128 F. 209 | 8th Cir. | 1903
after stating the case as above, delivered the opinion of the court.
i. The statutes of Kansas (sections 4883, 4889, Gen. St. 1901) restrict to a period of one year the time for reviving judgments “where either or both parties die after judgment and before satisfaction thereof/’ The water company was dissolved in May, 1898, by a judgment in quo warranto, and the interveners, Dana and Whiting, have taken 110 steps in the stale court wherein their judgments were obtained to revive them against tlie receiver. Upon these facts the trust company' strongly urges that these judgments have become mere nullities, and form no basis for the relief sought. Such a result does not flow from the situation stated. Neither at common law nor under the statutes of Kansas does a judgment for the payment of money become 'a mere
2. The original intervening petitions of Dana and Whiting are partly framed upon the theory that the liability of the water company to them, established by their judgments, was produced by the ordinary operation of its waterworks plant, and should be classed as ordinary operating expenses, and be accorded priority over the mortgage debts in payment out of the earnings during the receivership and out of the proceeds of the sale of the mortgaged property. This theory cannot be sustained. The liability was not incurred in the course of the receivership, but was incurred at a time when the waterworks was being operated by the water company. It is not based upon anything which tended to preserve or enhance the value of the mortgage security, but is based upon personal injuries to persons not in the employ of the water company, caused by the negligence of the company, and occurring more than two years before the receivership. It is well settled by the decisions of this and other courts that such claims are not preferential debts. St. Louis Trust Co. v. Riley, 16 C. C. A. 610, 70 Fed. 32, 30 L. R. A. 456; Farmers’ Loan & Trust Co. v. Northern Pacific R. R. Co., 24 C. C. A. 511, 79 Fed. 227; Veatch v. American Loan & Trust Co., 25 C. C. A. 39, 79 Fed. 471; Farmers’ Loan & Trust Co. v. Nestelle, 25 C. C. A. 194, 79 Fed. 748; Farmers’ Loan & Trust Co. v. Longworth, 27 C. C. A. 541, 83 Fed. 336; Veatch v. American Loan & Trust Co., 28 C. C. A. 384, 387, 84 Fed. 274, 277. Any preference or priority to which these interveners may be entitled was obtained solely by their intervention in the receivership suit.
3. When the judgments in favor of Dana and Whiting were rendered the entire property of the water company was in the possession
4. Did the pledge of income in the trust company’s mortgage become effective against income earned prior to the extension of the receivership, September 27, 1895? If not, the intention of the parties to that instrument, declared in unambiguous terms, has miscarried, and creditors who were less diligent than the trust company, and who had no mortgage or other lien upon the water company’s property, and no pledge of its income, have secured a substantial part of the income, earned after the time when the trust company asserted its right under the pledge. O’Halloran, a judgment creditor, was the first to move against the water company’s income, and in his suit the receiver was originally appointed. O’Halloran has been paid, and is no longer a party to "the controversy, which now really concerns only the trust company as second mortgagee, or the bondholders whom it represents, and the intervening judgment creditors, Dana and Whiting. The trust company was the next to move. It commenced a suit to foreclose its mortgage and to obtain the income therein pledged. The water company was then insolvent, and its entire property was in the possession of the receiver. In its bill the trust company distinctly claimed the income, and prayed that it be placed in possession of the mortgaged property under the terms of the mortgage, or that a receiver be appointed to take possession and collect the income for its benefit. The water company, not being in possession, could not perform its undertaking to deliver possession of the property to- the trust company, and thus place it in a position tO' receive the income. Nor could the receiver surrender the possession without the direction of the court. Under the court’s appointment, the receiver was exercising the water company’s right to collect and disburse the income until the trust company could and should lawfully claim it under the pledge in its mort
. “If. however, the receiver is appointed solely for the benefit of the plaintiff. in an action to which the senior mortgagees of income are not parties, and they do not choose to acquiesce, what are they to do? They cannot take possession from the mortgagor; the action of the court has disabled them to do that. Shall they sue the receiver for the possession? The court would hardly permit that. Shall they petition the court to discharge him, or direct him to turn the property over to them? There might be reasons — there were in this ease — growing out of questions of priority as to part of the property, and to the earnings properly attributable to that part, why the court could not properly grant such a petition. Being unable to take the possession from the mortgagor or from the receiver, what, then, can they do, except, if they are not parties to the action, tó come in by intervention, or, if they are parties,- to petition the court that there be paid to them b3r the receiver, out of the earnings which shall come into his hands, such part as, but for his appointment, they would have had the right to receive and apply on their mortgages. ⅜ * * When such mortgagees are in the action, and so in position to make their demand upon the court, it is entirely immaterial in what form it is made, so that it is clearly made, and presentó to.the court the ground of their claim, if it be not already before it. And at whose instance the receiver was appointed, and on what ground he was appointed., are wholly immaterial. Their right to demand that the earnings which shall come into the hands of the receiver shall be held for and paid to them does not depend on those things, but on the facts that, by taking the property through its receiver, the court has placed itself, so far as such senior mortgagees are concerned, in the position of the mortgagor, and that their only remedy is by application to the court.”
By placing the property of the water company in the custody of a receiver, and carrying on the business of the company through him, the court assumed the burden, during the continuance of the receivership, of administering the property and collecting the income for the benefit of whomsoever was entitled thereto, giving due effect to such priorities of right as were or. should be acquired under equitable levies of judgment creditors or pledges made by the debtor company. Hitz v. Jenks, 123 U. S. 297, 306, 8 Sup. Ct. 143, 31 L. Ed. 156; Dow v. Memphis & Little Rock R. R. Co., 124 U. S. 652, 655, 8 Sup. Ct. 673, 31 L. Ed. 565; Union Bank of Chicago v. Kansas City Bank, 136 U. S. 223, 236, 10 Sup. Ct. 1013, 34 L. Ed. 341; Porter v. Sabin, 149 U. S. 473, 479. 13 Sup. Ct. 1008, 37 L. Ed. ,815; Ames v. U. P. Ry. Co.
5. Does the decree in the Strong suit bar Dana and Whiting from claiming the rental there awarded to Strong under his mortgage? Whether that mortgage covered this rental, and, if it did, whether Strong took the steps necessary to make it effective in that regard, are questions which are determined in his favor by the decree in his suit. If the court had jurisdiction of the subject-matter, and had before it the requisite parties to' bind Dana and Whiting, further consideration of these questions is precluded. As shown in the foregoing statement, Strong’s bill, the city’s answer, and the answer or intervening petition of the receiver make it manifest that it was the intention of the parties to present for the court’s decision in that suit a controversy respecting rental then due from the city under its contract with the water company. Strong claimed this contract was,covered by his mortgage, and especially claimed that the city and water company were obligated, by the terms of the ordinance, to set apart and pay over to the Kansas fiscal agency in New York for application upon the interest and principal secured by his mortgage the rental for the original 150 hydrants. There -was no occasion for making the city a party to Strong’s bill, unless it was to secure the payment of the rental to Strong. The receiver claimed all of the rental as part of the income of the water company, which he, as receiver, was directed to collect and reduce to possession. The city, while apparently admitting the rental to be due to the water company, denied Strong’s right to it. It was the case of two rival claimants for payment of the same admitted debt, and was a matter growing out of Strong’s mortgage, and affecting its extent as a security. Both Strong and the receiver were claiming through and asserting the right of the water company against the city. That the court had jurisdiction of the subject-matter'is clear. While the receiver was not made a party to the Strong bill, he might have been, and his subsequent appearance or intervention in that suit was not excepted to. This appearance or intervention was fully justified by the direction, given to the receiver at the time of his appointment, to defend any suit seeking to establish a lien against the water company’s property, and to- prosecute any action necessary for the collection of any sum due to the company. Shields v. Coleman, 157 U. S. 168, 178, 15 Sup. Ct. 570, 39 L. Ed. 660. The receiver was therefore to be treated as though he had originally been made a defendant (French v. Gapen, 105 U. S. 509, 525, 26 L. Éd. 951), at least so far as the rental was concerned. Particularly is this true since the Strong suit and the receivership suit were both in the same court. By its decree the court resolved the controversy, with respect to certain of the rental, in favor
Of course, the Strong decree binds the receiver, and bars any further action or suit by him,' or others acting in the same right, against the city for the rental awarded to Strong. The creditors, Dana & Whiting, were not actual parties to the Strong suit, but they were represented by the receiver, and are as much bound by the decree as he is. They were what are sometimes termed quasi parties. Upon the appointment of the receiver the right to enforce the payment of hydrants’ rental and other rights in action due to the water company, or becoming due during the continuance of the receivership, vested in the receiver, and- lje bécame the proper party to prosecute all necessary suits for that purpose, and to defend such suits as should be commenced for the purpose of establishing claims against or rights to the property of the water company. Porter v. Sabin, 149 U. S. 473, 478, 13 Sup. Ct. 1008, 37 L. Ed. 815; Doggett v. Railroad Co., 99 U. S. 72, 78, 25 L. Ed. 301; Express Co. v. Railroad Co., 99 U. S. 191, 199, 25 L. Ed. 319; Gray v. Davis, 10 Fed. Cas. 1006, 1009; Davis v. Gray, 16 Wall. 203, 217, 219, 21 L. Ed. 447; High on Receivers (3d Ed.) § 316. In such suits, whether brought by the receiver or against him, it is not necessary, and generally is not even proper, to join creditors of the debtor company with the receiver as parties. Doggett v. Railroad Co., Express Co. v. Railroad Co., Gray v. Davis, supra. The
“A receiver is appointed upon a principle of justice for the benefit of all concerned. Every kind of property of such a nature that, if legal, it might be taken in execution, may, if equitable, be put into his possession. Hence the appointment has been said to be an equitable execution. He is virtually a representative of the court, and of all the parties in interest in the litigation wherein he is appointed. He is required to take possession of property as directed, because it is deemed more for the interests of justice that he should do so than that the property should be in the possession of either of the parties in the litigation. He is not appointed for the benefit of either of the parties, but of all concerned.” Davis v. Gray, 16 Wall. 217, 21 L. Ed. 447.
Mr. Calvert, in his work on Parties in Equity, says (pages 20, 21):
“There are certain persons whoso representative character is derived from the law. The most familiar instance is that of executors and administrators in respect of the personal estate of their testator or intestate. Whenever a suit is instituted which affects that personal estate, all the legatees have precisely that kind of interest which has been specified in the general rule; but they are unnecessary parties, inasmuch as by law their interests are protected. They themselves may be said to be represented in the person of the executor or administrator. It would be very inconvenient to bring them all in their own persons before the court, so they are allowed to appear by their representatives. Thus an adequate protection is provided for thoir interests, and the spirit of the general rule is adopted, although the letter of it is, for the sake of convenience, evaded.”
The relation of a receiver to intervening creditors, like these, is much the same as that of a mortgage trustee to the bondholders.
6. Should the cost of the new engine and additional wells incurred under the order of January 9, 1895, be charged in whole or in part upon the income earned after the pledge of income in the trust company’s mortgage became effective, March 18, 1895 ? The question is not whether these improvements • shall be paid for, but against what funds or income shall the completed payment of tljeir cost be charged? The master found that this expenditure was “not for repairs or for ordinary construction,” but was “for the permanent improvement and betterment of the property.” The receiver’s petition upon which the expenditure was authorized represented that the water company had “two pumping engines — one high-duty Gaskill, of four million gallons capacity, and one Knowles condensing pumping engine of three million gallons capacity. The latter bursted within the past twelve months two cylinders, which it would be very expensive to replace, and said engine has therefore not been used for a long time. Furthermore, this pump is unfitted for the direct pressure system in use at said works, for the reason that it is too light for that work, and is very expensive in the use of fuel. Your petitioner deems it necessary to purchase a new 'improved high-duty pumping engine of about four million gallons daily capacity.” After stating that the supply of water was obtained “through six-inch well points near the bank of the Kansas river,” the petition proceeded:
“When these well points were first put down, -they furnished a sufficient supply of water, but they have become corroded, and from other causes said well points do not furnish more than half the original quantity of water, and not sufficient to answer the required purposes. Tour petitioner, from consultation with capable engineerfe, and from his own knowledge, has-become satisfied that, in order to procure a sufficient quantity of water, it will be necessary to sink near the banks of said river at least two wells fifty feet in diameter.”
In his deposition, introduced in evidence by the intervening judgment creditors, the receiver testified:
“Q. Now, were these things you did under order of court in the nature of repairs on the plant as it already stood, or were they, or some of them, ad-*226 clitions to the plant, or renewals of parts of it? A. There was that new pump, and then the connecting therewith, and a new well, fifty feet in diameter, and then the boring out of the other pump, .which was in bad shape, making new .plungers, and all that sort of thing. Of course, some connections, valves, etc. Q. Make the plant more valuable? A. Well, it may be; yes, in a way. That was necessary to make the plant complete. It was never complete before. I will have to explain to you, perhaps.. They had a* pumping station down here, and they had two small pumps, and of course it was inadequate for the business entirely. It could not give enough pressure, and the city complained, and notified that they would not pay any more hydrant rental if they did not get more pressure; and it was necessary to make a plant just where it is. Of course, it. was more valuable. It was not of any value at all before. The well capacity was insufficient. It became absolutely necessary, to make it a self-sustaining plant, to sink that well. Q. Do you know whether these things were in contemplation by the company itself at the time you were appointed receiver? A. Yes, sir. Q. In other words, you carried out what the city [company] itself would have done? A. I was the manager of the company before the receivership, and I recommended these additions to make. it effective; but, of course, the company was in straits, and had no money to do it with, and had to stand off the council and everybody until we could get -money after the receivership. Q. What money came in after you became receiver, that would not have come into the company if it had continued in business? A. I got just about the same money; it came just the same as before the receivership. Q. If the company got the same money that you got, why was not the company-able to make these improvements which you were able to make as receiver? A. Because they paid interest on the bonds. After I became receiver we used the money to make improvements.”
The record discloses no other evidence bearing upon the character of these improvements. This evidence and the master's finding, which is not excepted to, make it clear that the cost of these improvements was not a current expense incurred in the ordinary course of operating the mortgaged property, but was an expense outside of the ordinary course, and incurred, not in operation, which includes repair, but in reconstruction, enlargement, and permanent improvement. Lackawanna, etc., Co. v. Farmers' Loan, etc., Co., 176 U. S. 298, 315, 20 Sup. Ct. 363, 44 L. Ed. 475.
When the order of January 9, 1895, was made, a receiver appointed under the bill of a judgment creditor (0’Halloran) was in possession of the property of the debtor company, and was'operating its waterworks plant, and collecting the income thereof with a view to satisfying the claim of the judgment creditor therewith. The entire property was then covered by mortgages to Strong and the trust company, securing the payment of an aggregate indebtedness exceeding the salable value of the property, and this was disclosed in the bill under which ..the-receiver was. appointed. The trust company’s mortgage, which had been duly recorded, as clearly pledged the income, and made it a part of the bondholders’ security, as it did the corpus of the property. The only difference is that the lien of such a mortgage upon the corpus is enforced upon default by foreclosure, while the lien upon the income is enforced -upon default by impounding it by a due assertion of the right to it in 'the manner heretofore shown. It is the income earned 1 thereafter, and- not that earned theretofore, that, as against creditors of the mortgagor^ is thus secured to the mortgagee. But. a mortgage of income, even before it is made effective against future income in -,the sense-just mentioned, gives to the mortgagee a vested right
“Q. You did not owe at that date for things actually furnished or labor actually done under that order up until that date the sum of $7,605.64 [?] did you? A. Of course, I do not remember the dates. I am of the impression that I owed nearly that much on that pump. I agreed to pay one-quarter when shipped, one-quarter when delivered, and the rest when turned over to us. The contract will speak for itself. I do not remember. Q. Which had all been furnished? A. Yes, sir.”
The master found:
“The entire sum of $19,972.76 expended under said order of January 9, 1895, had either been expended or obligations for its expenditure created by the receiver before the date of the filing of the petitions of intervention on the 31st day of August, 1895, by Kate J. Dana and Grace Whiting, adminis-tratrix of Catherine M. Whiting, deceased, and before the order extending the receivership to the Atlantic Trust Company cause, made the 27th day of September, 1895.” .
Under such circumstances a specific objection-, at the time of the extension of the receivership, to further disbursements under the court’s authorization, would have been unavailing. For other reasons it was probably not necessary. The order authorizing the improvements did not express a purpose to make their cost a charge upon the mortgaged property or its income prior or superior to the mortgage lien, and the order extending the receivership did not express such a purpose. As shown by the master’s report, there was in the hands of the receiver, March 18, 1895, when the trust company asserted its claim to the future income, a cash balance of $12,076.87, after paying $2,194.18 of the cost of said improvements, and after deducting the claim of O’Halloran, and all current operating expenses and obligations of the receivership, excepting the claim of Williams, and the taxes for 1895. The hydrants’ rental then due and uncollected included South Topeka rental, $3,673.49, and city rental, $10,391.58. Thus the assets of the existing receivership susceptible of use in paying for improvements undertaken by it were approximately sufficient to complete payment therefor without resorting to the property or income covered by the trust company’s mortgage lien. That the rental due from the city, other than the South Topeka rental, would eventually be awarded to Strong in his foreclosure decree, was not anticipated, and could not well have been. Considering the entire proceedings and the circumstances surrounding them, it cannot be said therefrom that the trust company is bound by the order of January 9, 1895, or by what was done thereunder, or that it expressly or otherwise assented that its vested mortgage lien be postponed or subordinated to the payment of the cost of these improvements, certainly not beyond any deficiency in the assets available for such payment, but not covered by its lien.
“This court has said that it ⅛ the exception, not the rule, that the priority of mortgage liens can be displaced. Kneeland v. American Loan & Trust Co., 136 U. S. 89, 98 [10 Sup. Ct. 950, 34 L. Ed. 379]; Thomas v. Western Car Co., 149 U. S. 95, 111 [13 Sup. Ct. 824, 37 L. Ed. 663]. We hare 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 npon the part of mortgage creditors to subordinate their claims to snch debts as those due to the Lackawanna Company.”
The debts there under consideration, and held inferior to the [trior lien of a recorded mortgage, were for steel rails sold and delivered to the mortgagor, where the requirement for their use in replacing old and worn ones upon the mortgaged railroad was imperative, but “so extensive as to amount to reconstruction.”
In Illinois Trust & Savings Bank v. Doud, 105 Fed. 123, 148, 44 C. C. A. 389, 414, 415, 52 L. R. A. 481, this court, after careful consideration of the rights of a mortgagee under a mortgage like the one here, said in conclusion:
“A mortgagee of the property, acquired and to be acquired, and of the in come of a quasi public corporation, such as a railroad company, obtains a lien ui>on the net income of the company after the current expenses of operation incurred in the ordinary course of business are paid, and impliedly agrees that the gross income shall be first applied to the payment of these current expenses, before the net income to which he is entitled arises. * ⅞ ⅛ The class of claims which may be awarded a preference in payment over the prior mortgage debt in equity is limited to claims for current expenses incurred in the ordinary ceñirse of the operation of the mortgaged property within a limited time before the appointment of a receiver. It does not include claims for money loaned, or for material or labor furnished to make necessary beneficial and permanent additions or improvements to the mortgaged property. * ⅜ s The test of a preferential equity of a claim is its consideration. If its consideration was a current expense of the operation of the mortgaged property, which inured to its benefit, and which was incurred in'the ordinary course of its business, within a limited time anterior to the appointment of the receiver, the claim may he preferred. The Supreme Court has refused to apply the principle of the civil and maritime laws of awarding priority to «the last creditor who furnished repairs and supplies to a vessel to the distribution of the proceeds of the foreclosure of mortgages of quasi public corporations. Railroad Co. v. Cowdrey, 11 Wall. 459, 474, 482, 20 L. Ed. 199; Thompson v. Railroad Co., 132 U. S. 08, 74, 10 Sup. Ct 29, 33 L. Ed. 256. If the consideration of a claim is not a part of the current expenses of the ordi-. nary operation of the mortgaged property, but is a part of the expense of constructing a permanent addition or improvement to it out of the ordinary course of its operation, neither the fact that it tended to conserve and improve the property and increase the security of the mortgagee, nor the fact that it was necessary to keep the mortgagor a going concern, nor the fact that the mortgagor pledged or mortgaged the current income to secure it, will give the claim a preferential equity over the lien of a prior mortgage.”
The claim there under consideration and held inferior to the prior lien of a recorded mortgage was for money loaned to the mortgagor to enable it to pay an installment of interest on the mortgage debt, and to construct an addition to the mortgaged electric plant.
These decisions are decisive of the present question. The difference that in each of them the claim denied priority in payment was incurred by the mortgagor, while here the improvements were made by a recciv
' It follows that the cost of the new engine and additional wells incurred under the order of January g, 1895, should be charged against the income earned prior to March 18, 1895, when the pledge of income in the trust company’s mortgage became effective. The judgment creditors, *Dana and Whiting, intervened in the receivership suit August 31, 1895, and cost °f these improvements, as an existing obligation of the receivership, was then a charge upon all the income not covered by the mortgage lien of the trust company, and therefore tkké's precedence over the equitable levy effected by their intervention.
,.'7. fflie-services of Williams, rendered after March 18, 1895, should be. charged against the income subsequently earned, and his services prior to that date should be charged against the prior income. The samé rule applies to the taxes. They were not payable until Novem-1⅜, but, being, for the entire calendar year, they could not equitably b.e.charged upon the income for that month, or for a fraction of the year including that month, any more than they could be charged against- the income for the particular week or day when they became payable; ' The nature of these expenses is such that, as between the parties to these appeals, they should be charged against current income.- The taxes were, of course, a lien superior to all of the other dlaims.
j,Under,the rules here announced, the entire property and income t will be taken in the satisfaction of receivership obligations and mort- * gag.e debts which are-superior to the claims of Dana and Whiting. The-decree of the court below is therefore reversed, with instructions to dismiss their intervening petitions.