Guaranty Trust Co. v. Galveston City R.

107 F. 311 | 5th Cir. | 1901

TOULMIN, District Judge,

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

_ 1. The first question presented on the record for our consideration is, what relation did the city of Galveston sustain towards the Galveston City Railroad Company, — that of stockholder or creditor ? The contention of appellant is that the city’s relation to and only interest in the railroad company was that of stockholder. The appellee does not insist thai:, as the result of the contract and mortgage, the city was a part’ owner in kind of the railroad property, as set up in its answer, or that it was both creditor and stockholder ; and the appellee’s counsel concedes that if the city’s status was that of a stockholder, common or preferred, it was not a creditor. But the contention is that it was a creditor of the railroad company; that “the question is, what was the substance? and not what was the form of the city’s status”? To use the language of the court in Corcoran v. Powers, 6 Ohio St. 19, “The question in such cases is not, what did the parties call it? but, what do the facts require the court .to call it?” It appears that the city of Galveston passed an ordinance embodying a contract between itself and certain promoters of the Galveston City Railroad Company, whereby the city granted said company the right to construct and operate, for a term of years, railways along and across, certain specified streets of the city, upon certain conditions. In the contract it was provided that in lieu of percentage on the net receipts of said railroad, and in lieu of bonus for the contract, 600 shares of the capital stock of said railroad should be made over and transferred to the city of Galveston; said 600 shares of stock to be paid up by said promoters, or by the company to be formed under the contract and franchise. The railroad company was duly incorporated and organized, and 600 shares of the capital stock of the company, of the par value of $50 each, were issued as fully paid up stock to the city, as .provided by the contract. The city was entered as a stockholder on the books of the company. It, was represented on the board of directors by its mayor, who was by agreement elected a director to represent its interest. It had the right to vote in the management of the company, and to shard in the distribution of dividends. It was represented at the meeting of the directors, by its mayor, who, as one of the directors, participated in said meeting, and voted for the resolution authorizing the issuance, execution, and sale of the bonds and the execution and delivery of the mortgage involved in this suit. The city’s stock was a part of the capital stock of the company, and it is clear that it possessed not only the characteristics, but the essential properties, of capital stock. But it is said that the company .granted to the city a first lien on its franchise and other property for the security of the city’s interest in the company; and it is argued by the learned counsel for the city “that the contract would have been meaningless if this lien obligation was ineffectual to shield the city’s rights from the consequences of indebtedness incurred by the company,” and it is contended that the city’s stock, security, or debt, by whatever name it may be called, “should not become worthless by extinguishment, but should be paid before other claims against the company, thus clearly making it a debt, and placing the city in the attitude of a creditor.” A debt is a sum of money due by contract, express or implied. The sum of money may be payable at a fixed time or upon a contingency. When payable upon a contingency, it becomes a debt only when the contingency has happened. Black, Law Diet. 338, and authorities cited in notes. A creditor is one to whom a debt is owing by another person, called the “debtor.” Black, Law Diet. 299, tit. “Creditor.” “In its strict sense, a creditor is one to whom money is due. In a more general and extensive sense of the term, a creditor is one who has a right to recover money of another on any account whatever.” 8 Am. & Eng. Enc. Law (2d Ed.) 239, 240. Where are the facts and circumstances in this case which show that the Galveston City Railroad Company owed to the city of Galveston any sum of money due by contract, express or implied, payable at a specified time or on a contingency? There was no contract by which the city was to receive a percentage on the net receipts of the railroad. There was no contract for a bonus to be paid to the city in consideration of the franchise, rights, and privileges granted by it to the railroad company, which was not to be paid or to become payable until the company allowed itself to become incumbered by debt. If a contract of this character might have been implied by the negotiations of the parties for such rights and privileges, whereby the city became a creditor, it ceased to be such creditor when it entered into the contract which was expressly made by them. That contract provided that:

“Said party [the promoter of,, the railroads] shall make over and transfer to the city of Galveston, in lieu of percentage on the net, receipts of said road, and in lieu of bonus for this contract, six hundred shares of the capital stock of said railroad; said six hundred shares of stock to be paid up by said party, or by the company to be formed under the contract.”

We find no language in this contract to express or imply the relation of creditor on the part of the city. But the language employed whereby the city was to acquire its interest in the company is apt to express the relation of stockholder. The instrument by which the security was given recites the terms of the contract, and, in consideration thereof, creates and grants a lien on the corporate property of the company to secure the interest of the city in the company, in the manner and to the extent provided for in the contract. In our judgment, there was nothing in the contract which placed the city in the attitude of creditor to the company, or clothed it with a single attribute of a creditor, further than in the “sense in which every shareholder is a creditor of a corporation to the extent of his contribution to the capital stock.” In the case of Hamlin v. Railroad Co., 24 C. C. A. 271, 78 Fed. 664, 36 L. R. A. 826, the court said:

“There is a sense in which every shareholder is a creditor of the corporation to the extent of his contribution to the capital stock. In that sense every corporation includes its capital stock among its liabilities. But that creditor relation is one which exists only between the corporation and its shareholders. It is a liability which is postponed to every other liability, and no part of the capital stock can be lawfully returned to the stockholders until all debts are paid or provided for. The violation of this well-understood principle is a breach of trust, and a creditor affected thereby may pursue the stockholders and recover as for an unlawful diversion of assets.”

What, then, was the interest of the city which the company undertook to secure? It seems to us clear that it was its interest as a stockholder. When a corporation is dissolved by consolidation with another, or becomes involved in debt and concludes to stop operations and pay its debts, if there are any assets left after paying off the debts they are ordinarily distributed between the stockholders in proportion to the number of shares which each holds. There is no preference of one stockholder over other stockholders, except such preference is expressly contracted for. A preference as to capital stock or a distribution of net assets may be expressly contracted for. Such preferred stockholders, however, are not creditors of the corporation, but are stockholders entitled to a preference over the holders of common stock. Cook, Stocks & S. § 270; Clark, Corp. 367; Coulter v. Robertson, 57 Am. Dec. 168; Hamlin v. Railroad Co., supra. We think the interest of the city of Galveston in the Galveston City Railroad Company was one capable of being secured, and that the evident purpose of the company in providing security for that interest was to give the city a preference in the distribution of the capital stock or net assets of the company over other stockholders. It will not be presumed that the purpose of the company was to make a contract by which the city was, to receive the par value or any part of its stock before all the debts of the company are paid. It would require the clearest language to show that such was its purpose. Our interpretation of the contract fails to disclose any such purpose. But, if it existed, the contract would be contrary to public policy and void. Cook, Stocks & S. §§ 271-278; Warren v. King, 108 U. S. 389, 2 Sup. Ct. 789, 27 L. Ed. 769; Hamlin v. Railroad Co., supra; Miller v. Ratterman, 47 Ohio St. 141, 24 N. E. 496. In Warren v. King, supra, the court said:

“One of the characteristics of capital stoek is that no part of the property of a corporation shall go to reimburse the principal of capital stock until all the debts of the corporation have been paid.”

And in Hamlin v. Railroad Co., supra, the court said:

“There is a wide difference between the relation of a creditor and a stockholder to the corporate property. One cannot well be a creditor as respects creditors proper, and a stockholder by virtue of a certificate evidencing his contribution to 1he capital of the corporation. Stock is capital, and a stock certificate but evidences that the holder has ventured his means as a part of the capital. It is a fixed characteristic of capital slock that no part of it can be withdrawn for the purpose of reimbursing the principal of the capital stock until (he debts of the corporation are paid. * * * If the purpose in providing for these peculiar shares was to arrange matters so that under any circumstances a part of the principal of stock might be withdrawn before the discharge of all corporate debts, the device would be contrary to the nature of capital stock, opposed to public policy, and void as to creditors affected thereby.”

Our opinion is that the first assignment of errors is well made, and it is sustained.

2. The master reported numerous claims as simple or ordinary debts, which he held could not be classified as preferential claims or liens over that of the mortgage bondholders, upon the property or earnings of the defendant railroad company in the custody of the court, as they were without equitable liens thereon; hut he held that the interveners had a lien, under the statutes of the state of Texas, upon the net earnings of the corporation, while In the hands of the receiver, for the payment of their said claims, prior and superior in right to the mortgage bondholders. To the master's report the appellant duly filed exceptions. The exceptions were overruled by the court, the report confirmed, and decrees rendered accordingly. This action of the circuit court presents the question whether the statutes of the state of Texas providing for the appointment of receivers, defining their powers and duties, and regulating proceedings under such appointment (Rev. St. Tex. arts. 1472, 1489, 1490), are applicable to receivers in the federal courts.

This court in the case of Bank v. Ewing, 43 C. C. A. 150, 103 Fed. 168, said:

“We do not think tint either the laborers’ lien law, or article 1472 of the Revised Statutes of Texas, regulating the distribution of funds that may come into the hands of a receiver of a state court, should or can be construed to have application to the classification of claims and priority of liens accruing against receivers appointed by the courts of the United States.”

While the language quoted was used in reference to article 1472 of the statutes, and as applicable to the claim of an employé in the immediate service of the receiver, we can perceive no reason why it is not equally applicable to a claim existing against the corpor ation at the time the receiver was appointed, the payment of which is sought to he made from the earnings of the corporation while in the hands of the receiver, as provided by article 1490 of the statutes; that being the article under which the claims in question in this ease were allowed as prior in right to the mortgage bondholders. Article 1490 is as follows:

“All judgments, claims or causes of action when determined, existing against any corporation at the time of the appointment of a receiver, shall be paid out of the earnings of such corporation while in the hands of the receiver, to the exclusion of mortgage action; and the same shall be a lien on such earnings.”

Both articles are a part of a system of receiverships established by the legislature of Texas, and both relaté to the distribution of : funds that come to the hands of a receiver. Some of the provisions of this statute are admittedly not applicable to receivers and to proceedings under the appointment of_receivers in the courts of the United States. It can hardly be supposed that the legislature intended some of the provisions of the same statute to apply to receiverships in the courts of the United States, and others not to apply. It will be observed that article 1490 creates no lien on the corpus of the property of the corporation in favor of claims existing against the corporation at the time of the appointment of a receiver, but gives a lien on the earnings of the corporation while in the hands of a receiver. Shall it be assumed that the legislature of Texas undertook to give a lien on funds in the custody of the fed.eral courts, and to regulate the distribution of such funds by the receivers of those courts? We think not. However, it is needless to further pursue this discussion. The court of last resort of the state of Téxas has interpreted the statutes in question. We follow the interpretation given to the statutes of a state by the supreme court of that state. First Nat. Bank v. Chehalis Co., 166 U. S. 440, 17 Sup, Ct. 629, 41 L. Ed. 1060; Nobles v. Georgia, 168 U. S. 398, 18 Sup. Ct. 87, 42 L. Ed. 515. In Fordyce v. Du Bose, 87 Tex. 78, 26 S. W. 1050, the supreme court of Texas said:

“Tiie several acts of tlie legislature upon the subjects of receiverships do not purport by their language to affect receivers appointed by the federal courts in their official capacity, and courts will construe them so as to embrace such, subjects as the legislature had the authority to legislate upon. These acts were not intended to affect the procedure of federal courts as to receivers appointed by such courts.”

We fully concur in this opinion.

The decree of the circuit court confirming the master’s report upon the interventions specifically set out in the second assignment of errors, and decreeing that under and by virtue of the statutes of Texas the intervéners had a lien upon, and were entitled to payment out of, the net earnings of the property while in the hands of the receiver, prior and superior in right to the complainant and the holders of the bonds secured by the mortgage herein foreclosed, should be reversed.

- 3. The master reported a number of claims as preferential and entitled to an equitable lien, superior in right to that of the mortgage bondholders, upon the earnings of the receivership. Exceptions were duly filed to the report, which the court overruled, and in all respects confirmed the master’s report, and entered decrees accordingly.- “A court of equity engaged in administering mortgaged railroad property, under a receivership in a foreclosure suit may prefer unpaid claims for current expenses of the ordinary operation of the railroad, incurred within a limited time before the receivership, to a prior mortgage lien, in the distribution of the income or of the proceeds of the mortgaged property.” Bank v. Doud (C. C. A.) 105 Fed. 123; Southern R. Co. v. Carnegie Steel Co., 176 U. S. 257, 20 Sup. Ct. 847, 44 L. Ed. 458; Lackawanna Iron & Coal Co. v. Farmers' Loan & Trust Co., 176 U. S. 298, 20 Sup. Ct. 363, 44 L. Ed. 475. The supreme court, in the cases cited, have, in effect, declared that, before an unsecured creditor can be accorded a preference over mortgage creditors in the distribution of net earnings in the hands of a receiver of a railroad, it should reasonably appear from the circumstances, including the amount involved and tlie terms of payment, that the debt was one fairly to be regarded as part of the operating expenses of the railroad, incurred in the ordinary course of business, and to be met out of current receipts. A creditor is not entitled to such preference and priority simply because that which he furnished to the railroad company prior to the appointment of the receiver was for the preservation of the property and for the benefit of the mortgage security. That, however, is an important element in the matter in considering the equity of the claim. The circuit court of appeals of the Eighth circuit, in the case of Bank v. Bond, supra, after an exhaustive “examination and'analysis of the facts and opinions in all the cases in the supreme court upon the subject of preferential claims in suits to foreclose mortgages of quasi public corporations,” said the decisions of the supreme court will be found to assert the proposition that “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 course of the operation of the mortgaged property within a limited time before the appointment of a receiver.” It appears from the record that there was no diversion of the current income from the payment of current expenses to the payment of interest on the mortgage debt, or to tlie permanent improvement of the mortgaged property. Hence the only question for us to determine here is whether there is error in the decree of the circuit court adjudging the claims now under consideration to be preferential claims, with an equity superior to the lien of the mortgage. Our opinion is there is no error in the decree, except, as to the claims of the Dickson Oar-Wheel Company, the Lee Iron Works, and a portion of the claim of the Paul Sbean Sanitary Plumbing & Manufacturing Company. The claim of the Dickson Car-Wheel Company was for Barr motor wheels sold to the defendant railroad company on September 18, 1896, and used by the company on its cars. The amount involved is $14.' The sale was presumably for cash, — nothing appears on the record to the contrary, — and it was made more than a year before the bill in this cause was filed. The claim of the Lee Iron Works appears to have been for labor performed and material furnished for the railroad company from December, 1895, to April, 1896, for which promissory nol.es were given at the time, payable at short intervals, and renewed from time to time, resulting finally in three notes, which fell due subsequent to the filing of the hill herein. The labor and material furnished were in connection with the railroad company’s track, overhead line, engines, boilers, and cars. The claim of the Paul Shean Sanitary Plumbing & Manufacturing Company is for $743.05, for material furnished the railroad company in the necessary repair of the engine in its power house employed to generate the electricity by which its cars were propelled. Some of the material was furnished from time to time from July, 1895, to February, 1896, for which a note was given, and on which a partial payment was subsequently made and a new note given. Other material was furnished in March, 1896, for which a note was given, a partial payment afterwards made on it, and a new note given for the balance. Forty-three and ¡¡/Too dollars of the claim is an open account for material furnished in September and October, 1897, a short time before the bill was filed and the receiver appointed herein. We think the Paul Shean Company’s claim to the extent of $43.05, only, should be allowed. The balance of the claim does not, in our opinion, come within the doctrine declared by the supreme court, hereinbefore referred to. We, however, think that all the other claims decreed by the circuit court to be preferential claims, with a superior equity to the mortgage, do come within that doctrine, and that they should be so allowed. They were for current expenses incurred in the ordinary course of business, and may be fairly regarded as part of the operating'expenses of the railroad. They accrued within five or six months before the appointment of the receiver.

4. It appears that the intervener the Buckeye Engine Company on September 16, 1892, made a contract with the defendant the Galveston City Kailroad Company under which it sold to the defendant two engines and certain boilers and other machinery, the purchase price of which was $15,000, and for which the railroad company executed certain promissory notes. Some of the notes were paid, leaving the balance, aggregating $7,500, unpaid. By the original contract it was stipulated that the engines and boilers were to remain the property of the intervener until full payment therefor is made. The machinery was delivered and placed in position in March and April, 1893. The contract was filed in the proper office for registration on August 9, 1893. The intervener sought to fix the mechanic’s lien on the property.' The 'master held that said claim of lien was not well founded, but held that:

“By virtue of the reservation by the intervener of title to the aforementioned machinery until fully paid for, and the act of the legislature of Texas (Acts 18S5, p. 70) declaring that all such reservations shall be held to be chattel mortgages, and by virtue of the fact that the said machinery was not delivered until after the mortgage under which the complainant claims had been executed, and that when delivered it carried with it the burden of the lien reserved by the intervener, the said intervener has a specific lien upon said two Buckeye engines for the payment and satisfaction of its said claim, prior and superior in right to the lien thereon created under and by virtue of said mortgage.”

No exceptions to the master’s report were filed by the intervener, but exceptions to the report were duly filed by the'appellant, complainant below, which were overruled, and the report confirmed by the court.

The statute of Texas provides that:

“All (reservations of the title to or property in chattels as security for the purchase money thereof, shall be held- to be chattel mortgages, and shall, when possession is delivered to the vendee, be void as to creditors and bona fide purchasers, unless such reservations be in writing and registered as required of chattel mortgages: provided, that nothing in this law shall be construed to contravene the landlordiand tenant act.” Article 3327, Rev. St. Tex.

The supreme court of Texas, in Harling v. Creech, 88 Tex. 300, 31 S. W. 357, held that the effect of the statute was to forbid conditional sales of personal property, or, rather, to convert all such contracts into chattel mortgages, and required registration of them to protect creditors and bona fide i>urehasers of the property.

The statute providing for registration of chattel mortgages is as follows:

“Every chattel mortgage, deed of trust or other instrument of writing intended to operate as a mortgage of or lien upon personal property which shall not he accompanied hy an immediate delivery, and he followed hy an actual and continued change of possession of the property mortgaged or pledged by such Instrument, shall he absolutely void as against the creditors of the mortgagor or person making the same, and as against subsequent purchasers and mortgagees or lien holders in. good faith, unless such instrument, or a true copy thereof, shall he forthwith deposited with and filed in the office of the county clerk of the county where the property shall then he situated, or if the mortgagor or person making the same he a resident of this state, then of the county of which he shall at the time he a resident.” Article 3328, Rev. St. Tex. »

The circuit court held, in effect, that the intervener had a chattel-mortgage lien by virtue of the contract in question, and decreed that it had a specific lien on said engines which was superior to that of the appellant’s mortgage. In this we think the court erred. Both mortgages were subject to the registration laws of the state of Texas. The lien first registered as provided by those laws is superior. The record shows that the chattel mortgage was recorded on August 9, 1893, while the mortgage to appellant was recorded on May 27, 3893. T3ie only ground, as appears from the report of the master, on which he based his ruling, and presumably the only ground on which the court sustained that ruling, — no other being disclosed by the record, — is that the engines were not delivered until after the mortgage under which the complainant (appellant) claims had been executed, and that when delivered it carried with it the burden of the lien reserved by the intervener. While the mortgage to appellant is dated January 1, 1893, it was not signed in the presence of and attested by subscribing witnesses, and it was not acknowledged until May 13, 3893. Rev. St. Tex. art. 630, provides that:

“Every deed or conveyance of real estate must he signed, or acknowledged, by the grantor in the presence of at least two credible subscribing witnesses thereto, or must he duly acknowledged before some officer authorized to take acknowledgments and properly certified to hy him for registration.”

“To convey title, it is necessary to deliver a completed deed.” 9 Am. & Eng. Enc. Law (2d Ed.) 3.50; Walker v. Renfro, 26 Tex. 142; Railroad Co. v. Garrett, 52 Tex. 133; Tuttle v. Turner, 28 Tex. 759. A deed takes effect at the time of its delivery. Tuttle v. Turner, supra. “The law presumes, in the absence of evidence to the contrary, that the date of the deed is the date of delivery,” but “this presumption is disputable, and the time of delivery may always be proved.” 9 Am. & Eng. Enc. Law (2d Ed.) 153.

It does not appear when appellant’s mortgage was delivered. There is no evidence on the subject. There are a number of authorities to the effect that when acknowledgment is essential to the validity of a deed, and the date of the acknowledgment differs from the date of the deed, the deed was delivered at the date of the acknowledgment. 9 Am. & Eng. Enc. Law (2d Ed.) 152, 153, and authorities cited in note. Under the statute of Texas, a conveyance is not effective unless it is signed in the presence of and attested by two subscribing witnesses, or is acknowledged. The mortgage in question was not attested by witnesses, and was not acknowledged until May 13, Í893, which was subsequent to the delivery of the engines. It was not a completed deed until acknowledged. Under the statute of Texas, in the absence of attestation by witnesses acknowledgment is essential to the validity of the mortgage. The date of the acknowledgment of the mortgage differing from the date of the mortgage, we hold the mortgage to have been delivered at the date of its acknowledgment. The record shows that the engines were delivered and placed in position, and had become permanently a part of the railroad property,' before appellant’s mortgage became effective, on May 13, 1893. But, if the engines be treated as after-acquired property, appellant’s mortgage covered all property then owned or to be thereafter acquired by the railroad company; and, under the rule well settled by the decisions of the supreme court, such mortgage created a lien which could not be displaced by the contract under which the engines were furnished, although it contained the stipulation that the title to the engines should not pass until they were fully paid for. Porter v. Steel Co., 122 U. S. 267, 7 Sup. Ct. 741, 30 L. Ed. 1210; Railroad Co. v. Hamilton, 134 U. S. 296, 10 Sup. Ct. 546, 33 L. Ed. 905; also, Phoenix Iron-Works Co. v. New York Security & Trust Co., 54 U. S. App. 408, 28 C. C. A. 76, 83 Fed. 757. No part of intervener’s claim was for operating expenses or repairs. No part of it was for keeping a completed road in operation, either in the way of labor or material. But it accrued in the construction of a plant, which was a part of the railroad system. Railroad Co. v. Hamilton, supra; Wood v. Safe-Deposit Co., 128 U. S. 416, 9 Sup. Ct. 131, 32 L. Ed. 472. But it seems to us that no equitable principles are involved in intervener’s claim. We think that the question at issue turns upon the legal rights of the parties under the registration laws of the state of Texas. The intervener having failed to record its chattel mortgage until after appellant’s mortgage was recorded, it lost its priority, if it ever had any.

5. The award of $7,500 to the special master commissioner as compensation for his services in selling the mortgaged property under the decree of foreclosure is complained of by appellant as unreasonable and excessive. There was no reference had by the circuit court to ascertain what would be reasonable and just compensation to rhe special master commissioner, and it does not appear that any evidence on the subject was introduced before the court. Questions of this sort rest largely in the discretion of the circuit court, and are rarely interfered with on appeal; but, as this cause must be reversed and remanded, the circuit court is directed to order a reference to ascertain what would be reasonable compensation to be allowed said special master commissioner, and that all parties interesied be duly uo tided of tbe time and place of bolding said reference, and be permitted to submit evidence in the matter if they see fit to do so. Reversed and remanded to the circuit court, with instructions to enter a decree in accordance with the views herein expressed,