280 F. 830 | 2d Cir. | 1922
(after stating the facts as above). 1. We agree with the conclusion of the District Court that Church is a general creditor and that the transactions between him and the gas company did not create an equitable lien in his favor on the earnings accruing prior to the extension of the receivership to the foreclosure suit, or
2. (a) Materials and supplies; (b) meters in stock, etc. These two classes of items were separately considered, due to the fact that the existence of the items under (b) came to the attention of counsel and court after item (a) had been considered. Both classes of items, however, are governed by the same principles, and will be considered under the same heading. The point is raised by Judge that the decree of September 11, 1917, disposed of items under (b), and therefore that the court’s order directing Special Master Clinton to take proof in respect of the items under (b) was too late, for the reason that the term had long since expired. The reservation in paragraph III of the decree of September 11, 1917, was that the right to “the cash, materials, supplies, and accounts receivable” should be determined by the court when the receivers filed their final accounts and applied for discharge. . In view of this reservation, it was competent for the court at any time, at least up to the application by the' receivers for their discharge, to construe the meaning of the words “materials and supplies,” and thus to keep the question open notwithstanding the entry of prior orders or decrees. We are of opinion, therefore, that this branch of Church’s appeal is properly here.
But to this rule there is an exception in the case of public utility corporations. It has long been recognized that property of such corporations, necessary for purposes of operation, is constantly subject to change and additions. Such corporations perform a public duty. Gas companies manufacture and distribute a necessary of modern life. It is important, therefore, to maintain, if possible, contiguous operation, even though property'is sold under foreclosure or execution. It is realized that, owing to the large sums required to finance such enterprises, there must be sound security offered to those who invest in bonds secured by mortgages on properties of this character. It is essential for the security of such bonds that a mortgage shall safeguard the existence of a going plant at the time that sale is had under a foreclosure' decree, to the end that the purchaser can continue to perforin
In Platt v. New York & Sea Beach R. Co., 9 App. Div. 87, 41 N. Y. Supp. 42, the court pointed out the reasons why the mortgage of a railroad company covered after-acquired personal property and announced a doctrine affected by the nature of the property and its relation to public duty and convenience. The opinion, in construing the effect of a particular statute, is not to be read as being confined to the purposes of that statute, but as, in addition, announcing important useful principles of general application -to similar subject-matter. This case was affirmed by the New York Court of Appeals on the opinion below in 153 N. Y. 670, 48 N. E. 1106. There is, of course, nothing to the contrary in Platt v. New York & Sea Beach R. Co., 63 App. Div. 401, 71 N. Y. Supp. 913. Again, in New York Security Co. v. Saratoga Gas Co., 88 Hun, 569, 587, 588, 34 N. Y. Supp. 890, the court laid down similar rules in respect of the property of a gas company, pointing out, inter- alia, that the doctrine applied, not merely to land and buildings, but to implements, tools, and machinery, and, in brief to whatever was “necessarily used in carrying on the business.” This opinion is also illuminating, and was likewise affirmed on opinion below in 157 N. Y. 689, 51 N. E. 1092.
It is suggested that in some manner MacDonnell v. Buffalo L. T. & S. D. Co., 193 N. Y. 92, 85 N. E. 801, modifies the force and authority of the two cases just referred to. In the MacDonnell Case the court was dealing with a peculiar state of facts, and further the clause relating to various kinds of personal property was restricted to such as might be acquired not only after the execution of the mortgage, but also “after default shall be made herein.” In the case at bar, as will presently appear, the after-acquired clauses did not contain any restriction to the effect that the after-acquired property mortgaged would only be such as might be acquired after default. Some expressions in the MacDonnell Case, which we need not pause to analyze at length, are at most dicta, and cannot be held to have changed the doctrine of the Platt and New York Security Co. Cases, supra. In the opinion of the New York Court of Appeals in the MacDonnell Case, no reference whatever is made to these two preceding cases, and such omission strongly confirms the view that the court did not intend to modify the principles which it had previously announced.
In Met. Trust Co. v. Dolgeville Electric Lt. & P. Co., 35 Misc. Rep. 467, 71 N. Y. Supp. 1055, the present Chief Judge of the New York Court of Appeals followed the New York Security Co. Case, 88 Hun. 569, 34 N. Supp. 890, and held that the terms o.f a mortgage on an electric light and power company covered' certain supplies consisting of wire still in the coils. In brief, we understand the New York rule to be that, in the case of a public utility corporation, a mortgage is valid in respect of after-acquired personal property necessary and appropriate for the physical operation of its franchises and the performance of its public duty.
Gas coal, gas oil, and similar materials are obviously necessary for the manufacture of gas, and just as much a part of the plant in operation as any machinery attached to the freehold. So, also, tools and implements are clearly necessary for purposes of operation, whether used in connection with manufacture or distribution. The test is not whether property of this character is physically attached to the freehold. Plainly, certain of such property, such as tools and implements, by their very nature, would not be physically attached to land or buildings, and coal and oil would necessarily be used up in the process of manufacture. The fact that such materials or supplies as are necessary for the manufacture and distribution of gas are kept on hand, instead of in some way being attached to the freehold, is immaterial in determining the lien of the mortgage, because with this class of mortgages there is no reason why such necessary materials and supplies may not, as against general creditors, be covered by the mortgage,. and every reason to the contrary.
The “gas stove stock,” representing an item of $9,195.65, is on the same basis as portables. That item referred to a stock" of gas stoves kept on sale to encourage the use of gas. Such articles were not necessary for the manufacture or distribution of gas, and must be regarded merely as merchandise, used to promote the sale of gas, but in no sense necessary to the operation of the plant. Such merchandise was not subject to the mortgage, and therefore the purchaser was not entitled to this item. As we are not advised as to the value of the “portables,” or as tp the nature or value of the “lamps,” included in the item “general materials and supplies,” we are unable to state the result in figures, and must remit that detail to the District Court.
In view of the foregoing, it is apparent that the District Court rightly decided that the items under (b), consisting of meters in stock, horses', automobiles, stable equipment, tools, etc., were subject to the mortgage lien,, and passed to the purchaser, except the item of $2,847 for “fuel and lighting appliances.” We gather from the testimony of Meyers and from Exhibit 19 that “fuel and lighting appliances” consisted of articles for rent or for sale, which were connected on consumers’ premises, but not necessary to manufacture and distribution.
To summarize: Judge is entitled to all the articles under (a), except portables, gas stove stock, and possibly lamps, and to -all utider (b), except “fuel and lighting appliances.” Under his bond, he must make payment to the receivers of $9,195.65 for the gas stove stock, and whatever may prove to be the value of the “portables,” and possibly tire “lamps,” as of September 30, 1917. He must also make payment of $2,847 for “fuel and lighting appliances.”
“Until the gas company shall have made default in the payment of the principal or interest of any of the bonds hereby secured, or intended so to be, or in the performance of the covenants, or any of them, herein expressed to be kept and performed by the gas company, it shall have the possession, use, enjoyment, and control of all the property and franchises covered by this mortgage, with the appurtenances, and shall receive the rents, issues, income and profits thereof. * * * ”
A similar provision wqs incorporated in the 1899 mortgage. In such a case, cash and accounts receivable existent prior to a mortgage fore
Whether the mortgage lien in respect of “rents, issues, income and profits” of the property and franchises covered by the mortgage attached at the date of filing the foreclosure bill, or at the date of the foreclosure receivership, is a question concerning which decisions are not in harmony. We need not however, determine this question, for the reason that, for purposes of convenient accounting, the litigants seem to have agreed on April 30, 1915, as the foreclosure receivership date. Thus, on April 30, 1915, the unmortgaged assets in the hands of the sequestration receivers, to the exclusion of the foreclosure receivers, consisted of certain materials and supplies, accounts receivable and cash in amounts to be referred to infra. Eater there was received a refund for taxes, to which we shall also refer infra.
4. Creditors. There has been no separate accounting of the sequestration receivers, and no attempt to determine how much of the fund now awaiting distribution shall be credited, respectively, to the sequestration and the foreclosure receiverships. It is, of course, also necessary to ascertain who are the creditors. By reason of the course which the actual administration of these receiverships has taken, Church, the railroad, and the trustee are the only creditors remaining whose claims arose because of transactions prior to receiverships, unless the depositors are also creditors. The deposits are of three classes *.
“It is hereby expressly agreed between the Buffalo Gas Company and the said depositor that this deposit shall bo subject to the deduction of any indebtedness due from depositor to said company. Upon full payment of any such indebtedness, and return of this certificate, the said Buffalo Gas Company agrees to refund said deposit, with interest. Interest ceases on the day depositor ceases to be a consumer.”
Although the depositor has been lawfully compelled to deposit security, yet the corporation seemingly may so use the deposit as to deprive it of some of the characteristics of a trust fund. Thus the status of the deposit is different, on the one hand, from that of security for rent given as part of an agreement between landlord and tenant, as.in In re Banner (D. C.) 149 Fed. 936, and, on the other, from that of property which may be reclaimed only if it or its proceeds can be traced, as instanced in In re J. C. Wilson & Co. (D. C.) 252 Fed. 631. Courts of equity have marshaled assets and assigned priorities in response to equitable requirements and business necessity, as is illustrated by the now well-established principle that preference will be accorded to claims for materials and supplies furnished to public utilities for current operation within a limited period prior to receivership. The fact that, because of statutory permission, such deposits are not made as the result of voluntary agreement, but compulsorily required as a condition of supplying gas, is sufficient to justify a court of equity in treating them as preferred claims.
(c) Main Extension Deposits. These deposits, without interest, were made under rules duly approved by the Public Service Commission, which provided that, in case the gas company deemed it inexpedient to extend a gas main at its own expense, it could require the applicant for the extension to make an advance deposit to cover the estimated cost, the gas company, agreeing to refund the deposit in certain installments, based on the consumption of gas resulting from the extension. These deposits are in the same position as the main to curb deposits.
It is urged that the basis of the decree of September 11, 1917, was that Church should have the right to realize upon these bonds, through the deficiency judgment, only if that judgment obtained “a priority of any kind.” We need not determine this, nor the contrary contention. The adjudication of September 11, 1917, was clear, and, the term hav
6. The Accounting. Owing to the method of administration and the failure to state separate accounts for the sequestration and foreclosure receiverships, respectively, it is impossible for us to set up the figures of these accounts. We shall endeavor, however, to state the principles involved.
The sequestration and foreclosure receiverships are separate, but may, as matter of practical administration, run concurrently until the whole estate is wound up. This is because the sequestration receivership has possession of the unmortgaged assets, which, for accounting purposes, do not at any time go into the possession of the foreclosure receivers. Primarily the fund of the sequestration receivership is made up of the unmortgaged property on hand when the receivers take possession, whether physical property or accounts receivable and the like. At the conclusion of the sequestration receivership, this fund may be larger or smaller, dependent upon the results of the operation of the sequestration receivership. To illustrate, with arbitrary figures: At the inception of a receivership, there may be cash on hand $50,000, accounts receivable $50,000, and unmortgaged property worth $50,000, thus making an apparent total of $150,000. Assuming that the receivers continue business and are successful in increasing the value of the 'estate, they may have at the conclusion of their operation cash $100,000; the accounts receivable due prior to the receivership may have been collected to the extent of $40,000, and $20,000 may be due from purchasers and customers on good accounts receivable developed during the operation. Unmortgaged personal property, including pre-receivership unmortgaged personal property, and such as may have been purchased by the receivers in the course of their operation, may amount to $60,000. The total would be $220,000. On the other hand, the receivership operation may have resulted in a loss, leaving on hand, say, only $50,000. It is the fund of $220,000 or $50,000, as the case may be, which is to be distributed in accordance with well-settled principles and practice. First, there must be paid the expenses of administration, then the debts incurred by the receivers for their operation. The balance is the fund distributable among preferred and general creditors. Out of such balance, there must be first paid the claims of preferred creditors, principal and interest, and the remaining sum, if any, constitutes the fund available for distribution to general creditors.
In the case at bar there is a statement, known as Exhibit 6, purporting to show assets and liabilities as of September 24, 1914, the date of filing the sequestration bill, April 30, 1915, the convenient date marking the commencement of the foreclosure receivership, and September 30, 1917, the date of the transfer to Judge, as a result of the sale under foreclosure. This exhibit may- be useful for bookkeeping purposes, but is not to be taken as stating the account either of the sequestration or of the foreclosure receivership. The matter is further com
Applying the principle, supra, to the case at bar, the sequestration receivers at the conclusion of their receivership had in hand materials and supplies in the amount set forth in 2 (a) and (b) supra, cash to the extent of $152,105.84 and accounts and bills receivable. To arrive at this last item, it must be ascertained what accounts and bills receivable outstanding on April 30, 1915, were ultimately collected. The amount set forth in Exhibit 6 is roughly $87,600, less about $8,600 reserved as of April 30, 1915, for bad debts. By this time the receivers must know the exact figure for these items of accounts and bills receivable. To the foregoing must be added an item of $4,808.86 due to the following circumstances: In December, 1919, the receivers made an adjustment with the city of Buffalo on account of franchise taxes for the years 1912, 1915, and 1916, as a result of which they received a net refund of $11,066.16. This refund does not appear on Exhibit 6, because made after the date of that statement. Of this net refund, $4,808.86 was for the year 1912. Having thus ascertained the gross fund in hand, it is next necessary to determine who are the creditors entitled to share in this fund, and how the amount of their claims shall be ascertained.
There is an item in Exhibit 6 entitled “Trade and Other Acts.” The pre-receivership claims of this character were paid, as p above stated. It is also apparent that any of these obligations which may have been incurred by the sequestration receivers were also paid, so that there are now no creditors of this class. There was an item for current taxes which we assume were governmental in personam taxes against the corporation and the sequestration receivership. The record is not clear as to whether or when these taxes were paid, and this we must leave to be dealt with by the District Court. There is an item for city taxes for 1913 and 1914. The purchaser at foreclosure sale bought
The foregoing analysis leaves as creditors sharing in the balance in the hands of' the sequestration receivers, after payment of expenses of administration and debts incurred during receivership operation, and possibly current taxes: (1) Consumer depositors as preferred claimants; (2) the other two classes of depositors, and Church and the trustee as general creditors. In respect of all the three classes of depositors, there has as yet been no notice to file claims. The publication of such a notice was recommended by the special master and approved by the court, and it was ordered that funds to meet these claims should be deposited in the registry of the court. Such funds, however, should not be so deposited to remain there indefinitely. Persons who have made deposits and have ceased to be consumers should be required by appropriate notice to file their claims, and, failing so to do, all claims should be cut off which are not filed within the time indicated by the notice. The other two classes of depositors are entitled to share as general creditors, without interest, only if they have become consumers. They may never become consumers, and their claims should be similarly cut off by the same procedure as to notice. The procedure has been fully described in Pennsylvania Steel Co. et al. v. New York City Ry. Co. et al., 198 Fed. 721, 735, 117 C. C. A. 503, where, per Judge Noyes, this court laid down the rule in respect of proving claims.
There is thus left in this connection only the question of the status of the' trustee’s deficiency judgment. The contention of Church is that the appointment of the sequestration receivers constituted an equitable lien in favor of the creditors then existing, and that, as the bonds were not then in default, they were not entitled to share in the fund of the sequestration receivership. An examination of the certified question in the Saratoga Gas Co. Case will show that all that was decided by the court was that the foreclosure receiver had no prior right to “the debts and accounts due to the corporation upon sales by it of products of its plant produced after the giving of the mortgage and before the appointment of either receiver.” As the receivers in that case
The answer to the contention of Church is that in this circuit the rule as to the times of ascertaining provable claims against an insolvent estate is as stated by Judge Noyes in the Penn. Steel Co. Case, supra. The claim on the bonds is within the class described by Judge Noyes at page 738 of his opinion (198 Fed. 738, 117 C. C. A. 520) as “claims which at that time are certain, but which are not matured.” Such claims are clearly provable, because “the right of a creditor to participate in the assets of an insolvent estate — a right in rem, and not in personam — is not dependent upon the existence of an accrued cause of action at the time of the receivership.” This subject was considered in the Metropolitan Street Railway receivership by the late William R. Turner, a special master highly experienced in this class of litigation. In the receivership record in Pennsylvania Steel Co. v. Metropolitan Street Railway Co. (volume 32, p. 645), Mr. Turner held:
“Tho claimant trustee under tho two Metropolitan mortgages have an un-cpiestionable right raider the authorities, federal and state, to prove claims to the extent of the face value of bonds secured, against general assets of the insolvent Metropolitan Company, subject only to the limitation that the amount of the deficiency decrees to be hereafter entered will suggest a maximum amount to be paid on the claims allowed. Merrill v. Bank of Jacksonville, 173 U. S. 131; People v. Remington, 121 N. Y. 328; Matter of Simpson, 36 App. Div. 562,”
This was affirmed by Judge Eacombe on the special master’s opinion. See page 763 of volume 32, supra. In addition to the cases cited by Special Master Turner, sec Chemical Nat. Bank v. Armstrong, 59 Fed. 372, 8 C. C. A. 155, 28 L. R. A. 231; Merchants’ Nat. Bank. v. Flippen, 158 N. C. 334, 74 S. E. 101; Matter of Bates, 118 Ill. 524, 9 N. E. 257, 59 Am. Rep. 383; Third National Bank v. Haug, 82 Mich. 607, 47 N. W. 33, 11 L. R. A. 327; Detroit Trust Co. v. State Bank of Michigan, 150 Mich. 530, 114 N. W. 327. Judge Dietrich also recognized this principle in a careful discussion in Westinghouse Elec. & Mfg. Co. v. Idaho Ry. R. & P. Co. (D. C.) 228 Fed. 972, hut held otherwise in view of certain provisions of an Idaho statute.
As the trustee has not appealed, we need not be concerned with proof of the whole amount of debt due on the bonds as of the time of the appointment of the sequestration receivers, but it will suffice for the purposes of this case (and we limit our decision to this1 case) that the trustee may come in as a general creditor to the extent of the deficiency, with interest figured however only up to September 24, 1914.
From the foregoing, it is apparent that the decree must be modified, and the cause returned to the District Court, with instructions to t^ke such further proceedings as may not be inconsistent with this opinion.
Decree modified, without costs.
Mortgage of 1897: “All and singular its personal property, its gas works, plants, and machinery for making, generating, and supplying gas, its service and. other pipes, holders, mains, meters, purifiers, generators, cocks, tools, implements, and all apparatus, services, connections, fixtures, appurtenances, licenses, contracts, and agreements, and patented or other processes for making and distributing, gas now owned or which shall hereafter he acquired by the gas company, all of which personal property is hereby declared to be fixtures and appurtenances of said gas works and plants and parts of the same, but the particular description of personal property herein contained shall not be con-sirued to exclude any other personal property which now belongs to or which may hereafter be acquired by the gas company, and also all improvements, additions made or to be made to said plants and properties, real and personal, and all replacements of the same or the appurtenances thereof,, and also all and every other estate, right, and interest, privilege, and franchise, corporate or mixed, which the gas company now owns or holds, or may or shall hereafter acquire, own, or hold.”
Mortgage of 1899: “All and singular its supplies of every name, nature, and description, * * * and all and singular the moneys, book accounts, bills receivable, and other property of every name, nature, and description, which have been or which shall hereafter be acquired by the party of the first part, whatever the particular description thereof shall be, * * * and also all and singular its personal property, plants and machinery for making, generating, and supplying gas, its service and other pipes, holders, mains, meters, purifiers, generators, tools, implements, and all apparatus, services, connections, fixtures, licenses, contracts, and agreements, now owned or which shall .hereafter be acquired by the gas company, all of which personal property is hereby declared to be fixtures and appurtenances of said gas works and plants- and parts of the same.”
“Every gaslight * * * corporation may require every person to whom such corporation shall supply gas * * * to deposit with such corporation a reasonable sum of money * * * as security for the payment of the gas * * * rent or compensation for gas consumed, * * * to become due to the corporation, but every corporation shall allow and pay to every such depositor legal interest on the sum deposited for the time his deposit shall remain with the corporation.”
“V. The defendant, Buffalo Gas Company, is indebted to the intervener, Church, upon a note made by the said gas company and now held by said Church, in the sum of $22,500 and interest thereon from September 1, 1917, and the said Church has a lien upon $95,000 par value of the first mortgage 5 per cent. 50 year gold bonds of the Buffalo City Gas Company, first as security for the payment of said note and interest, and next as security for the indebtedness set out in paragraph IV, and said Church is entitled to share in the proceeds of the sale of the mortgaged property to- an amount equivalent to 40 per cent, of the par value of said $95,000 of bonds by reason of such liens, and to any further sum that may be realized upon said $95,000 of bonds through the deficiency judgment recovered herein by the New York Trust Company against said Buffalo Gas Company.”