58 F. 257 | U.S. Circuit Court for the District of Eastern Wisconsin | 1893
(orally.) On the 26th of September an order or decree was entered directing the receivers of the Northern Pacific Railroad Company to surrender the possession of the leased lines to Ihe lessors, the Wisconsin Central Company and the Wisconsin Central Railroad Company, based upon the original petition of (he lessors of the 18th of August, and , their supplemental petition of ihe lllh of September.
The Wisconsin Central Company and the Wisconsin Central Railroad Company, the lessors, now move the court for a further order
This application is opposed by the receivers upon two grounds: First, that compensation for use is to be measured either by the net earnings during the period of use or by the value of the use to be ascertained, and not-by the stipulated rental of the contract; and, second, that whereas the Northern Pacific Railroad Company has an unadjusted and disputed claim for betterments and otherwise in excess of all previously accrued rentals due from that company to the lessors, which claim is now, under order of the court, before a master for adjustment, any order of payment should be withheld until such adjustment, and the ascertained amount over and above the amount of rentals accrued before the receivership should be allowed to be set off against the amount to be allowed for the use of the leased lines during the possession by the receivers.
That we may readily ascertain the principles of law which apply to and must govern the ruling upon these questions, it is important to accurately understand the relative positions of the parties in-, terested, and the facts upon which the contention rests.
The bill was filed by the Farmers’ Loan & Trust Company as trustee for the holders of the bonds issued under various mortgages specified in the bill upon the main and branch lines of the Northern Pacific Road west of St: Paul and Ashland, and also as trustee under the collateral trust indenture of May 1,1893, by which the floating indebtedness was to be funded upon certain personal securities lodged in trust with the trustee; and by the firm of William C. Sheldon & Co. and P. B. Winston, as stockholders and creditors of the Northern Pacific Railroad Company. The bill was filed in behalf of all other stockholders and creditors of the company who might choose to become parties thereto.
The bill declared tha.t the Northern Pacific Railroad Company constructed and maintained its various lines of railroad, with branches and feeders, from the city of Ashland, Wis., to Tacoma, in the state of Washington, and to Portland, in the state of Oregon. It also asserts the lease from the Wisconsin Central Company and the Wisconsin Central Railroad Company under which the Northern Pacific Company operated the Central lines and the Chicago terminals of the Chicago & Northern Pacific Railroad Company, whereby, says the bill—
"The defendant, the Northern Pacific Railroad Company, has acquired important terminal facilities for freight and passenger traffic in the city of Chicago, and the ownership and control of important belt lines of railroad, furnishing connections with every trunk line entering the, city of Chicago, and'with the largest and most important industries located in and about that city.”
The bill also informed the court that—
“All of said lines of railroad, telegraph lines, and property have been, and are now being, operated by the defendant as a unit, forming one vast rail*259 way system, known as the Northern Pacific System, the maintenance of every part of which is essential to the proper operation of the remainder.”
It also declares to the court its ownership of the stock of the Chicago & Northern Pacific Railroad Company to the extent of !si5.100,000, being the majority amount thereof; and that to preserve valuable railway connections and terminal facilities at Chicago, acquired under the .lease, and the ownership of the stock, it was essential that the interest on the bonds issued by the Chicago & Northern Paciiftc road, amounting to $2(>,180,000, should be promptly paid, the terms of the lease complied with, and that no default in either of said obligations be permitted to occur. It also appeared that the Northern Pacific Company was the owner of at least some three million of the Chicago & Northern Pacific, bonds, and of the entire issue, six million, of the Chicago & Calumet Terminal Railway Company’s bonds.
The bill further gave the court to understand that—
“The said railroads and property, as now held and controlled by the defendant as aforesaid, form an important trunk line, which constitute one of the most important ingredients of its value, and that its severance would result in a ruinous sacrifice to every interest in the property; and that unless this court, in view of the impending and inevitable defaults as aforesaid, will deal with the properly as a single trust fund, and take it into .judicial custody for the protection oí every interest therein, individual creditors will assert their remedies in different courts in said several comities; that a race of diligence will result, and judgments and priorities will he attempted; that levies and atiachmems will be laid upon engines and cars of the defendant, which will greatly interfere with and ultimately prevent the defendant Irom the proper discharge of its duties as a public carrier; that the United States mails will be stopped; that the defendant will be unable to fulfill its chartin' duties to the government of the United States and to connecting railroads; that commerce between the several states will be interfered with; that communication between many cities, towns, and places which are wholly dependent upon said railroads will be interrupted; that serious and irreparable injury to their trade and commerce and tlieir general prosperity will result; that’divers of the lessors of the railroads now operated by the defendant as aforesaid will enforce the re-entry covenants of their leases; that the continued default of tiie mortgage debts will, by the terms of the various mortgages, produce the immediate maturity of all the bonds secured by the said mortgages; that a vast and unnecessary multiplicity of suits will result, and a most important and valuable property will be dismembered by the «•lushing decrees of many courts at the suits of separate creditors; that said property may be shielded and preserved as a valuable single trust property by adequate judicial protection, and the sums due and to become due to the defendant's bondholders and creditors secured and ultimately paid in full. But your orators aver that unless such a course is pursued, to wit, the taking of the property into judicial custody, said property will be dismantled, dissipated, and dismembered, and vast sums of money will be lost to the various creditors anil stockholders of said company, and the public interests seriously affected. And your orators aver that the unity' of the property and its integrity ns a whole, as now held and operated, constitute one of the most important elements of its value, and that to permit its severance will result in ruinous sacrifice of every interest in said property.”
It wits further charged that “part, of the said Northern Pacific Railroad is located in the district embraced within the jurisdiction of this court.” That, of course, refers to the eastern district of Wisconsin, and could only comprehend the Wisconsin Central
The prayer of the hill asks the court, among other things, to fully administer the trust fund in which the complainants are interested, consisting, says the hill—
“Of the entire railroad system, lands, and assets of the Northern Pacific Railroad, to marshal its assets, ascertain and determine the priority of liens upon each and every part of all the said system of railway. That for the purpose of enforcing the liens and equities of the holders of the demand loans and of the floating debt of the defendant, the preferred stockholders, and of the various bond and lien holders, as well as to preserve the unity of said system as it has been for years maintained and operated, and prevent the disruption thereof by separate executions, attachments, and sequestrations, the occurrence of which will be unavoidable' in view of the inevitable defaults in interest which will soon occur, your orator prays that this court will forthwith appoint one or more receivers of the entire system of railroads held and operated by the defendant, and of all the equipments, material, machinery, supplies, moneys, accounts, choses in action, shares of stock, bonds, and assets of every description, and wheresoever situated, belonging to the defendant, and pf all said lands and land grants, leasehold contractual rights and property belonging to the defendant, with authority to manage and operate the same; and the officers, managers, superintendents, agents, and employes of the defendant bp required forthwith to deliver up the possession of all and singular each and every part of the said property over which the receivers shall be appointed, wherever situated.”
Upon the prayer of the complainants the court appointed receivers of all the property of-the defendant corporation, including the railways leased by the Wisconsin Central Companies, with direction to the receivers to take possession and operate the entire system. Under this order the receivers took possession and operated the entire system, including the Wisconsin Central lines and the Chicago terminals, until possession of the lines and terminals was surrendered to the Wisconsin Central Company and the Wisconsin Central Railroad Company, the lessors, by direction of this court, on the 26th of September, 1893.
Within three days after the filing of the bill and the appointment of the receivers, the lessors, the Wisconsin Central Companies, applied to this court by intervening petition, praying — First, for payment by the receivers of rentals accruing under the lease prior to the receivership, and in accordance with the terms of the lease; and, second, that the receivers be directed to apply for leave to adopt the lease in its entirety, and, failing such election, that the companies’ lessors be declared entitled to resume possession of the demised premises. Upon that petition the court directed the matter to be heard on the 23d of August. On that day, at the request of the receivers, time was allowed them until the 30th of August to file answers to such intervening petition. At the adjourned day answers were filed, by which the receivers insisted that they had not had reasonable time to determine whether the interest of the trust estate required the adoption or rejection of the lease and the operation of the leased lines, and requested further time, which was allowed, against the protest of the Wisconsin Central Companies, and the receivers were required to report their determination upon the question by the 15th of September.
These I believe to be the essential facts with respect to the possession and operation of the leased lines by the receivers upon which the determination of the question of the measure of compensation to be awarded for such possession must be determined.
The general principle by which questions of this character are to be ruled is well stated by Mr. High in his work upon Receivers, (section 273:)
“As a rule, receivers are not liable upon the covenants of the persons over whose effects they are appointed, bnt become liable solely by reason of their own acts. Receivers who have been appointed over a corporation, and who have accepted the trust, and taken possession of the assets, do not thereby become liable for the rent of the premises held by the company under a lease, nor can they be held liable until they elect to take possession of the premises, or until tlie doing of some act which would in law be equivalent to such an election. But when a receiver enters upon and occupies premises which luid been leased to a corporation over which he is appointed, he thereby becomes liable for the rent due tinder tlie lease, the liability in such case being the common liability of the assignee of a lease, and not for the debis duo from tlie corporation; and in such a case, the fads being undisputed, it is proper for tlie court io direct the receivers to make payment to the lessor without a reference to determino the matter.”
Títere appears to be no dispute with reference to that general principle as announced by Mr. High. It is restated by the supreme court in perhaps stronger and more emphatic terms in the case of Oil Co. v. Wilson, 142 U. S. 313-322, 12 Sup. Ct. Rep. 235, in these words:
“The receiver did not simply, by virtue of his appointment, become liable upon the covenants and agreements of the railway company. Upon taking possession of the property he was entitled to a reasonable time to elect whether he would adopt this contract and make it his own, or whether he would insist upon the inability of the company to pay, and return the property in good order and condition, paying, of course, tlie stipulated rental for it so long as he used it.”
In other words?, when the court, upon the petition and at the prayer of the complainant, appoints receivers, who are directed to take possession of the leased lines of railway operated in connection with the main line, such receivers take by order of the court, and do not, therefore, by the mere act of such possession, become assignees of the term; they having, so to speak, a breathing space to determine whether or no they will assume the cove-
In order to ascertain whether that decision is pertinent and binding here, the facts of that case need to be carefully considered. The Wabash, St. Paul & Pacific Railroad Company, on the 27th of May, 1884, filed its bill, making defendants various parties interested in the lines of the Wabash Company as lienors, mortgagors, or trustees under deeds of trust covering the lines or portions of them, including the trustees of the general mortgage and the Quincy Railroad, lessor to the Wabash Company. The Wabash Company asked that possession should be taken of this road and these leased lines, and that they be operated by the receiver until such time, as to thé leased roads, as he should elect with reference to the adoption of the leases in order to the protection of' the interests of all concerned.
On the 29th of May, before the receivers took possession, and on the 26th of June following, they petitioned the court for advice with respect to the payment of interest on the bonds of the Quincy Company, which, by the terms of the lease, the insolvent company was required to pay. The receivers notified the court that the operation of the road has not sufficed to pay its operating expenses and the cost of maintenance, and interest upon the bonds. An order was made upon that petition that, until otherwise directed, the receivers should keep account of the earnings, and as to the lines which had not earned the interest, including the Quincy Company, that the receiver should make report thereof quarterly, showing the income upon each of the leased lines. On the 16th of December following, the Quincy Company intervened by petition, setting forth that it had no means to pay the interest on its mortgages; that .there had been default, and that there would result foreclosure if the default should continue; that it could not obtain payment of the Wabash Company; and it prayed that that interest might be paid out of the funds of the Wabash Company in charge and under control of the court or its receivers, or that the court order that the lease be transferred to another
Upon that petition it was ordered that if, within 60 days, the St. Joseph & Quincy road should pay the interest, and would assume by proper agreement the liabilities and obligations to be performed by the lease, then the lease should become assigned and vested in the St. Joseph Company free from any right of the Wabash Company. That was never done. On April 16, 1885, the receivers prayed order with respect to the future operations of the leased lines, and concerning the payment of the respective rentals which the Wabash Company had agreed to pay, upon which the court ordered that, where a subdivision earned no surplus, simply paid operating expenses, no rent or subdivisional interest will be paid. If the lessor or the subdivisional mortgage*; desires possession or foreclosure he may proceed at once and assert his rights. While the court will have to operate such subdivision unlil some application be made, yet the right of a lessor or mortgagee, whose rent or interest is unpaid, to insist upon possession or foreclosure, will be promptly recognized.
Afterwards, on the 15th of July, 1885, upon demand of the Quincy road, it obtained possession by order of the court. Subsequently a decree of foreclosure of the property of the Wabash Company was • enforced, and the proceeds of the sale were paid into court. An application was then made by the Quincy road that the court should order out of the proceeds of the Wabash property the payment of the rental on the Quincy line accruing during the receivership, and according to the terms of the lease.
The court, in determining the question, referred to the case of Oil Co. v. Wilson, quoting from the'opinion of the court the expression to which I have adverted, and asserted an approval of the ‘doctrine that, as between the mortgagees invoking the interposition of the court and the lessor, the agreed rental was the proper payment to be made for the use of the rolling stock under the particular contract there in question; but say, as to the case (hen before them, that there was no resistance by the receivers, or impediment interposed by them to the re-entry of the Quincy Company, that the receivers did not remain in possession, nor were they authorized by the court to so remain as to render the lessor unable itself to resume possession. The lease gave the Quincy Company the option to re-enter, and put an end to it upon default in payment of rental continued for 30 days; that if the appellants, the Quincy Company, had applied to the circuit court for possession of the property earlier than they did, the court, in view of the case disclosed by the record, would not have declined to hand it over; that when the company applied for possession it did not avail itself of the order of the court; that subsequently, on a renewed application, the company relook its road, freed from any liability for the enormous preferential indebtedness of the Wabash Company, and with its public duty discharged up (o that time by the receivers at a loss of more than $20,000; and that the lease had not theretofore been canceled by the court,
There is, I think, a manifest distinction between that case and the one at bar. There the lessor — the inactive lessor — sought to obtain preference over a mortgagee not applying for the receiver, a lessor who sought to obtain rental pursuant to the terms of the lease, when he was a party to the suit, and could have asked and |would have received possession, but allowed the road for a long !time to be operated by the receivers, knowingly at a loss. Here possession of these leased lines was asked for by the trustee of the mortgages. The court was asked by the trustee to take possession of this leased line, and operate it in connection Avith the main line of the defendant company, ,as a unit, and to keep and maintain in its integrity and operate the entire system of roads from Chicago to the Pacific. In other words, as plainly as language could state it, the trustee, the Farmers’ Loan & Trust Company, asked the court to adopt this lease, and to enter into possession and operate it in the interest of the bondholders.
In the Quincy Case the bill was filed by the insolvent company. It was nnable longer to continue the operation of the road, and 'petitioned the court, in the interest of every one interested, as well as in its own interest, to take possession of the leased lines; and the lessors Avere parties to that suit. And the lessors, under those circumstances, without application to the court for possession, allowed the road to be operated from May 29, 1884, to July 15, 1885, by the receivers, at a loss to its knowledge, and without the slightest attempt to obtain possession. It could well have been held in that case that such action or nonaction of the lessor would be held in equity to be an assent to the operation of that line by the receivers.
But here- possession was not only taken at the request of the trustee of .the mortgage, upon the assertion that the severance of the trunk line to Chicago would result in ruinous sacrifice, but it has been continued against the continued protest of the lessors, who almost from the date of the filing of the bill have sought to compel the receivers to determine whether or no they will maintain possession, adopting the lease, and, if not, that possession should be surrendered to the lessors; and also, when delay became inevitable, .by the demand and act of re-entry they put themselves in the legal
So that here the lessors have been continuously knocking at the door of the court demanding possession of the demised premises, and possession has been withheld from them against their consent, and against their protest.
It appears to the court that under such circumstances it would be inequitable to say that the court or its receivers should hold possession of the demised premises, refusing to pay rent accruing before the receivership, taking from the lessor their estate without their consent, express or implied, and saying to them: “While we take and withhold that possession until it shall be satisfactorily determined whether it is proliiablo or not to operate the road, you, the lessee, shall not have your rental pending- that determination according to the stipulation of the lease under which possession was taken.” This possession was held that it might be resolved whether, in the interest of the bondholders and creditors of the Northern Pacific road, it would be expedient to operate the leased line. It was so taken at the request of the trustee representing the bondholders, and at the request of the creditors of the road. Under those circumstances, I perceive no reason why the general rule should not prevail, and no equity to take it from without that rule. I see no reason, if this leased road has been operated at a loss, as was asserted in general terms by the receivers, that that loss should not be visited upon those at whose request possession was taken, rather than that they should be permitted to experiment with the property of another, without paying that oilier the stipulated rental of the lease under which their insolvent debtor had possession, and through whom, and through whom alone, the trustee and the general mortgagees could have obtained possession.
The court therefore holds, upon the facts here disclosed, for the occupation of this road by the receivers, compensation must be paid, measured by the stipulations of the lease.
As to the second question:
The Central Companies, under the stipulations of the lease, were entitled to receive from the Northern Pacific Railroad, for unpaid rental of the Central lines up to the time of the receivership, about $175,000. The receivers concede substantially that this is so, but they have alleged an offset against that rental to an amount somewhat near a million of dollars. That claim and offset is denied, and the matter was heretofore referred to a master to determine it, and is now pending before Mm. The receivers now ask to set off so much of that claim as will satisfy the sum that may be due for compensation by reason of their possession of the premises. Of the amount of offset claimed, about $156,000 is for equipment under article 11 of the lease; about $33,000 is for rentals under article 16 of the lease; and about $414,000 is for betterments and improvements under article 19 of the lease. If those amounts should be deducted from the claim in offset, there would not exist more than
The principle upon which courts of equity act' in respect to the matter of offset is perhaps well stated by Mr. Justice Story in Dade v. Irwin’s Ex’r, 2 How. 383. “It is clear,” he says, “that courts of equity do not act upon the subject of set-off in respect to distinct and unconnected debts, unless some other peculiar equity has intervened calling for relief; as, for example, in cases where there has been a mutual credit given by each upon the footing of the debt of the other, so that a just presumption arises that the one is understood by the parties to go in liquidation or set-off of the other.” See, also, Greene v. Darling, 5 Mason, 201; Gordon v. Lewis, 2 Sum. 628; Id. 143; Manufacturing Co. v. Armstrong, 34 Fed. Rep. 94. There have been many adjudications to the like effect, and establishing the same principle. It has been held that in equity a debt cannot be set off against another if they are in different rights, as, for example, a demand in the character of a trustee or executor cannot be set off against a debt due from the trustee or executor personally, although the executor gives evidence to show that he is in fact personally benefited and entitled to the amount which is due to him in the character of executor.
In one case A. was the executor and trustee of a fund as to a moiety of which he was entitled beneficially. The fund was in the hands of R, who died insolvent. It was held that A. could not set off the debt to the trustee against a debt due to B.; in other words, that the claim and offset must exist in the same right. It could not be permitted that a receiver of a railroad who had purchased supplies for the purpose of operating the road should be allowed, when called upon for payment, to set off against that obligation a debt due from the seller of the supplies to the company of which he was receiver. It would be manifestly inequitable, especially if that claimed debt were disputed and unliquidated.
“The mere existence of cross demands,” says the vice chancellor in Dodd v. Lydall, 1 Hare, 337, “does not of - necessity give a right of equitable set-off; and certainly the mere pendency of an account out of which a cross demand may arise will not confer such a right.”
It was decided in Rawson v. Samuel, Craig & P. 178, that in a case of cross demands arising out of transactions not necessarily connected with each other, a court of equity is bound to look into all the circumstances of' the case, and see whether an equity is made out for blending the two matters together at the expense of possible delay in concluding one of these matters. That was where the claim arose under the same right; but the equitable claim of set-off here asserted arose in favor of the northern Pacific road against the Central Companies, and is sought to be set off against an acknowledged claim of the Central Companies against the receivers .for the use and occupation of its property by the receivers under order of the court. There is a decision in Osgood v. Ogden, 3 Abb. Dec. 425, which perhaps throws some light upon the principles by which the question is to be determined. A receiver of an insolvent .corporation, suing on a cause of action on which the company itself
Treating this as a suit by the Central Companies against the receivers for use and occupation, the receivers represent, not the Northern Pacific Railroad Company, but the creditors of that company, and, under that authority, could not be permitted to set off a claim in favor of the Northern Pacific Company against the Central Companies. In Otis v. Shantz, 55 Hun, 603, 8 N. Y. Supp. 293, —and the samé principle is asserted by James v. McPhee, 9 Colo. 486, 13 Pac. Rep. 535, and Peeler v. Turnpike Co., 14 Pa. St. 163,— it was ruled that a creditor who purchases goods from an assignee for the benefit of creditors cannot set up in the way of counterclaim, in action for the price, any matters which accrued against the debt, or before its assignment. So, in the case of Cook v. Cole, 55 Iowa, 70,
These receivers, with respect to their use of this road, can stand in no better plight than the Northern Pacific Railway Company. If they have the right to offset any claim of the Northern Pacific road, they can only offset it under the terms and provisions of this lease; and that lease denies the right so to offset against rentals disputed and unadjusted claims.
It appears to me, therefore, that the offset claimed ought not to be permitted to interfere with the payment for use and occupation by the receivers. By the terms of the lease, the rentals are not payable until 60 days after they have accrued. It is reported to the court that the receivers have set aside, under a previous order of the court, the percentage of gross earnings required by the lease as rental to the lessors, and that a portion of the earnings has not been collected, and cannot be for some time to come.
The order will therefore be, with respect to compensation for use of the Wisconsin Central lines proper, that compensation for such occupancy by the receivers be measured by the stipulated percentage of'gross earnings stated in the lease; that the set-off be not allowed; and that the receivers of the Northern Pacific Railroad from time to time pay to the receivers of the Wisconsin Central Companies the proportion of gross earnings which under the lease is reserved as compensation, less a rebate of interest at the rate of 6 per cent, per annum from the time of the payment until maturity, as stipulated in the lease.
Any question under the lease with respect to the possession and operation of the Chicago & Northern Pacific road is reserved.
7 N. W. Rep. 419.