Bound v. South Carolina Ry. Co. , 7 C.C.A. 322 ( 1893 )

MORRIS, District Judge,

after stating the case as above, delivered the opinion of the court.

The principal point of contention on this appeal is whether or not the court was right in directing a sale clear of all liens, or should have decreed a sale subject to the first consolidated mortgage and all prior incumbrances. The objection urged that the decree was not in conformity to the prayer of the original hill, which was only for a foreclosure of the second consolidated mortgage, we think is not tenable. The receiver was appointed upon the prayer of the original complainant, and upon Ms prayer all persons having liens, mortgages, or claims of any kind were required to come into that casi, and were enjoined from proceeding in any other case to enforce their rights. After all the lien claimants had come in, asking affirmative relief, with no objection to the form of their proceeding from any one, and after the court for nearly three years had dealt with the suit as a consolidated case, embracing all the parties as actors, in our opinion it was Loo late, upon the passing of the final decree, for the complainant to contend that, because the lienors had filed cross Mils, and had not obtained leave to file original bills, the pleadings were irregular. The result of the tiling of cross bills by all the lienors, all asking affirmative relief and a sale of the mortgaged property, to which mode of pleading no one raised any objection, was that the proceeding became and was treated by all parties as a consolidated case for the assertion of their respective righ ts as creditors, and for the preservation of the railroad and its franchises until their respective priorities could be adjudicated, and a decree for sale could be obtained, and the property handed over to a purchaser. All the proceedings from the filing of the original hill and the appointment of the receiver, in October, 1889, to the filing of the opinion of the court, in June, 1892, were so treated by the parties and by the court. The proceeding was in fact a consolidated case, in which all the creditors and claimants were actors, seeking payment of their respective claims, and in which they all agreed that a receiver was necessary, and in which, by order of the court, and upon the prayer of the original complainant, they were all enjoined from proceeding in any other court or in any other case If the prior lienors had proceeded by leave of the court by original bill to enforce their liens by foreclosure, the court would have ordered their cases consolidated with the case in which the receiver .had been appointed, and in which the property and all its revenues was in the custody of the court, and in which the amount and priorities of the different liens was being .ascertained.

On this branch of the appeal, the only substantial question is Whether, assuming that the question was properly before it, the court was right in ordering the sale free from all liens. Certainly, so far as the Coghlan mortgage of 1837 and the mortgage of 1868 were concerned, those lienors were pressing for a sale, and were entitled to it, unless paid. No one, so far as the record discloses, up to the time when the opinion of the court on the final hearing .was filed had offered to pay them. Did the petition afterwards ¡filed by Smith and Kissell contain such an offer? We think it ¡did not. Their petition asked the court to direct the holders of these prior securities to deposit them in court, and that the petitioners, or those acting with them, might have the privilege of redeeming; but it made no offer to redeem. Indeed, it rather appears from the language of the petition that they guardedly abstained from making such an offer. It also asked the court to diirect a sale, subject to all incumbrances prior to the second consoli-jdated mortgage, and to direct that out of the proceeds of sale under 'foreclosure of the second consolidated mortgage there should first be paid all interest in arrear on the mortgage of 1837, the mortgage of 1868, and the first consolidated mortgage, but it made no offer to bid an amount to pay those arrearages, or any of the large costs 'and expenses of the suit and of the sale. There was, therefore, reason to anticipate, in view of what had come to the knowledge of the court through the receivership of the insolvency of the railroad •company, that the scheme of sale proposed by Smith and Kissell would prove nugatory. It is also far from clear, unless upon a distinct agreement of the parties concerned, how the court could direct that the proceeds of a sale under the second consolidated mortgage to realize money to be applied to the payment of its bondholders should be applied to the payment of the interest on prior incumbrances. It is a proper requirement of a petition to be allowed to redeem that it should contain a formal offer to pay whatever sums the petitioner admits to be due. Story; Eq. PI. (8th Ed.) § 187 et seq. Considering the delay in filing this petition until after the announcement of the decision of the court, and in view of-the fact that the claims to be redeemed had been ascertained and adjudicated, . there was every reason why such an offer should be distinctly made before tbe court could be asked to direct that the petitioners might redeem in the special manner prayed by them. The general right to redeem according to the ordinary course of equity was sufficiently allowed by the clause of the decree which, after ascertaining and adjudicating the several claims and their priorities, provided that “said railroad company, or any one for it, or any one claiming under it, or any of the parties to this suit, may redeem such premises, property, and franchises at any time before such sale shall have been made upon payment of the several amounts so found to be due, together with all costs of advertisement of the sale which may be incurred.”

Smith and Kissel did not represent all of the first consolidated mortgage bondholders, and the scheme proposed by them made no provision for payment of the arrears of interest which the minority of the bondholders were at least entitled to have paid them, unless the suggestion that it should be taken out of the money to be derived from a sale to satisfy the second mortgage bondholders can be so considered.

'With regard to the alleged error in making the purchaser at the sale take the property subject to the outstanding expenses and obligations incurred by the receiver not already paid out of revenue, the decree required the receiver to file a statement of such outstanding obligations and unpaid expenses prior to the sale, showing in detail all unpaid claims and obligations, so that the amount could be known at the sale with sufficient certainty to enable an intending purchaser to hid with confidence. It is a proper, if not the only, way of selling such a property, which must be kept going by tbe receiver until delivered to the purchaser.

Steel rails to the amount of $50,255.93, necessary for the maintenance of the road, were purchased in April, 1888, by tbe railway company, upon a credit of 8 months,, from the Lackawanna Iron & Coal Company. This purchase was 18 months prior to the appointment of the receiver. The expectation and promise of the president of the railway company was that the purchase would be paid for out of tbe earnings of tbe railroad, and the time of payment was arranged with reference to the expected receipt of earnings. These expectations were not fulfilled, and only a portion of the debt was paid, the notes for the balance being extended from time to time until the receiver was appointed. During this interval, in July, 1888, three mouths after the purchase, and before the first notes matured, the sum of $33,960 was paid on account of interest to the second consolidated mortgage bondholders. This money was borrowed on notes of the company, which were subsequently paid out of the earnings of 1889. The court held that this payment of interest was a diversion of earnings, which had been dedicated to tbe payment of this purchase of materials necessary for the maintenance of the road, and, as the second mortgage bondholders had filed the bill asking for a receiver, that the Lacka-wanna Company had an equity as against them to displace their mortgage lien to the extent of the earnings which had been paid to them.

We think the court was in error in so holding. The rule giving preference to current expenses incurred on the faith of the earnings of a railroad shortly before the appointment of a receiver has never been carried so far. The debt of the Lackawanna Company was an ordinary merchandise debt, evidenced by notes, which were renewed from time to time. It had no stronger equity or claim upon the earnings than had those who advanced money to pay the July interest on the second consolidated bonds. The railway company was struggling with financial difaculties, and no doubt the effort to raise money to pay interest and prevent foreclosure was intended for the benefit of all the floating debt creditors. The railroad property being heavily mortgaged, all that any unsecured creditors had to look to for payment was the earnings. The immediate earnings, it is clear, the Lackawanna Company did not look to, as the sale was upon a credit of eight months. It must be inferred, therefore, that it was expected that interest on the mortgage debts was meanwhile to be paid during the running of the credit, otherwise a foreclosure would have been imminent within three months after the sale of the steel rails was made. The claim is quite different from those ordinary and necessary current expenses of operating a railroad contracted but a short time before a receivership, and which, by the sudden action of the court in appointing a receiver, are left unpaid.

The supreme court has recently, in Thomas v. Car Co., 149 U. S. 95, 13 Sup. Ct. Rep. 824, indicated the narrow limits to which an equity court should confine itself in allowing any unsecured claim to displace vested, contract liens. Wages due employes, current operating expenses, current balances of ticket and freight money arising from indispensable business relations, and similar current debts accruing within 90 days, are recognized as among the limited class of claims which, in its discretion, the court may allow to have priority. In the case cited the supreme court held it error to allow a claim for the rental of cars necessary to operate the road for the six months prior to the receivership. The court said:

“The case of a corporation for the manufacture and sale of cars dealing with a railroad company, whose road is subject to a mortgage securing outstanding bonds, is very different from that of workmen and employes, or those who furnish from day to day supplies necessary for the maintenance of the railroad. Such a company must be regarded as contracting upon the responsibility of the railroad company, and not in reliance upon the interposition of a court of equity.”

In Kneeland v. Trust Co., 136 U. S. 89, 10 Sup. Ct. Rep. 950, the supreme court said:

“No one is hound to sell to a railroad company, or to work for it, and whoever has dealings with a company whose property is mortgaged must be assumed to have dealt with it on the faith of its personal rtesponsibility, and not in expectation of subsequently displacing the priority of the mortgage liens. It is the exception, and not the rule, that such priority of liens can be displaced. We emphasize this fact of the sacredness of contract liens for the reason that there seems to be growing an idea that the chancellor, in the exercise of his equitable powers, has unlimited discretion in this matter of displacement of vested liens.”

In the present case it is true that the promise was to pay out of the earnings, and it is also true that out of those earnings, to the extent of the amount decreed to have priority, interest was paid to the second mortgage bondholders, but it is also true that, by granting an original credit of 8 months, and by extending that credit over a period amounting in all to 18 months, the Lackawanna Company must have contemplated that during that period the interest falling due on the mortgage bonds was to be kept paid out of the earnings, so that the road could remain in the hands of the railway corporation. In our opinion, the decretal order of June 25, 1892, allowing priority to the claim of the Lackawanna Coal & Iron Company must be reversed, and the decree of November 23, 1892, so modified as to disallow the priority of that claim over any of the mortgage bonds.

The other assignments of error do not, in our judgment, require special discussion. The conclusion we have readied is that the decree should stand, with the modification above mentioned, and that the sale should be made in accordance with the decree, after such reasonable opportunity for payment, and after such proper and reasonable notice of the time of sale, as the court may direct.

Decree of June 25, 1892, allowing priority to the claim of the Lackawanna Coal & Iron Company reversed, and decree of November 2.3, 1892, modified accordingly, and affirmed as so modified; the costs of these apjieals to be paid out of the fund.