120 F. 398 | U.S. Circuit Court for the District of Western Missouri | 1903
The questions to be determined in this case arise in the following manner: . After a decree of foreclosure- and sale had been entered in the above-entitled cause, and in pursuance thereof all the property of the Kansas City, Pittsburg & Gulf Railroad Company had been sold, which sale took place in March, 1900 (the bill of foreclosure having been filed on April 28, 1899, and receivers appointed at that time), John Breuel and others filed petitions of intervention in the above-entitled cause; claiming the right to do so under certain provisions of the decree of foreclosure. These intervening petitions were referred to the special master theretofore appointed in the cause for hearing and a report thereon. The Kansas City Southern Railway Company, the purchaser at the foreclosure sale, filed a demurrer to the several intervening petitions before the master, and, after a hearing had thereon,, the master reported that the demurrers should be sustained. Excep
The various intervening complaints, which were identical in form, stated, in substance, that when the Kansas City, Pittsburg & Gulf Railroad Company constructed its railroad across the valley of a creek in Bates county, Mo., near the eastern boundary line of the state of Kansas, it erected an embankment across the valley, thereby obstructing the natural flow of the waters in said creek, and caused them to overflow the petitioners’ lands, situated in the state of Kansas. The petitioners alleged that as a result of said overflow their crops had been damaged to a certain extent during the years 1896, 1897, and 1898; the embankment, as it seems, having been erected as early as the year 1894. For the amount of the damages so sustained they claimed an allowance against any funds then or thereafter in the hands of the receivers, derived from any source, and that, in case there were no funds in the hands of the receivers, the property . which had been sold at the foreclosure sale, and was then in the hands of the Kansas City Southern Railway Company, be charged with a lien for the damages which the interveners had severally sustained, and that, unless these damages were paid, the property be retaken and sold to liquidate their several demands. This relief was prayed for on two principal grounds: In the first place, it was claimed that the receivers, when appointed, in April, 1899, had taken possession of certain personal property of the Kansas City, Pitts-burg & Gulf Railroad Company, the mortgagor, which was located at Ft. Scott, Kan., and consisted of materials and supplies for the operation of a railroad — the same being of large value — which personal property, although described in the mortgage that had been foreclosed, yet, by virtue of the fact that the property was not delivered to the mortgagee, and by virtue of the fact that the provisions of Kansas laws relating to the recording of chattel mortgages had not been fully complied with, was not, as the interveners claimed, subject to the lien of the mortgage, so far as general creditors of the mortgagor were concerned. It was also alleged by the petitioners that no default had occurred under the mortgage when the receivers were appointed, such as authorized the trustees in the mortgage to take possession of the m’ortgaged property, and that the money on hand at that time, in the treasury of the mortgagor company, which came to the possession of the receivers, as well as the income which was derived by the receivers from the operation of the mortgaged property up -to October 1, 1899, was not subject to the lien of the mortgage, but was subject to the claims of general creditors. The interveners insisted that their claims should be paid out of the two funds last described, because, as respects them, they were not subject to the lien of the mortgage. In the second place, the interveners allege that the stockholders and bondholders of the Kansas City, Pittsburg & Gulf Railroad Company, .prior to the foreclosure sale, placed their stock and bonds in the hands of a reorganization committee upon the understanding and agreement with said committee, which was subsequently carried into effect, that a new company should be formed to purchase the property of the mortgagor com
Counsel for the interveners concede that the claims which they present were filed pursuant to paragraph 19 of the final decree, which ordered the special master to give a notice “requiring the holders of any claims against the Kansas City, Pittsburg & Gulf Railroad Company, or the receivers thereof, to present the same to him for allowance * * * within the period of six months after the first publication of such notice.” The object of this provision of the decree was to require the holders of what are known as “preferential demands” and demands contracted by the receivers, to be presented for allowance within the period named, to the end that the aggregate amount of the debts Which were entitled to payment in advance of the mortgage debt might be ascertained, and paid out of the fund realized at the mortgage sale before the fund was distributed among bondholders. The provision in question had reference solely to “preferential demands” and debts created by the receivers, as is clearly disclosed by the notice subsequently published by the master, the .form of which notice was submitted to the court, and by it approved, before it was published. The notice in question called for the presentation of claims or demands against the receivers and against the property of the Kansas City, Pittsburg & Gulf Railroad Company, which had been theretofore sold pursuant to the decree of foreclosure, “which claims or demands are alleged to be of a preferential character, and to be such as the purchaser at the foreclosure sale is required to pay under and by virtue of the provisions of the decree of foreclosure:” This notice, and the paragraph of the decree in conformity with which it was drawn, required parties to file such claims only, existing against the mortgagor company, as were entitled to payment out of the proceeds of the foreclosure sale before any distribution was made among bondholders; the object being to ascertain the net amount applicable to the payment of the mortgage debt. The provision of the decree that claims not thus presented should not be enforceable against the receivers, or against the property which had been sold, only operated to bar preferential demands and demands contracted by the receivers. It was not intended to bar the rights of creditors holding claims of a different character, nor did it have that effect. That paragraph 19 of the decree was inserted for no other purpose than the one last indicated, and had reference to preferential demands and those contracted by the receivers, is further shown by paragraph 15 of the decree and by paragraph 6 of the
Now, the claims involved in the present controversy are claims for unliquidated damages against the Kansas City, Pittsburg & Gulf Railroad Company. They have never as yet been reduced to a judgment in any court. Some of them accrued three years prior to the filing of the bill of foreclosure, and all of them had accrued before the bill was filed. It is obvious, therefore, that they are not preferential demands, in the sense in which that term is used in the decree, but are merely general claims against the mortgagor company, and are not supported by any lien, legal or equitable, against any of its property. Trust Co. v. Riley, 16 C. C. A. 610, 70 Fed. 32, 30 L. R. A. 456; Bank v. Doud, 44 C. C. A. 389, 105 Fed. 123, 52 L. R. A. 481. In view of these facts, the master was invested with no authority to hear and adjudicate these claims by virtue of paragraph 19 of the decree, and the notice issued in conformity therewith; and while it is true that some of the intervening petitions were referred generally to the master for hearing and report, by an order made on June 5, 1900, yet this order must be understood as having been made under and subject to the specific powers that had been conferred upon the master by the decree. It was entirely proper, therefore, for the master to decline to enter upon a hearing with respect to the merits of these unliquidated demands against the Kansas City, Pittsburg & Gulf Railroad Company, when it became apparent that they were in no sense claims of a preferential character or demands contracted by the receivers, and when it further appeared that their allowance and payment was pressed on the ground that some property had come to the possession of the receivers, to which the lien of mortgage possibly did not extend, and when it further appeared that, whether the mortgage lien did or did not extend to such property, the court, by its final decree, had in fact adjudicated that the mortgage did cover such property, and had directed its sale for the satisfaction of the mortgage indebtedness.
It is urged, however, in behalf of the interveners, that it is competent for the court to grant the relief now prayed for, even if it be true that the master properly rejected the interventions when he discovered that they were not founded upon preferential demands or debts contracted
The case has been treated thus far upon the assumption that certain personal property, described as materials and supplies incident to the operation of a railroad,- and located at Ft. Scott, Kan., has been subjected to the payment of the mortgage indebtedness, or has been consumed in a manner which was beneficial to the mortgage bondholders, to which the lien of the mortgage did not extend, so far as the interveners are concerned. But this assumption seems to be erroneous. The mortgage in controversy was filed and recorded as a real estate mortgage in Crawford county, Kan., where the personal property in dispute was located, but it was not filed, it seems, as a chattel mortgage in said county; nor was an annual affidavit afterwards made, showing the amount due and unpaid thereon, as the local law (sections 4244, 4246, Rev. St. Kan. 1901) requires. It is conceded that the mortgage in question sufficiently,described the property in controversy, and intended to convey it as security for the mortgage debt; but it is contended that for want of an actual delivery of the property to the trustees in the mortgage, and because of the failure to comply with local laws concerning the registry of chattel mortgages, it was void as to creditors-such as the interveners. The question has been mooted whether the law relating to the recording of chattel" mortgages is applicable to railroad mortgages, such as cover an entire railroad and all personal property connected therewith and appurtenant thereto, and the authorities on that point have been collected by counsel with some care. Hammock v. Trust Co., 105 U. S. 77, 26 L. Ed. 1111; Southern California Motor Board Co. v. Union Loan & Trust Co., 12 C. C. A. 215, 64 Fed. 450; Farmers’ Loan & Trust Co. v. Detroit, B. C. & A. R. Co. (C. C.) 71 Fed. 29. But it is deemed unnecessary on this occasion to express an opinion with relation to the point thus raised. Under the laws of Kansas an unrecorded chattel mortgage is. only void as to creditors and subsequent purchasers and mortgagees in good faith. It is valid as between the mortgagor and mortgagee, and, if a delivery to the mortgagee takes place at any time before a levy or seizure is made in behalf of those persons as to whom it is void, the defect will be cured, and the mortgagee’s lien will be protected, regardless of his failure to record the instrument or to make the annual affidavit. Dayton v. Bank, 23 Kan. 421, 423; Cameron v. Marvin, 26 Kan. 612; Dolan v. Van Demark, 35 Kan. 304; Leech v. Manufacturing Co. (Kan.) 56 Pac. 134. Now, it is undeniable that the receivers took possession of the personal property in controversy un
The right of the interveners to have their unliquidated demands for damages inflicted by the mortgagor company allowed and paid because the receivers took ^possession of some money in the treasury of the mortgagor company when they were appointed, and received the net income of its property until October x, 1899, when the second default in the payment of interest accrued, and when the trustees in the mortgage, by virtue of its provisions, were entitled to take possession of the mortgaged property without the aid of legal process, rests upon no better ground and is supported by no higher equity than their right to relief predicated upon the ground which was last considered. The mortgage which is involved in the present case, in broad terms, pledged all “revenues, rates, tolls, incomes, rents, issues, profits, and sums of money arising from or to arise from” the operation of the mortgagor’s railroad to the payment of its bonded indebtedness. The bill under which the receivers were appointed charged that there had been a default on the part of the mortgagor in the payment of an interest installment amounting to $575,000, which fell due April 1, 1899; that the mortgagor owed floating debts and accrued taxes to the amount of about $575,000, which it was unable to pay; that it owed nearly $2,000,000 on account of rolling stock, which sum it was required to pay at the rate of $40,000 per month; that a large sum of money would soon become due to its employés on account of wages; and that the mortgagor company was unable to meet these obligations, and was in fact insolvent. These allegations proved to be well founded. It is within the personal knowledge of this court that the funds which came to the possession of the receivers, and all the income which they derived from the operation of the road, up to October 1, 1899, were insufficient to pay off floating debts and meet current obligations and keep the railroad in operation, and that large sums of money were borrowed by the receivers, by direction of the court, to supply the deficiency, which loans were subsequently paid by or in behalf of the bondholders or other persons interested in the property. The fact is that the railroad, at the time the receivers were appointed, was in many respects incomplete and unfitted for operation. It was not in a condition, without further large expenditures of money and labor, to earn any net income. The funds to complete it and to make good any' deficiency in operating expenses were raised, by means of receivers’ certificates, on the credit of the property in their hands, and, by an order of this court, were made a special lien on the property, paramount
With respect to the second ground of relief which is relied upon in the several interventions (being the ground hertofore stated), it is to be observed that this court has heretofore decided that it would not entertain an intervening petition which was filed in this cause by an unsecured creditor of the Kansas City, Pittsburg & Gulf Railroad Company with a view of compelling the Kansas City Southern Railway Company, the purchaser at the foreclosure sale, to pay his demand upon the ground that no foreclosure of the mortgagor’s interest in the mortgaged property had in fact been effected by the foreclosure suit, and that the legal proceedings taken in that behalf had merely operatedvas a reorganization of the mortgagor company; leaving the property to which the proceeding related in the purchaser’s hands, subject to the payment of the mortgagor’s debts. No sufficient reasons are disclosed for departing from that rule on the present occasion. The foreclosure suit was heard and determined in the usual way, and according to the established course of procedure in such cases. An upset price ($12,500,000) was fixed by the court, which, considering the then condition and value of the mortgaged property, was deemed ade
Touching the final paragraph of the decree, on which counsel for the interveners seem to lay some stress, as containing a reservation of power in the court to modify or amend the decree at the instance of' a party or an intervener, it is to be observed that this clause was inserted in the decree solely for the purpose of reserving the power to make such modifications in the conditions of the sale and as to the distribution of the proceeds as might be deemed necessary, intermediate the entry of the decree and the occurrence of the sale. It was not intended as a reservation of power to overturn the decree and rights-acquired thereunder after the sale of the mortgaged property, and the-delivery of the same to the purchaser, at the instance of any third party who might come forward and suggest that the decree was in some respects erroneous.
■ The result is that the exceptions to the master’s report will be overruled, his report will be confirmed, and an order will be entered dismissing the several interventions.