Lackawanna Iron & Coal Co. v. Farmers' Loan & Trust Co., No. 503

No. 503 | 5th Cir. | Feb 25, 1897

PARLANGE, District Judge

(after stating the facts as above). It is contended on behalf of the Lackawanna Iron & Coal Company that its claim is a preferential one, within (he doctrine of Fosdick v. Schall, 99 IT. S. 235, and other cases in which certain claims were accorded preference over the holders of railroad mortgage bonds. The intervener's counsel urge that the case of Burnham v. Bowen, 111 U. S. 777, 4 Sup. Ct. 675, is analogous in principle to the present case. The urgent need of the railway company for the rails supplied by the intervener; the dilapidated condition of the road prior to the supplying of the rails; the danger to life, limb, and property which resulted from such condition; the increased business of the road and the augmented value of the bondholders’ security,—are asserted and are pressed upon the court’s attention, as considerations for declaring the intervener’s claim preferential. Even if all these assertions were sustained by the findings,—and some of them do not appear to be so sustained,-—the intervener’s claim to a preference would, in our judgment, have to be rejected. We do not understand that the doctrine enunciated in Fosdick v. Schall, supra, was based merely or mainly upon the urgency of the need of the railway for the labor, supplies, or equipment to which a preference is accorded. Yor do we apprehend that the mere fact that the supplies, labor, or equipment furnished, may have augmented the value of the bondholders’ security, gives rise to a preference. In the light of Fosdick v. Schall, supra, and the other cases in which the supreme court and other courts have followed the main case, our understanding of the doctrine is that within narrow limits, a court of equity, having in its custody a railroad which is being foreclosed by its mortgage creditors, may make preferential payments of such claims as debts due to operatives, limited amounts due-to connecting roads for unpaid freight and ticket balances, and limited amounts due for supplies needed from day to day, or from month to month, in the ordinary course of the railroad’s operations. The controlling principle appears to be that a railroad, having public duties to discharge, must be kept a going concern while in the hands of the court, and that to that end debts due its employés and other current debts incurred for its ordinary operations, which it is not usually practicable to pay in cash, and which, are therefore payable on short terms, should be paid as they would have been paid, if the court had not taken away from the corporation the control of the railroad. A cessation of the railroad’s operations by failure to pay promptly the operatives or such other debts as railroads must necessarily incur for their ordinary, current operations, must be prevented. The preferential payment of debts, restricted to the narrow limits indicated, operates no impairment of the bondholders’ rights, for it is made both in the interest of the property and of the public. One purpose is to preserve the property in such condition that it may be sold as a going concern, and-thus may suffer no diminution of value while in the hands of the court. This is to the direct benefit of all creditors. The other purpose is to enable the railroad to continue the performance of its public duties. Of this the creditors will not be heard to complain, because they are charged with knowledge of the public obligations of their debtor.

In Finance Co. of Pennsylvania v. Charleston, C. & C. R. Co., 10 C.C.A. 323" court="4th Cir." date_filed="1894-05-22" href="https://app.midpage.ai/document/finance-co-of-pennsylvania-v-charleston-c--c-r-8850137?utm_source=webapp" opinion_id="8850137">10 C. C. A. 323, 62 Fed. 205, the circuit court of appeals for the Fourth circuit, through Mr. Chief Justice Fuller, after stating certain debts which may be paid by preference, says: “Of course, the discretion to enter such orders should be exercised with great care.” The chief justice then refers to the case of Thomas v. Car Co., 149 U.S. 95" court="SCOTUS" date_filed="1893-04-24" href="https://app.midpage.ai/document/thomas-v-western-car-co-93603?utm_source=webapp" opinion_id="93603">149 U. S. 95, 13 Sup. Ct. 824, as indicating the narrow limits within which a court of equity should confine itself in making preferential payments over railroad mortgagees.

In Thomas v. Car Co., just cited, the supreme court quoted approvingly from Kneeland v. Trust Co., 136 U.S. 89" court="SCOTUS" date_filed="1890-05-19" href="https://app.midpage.ai/document/kneeland-v-american-loan--trust-co-92812?utm_source=webapp" opinion_id="92812">136 U. S. 89,10 Sup. Ct. 950, where it was said:

“The appointment of a receiver vests in the court no absolute control over the property, and no general authority to displace vested contract liens. Because, in a few specified and limited cases, this court has declared that unsecured claims were entitled to priority over mortgage debts, an idea seems to have obtained that a court appointing a receiver acquires power to give such preference to any general and unsecured claims. It has been assumed that a court appointing a receiver could rightfully burden the mortgaged property for the payment of any unsecured indebtedness. Indeed, we are advised that some courts have made the appointment of a receiver conditional upon the payment of all unsecured indebtedness, in preference to the mortgage liens sought to be enforced. Can anything be conceived which more thoroughly destroys the sacredness of .contract obligations? One holding a mortgage debt upon a railroad has the same right to demand and expect of the court respect for his vested and contracted priority as the holder of a mortgage on a farm or lot. So, when a court appoints a receiver of railroad property, it has no right to make that receivership conditional on the x>ayment of other than those few unsecured claims which, by the rulings of this court, have been declared to have an equitable priority. No one is bound to sell to a railroad company, or to work for it; and whoever has dealings with a company when property is mortgaged must be assumed to have dealt with it on the faith of its personal responsibility, 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.”

In Thomas v. Car Co., supra, the supreme court proceeded to say:

“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 of those who frunish, from clay to flay, supplies necessary for the maintenance of the railroad. Such a company must be regarded as contracting upon the responsibility of the railroad conrpany, and not in reliance upon the interposition of a court of equity.”

In Kneeland v. Trust Co., supra, it is said:

“It is the exception, and not the rule, that such priority of liens can be displaced. We emphasize this fact of the sacredncss of contract, liens for the reason that there seems to be growing an idea that Hie chancellor, in the exercise of his equitable powers, has unlimited discretion in this matter of the displacement of vested liens.”

In Bound v. Railway Co., 7 C.C.A. 322" court="4th Cir." date_filed="1893-10-04" href="https://app.midpage.ai/document/bound-v-south-carolina-ry-co-8847882?utm_source=webapp" opinion_id="8847882">7 C. C. A. 322, 58 Fed. 473, the circuit court of appeals for the Fourth circuit, Mr. Chief Justice Fuller sitting ¡is a member of the court, in a case almost identical with the present case, said:

“The supreme court has recently in Thomas v. Car Co., 149 U.S. 95" court="SCOTUS" date_filed="1893-04-24" href="https://app.midpage.ai/document/thomas-v-western-car-co-93603?utm_source=webapp" opinion_id="93603">149 U. S. 95, 13 Sup. Ct. 824, indicated the narrow limits to which an equity court should coniine itself in allowing any unsecured claim to displace vested contract liens. Wages due employSs, current operating expanses, 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 sui>reme 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.”

Bound v. Railway Co., supra, has been cited by the circuit court’ of appeals for the Fourth circuit in Finance Co. of Pennsylvania v. Charleston, C. & C. R. Co., 10 C. C. A. 326, 62 Fed. 208; by Circuit Judge Simonton in Central Trust Co. of New York v. Charlotte, C. & A. R. Co., 65 Fed. 269; and by Circuit Judge Colt in Wood v. Railroad Co., 70 Fed. 743.

It would subserve no useful purpose to cite more extensively from the numerous authorities which show the narrow and restricted limits within which, in cases such as the matter in hand, preferential payments can he made. No case has been cited, nor has any come under our observation, in which such a claim as that of the Lackawanna Company has been, on final adjudication, allowed a preference.

The case of Burnham v. Bowen, supra, relied on by the intervener’s counsel, and claimed to be analogous in principle to the instant case, was based on a demand l'or coal used in running the locomotives. The coal was supplied to the railroad company a few months before the appointment of the receiver, and the claim was found by the supreme court to bo “one of the current debts for operating expenses, made in the ordinary course of continuing business.” We discover no similarity of principle between that case and the case at bar. Coal is an article of constant and uninterrupted consumption on a railroad, and its purchase at short intervals, for the purpose of running the locomotives, in quantities not exceeding the operating requirements of the road, is clearly a current expense of the road. But it is difficult to see how the purchase of 20,000 tons of rails, made under the circumstances stated in the intervener’s own pleadings, can be a current debt “for operating expenses made in the ordinary course of continuing business.” If the road was in the condition of dilapidalion which is inferable from the intervener’s averments, it might be sufficient to say, in denying the demand, that the rails were supplied, not as a matter arising in the ordinary course of the railroad’s operations, but for the virtual reconstruction of the road. No authorities need be cited to establish the proposition that works of reconstruction are not entitled to preferential payment. That the necessity for the supplies does not entitle to preferential payment, unless the supplies are for current expenses in the ordinary course of operation, is forcibly shown by the case of Morgan’s L. & T. R. R. & S. S. Co. v. Texas Cent. Ry. Co., 137 U.S. 171" court="SCOTUS" date_filed="1890-11-24" href="https://app.midpage.ai/document/morgans-louisiana--texas-railroad--steamship-co-v-texas-central-railway-co-92870?utm_source=webapp" opinion_id="92870">137 U. S. 171, 11 Sup. Ct. 61, in which it was substantially held that the mere fact that money was loaned to a railroad company to pay the interest on its first mortgage bonds does not entitle the lender to preference; and that, although advances of money may have enabled a railway company to maintain itself, that fact alone does not entitle the lender to priority

The contention that the intervener is entitled to preference because the rails supplied by it must have enhanced the value of the bondholders’ security is clearly untenable. In Railway Co. v. Cowdrey, 11 Wall. 482, Mr. Justice Bradley, as the organ of the court, said:

“As to the point of giving priority to tlie Inst «’editor for aiding to conserve the thing, all that is necessary to say is that the rule referred to has never been introduced into our laws except in maritime cases, which stand on a particular reason.”

Also, see Thompson v. Railroad Co., 132 U.S. 68" court="SCOTUS" date_filed="1889-11-04" href="https://app.midpage.ai/document/thompson-v-white-water-valley-railroad-92568?utm_source=webapp" opinion_id="92568">132 U. S. 68, 10 Sup. Ct. 29; Jones, Corp. Bonds, § 584; Fogg v. Blair. 133 U.S. 534" court="SCOTUS" date_filed="1890-03-03" href="https://app.midpage.ai/document/fogg-v-blair-92689?utm_source=webapp" opinion_id="92689">133 U. S. 534, 10 Sup. Ct. 338; Railroad Co. v. Hamilton, 134 U.S. 296" court="SCOTUS" date_filed="1890-03-17" href="https://app.midpage.ai/document/toledo-delphos--burlington-railroad-v-hamilton-92728?utm_source=webapp" opinion_id="92728">134 U. S. 296, 10 Sup. Ct. 546.

The unusually large purchase of rails; the. time within which they were to be delivered; the condition of the road; the contracts providing for notes at six months, renewable for a like term, at the maker's option; the hypothecation of securities for the payment of the claim; the knowledge which the intervener had of the mortgage; the fact that the contracts contained no promise to pay out of any particular fund; the time which elapsed between the date of the contracts and the appointment of a receiver in cause No. 185,—are circumstances which, taken together, cannot fail to convince us that the intervener relied upon the general credit of the railway company.

We see no error in the action of the circuit court in dismissing the petition of intervener, and the decree appealed from is therefore affirmed.