defendant Railway Company as soon as received."
The bonded debt of the Railway Company on January 1, 1885, was
$16,874,500. The interest on all classes of its bonds payable in
1894, amounting to $1,194,200, was paid as it matured. The
Railway Company first made default in the payment of interest on
its bonds January 1, 1895, on which day the interest on first
mortgage bonds became payable.
The Southern Development Company, a California corporation, on
the 16th day of February, 1885, instituted suit against the
Houston and Texas Central Railway Company, asserting a claim
against it for about $600,000 for money loaned at various times.
This was cause No. 185. It set forth in its bill the embarrassed
condition of the Railway Company, the danger of its property
being scattered, wasted and lost, and asked that the Company's
property be put in the hands of receivers, and a decree passed
directing that out of the rents, revenues, issues and profits
coming into the hands of the receivers, after payment of costs of
administration, operating and other necessary expenses, the
claims of the plaintiff, the Southern Development Company, with
interest and costs be paid. On the motion of that Company, Clarke
and Dillingham were appointed receivers of the property. They
immediately qualified as receivers and took possession of the
property. An amended and supplemental bill was filed making
Easton, Rintoul and the Farmers' Loan and Trust Company
defendants as trustees of the various mortgages upon the Railway
Company's property. Clarke and Dillingham continued to act as
receivers until about July 10, 1886, when they delivered
possession of the property and the revenues in their hands to
Easton, Rintoul and Dillingham who had previously
Page 305
been appointed joint receivers of the Railway Company under bills
filed by the trustees of certain mortgages on the main line and
Western Division, and also by the Farmers' Loan and Trust Company
as trustee in the general mortgage of the Houston and Texas
Central Railway Company. The last-named litigation was known as
cause No. 198.
In cause No. 185 the Lackawanna Company intervened by
petition, and asked to be made a coplaintiff. It prayed that an
account be taken of its several demands, that the amount thereof
with interest be paid out of the net revenues of the Railway
Company, and be declared a lien thereon and upon all the property
of the Company superior in rank to the claims of the trustees and
to the mortgage bonds and coupons issued under their various
deeds of trust.
To the bill of the Southern Development Company, Easton and
Rintoul, trustees, demurred generally and specially. The demurrer
was sustained, and the bill and supplemental bill were dismissed
with costs on the 27th day of May, 1886, but without prejudice to
the rights of the complainants to assert their claims, if any
they had, in such manner as they were advised. By the same decree
Clarke and Dillingham were discharged and ordered to turn over
all the property and effects of the Railway Company together with
its accrued revenues in their possession to Easton, Rintoul and
Dillingham, who had then been appointed joint receivers of the
Railway Company under an order made in the "Consolidated Cause
No. 198,"Easton and Rintoul, Trustees, and the Farmers' Loan
and Trust Co. v.Houston and Texas Central Co. et al. — the
constituent suits of such consolidated cause being causes Nos.
198, 199 and 201, which were bills of foreclosure against various
parts of the railway.
The three mortgages declared on in causes 198, 199 and 201
were duly foreclosed by final decree entered in the consolidated
cause on the 4th day of May, 1888, and on September 8, 1888, all
the property of the Railway Company was sold under that decree,
George E. Downs becoming the purchaser of the Waco and
Northwestern Division, subject, however, to the particular
mortgage sought in this suit to be foreclosed,
Page 306
namely, the mortgage of June 16, 1873, known as the Waco Division
first mortgage, the Farmers' Loan and Trust Company being the
trustee therein. The sale was also made subject to the right
which the court reserved by the decree (to use the words of the
master in his report) to charge upon the property or any part
thereof the payment of any amount that might be found to be due
and payable by reason of intervening petitions theretofore filed
in that cause and be entitled to priority over the mortgage debts
referred to in the decree.
From February 20, 1885, to the date of the report, the
property of the Railway Company, forming the subject-matter of
the receivership in this cause, was continuously in the
possession of the court under proceedings in suit No. 185, and
thereafter in suits Nos. 198 and 227.
The master found and reported that no interest had been paid
on the bonded indebtedness by either of the receivers in this
cause; that Alfred Abeel, receiver in this cause, had expended
under the orders of the court $46,505.40 for betterments and
permanent improvements from December 10, 1892, to September 3,
1895, consisting of bridges, shops, roundhouse, car shed, water
stations, locomotives, chair car and fencing; that no part of the
income arising from the operation of the road and no part of the
proceeds of sales of old rails, old iron, old cars and engines,
coming into the possession of the receivers in causes 185 and
198, ever came into the possession of the receivers in this
cause, and it did not appear that any part of the equipments
purchased by the receivers in causes 185 and 198 ever came into
the possession of the receivers in this cause; that the evidence
failed to show that any improvements and betterments of the
property, added to the property of the Houston and Texas Central
Railway Company by the receivers in causes 185 and 198, were made
on the Waco Division;that prior to April 6, 1889, no separate
accounts were kept of the receipts and disbursements of the Waco
Division, but the same was operated as a branch of the general
system of the Houston and Texas Central Railway Company, and the
evidence failed to show what, if any, of the expenditures made by
the receivers in causes 185 and 198 for extraordinary
Page 307
repairs, betterments and improvements, and for operating and
running expenses, were made for the Waco Division and what
portions for other divisions of the Houston and Texas Central
Railway Company, and this was true also as to receipts and
income; that the receivers in cause 185 had on hand in cash at
the opening of business on January 21, 1886, $175,393.65, but it
did not appear that any part of that fund came to the hands of
the receivers in this cause; and that the receiver in cause 198
had on hand at the beginning of business on April 6, 1889, cash
amounting to $215,842.45, but it did not appear that any part of
that sum came to the hands of the receivers in this cause.
The mortgage given by the Railway Company to the Farmers' Loan
and Trust Company, dated June 16, 1873, and herein declared on,
contained the following provisions:
"And in case the said Houston and Texas Central Railway
Company shall fail to pay the principal, or any part thereof, or
any instalment of the interest, or any part thereof, on any of
the said bonds at any time when the same shall become due and
payable according to the tenor thereof, and for sixty days after
having been demanded, it shall be competent for the said trustee,
its successors or assigns, to enter upon the said railway and the
premises and property herein conveyed, by its attorneys and
agents, and take possession of the same without let or hindrance
of the said first party, and every part and parcel thereof, and
the appurtenances, and appoint an agent to operate and manage the
same, and receive the revenue and income thereof, applying the
said funds, after deducting taxes, necessary expenses and counsel
fees, to keep the same in good order and repair, and the surplus
to pay the principal and interest of all the bonds which may be
due and outstanding, and secured herebypro rata, and
thereafter, to the payment of any contributions due to the
sinking fund herein established. And upon the request of the
holders of one fifth in amount of the bonds so in default which
may be at any time outstanding under this deed of trust, it shall
be the duty of said second party, by its president or agent duly
appointed in its behalf, to enter upon and take actual possession
with or without entry
Page 308
or foreclosure of said railway and property herein described, and
all and singular each and every part and parcel thereof, and
assume its management until the arrears of both principal and
interest be paid, or the property sold, as herein prescribed,
receiving the rents, revenues and income thereof, and applying
them in the same manner as above stated. It is, however,
expressly agreed that the said party of the first part may
dispose of the current net revenues and income of all the said
property and railway hereby conveyed in such manner as it shall
deem best, until default shall be made in the payment of the
interest or principal of said bonds, or of any one or more of
them, and shall have the right to sell and dispose of any of such
real estate or other property as it may own or acquire, which may
not be needed or required for the purposes and business of the
said Waco and Northwestern Division, except in the case of the
six thousand acres per mile of completed road, and which sale and
conveyance of such outside property shall transfer the said
property and title free from incumbrance of this mortgage or deed
of trust, and to change its tracks and make any and all
alterations necessary for the benefit of the same."
That mortgage contained no provision authorizing the trustee,
if it acquired possession of the railway under that instrument,
to pay any floating debt or debts of the mortgagor company out of
the gross earnings of the railway.
During the receivership of Clarke and Dillingham, in cause
185, they received revenues from the operation of the railway,
from February 23, 1885, to January 21, 1886, $2,758,487.40, and
paid out for operating expenses, taxes, etc., for the same
period, $2,137,322.44, leaving a surplus of $621,164.96. From
January 21 to July 10, 1886, they received $1,143,731.05, and
paid out for operating expenses during the same period
$1,341,753.85, leaving a deficit for that period of $198,022.80,
but leaving a net balance from the operation of the railway from
February 23, 1885, to July 10, 1886, of $423,142.16. When Clarke
and Dillingham took possession of the property of the Railway
Company on February 23, 1885, they received in cash $30,416.34,
while they collected for traffic balances
Page 309
and other claims $118,730.08, from sales of old rails on hand
February 23, 1885, $110,275, and from sales of old cars $6500,
making a total of $265,921.42.
Clarke and Dillingham during the time they were in possession
of the property as receivers, and Easton, Rintoul and Dillingham
while they were in possession as receivers, expended under the
orders of court the following sums outside of operating expenses:
$23,274.20 for liabilities of the Railway Company; $751,438.15,
interest on first mortgage bonds of the Company due January 1 to
July 1, 1885; $245,793.64 for new steel rails; $125,695.44 for
car trust notes; $265,696.33 for new passenger coaches, baggage,
mail and express cars, locomotives, etc.; and $126,218.62 for
right of way, fencing track, real estate, depot, round-house,
foundry and pattern-house; in all, $1,536,116.38, of which
$384,026.20 was expended under the receivership of Clarke and
Dillingham. These were the receipts and expenditures up to
January 9, 1888, and there was no evidence as to receipts and
expenditures after that date.
Easton, Rintoul and Dillingham during their receivership
realized out of proceeds of sale or collection of old assets of
the defendant company the sum of $135,889.70.
The receivers in cause 198 received from the receivers in
cause 185 the sum of $138,751.37 in cash.
The receivers in the consolidated cause 198, after taking
possession on July 10, 1886, paid liabilities of the receivers,
Clarke and Dillingham, taxes, outstanding vouchers, pay rolls,
traffic balances, $221,421.32, and collected from the amount due
Clarke and Dillingham as receivers in cause 185 the sum of
$39,016.69.
On the 26th day of November, 1886, the Lackawanna Company
filed its petition of intervention in cause 198, praying
substantially for the same relief against all the railways,
revenues, earnings, moneys and other properties and assets of the
defendant company, including those forming the subject-matter of
the receivership herein, as was prayed for by its petition of
intervention in this cause. Upon that petition the master
reported in that cause that under the facts the
Page 310
debt for which the company filed its petition was of a character
equitably entitling it to be discharged in preference to the
mortgage represented in that suit, but which preference should be
applicable to so much only of the company's debt as should remain
unsatisfied after exhausting the 170 first mortgage five per cent
bonds of the Galveston, Harrisburg and San Antonio Railway
(Mexican Pacific extension) of the face value of $170,000, and
which, as heretofore stated, were pledged as security. The
Farmers' Loan and Trust Company filed exceptions in that cause to
the master's report, but at the date of the master's report in
this cause the exceptions had not been brought to a hearing.
The Lackawanna Company on the 30th day of April, 1889, filed
suit upon its claims against the Houston and Texas Central
Railway Company in the District Court of Dallas County, Texas, a
court of competent jurisdiction, and in that suit, after due
citation, judgment was rendered against the railway company May
19, 1899, for $555,914.25 with interest. Upon that judgment
execution was issued and was returned August 20, 1899, no
property found subject to execution.
Of the interest paid by the receivers on the first mortgage
bonds of the defendant railway company, $79,800 consisted of
coupons upon the first mortgage bonds of the company secured by
mortgage upon the Waco Division, being the property forming the
subject-matter of the litigation herein. Interest was paid upon
the coupons representing the same, maturing January 1 and July 1,
1885, to the amount of $11,571, making a total amount of interest
paid to holders of bonds secured by mortgage on the Waco Division
of $91,371, paid May 1, 1887.
During the years 1883 and 1884 the defendant company paid
$2,386,400 interest upon its bonds, which amount, less
$1,043,198.27, borrowed for interest purposes in those years, was
presumably (the contrary not appearing) paid from its income or
current earnings, and out of said total the sum of $159,600 was
paid as interest upon the first mortgage bonds of the Waco
Division, the bonds which are the subject-matter of the bill of
complaint in this cause. During 1883 and 1884
Page 311
$2,225,000 approximately were expended from the earnings and
general income of the defendant company's property in the payment
of interest on bonds and in additional equipments, permanent
improvements, etc.
The accounts of the railway company were not kept in such
manner as to indicate the exact fund out of which the interest on
the first mortgage bonds of the Waco Division was paid, or the
exact fund out of which the interest upon the bonds of the other
divisions was paid; and no separate account was kept of the
earnings of that division as distinguished from the net earnings
of the other divisions of the railway company, either prior to or
during the receivership thereof, until about April 20, 1889.
During the receivership in cause 198, the receivers expended in
the payment of interest upon the bonds forming the subject-matter
of the bill of foreclosure herein the sum of $91,371.
By a final decree rendered March 16, 1892, the Circuit Court
made in this cause a decree of foreclosure and sale in behalf of
the Farmers' Loan and Trust Company. The decree contained these
among other provisions:
"And the purchaser or purchasers of said property at said sale
shall, as a part of the consideration of the purchase, and in
addition to the sum bid, take the property upon the express
condition that he or they will pay off, satisfy and discharge any
and all claims and interventions now pending and undetermined in
this court, accruing prior to the appointment of the receiver
herein or during the receivership, which may be allowed and
adjudged by this court as prior in right to complainant's
mortgage, together with such interest as may be allowed; and also
upon the further express conditions that he or they will pay off,
satisfy and discharge all debts, claims and demands of whatsoever
nature incurred or which may hereafter be incurred by said
receiver Charles Dillingham, and which have not been or shall not
hereafter be paid by said receiver or other parties in interest
herein; and said purchaser or purchasers, their successor or
successors, or assigns, shall also have the right to appear and
make defence to any claim, debt or demand sought to be enforced
against
Page 312
said property; and said purchaser or purchasers, their successor
or successors, or assigns, shall also have the right to appear
and make defence to any claim, debt or demand pending and
undetermined at the date of the confirmation of such sale. . . .
"And it is further ordered, adjudged and decreed that it be
recited in the deed to be executed and delivered to said
purchaser or purchasers, that he or they do take said property,
subject to, and that said purchaser or purchasers do assume and
agree to pay off any and all debts, claims and demands of
whatsoever nature now pending and undetermined, and which may be
allowed and adjudged by this court, as prior to any right secured
under complainant's mortgage, and subject likewise to all debts,
claims and demands of whatsoever nature incurred by Charles
Dillingham as receiver in this cause, and which may remain unpaid
at the termination of said Dillingham's receivership, provided
the same be presented, as hereinbefore provided, within six
months after the confirmation of said sale. It is further
ordered, adjudged and decreed that the rights of the Lackawanna
Coal and Iron Company, the Southern Development Company, the
Pacific Improvement Company and the Morgan's Louisiana and Texas
Railroad and Steamship Company, intervenors herein, and the
rights of all other intervenors herein, be and they are hereby
reserved to be hereinafter adjudicated, and are in no manner
affected or prejudiced by this decree. It is further ordered that
the disposition of any surplus funds arising from the earnings of
the road, or otherwise, that may be in the hands of the receiver,
is reserved for future determination."
Subsequently, February 26, 1896, a decree was passed in this
cause dismissing the intervention herein by the Lackawanna Iron
and Coal Company and the Pacific Improvement Company, but without
prejudice to the rights of those companies under or by virtue of
the intervention in equity cause 198.
This order was affirmed in the Circuit Court of Appeals.
52 U.S. App. 91. The case is now here on certiorari for
reexamination.
Page 313
The above statement of the history of this litigation shows that the Houston and Texas Central Railway Company had three contracts with the Lackawanna Company for steel rails; that those contracts were made, respectively, on December 28, 1882, April 26, 1883, and October 30, 1883; and that all the rails delivered under the first contract, and about one half of those delivered under the second contract, were paid for, leaving unpaid for one half of the rails delivered under the second contract and all delivered under the third contract. But the claim for the balance due for rails covered by the contract of April 26, 1883, is abandoned because, as stated by counsel for the Lackawanna Company, it is impossible to state with certainty how many of the rails delivered under that contract were actually used on the Waco Division. We are therefore only concerned in this case with the contract of October 30, 1883, under which rails were delivered.
It also appears that in suit No. 185, brought by the Southern Development Company in February, 1885, receivers werePage 314appointed of the entire property of the Houston and Texas Central Railway Company, including the Waco Division; that that suit was dismissed in May, 1886, and shortly before that time suits were brought by the trustees of the mortgages on the main line and on the Western Division of that company for the foreclosure of those mortgages, receivers were appointed and the suits were consolidated as Consolidated Case 198; that in the latter cause the entire property was sold September 8, 1888, subject, however, to the first mortgage on the Waco Division; and that the Waco Division was separately sold subject to the first mortgage thereon.
Subsequently, September 6, 1889, the present suit was brought to foreclose the first mortgage on the Waco Division. The Lackawanna Company intervened herein by petition, asking that an account be taken of the amounts due to it, and for a decree "declaring that the sums so due are liens upon the net earnings of said Railway Company, and especially upon those portions of said net earnings which have accrued or may accrue from the railways described in the bill of complaint in this cause, both those accrued prior to said receivership in said cause No. 185, and those accrued and to accrue during the receivership in said cause No. 198, extended to this cause, and upon all of the property of said railway company, superior in rank to the claims of said trustee and of the mortgage bonds and coupons issued under the deed of trust sought to be foreclosed in this cause;" and "that the net earnings of the railway described in the bill of complaint in this cause in the hands of said receiver, accrued or to accrue, be first devoted to the payment of the accounts so decreed, and if they be not sufficient prior to the final decree in this cause to pay said amounts, then that your honors do decree the payment of said amounts out of any proceeds of sale of the property of said Railway Company to be made under said final decree, the amounts so decreed to your petitioner to be paid in preference to any amount due under the mortgage bonds and coupons issued under the deed of trust annexed to the bill of complaint in this cause."
The principal ground upon which the Lackawanna CompanyPage 315bases its claim for the relief asked is that when each of the above contracts were made the Waco Division was in such condition that new rails were imperatively required in order that the road might be safely used for the transportation of persons and property. Such, it may be assumed, was the condition of the road when the rails were contracted for and delivered, for it was so found by the master to whom the intervening petition of the Lackawanna Company was referred with direction to take the account prayed for and to report the facts, and to that report no exceptions were filed. But the necessary inference from the report in connection with the averments of the intervening petition is, that the work required to be done in order to put the main road of the Houston and Texas Central Railway Company and its divisions in proper condition was not such as would be done in the ordinary course of the business and operations of a railroad, but was so extensive as to amount to reconstruction, or the construction of new road. That was the view expressed by the Circuit Court of Appeals, and it explains what the master meant by the finding that the debt for which the Lackawanna Company claimed payment could not be classed as a "current debt made in the ordinary course of business." 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. But we are of opinion that such expenditures as those incurred in the making of the contracts with the Lackawanna Company were not such as are made in the ordinary course of the operations of a railroad, and cannot be deemed current debts within the rule that a railroad mortgagee when accepting his security impliedly agrees that the current debts of a railroad company contracted in the ordinary course of its business, in order to keep it a going concern, shall be paid out of current receipts before he has any claim uponPage 316such income.Southern Railway Co. v.Carnegie Steel Co.,ante, 257, and authorities there cited. They are rather to be regarded as extraordinary expenditures, outside of the ordinary course of business and incurred for purposes not of repair but of construction. This court has said that it is the exception, not the rule, that the priority of mortgage liens can be displaced.Kneelandv.American Loan Trust Co.,136 U.S. 89,98;Thomasv.Western Car Co.,149 U.S. 95,111. We have said that priority of unsecured claims is recognized only in a few specified cases in which equity and good conscience require that the vested liens of mortgage creditors shall be postponed in the application of current earnings to current debts. Sound principle forbids that a court of equity should imply an agreement upon the part of mortgage creditors to subordinate their claims to such debts as those due to the Lackawanna Company. To so hold would place their rights at the mercy of the railroad company having charge of the property upon which their recorded liens rest. Besides, the rails in question were delivered long before the railroad company had made any default in the payment of interest; about sixteen months before the company's property was put into the hands of a receiver, and about five and a half years before the appointment of a receiver in this cause. Then there is the circumstance that the Lackawanna Company, during the negotiations resulting in the execution of renewal notes under the second contract for rails, demanded and received collateral security to a large amount from the railroad company — a circumstance tending to show that it did not regard itself as entitled to an equitable claim upon net earnings in preference to mortgage creditors, but relied upon the general credit of the railroad company. However meritorious the claim of the Lackawanna Company may be as between it and the railroad company, we cannot by reason of anything appearing in the record impair or displace the liens of mortgage creditors for its benefit. Under all the circumstances, including the amount of the debt and the long period of credit, the claims in question must be regarded as general unsecured debts, not contracted in the ordinary course of business, andPage 317with the expectation of the parties that they were to be met out of current receipts in preference to claims of mortgage creditors. It is not therefore entitled to the priority claimed. The view taken of the case by the Circuit Court of Appeals is indicated by Judge Parlange, whose opinion, on behalf of that court, thus concludes: "The unusually large purchase of rails, the time within which they were to be delivered, the condition of the road, the contracts providing for notes at six months renewable for a like term at the maker's option, the hypothecation of securities for the payment of the claim, the knowledge which the intervenor had of the mortgage, the fact that the contracts contained no promise to pay out of any particular fund, the time which elapsed between the date of the contracts and the appointment of a receiver in cause No. 185 — are circumstances which, taken together, cannot fail to convince us that the intervenor relied upon the general credit of the railway company."
The decree of the Circuit Court of Appeals is thereforeAffirmed.